________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM 10-K
(Mark One)
[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
Commission file number: 333-36234
LEVI STRAUSS & CO.
(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.)
1155 BATTERY STREET, SAN FRANCISCO, CALIFORNIA 94111
(Address of Principal Executive Offices)
(415) 501-6000
(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 x 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'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]
The Company is privately held. Nearly all of its common equity is owned by
members of the families of several descendants of the Company'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's classes of
common stock, as of the latest practicable date.
Common Stock $.01 par value ------ 37,278,238 shares outstanding on February 1,
2002
Documents incorporated by reference: None
LEVI STRAUSS & CO.
TABLE OF CONTENTS TO FORM 10-K
FOR FISCAL YEAR ENDING NOVEMBER 25, 2001
PART I
PAGE
----
Item 1. Business...................................................................................................... 3
Item 2. Properties.................................................................................................... 12
Item 3. Legal Proceedings............................................................................................. 14
Item 4. Submission of Matters to a Vote of Security Holders........................................................... 14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................... 15
Item 6. Selected Financial Data....................................................................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ........................ 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................................... 37
Item 8. Financial Statements and Supplementary Data................................................................... 43
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......................... 79
PART III
Item 10. Directors and Executive Officers of the Registrant............................................................ 80
Item 11. Executive Compensation........................................................................................ 84
Item 12. Security Ownership of Certain Beneficial Owners and Management................................................ 89
Item 13. Certain Relationships and Related Transactions................................................................ 93
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................................. 94
SIGNATURES.............................................................................................................. 100
Financial Statement Schedules........................................................................................... 102
Supplemental Information................................................................................................ 103
2
PART I
ITEM 1. BUSINESS
OVERVIEW
We are one of the world'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) and Dockers(R) 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 840 franchised or independently
owned stores dedicated to our products outside the U.S. and operate a small
number of company-owned stores.
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%
Our business is currently organized into three geographic divisions: the
Americas, consisting of the U.S., Canada and Latin America; Europe, including
the Middle East and Africa; and Asia Pacific. Our operations in the U.S. are
conducted primarily through Levi Strauss & Co., while our operations outside the
U.S. are conducted primarily through foreign subsidiaries owned directly or
indirectly by Levi Strauss & Co. In fiscal year 2001, we had net sales of $4.3
billion, of which the Americas, Europe and Asia Pacific accounted for 67%, 25%
and 8%, respectively. (FOR MORE FINANCIAL INFORMATION ABOUT OUR OPERATIONS
OUTSIDE THE U.S., SEE NOTE 18 TO THE CONSOLIDATED FINANCIAL STATEMENTS.) In
fiscal year 2000, we had net sales of $4.6 billion.
OUR BUSINESS STRATEGY
Our primary strategic goals are to continue stabilizing our business and
resume profitable growth. We believe achievement of these objectives will help
us increase our financial strength and flexibility and meet our goal of
regaining investment grade ratings on our debt securities. To achieve these
goals, we have several key business strategies.
REINVIGORATE OUR BRANDS THROUGH PRODUCT INNOVATION AND INCREASED CONSUMER AND
CHANNEL RELEVANCE
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 for our products. We
intend to:
o focus on aggressively updating our core products and creating new
products that incorporate superior fit, design and performance
innovations, and new fabrics and finishes that draw on our long
heritage of originality in product design and fabrication;
o design and market products at competitive price points that are
relevant to a wide range of consumer segments, from teenagers and
trend initiators who demand fashion-forward styles, to urban
professionals who desire sophisticated casual wear, as well as to the
broad group of consumers who want mainstream, quality branded
jeanswear and khaki pants for everyday and business wear;
o capitalize on our global brand recognition and marketing capabilities
by adopting successful products and design concepts developed in one
region and introducing them to other geographic markets in which we
operate;
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o target our product offerings to specific distribution channels in
order to reach discrete consumer segments, strengthen our position in
our existing channels, create a shopping experience that is easy and
appealing and address shifts in retail distribution channels in the
U.S., Europe and Japan; and
o develop product-focused marketing programs using both traditional
advertising vehicles such as television, print and point-of-sale
materials and other vehicles such as concert sponsorships, product
placement and Internet sites.
ACHIEVE OPERATIONAL EXCELLENCE
We are implementing strategies and processes for lowering our worldwide
sourcing costs and more effectively fulfilling product demand and replenishing
core items. We intend to:
o improve operational flexibility and speed to market through better
coordination of our design, merchandising, forecasting, sourcing and
logistics processes;
o improve the linkage of product supply to consumer demand and our
ability to ship product orders in a timely manner;
o improve our product sourcing and operating efficiencies to reduce
product costs through product reengineering, product line
rationalization, process simplification, enhanced system capabilities
and taking advantage of our global scale; and
o focus on working capital control through improved forecasting,
inventory management and product mix.
IMPROVE OUR RELATIONSHIPS WITH OUR CUSTOMERS AND UPGRADE THE PRESENTATION OF OUR
PRODUCTS 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 and specialty retailers. Through better relationships and collaborative
business planning with our customers, we must ensure that the right products are
available and in-stock at retail, and are presented in ways that enhance brand
appeal and attract consumers. We intend to:
o generate better economics for our retail customers in terms of sales
and margins;
o engage in more collaborative planning with our retail customers to
achieve better product assortment, availability and inventory
management;
o sell where consumers shop by increasing our distribution in all of the
regions where we operate;
o offer effective marketing and sales support programs; and
o improve the presentation of our product through new retailing formats,
better fixtures and visual merchandising, on-floor merchandising
services and other sales-area upgrade programs.
We believe we can execute these strategies through adhering to our core
values to achieve our vision of marketing the most appealing and widely worn
casual clothing in the world.
OUR BRANDS AND PRODUCTS
We market a broad line 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) and Dockers(R)
brands, we target specific consumer segments and provide product differentiation
for our retail customers in our distribution channels. 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, fabrications
and colors. 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.
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LEVI'S(R) BRAND
We market jeans and jeans-related products under the Levi's(R) brand around
the world. Since their invention in 1873, Levi's(R) jeans have become one of the
most successful and widely recognized brands in the history of the apparel
industry. In fiscal year 2001, sales of our Levi's(R) brand products represented
approximately 75% of our net sales, and accounted for approximately 66% of net
sales in the Americas, approximately 91% of net sales in Europe and
approximately 95% of net sales in Asia Pacific.
Our Levi's(R) 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
We market casual clothing, primarily pants and tops, under the Dockers(R)
brand, in more than 40 countries. We launched the brand in 1986 to address an
emerging consumer interest in khaki pants. We believe that the Dockers(R) 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 workplace
by helping create a standard for business casual clothing. In fiscal year 2001,
sales of Dockers(R) brand products represented approximately 25% of our net
sales, accounting for approximately 34% of net sales in the Americas,
approximately 9% of net sales in Europe and approximately 5% of net sales in
Asia Pacific.
Our Dockers(R) brand offerings are primarily targeted to men and women ages
25 to 39 and include:
o DOCKERS(R) BRAND. Dockers(R) brand products are the core line of the
brand. They include a broad range of casual pants and are complemented
by a variety of tops and seasonal pant products in a range of fits,
fabrics, colors, styles and performance features. New for 2001 was 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
products in the Americas, Europe and Asia through a variety of
channels, including department stores and chain stores.
o DOCKERS(R)PREMIUM. The Dockers(R)Premium pant line includes a range of
cotton pants constructed from premium fabrics with sophisticated
details in a range of finishes, fits, styles and colors. We distribute
these products through J.C. Penney Company, Inc. and department
stores in the U.S.
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o SLATES(R), A DOCKERS(R)BRAND. This Dockers(R)-endorsed line of dress
pants for men offers dressier 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. The
Slates(R)brand "Fitzgerald," a poly-wool gabardine pant, remained in
2001 the top-selling individual slack sold in U.S. department stores
for the fifth consecutive year. We work with licensees to develop and
market complementary products under the Slates(R)name, including a
broad assortment of knit and woven tops, dress shirts, sweaters,
hosiery, ties, sportcoats and suit separates. This line is distributed
to department stores and specialty stores in the U.S.
o OTHER PRODUCTS. Our other Dockers(R) product lines include Exact(R), a
dress pant line available through chain stores in the U.S.; Dockers(R)
Recode(R), a range of casual and dress casual pants and shirts sold
exclusively in U.S. department stores; Dockers(R)K-1 Khakis, a premium
khaki pant made from the original Cramerton(R) army cloth and sold in
Europe 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
We distribute our products on a worldwide basis through selected retail
channels, including chain stores, department stores, specialty stores, dedicated
franchised stores, outlets, Internet sites and mail-order catalogs. Our
distribution strategy focuses on:
o strengthening our retail relationships and presence through improving
collaborative account planning and product replenishment, generating
better economics for retailers in terms of sales and margins,
achieving better performance against delivery and other service
requirements, and providing products targeted for their core
consumers; and
o creating a shopping experience that is easy and appealing through
improving the presentation of our products at retail by introducing
new retailing formats, visual merchandising, executing new fixtures,
improving point-of-sale and on-product and other sales-area upgrade
programs and providing on-floor merchandising services.
AMERICAS
In the Americas, we distribute our products through national and regional
chains, department stores, specialty stores and Levi's Store(R)retail shops. We
have approximately 3,200 retail customers operating more than 18,900 locations
in the U.S. and Canada. Sales of Levi's(R)and Dockers(R)products to our top five
and top ten customers in the U.S. accounted for 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 ten
customers in fiscal year 2001, on both an Americas and total company basis, were
(in alphabetical order): Designs, Inc., Dillards, Inc., Federated Department
Stores, Inc., Goody's Family Clothing, Inc., J.C. Penney Company, Inc., Kohl's
Corporation, The May Department Stores Company, the Mervyn's unit of Target
Corporation, 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%, 12% and 11% of our total net sales in fiscal
years 2001, 2000 and 1999, respectively. We also target limited distribution
premium products like Levi's(R) Vintage Clothing to independent, image-conscious
specialty stores in major metropolitan areas who cater to more fashion-forward,
trend-influential consumers.
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) and Dockers(R) Store retail shops; mail
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 for nearly half our European sales on 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. In fiscal year 2001, our top ten European customers accounted
for approximately 9% of our total European net sales.
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ASIA PACIFIC
In Asia Pacific, we generate over half of our sales through the specialty
store channel, which includes multi-brand as well as independently owned Levi's
Store(R) 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% of our 2001 net sales in the region.
DEDICATED STORES
We have a network of approximately 840 franchised or other independently
owned stores selling Levi's(R) brand or Dockers(R) brand products under the
"Original Levi's Store(R)," "Levi's(R) Store" and "Dockers(R) 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) brand, including stores in the U.S. located in New
York, Chicago, Orange County, San Francisco, San Diego, Boston and Seattle and
in Europe located in London, Milan, Paris and Berlin.
We also own in the U.S. and Japan, and license third parties in the U.S.
and abroad to operate outlet stores for the disposition of closeout, irregular
and return goods. Sales through our outlet channels in the U.S. represent less
than 5% of our total net sales. 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
We operate web sites devoted to the Levi's(R) and Dockers(R) brands as
marketing vehicles to enhance consumer understanding of our brands. We do not
sell products directly to consumers through these Internet web sites. In the
U.S., our products are currently sold online through specifically authorized
third party Internet sites that meet our standards, such as www.macys.com,
operated by Federated Department Stores, Inc., www.jcpenney.com and
www.kohls.com., and visitors can link to authorized sites 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
Internet sites.
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 million, or 8.4% of total net
sales, on these activities in fiscal year 2001. 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-consistent brand values. This approach allows us to achieve
consistent brand positioning while allowing flexibility to optimize program
execution in local markets.
Our marketing strategy focuses on:
o developing clear consumer value propositions for product development
and messaging in order to differentiate our brands and products;
o developing integrated marketing programs that effectively coordinate
product launches and promotions with specific traditional and
non-traditional advertising and retail point of sales activities;
o creating superior quality, product-focused advertising; and
o enhancing presentation of product at retail through innovative retail
initiatives.
7
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. Recent activities include the
summer and fall 2001 U.S. tour of the Levi's(R) "Make Them Your Own Zone," a
custom-built tractor-trailer featuring games, product displays, video
"style-cam," and karaoke that travels to concert venues, lifestyle festivals and
retail locations.
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 on our ability to:
o develop innovative, high-quality products in fits, finishes, fabrics
and performance features that appeal to a broad range of consumers;
o anticipate and respond to changing consumer demands in a timely manner;
o maintain favorable brand recognition;
o generate better economics for our customers in terms of sales and
margins;
o ensure product availability through effective planning and
replenishment collaboration with retailers;
o offer competitively priced products;
o provide strong and effective marketing support; and
o obtain sufficient retail floor space and effective presentation of
products at retail.
We believe our competitive strengths include:
o strong worldwide brand recognition;
o competitive product innovation, quality and value;
o long-standing relationships with leading retailers worldwide;
o our network of franchised and other dedicated retail shops in Europe,
Asia, Canada and Latin America; and
o our commitment to ethical conduct and social responsibility.
We believe that the total unit sales of Levi's(R) brand jeans in the U.S.
is second only to the combined total unit sales in the U.S. of VF Corporation's
principal jeans brands, Wrangler, Lee and Rustler. We believe that the total
unit sales of Levi's(R) brand jeans on a pan-European basis and on a pan-Asia
Pacific basis is greater than the total unit sales of jeans of any single brand
in those regions and that there is no single competitor offering multiple brands
with greater total sales of jeans in either of those regions.
AMERICAS
We face intense competition across all of our brands from vertically
integrated specialty stores, mass merchandisers, retailer private labels,
designer labels and other branded labels. We sell both basic and
fashion-oriented products under the Levi's(R) and Dockers(R) 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 other jeanswear manufacturers, including VF Corporation, marketer of
the Wrangler, Lee and Rustler brands;
o fashion-oriented designer apparel marketers, including Polo Ralph
Lauren Corporation, Calvin Klein, Nautica Enterprises, Guess?, Inc. and
Tommy Hilfiger Corp.;
o vertically integrated specialty stores, including Gap Inc., Abercrombie
& Fitch, American Eagle Outfitters Inc., J. Crew and Eddie Bauer, Inc.;
o fashion-forward jeanswear brands that appeal to the youth market,
including the L.E.I., MUDD, FUBU, Lucky and Diesel brands among others;
o casual wear marketers, including Haggar Corp., Liz Claiborne, Inc. and
TSI International, maker of Savanne and Farah products;
o retailer private labels, including J.C. Penney Company, Inc.'s Arizona
brand and Sears, Roebuck & Co.'s Canyon River Blues and Canyon River
Khakis brands; and
o mass merchandisers, including Wal-Mart Stores, Inc., Target Corporation
and Kmart Corporation.
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EUROPE
While there is no one particular brand with a strong pan-European presence,
strong local brands and retailers exist in certain markets, including Diesel in
Italy and Scandinavia, Pepe in Spain and Lee Cooper in France. Zara, Hennes &
Mauritz AB, Energie and other vertically integrated specialty retailers, and
athletic wear firms such as adidas-Salomon, also offer competitive products and
are an increasing and effective competitive force in the market. Our principal
U.S. competitors, including Gap Inc. and VF Corporation, also compete in Europe.
ASIA PACIFIC
Competitors in the jeanswear market consist of both regional brands, such
as Edwin, our principal competitor in Japan, and U.S. brands, including Lee,
Wrangler and Guess? which offer basic products available in local markets.
Competitors in both jeanswear and casual apparel also include vertically
integrated specialty stores, such as UNIQLO, Gap Inc., Esprit 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 linkage 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 outsourcing 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, Galey & 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.
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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.
TRADEMARKS
We regard our trademarks as our most valuable assets and believe they have
substantial value in the marketing of our products. Levi's(R), Silvertab(R),
501(R), Dockers(R), Slates(R), the Arcuate trademark, the Tab Device and the Two
Horse(R) 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 where our products are manufactured and 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 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 of our orders are subject to cancellation. For those
reasons, our order backlog may not be indicative of future shipments.
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 We were the first multinational company to develop a comprehensive
code of conduct intended to ensure that workers making our products
anywhere in the world would do so in safe and healthy working
conditions and be treated with dignity and respect.
o Our commitment to social justice is highlighted by a unique initiative
that addresses racial prejudice and seeks to improve race relations by
supporting community organizations working together to eliminate
racism.
o We were among the first companies to offer employee benefits such as
flexible time-off policies and domestic partner benefits.
o We have been a leader in promoting AIDS awareness and education since
1982.
10
o We responded immediately to the needs of those affected by the
tragedies of the terrorist attacks on September 11, 2001 by providing
grants to numerous agencies and providing product donations for the
rescue workers.
o We conducted our second annual Volunteer Day in 2001 and expanded it
across the U.S., Canada and some parts of Latin America. More than
2,600 employees volunteered for over 10,000 hours benefiting 40
non-profit agencies.
We are active in the communities where we have a presence. We and the Levi
Strauss Foundation jointly contributed $13.6 million during fiscal year 2001 to
community agencies in more than 40 countries to support employee volunteerism
and programs in AIDS prevention and care, economic empowerment, youth
empowerment and social justice. In addition, we support more than 80 community
involvement teams worldwide that facilitate employee volunteerism and raise
funds for community projects.
EMPLOYEES
As of November 25, 2001, we employed approximately 16,700 employees, about
8,600 of whom were located in the U.S. Most of our production and distribution
employees in the U.S. are covered by various collective bargaining agreements.
Outside the U.S., 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 2. PROPERTIES
We conduct manufacturing, distribution and administrative activities in
owned and leased facilities. We have renewal rights in 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, 2001 is summarized in the following table:
LOCATION PRIMARY USE LEASED/OWNED
- -------- ----------- ------------
UNITED STATES
Little Rock, AR.......................................................... Distribution Owned
Hebron, KY............................................................... Distribution Owned
Canton, MS............................................................... Distribution Owned
Henderson, NV............................................................ Distribution Owned
San Antonio, TX.......................................................... Finishing Owned
San Antonio, TX.......................................................... Manufacturing Owned
San Francisco, CA........................................................ Manufacturing Owned
Blue Ridge, GA........................................................... Manufacturing Owned
Powell, TN............................................................... Manufacturing Owned
Brownsville, TX.......................................................... Manufacturing Leased
El Paso ,TX............................................................. Manufacturing Owned
San Benito, TX........................................................... Manufacturing Owned
Westlake, TX............................................................. Data Center Leased
OTHER AMERICAS
Buenos Aires, Argentina.................................................. Distribution Leased
Etobicoke, Canada....................................................... Distribution Owned
Stoney Creek, Canada..................................................... Manufacturing Owned
Brantford, Canada........................................................ Finishing Leased
Edmonton, Canada......................................................... Manufacturing Leased
Naucalpan, Mexico........................................................ Distribution Leased
EUROPE, MIDDLE EAST AND AFRICA
Schoten, Belgium......................................................... Distribution Leased
Les Ulis, France......................................................... Distribution Leased
Heustenstamm, Germany.................................................... Distribution Owned
Kiskunhalas, Hungary..................................................... Manufacturing and Finishing Owned
Copenhagen, Denmark...................................................... Distribution Leased
Milan, Italy............................................................. Distribution Leased
Amsterdam, Netherlands................................................... Distribution Leased
Plock, Poland............................................................ Manufacturing and Finishing Leased
Warsaw, Poland........................................................... Distribution Leased
Dundee, Scotland......................................................... Manufacturing Owned
Bellshill, Scotland...................................................... Finishing Owned
Northampton, U.K......................................................... Distribution Owned
Cape Town, South Africa.................................................. Manufacturing, Finishing and Leased
Distribution
Sabedell, Spain.......................................................... Distribution Leased
Bonmati, Spain........................................................... Manufacturing Owned
Olvega, Spain............................................................ Manufacturing Owned
Helsingborg, Sweden...................................................... Distribution Owned
Corlu, Turkey............................................................ Manufacturing, Finishing and Owned
Distribution
ASIA PACIFIC
Auckland, New Zealand.................................................... Distribution Leased
Adelaide, Australia...................................................... Manufacturing and Leased
Distribution
Brisbane, Australia...................................................... Distribution Leased
Sydney, Australia........................................................ Distribution Leased
Karawang, Indonesia...................................................... Finishing Leased
Hiratsuka Japan.......................................................... Distribution Owned
Makati, Philippines...................................................... Manufacturing Leased
12
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 87 administrative and sales offices in
33 countries, as well as lease a number of small warehouses in seven countries.
In addition, we have 57 company-operated retail and outlet stores in ten
countries in leased premises, of which eight are outlet stores in the United
States, and 13 are stores located in Poland. We also own or lease a few
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 3. LEGAL PROCEEDINGS
We are subject to claims against us, and we make claims against others, in
the ordinary course of our business, including claims arising from the use of
our trademarks and with respect to employment matters. We do not believe that
the resolution of any pending claims will materially adversely affect our
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during our 2001
fiscal fourth quarter.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'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 trust 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' 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' 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" to which all voting trust
certificate holders are invited to attend. These meetings are not a "meeting of
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, there were 166 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 prohibit our declaring or paying any
dividends without first obtaining consents from our lenders. In addition, in
January 2001 we entered into indentures relating to our 11.625% senior notes due
2008 that limit our paying any dividends. For more detailed information about
our bank credit facilities and senior notes, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and Notes to Consolidated Financial Statements.
15
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes selected financial data. The following
selected statements of income data and cash flow data for fiscal years 2001,
2000, 1999, 1998 and 1997 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.
The financial data set forth below should be read in conjunction with, and
is qualified by reference to, "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 2001
presentation.
YEAR ENDED
----------
NOVEMBER 25, NOVEMBER 26, NOVEMBER 28, NOVEMBER 29, NOVEMBER 30,
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
STATEMENT OF INCOME DATA:
Net sales........................ $4,258,674 $4,645,126 $5,139,458 $5,958,635 $6,861,482
Cost of goods sold............... 2,461,198 2,690,170 3,180,845 3,433,081 3,962,719
---------- ---------- ---------- ---------- ----------
Gross profit..................... 1,797,476 1,954,956 1,958,613 2,525,554 2,898,763
Marketing, general and
administrative expenses........ 1,355,885 1,481,718 1,629,845 1,834,058 2,045,938
Other operating (income)......... (33,420) (32,380) (24,387) (25,310) (26,769)
Excess capacity/restructuring charges
(reversals)(1)................... (4,286) (33,144) 497,683 250,658 386,792
Global Success Sharing Plan(2) .. -- -- (343,873) 90,564 114,833
---------- ---------- ---------- ---------- ----------
Operating income................. 479,297 538,762 199,345 375,584 377,969
Interest expense................. 230,772 234,098 182,978 178,035 212,358
Other (income) expense, net...... 8,836 (39,016) 7,868 34,849 (18,670)
---------- ---------- ---------- ---------- ----------
Income before taxes.............. 239,689 343,680 8,499 162,700 184,281
Income tax expense............... 88,685 120,288 3,144 60,198 46,070
---------- ---------- ---------- ---------- ----------
Net income....................... $ 151,004 $ 223,392 $ 5,355 $ 102,502 $ 138,211
========== ========== ========== ========== ==========
OTHER FINANCIAL DATA:
EBITDA(3)........................ $ 559,916 $ 629,743 $ 319,447 $ 504,357 $ 516,863
Adjusted EBITDA(4)............... 555,630 596,599 473,257 845,579 1,018,488
Capital expenditures............. 22,541 27,955 61,062 116,531 121,595
Ratio of total debt to adjusted EBITDA 3.5x 3.6x 5.6x 2.9x 2.6x
Ratio of adjusted EBITDA to
interest expense............... 2.4x 2.5x 2.6x 4.7x 4.8x
Ratio of earnings to fixed
charges(5)..................... 1.6x 2.0x 1.0x 1.6x 1.6x
STATEMENT OF CASH FLOW
DATA:
Cash flows from operating
activities..................... $ 141,900 $ 305,926 $ (173,772) $ 223,769 $ 573,890
Cash flows from investing
activities..................... (17,230) 154,223 62,357 (82,707) (76,895)
Cash flows from financing
activities..................... (139,890) (527,062) 224,219 (194,489) (530,302)
BALANCE SHEET DATA:
Cash and cash equivalents....... $ 102,831 $ 117,058 $ 192,816 $ 84,565 $ 144,484
Working capital.................. 651,256 555,062 770,130 637,801 701,535
Total assets..................... 2,983,486 3,205,728 3,670,014 3,867,757 4,012,314
Total debt....................... 1,958,433 2,126,430 2,664,609 2,415,330 2,631,696
Stockholders' deficit(6)......... (935,943) (1,098,573) (1,288,562) (1,313,747) (1,370,262)
16
<FN>
______________
(1) We reduced overhead expenses and eliminated excess manufacturing capacity
through extensive restructuring initiatives executed during 1997, 1998,
1999 and 2001, including closing 29 of our owned and operated production
and finishing facilities in North America and Europe. In fiscal year 2001
and 2000, we reversed reserve balances relating to these activities due to
updated estimates.
(2) In 1996, we had adopted a Global Success Sharing Plan that provided for
cash payments to our employees in 2002 if we achieved pre-established
financial targets. We recognized and accrued expenses in 1998, 1997 and
1996 for the Global Success Sharing Plan. During 1999, we concluded that,
based on our financial performance, the targets under the plan would not be
achieved. As a result, in 1999 we reversed into income $343.9 million of
accrued expenses, less related miscellaneous expenses. Consequently, no
cash payments will be made under the Global Success Sharing Plan.
(3) EBITDA equals operating income plus depreciation and amortization expense.
EBITDA is not intended to represent cash flow or any other measure of
performance in accordance with generally accepted accounting principles.
(4) The calculation for adjusted EBITDA is shown below:
YEAR ENDED
----------
NOVEMBER 25, NOVEMBER 26, NOVEMBER 28, NOVEMBER 29, NOVEMBER 30,
2001 2000 1999 1998 1997
---- ---- ----- ---- ----
(DOLLARS IN THOUSANDS)
EBITDA.......................... $559,916 $629,743 $319,447 $504,357 $ 516,863
Excess capacity/restructuring
charges (reversals)............ (4,286) (33,144) 497,683 250,658 386,792
Global Success Sharing Plan..... -- -- (343,873) 90,564 114,833
-------- -------- -------- --------- ----------
Adjusted EBITDA................. $555,630 $596,599 $473,257 $845,579 $1,018,488
======== ======== ======== ======== ==========
(5) For the purpose of computing the ratio of earnings to fixed charges,
earnings are defined as income from continuing operations before income
taxes, plus fixed charges and less capitalized interest. Fixed charges are
defined as the sum of interest, including capitalized interest, on all
indebtedness, amortization of debt issuance cost and that portion of rental
expense which we believe to be representative of an interest factor.
(6) Stockholders' deficit resulted from a 1996 transaction in which our
stockholders created new long-term governance arrangements for us,
including the voting trust and stockholders' agreement. In the 1996
transaction, a group of stockholders of our former parent, Levi Strauss
Associates Inc., established a new company, LSAI Holding Corp., to which
they contributed approximately 70% of the outstanding shares of Levi
Strauss Associates Inc. Levi Strauss Associates Inc. was then merged with a
subsidiary of LSAI Holding Corp. In the merger, shares of Levi Strauss
Associates Inc. not contributed to LSAI Holding Corp., including shares
held under several employee benefit and compensation plans, were converted
into the right to receive cash, thereby making Levi Strauss Associates Inc.
a wholly-owned subsidiary of LSAI Holding Corp. Funding for the cash
payments in the merger was provided in part by cash on hand and in part
from proceeds of approximately $3.3 billion of borrowings under bank credit
facilities. In October 1996, Levi Strauss Associates Inc. and LSAI Holding
Corp. were merged into Levi Strauss & Co. These transactions were accounted
for as a reorganization of entities under common control.
</FN>
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements, including, in particular,
statements about our plans, strategies and prospects under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business." Among these forward-looking statements are statements regarding our
anticipated performance in fiscal year 2002, specifically statements relating to
our net sales, gross profit, marketing, general and administrative expenses,
advertising expense, inventories and capital expenditures.
We have based these forward-looking statements on our current assumptions,
expectations and projections about future events. When used in this report, the
words "believe," "anticipate," "intend," "estimate," "expect," "project" and
similar expressions are intended to identify forward-looking statements,
although not all forward-looking statements contain such words. These
forward-looking statements speak only as of the date of this report, 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.
Although we believe that the expectations reflected in these forward-looking
statements are reasonable, we can give no assurance that these expectations will
prove to be correct or that we will achieve savings or other benefits
anticipated in the forward-looking statements. We disclose important factors,
some of which may be beyond our control, that could cause actual results to
differ materially from management's expectations in this report, including,
without limitation:
o changing domestic and international retail environments;
o changes in the level of consumer spending or preferences in apparel;
o dependence on key distribution channels, customers and suppliers;
o the impact of competitive products;
o changing fashion trends;
o our supply chain executional performance;
o the effectiveness of our promotion and marketing funding programs with
retailers;
o ongoing competitive pressures in the apparel industry;
o trade restrictions;
o consumer and customer reactions to new products and retailers; and
o political or financial instability in countries where our products are
manufactured.
For more information on these and other factors, see "Factors That May
Affect Future Results." We caution prospective investors 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 to the SEC's Release No. 33-8040, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies," 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 policies 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 due to rounding).
YEAR ENDED
------------------------------------------
NOVEMBER 25, NOVEMBER 26, NOVEMBER 28,
2001 2000 1999
------------ ------------ ------------
Net sales ............................................ 100.0% 100.0% 100.0%
Cost of goods sold.................................... 57.8 57.9 61.9
------ ------ ------
Gross profit.......................................... 42.2 42.1 38.1
Marketing, general and administrative expenses........ 31.8 31.9 31.7
Other operating (income).............................. (0.8) (0.7) (0.5)
Excess capacity/restructuring charges (reversals)..... (0.1) (0.7) 9.7
Global Success Sharing Plan (reversal)................ -- -- (6.7)
------ ------ ------
Operating income...................................... 11.3 11.6 3.9
Interest expense...................................... 5.4 5.0 3.6
Other (income) expense, net........................... 0.2 (0.8) 0.2
------ ------ ------
Income before taxes................................... 5.6 7.4 0.2
Income tax expense.................................... 2.1 2.6 0.1
------ ------ ------
Net income............................................ 3.5% 4.8% 0.1%
====== ====== ======
NET SALES SEGMENT DATA:
GEOGRAPHIC
Americas......................................... 67.1% 67.8% 66.6%
Europe........................................... 25.0 23.8 26.5
Asia Pacific..................................... 7.9 8.4 7.0
OVERVIEW
We have been challenged over the last five years with declining sales. The
decline was due to both industry-wide and company-specific factors.
Industry-wide factors included intense competition, shifts in consumer
preferences and, more recently, weak economies and retail markets.
Company-specific factors included brand equity erosion, insufficient product
innovation, poor presentation of our product at retail, operational problems in
our supply chain and weakness in our key distribution channels.
In late 1997, we began restructuring our business to address 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 contract
manufacturers. Beginning in 1999, we put in place a new senior management team.
We have adopted and executed new strategies focused on product innovation,
operational performance, retail relations and financial discipline. We have
taken actions to improve our business planning, supply chain and other
operational processes and internal capabilities. These efforts are beginning to
result in positive developments across several dimensions of our business
including improvements in our products, our service levels, our relations with
customers and the presentation of our products at retail. This outcome is most
evident in Europe where net sales, on a constant currency basis for the last
three consecutive quarters of fiscal year 2001, showed modest growth compared to
fiscal year 2000. Our focus and financial discipline have helped us end the year
with solid gross margins along with reduced operating expenses and debt.
19
Our ability to reverse the sales declines and grow our business depends in
part on our ability to continue to execute multiple business strategies in
difficult economic and retail environments. These strategies include:
o developing market-right and innovative products and ensuring every element
of the product range contributes to brand image and profitability;
o offering products to multiple consumer segments at a broad range of price
points;
o revitalizing our retail relationships through improving collaborative
account planning and product replenishment, and generating better economics
for retailers in terms of sales and margins;
o creating an easy and appealing jeanswear and casualwear buying experience
through improving presentation of our products at retail; and
o reducing the cost and time associated with product design, development and
sourcing activities.
As we go into 2002, we believe the successful execution of these
strategies will continue to stabilize, and position us to ultimately grow, 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 and retailer promotions and incentives when the
sale is recorded. We estimate allowances based on various market data,
historical trends, invoices and information from customers. Our actual returns
and allowances have not materially differed from our estimates.
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 reflects 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 narrowing sales decline, in view of the
current economic and retail environment, reflects 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 anticipate 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, we believe our 2002 constant currency net sales will decline
in the low single digits and we are planning our production and operating
expenses accordingly.
In the Americas, net sales in the U.S. 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. We believe retailers are
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) Superlow jeans
and Dockers(R) Mobile(TM) pant, supported by the right advertising and retail
programs, our data shows improved sell-through to consumers. Our performance in
the U.S. also reflected our targeted retailer promotions and incentives that
drove sales volumes during the fourth quarter of fiscal year 2001.
20
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
believe the constant currency results indicate that our business in Europe is
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 believe this reflects the impact of our updated
and innovative products, retail presentation programs and improved delivery
performance in the region.
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 accounts
for approximately 55% of our business in Asia, 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 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 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 include 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 continue 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 is consistent with our 2001 target
range of 8 to 9%. In fiscal year 2002, we expect advertising expense to be
approximately 8% of net sales.
OTHER OPERATING INCOME. For fiscal year 2001, licensing income increased
3.2% from 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. For fiscal year 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 fiscal year 2001 that resulted in workforce reductions in the
U.S. and Japan. In fiscal year 2000, we reversed charges of $33.1 million
primarily due to updated estimates related to prior years' restructuring
initiatives.
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 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. 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 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 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 year 2000 included 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% 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 moving 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, as well
as improved sourcing costs and the benefit of cost reductions resulting from
plant 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 to our continuing cost containment
efforts, lower salaries and related expenses resulting from prior year
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
The following is a summary of the actions taken and related charges and
reversals associated with our excess manufacturing capacity and other
restructuring activities. Restructuring reserves include only costs associated
with exit activities approved by executive management. Such costs are not
associated with nor do they benefit continuing activities. We review and
evaluate these activities periodically.
o During November 2001, we instituted various reorganization initiatives
in the U.S. that included simplifying product lines and realigning our
resources. We recorded an initial charge of $20.3 million in 2001 for
an estimated displacement of 517 employees. As of November 25, 2001,
the balance in this reserve was $20.0 million, and approximately 125
employees have 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 During November 2001, we 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. We recorded an initial charge of $2.0 million
in 2001 for an estimated displacement of 22 employees. As of November
25, 2001, the balance in this reserve was $2.0 million, and no
employees have been displaced. The remaining balance is primarily for
severance and employee benefits. We expect to fully utilize the
reserve balance by the end of 2002.
o During September 1999, we announced plans to close one manufacturing
facility and further reduce overhead costs by consolidating operations
in Europe. We recorded an initial charge to set up a reserve of $54.7
million. The manufacturing facility was closed in December 1999. In
fiscal years 2001 and 2000, $0.4 million and $2.2 million,
respectively, of the remaining reserve balance was reversed due to
updated estimates associated with employee benefits. As of November
25, 2001, the balance in this reserve was $2.5 million, and
approximately 945 employees had been displaced. The remaining balance
is primarily 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 benefits 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
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, total cash
and cash equivalents were $102.8 million, a $14.2 million decrease from the
$117.1 million cash balance as of November 26, 2000. Total debt as of November
25, 2001 was $1,958.4 million, a $168.0 million decrease from the balance as of
November 26, 2000. All debt obligations are on our balance sheet. We have no
off-balance sheet debt obligations.
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 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. Cash provided by operating activities
in fiscal year 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.
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 year primarily due to the
capitalization of underwriting and other fees for the senior notes 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' 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 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 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. Cash used for investing
activities during fiscal year 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 spending for fiscal year 2001 was $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, primarily for system enhancements.
CASH USED FOR FINANCING ACTIVITIES. Cash used for financing activities for
fiscal year 2001 was $139.9 million, as compared to $527.1 million in the same
period in 2000. We used cash in fiscal year 2001 primarily for repayment of
existing debt offset by the senior notes issued in January and the U.S.
receivables securitization transaction completed in July (SEE NOTE 7 TO THE
CONSOLIDATED FINANCIAL STATEMENTS). In fiscal year 2000, cash used for financing
activities was for repayment of existing debt.
FINANCIAL CONDITION
CREDIT AGREEMENTS. On February 1, 2001, we entered into a $1.05 billion
senior secured credit facility to replace the then existing 2000 credit facility
on more favorable terms. The credit facility consisted of a $700.0 million
revolving credit facility and $350.0 million of term loans. This facility
reduces our borrowing costs and extends the maturity of our principal 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 the revolving credit facility was reduced by
$152 million of guarantees and letters of credit issued under the revolving
credit facility, yielding a net availability of $473.0 million.
The facility is secured in substantially the same manner as the 2000 credit
facility. Collateral includes: domestic inventories, certain domestic equipment,
trademarks, other intellectual property, 100% of the stock of 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'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 the 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 us and our
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 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 agreements also contain financial covenants
that we must satisfy on an ongoing basis, including maximum leverage ratios and
minimum coverage ratios. As of November 25, 2001, we were in compliance with the
financial covenants under the facility.
Effective January 29, 2002, we completed an amendment to our 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. We have not made
final decisions regarding potential plant closures. The amendment also excludes
from those computations the non-cash portion of our long-term incentive
compensation plans. Second, the amendment reduces by 0.25 the amount of the
required tightening of the leverage ratio beginning 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.
U.S. RECEIVABLES SECURITIZATION. On July 31, 2001, we completed a
receivables securitization transaction involving receivables generated from
sales of products to our U.S. customers. The transaction involved the issuance
by Levi Strauss Receivables Funding, LLC, an indirect subsidiary, of $110.0
million of 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 our senior secured 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. In January 2001, we issued two series of notes payable,
U.S. $380.0 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 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 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" and the senior
unsecured notes were downgraded 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.
27
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 (income) expense, net.
FOREIGN EXCHANGE MANAGEMENT
We adopted SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities," on the first day of fiscal year 2001 (see "New Accounting
Standards" below.) SFAS 133 requires all derivatives to be recognized as assets
or liabilities at fair value. We 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
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. 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 hold derivative positions only in currencies to which we have
exposure. We have established a policy for a maximum allowable level 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
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.
The Financial Accounting Standards Board ("FASB") issued SFAS 142,
"Goodwill and Other Intangible Assets," dated June 2001, which 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 on the first day of fiscal year 2003. Amortization
expense for fiscal year 2001 was $10.7 million. We are currently evaluating the
impact adoption may have on our financial position and results of operations.
The FASB issued SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," dated August 2001. This statement supercedes SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and the accounting and reporting provisions of APB Opinion No.
30, "Reporting Results of 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 one 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 evaluating
the impact SFAS 144 may have on our financial position and 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.
Our substantial debt may have important consequences. For instance, it
could:
o make it more difficult for us to satisfy our financial obligations;
o require us to dedicate a substantial portion of any cash flow from
operations to the payment of interest and principal due under our
debt, which will reduce funds available for other business purposes;
o increase our vulnerability to general adverse economic and industry
conditions;
o limit our flexibility in planning for or reacting to changes in our
business and the industry in which we operate;
o place us at a competitive disadvantage compared to some of our
competitors that have less financial leverage; and
o limit our ability to obtain additional financing required to fund
working capital and capital expenditures and for other general
corporate purposes.
All borrowings under our bank credit facilities 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.
29
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 assurance
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 bank credit facilities and the indentures relating to our 11.625%
senior notes due 2008 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 bank credit facilities. 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 bank credit facilities mature in August 2003 and our 6.80% notes due
2003 mature in November 2003, at which time we will be required to repay or
refinance those borrowings. We cannot provide assurance that we will be able to
obtain replacement financing at that time or that any available replacement
financing will be on terms acceptable to us. If we are unable to obtain
acceptable replacement financing, we will not be able to satisfy our obligations
under our bank credit facilities or notes due 2003 and may be required to take
other actions to avoid defaulting on those facilities, 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.
Our notes due 2003, 2006, and 2008 are general senior unsecured obligations
that rank equal in right of payment with all of our existing and future
unsecured and unsubordinated debt. The 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 obligations of our
subsidiaries.
Because our bank credit facilities are secured obligations, failure to
comply with the 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, to the holders of our capital stock. In addition, we
have a receivables securitization facility relating to 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.
Holders of the notes due 2003, 2006 and 2008 are creditors of Levi Strauss
& Co. and not of our subsidiaries. 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's creditors,
including trade creditors, and any prior or equal claim of any equity holder of
that subsidiary. 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 bank credit facilities, or
are not owned by us. As a result, creditors receive less, proportionately, than
our secured creditors and the creditors of 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.
We conduct our foreign operations through foreign subsidiaries, which in
fiscal year 2001 accounted for approximately 38% 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. We only receive the cash that remains after our foreign
subsidiaries satisfy their obligations. 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.
30
RISKS RELATING TO THE INDUSTRY IN WHICH WE COMPETE
THE WORLDWIDE APPAREL INDUSTRY IS 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. As a result, any
substantial deterioration in general economic conditions or increases in
interest rates, or terrorist or political events that diminish consumer spending
and confidence, in any of the regions in which we compete, could adversely
affect the sales of our products.
WE FACE INTENSE COMPETITION IN THE WORLDWIDE APPAREL INDUSTRY.
We face a variety of competitive challenges from other domestic and foreign
jeanswear 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 developing innovative, high-quality products in fits, finishes,
fabrics and performance features that appeal to a broad range of
consumers;
o anticipating and responding to changing consumer demands in a timely
manner;
o maintaining favorable brand recognition;
o generating better economics for our customers in terms of sales and
margins;
o ensuring product availability through effective planning and
replenishment collaboration with retailers;
o offering competitively priced products;
o providing strong and effective marketing support; and
o obtaining sufficient retail floor space and effective presentation of
products at retail.
Increased competition in the worldwide apparel industry, including from
international expansion of vertically-integrated specialty stores and mass
merchants and from Internet-based competitors, could reduce our sales and prices
and adversely affect our results of operations.
THE WORLDWIDE APPAREL INDUSTRY IS EXPERIENCING PRICE DEFLATION.
The worldwide apparel industry continues to experience price deflation.
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. and increased value-consciousness on the part of consumers.
Downward pressure on prices may:
o limit our ability to maintain or improve gross margins;
o increase customer demands for allowances, margin assistance and other
forms of economic support that could adversely affect our
profitability; and
o increase pressure on us to further reduce our cost of goods and our
operating expenses.
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 success depends in large part on our ability to develop, market and
deliver innovative, exciting products that appeal to multiple consumer segments
at a range of price points. Any failure on our part to develop innovative
products, update core products or anticipate, identify and respond effectively
to changing consumer demands and fashion trends could adversely affect retail
and consumer acceptance of our products, limit sales growth and leave us with a
substantial amount of unsold inventory. If we do have such inventory, we may be
forced to rely on markdowns, which may harm our business. At the same time, 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 in consumer preferences is
heightened by our increasing reliance on offshore manufacturers, as offshore
outsourcing may increase lead times between production decisions and customer
delivery.
INCREASES IN THE PRICE OF RAW MATERIALS OR THEIR REDUCED AVAILABILITY COULD
INCREASE OUR COST OF SALES AND 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. 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.
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 duties imposed on imported products 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.
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 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.
Our business has declined in recent years. Net sales declined from $7.1
billion in 1996 to $4.3 billion in 2001, a decrease of 40%. Our market research
indicated that we experienced significant brand equity and market position
erosion in all of the regions in which we operate. Our declining business, and
the actions we took in response to that decline, prevented us from repaying the
substantial debt we incurred in the 1996 transaction 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 to these trends, we have made substantial strategic,
operational and management changes. We do not know whether those changes will
have the desired effect on our worldwide operations or on the financial results
of any of our operating regions.
32
WE MAY BE UNABLE TO MAINTAIN OR INCREASE OUR SALES THROUGH OUR CURRENT
DISTRIBUTION CHANNELS.
In the U.S., 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, account for
most of the growth in jeanswear and casual wear sales in the U.S. 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, we do not sell products to mass merchants in the U.S., such as
Wal-Mart Stores, Inc., the Target division of Target Corporation and Kmart
Corporation, a 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, entry or expansion into distribution 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 declines in the independent retailer channel may
adversely affect the sales of our products in Europe.
In Asia, we experienced declines in our core department stores channels in
Japan and Australia, our two largest businesses in the region. Our business in
Japan experienced a number of customer bankruptcies and we face increasing
pressure to open new distribution throughout the region.
We also do not have a large portfolio of company-owned stores and Internet
distribution channels possessed by 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" 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 industry 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.
A GROUP OF KEY U.S. CUSTOMERS ACCOUNTS FOR A SIGNIFICANT PORTION OF OUR SALES.
Net sales to our ten largest customers, all of which are located in the
U.S., totaled approximately 47% and 48% of total net sales during fiscal years
2001 and 2000. One customer, J. C. Penney Company, Inc., accounted for
approximately 13% of our fiscal year 2001 net sales and 12% of our fiscal year
2000 net sales. 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 that trend to continue, including in Europe,
Canada and Mexico.
While we have long-standing customer relationships, we do not have
long-term contracts with any of them. As a result, purchases generally occur on
an order-by-order basis, and the relationship, as well as particular orders, can
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
buying 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'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'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 derived mostly from sales of jeans products. Our Levi's(R)
brand, which consists primarily of denim bottoms, generated approximately 75% of
our total net sales in 2001. Sales of Levi's(R) brand products accounted for
approximately 66% of net sales in the Americas, approximately 91% of net sales
in Europe and approximately 95% of net sales in Asia Pacific. Our success is
dependent on the strength of consumer demand for branded jeans products 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 on our business and financial condition.
WE RELY ON INDEPENDENT MANUFACTURERS FOR MOST OF OUR PRODUCTION.
Our reliance on independent manufacturers for the majority of our
production could harm our operations. We depend upon our contract manufacturers
to secure a sufficient supply of raw materials and maintain sufficient
manufacturing and shipping capacity. This dependence could subject us to
difficulty in obtaining timely delivery of products of acceptable quality. In
addition, a contractor'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 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 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 A FEW KEY SUPPLIERS FOR A LARGE PORTION OF OUR FABRIC PURCHASES.
Three vendors, Cone Mills Corporation, Galey & Lord, Inc., including its
Swift Denim subsidiary and Burlington Industries, Inc. supplied approximately
45% of our total volume of fabric purchases worldwide in 2001. Cone Mills, our
largest supplier, supplies various fabrics to us and is the sole supplier of the
denim used for our 501(R) jeans. Purchases from Cone Mills accounted for
approximately 25% 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.
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. We cannot provide assurance that we will 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,
or in the markets for the fabrics we purchase, including disruptions arising
from mill closures or consolidation resulting from excess industry capacity or
otherwise. Any of those 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.
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 initiating substantial changes in our information systems in the U.S.
and Asia;
o rolling out new collaborative account planning, replenishment and
marketing programs with customers;
o making organizational changes in the U.S. 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 strength of our
planning, the quality of integration across business functions and the success
of our management team in leading and motivating our employees. We cannot
provide assurance that we will be able to execute successfully all of 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) brand and our U.S. sales
organization. We cannot provide assurance that our management team will be able
to work together successfully to execute our strategy, and our business and
financial condition may suffer if they fail to do so.
THE SUCCESS OF OUR BUSINESS DEPENDS ON OUR ABILITY TO STRENGTHEN OUR INTERNAL
CAPABILITIES AND HUMAN RESOURCES.
We need talent, skills and experience in a number of areas including core
business activities. Our success is dependent upon strengthening our internal
capabilities, including our management bench strength, 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 retain and attract qualified employees has been 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
ability to retain 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.
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 assurance 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 assurance 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 of some foreign countries may not
allow us to protect our proprietary rights to the same extent as we do in the
U.S. 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.
In fiscal year 2001, we generated approximately 38% of our net sales
outside the U.S., 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 and economic instability;
o exchange controls;
o language and other cultural barriers;
o less-protective laws relating to intellectual property;
o foreign tax treaties and policies; and
o restrictions on the transfer of funds to or from foreign countries.
Our reported financial performance on a U.S. dollar denominated basis is
also subject to 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 from the prior year
period, net sales for fiscal year 2001 would have increased approximately 1% for
our Europe division. Approximately $85.3 million of the decrease in total net
sales for fiscal year 2001, as compared to the same period in 2000, was 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.
We manage our foreign currency exposures in a way that makes it unlikely
that 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 the changes in the market values of those exposure management
instruments that do not qualify for hedge accounting treatment in income and, as
a result, our earnings may be subject to volatility.
36
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 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. As a result, we cannot provide assurance 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DERIVATIVE FINANCIAL INSTRUMENTS
We are exposed to market risk primarily related to foreign exchange,
interest rates and 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 currently do not manage our
exposure to the price of cotton with derivative instruments.
FOREIGN EXCHANGE RISK
Foreign exchange market risk exposures are primarily related to cash
management activities, raw material and finished goods purchases, net investment
positions and royalty flows from affiliates.
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 January 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
======= =======
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 expire 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
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 25, 2001
(DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED)
YEAR ENDED
------------------------------------------------------------------------------------------
FAIR
VALUE
2001 2002 2003 2004 2005 2006 2007 2001
---------- ---------- -------- -------- -------- -------- -------- ---------
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)
<FN>
______________
*Assumes no change in short-term interest rates
</FN>
41
INTEREST RATE TABLE AS OF NOVEMBER 26, 2000
(DOLLARS IN THOUSANDS UNLESS OTHERWISE STATED)
YEAR ENDED
------------------------------------------------------------------------------------------
FAIR
VALUE
2000 2001 2002 2003 2004 2005 2006 2000
---------- ---------- -------- -------- -------- -------- -------- ---------
DEBT INSTRUMENTS
Fixed Rate (US$)........... $ 856,637 $ 850,548 $844,774 $488,465 $481,571 $450,000 -- $ 684,486
Average Interest Rate.... 7.05% 7.03% 7.02% 7.15% 7.13% 7.00% -- --
Fixed Rate (Yen 20 billion). $ 184,043 $ 184,043 $184,043 $184,043 $184,043 $184,043 $184,043 $ 133,945
Average Interest Rate.... 4.25% 4.25% 4.25% 4.25% 4.25% 4.25% 4.25% --
Variable Rate (US$)........ $1,071,185 $1,069,417 $ 68,143 $ 56,889 $ 24,365 -- -- $1,071,185
Average Interest Rate*... 8.85% 8.85% 7.64% 8.06% 9.68% -- -- --
INTEREST RATE DERIVATIVE
FINANCIAL INSTRUMENTS
RELATED TO DEBT
Interest Rate Options
Collar = Locked fixed payer rate
in 6.72%-7.20% range/Receive
variable 3 month LIBOR,
combined with Receive 8.25%
fix/Pay variable 3 month LIBOR $ 75,000 $ 75,000 -- -- -- -- -- $ (85)
Combination Pay fix 7%/
Receive fix 8% vs variable 3
month LIBOR $ 75,000 $ 75,000 -- -- -- -- -- $ 2
Combination Pay fix 8.10%/ Pay
fix 6.72% vs Receive 3 month
LIBOR $ 75,000 $ 75,000 -- -- -- -- -- $ (170)
Collar = Locked fixed payer rate
in average 6.75%-7.20% range $ 200,000 $ 200,000 -- -- -- -- -- $ (537)
<FN>
______________
*Assumes no change in short-term interest rates
</FN>
42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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' 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'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'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
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: 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") 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's fiscal year consists of 52 or 53 weeks, ending on the last
Sunday of November in each year. The 2001, 2000 and 1999 fiscal years consisted
of 52 weeks and ended November 25, 2001, 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 2001
presentation.
ESTIMATES
The preparation 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
The Company is one of the world'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) and Dockers(R) brands. The Company markets its Levi's(R) and
Dockers(R) brand products in three geographic regions: the Americas, Europe and
Asia Pacific.
The stockholders' deficit resulted from a 1996 transaction in which the
Company's stockholders created new long-term governance arrangements, including
a voting trust and stockholders 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's ability to
satisfy its obligations and to reduce its total debt depends on the Company's
future operating performance and on economic, financial, competitive and other
factors, many of which are beyond the Company's control.
The Company relies on a number of suppliers for its manufacturing
processes, particularly Cone Mills Corporation, which has been and remains the
sole supplier of the denim used for 501(R) jeans through the Company's only
long-term supply contract. In 2001, 2000 and 1999, Cone Mills Corporation
supplied approximately 25%, 26% and 22%, 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's
results of operations.
For 2001, 2000 and 1999, the Company had one customer that represented
approximately 13%, 12% and 11%, 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's total net sales. Net sales to the
Company's ten largest customers, all of which are located in the U.S., totaled
approximately 47%, 48% and 46% of total net sales during fiscal years 2001, 2000
and 1999, respectively.
48
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Most of the Company's production and distribution employees in the U.S. are
covered by various collective bargaining agreements. Outside the U.S., most of
the Company's production and distribution employees are covered by either
industry-sponsored and/or state-sponsored collective bargaining mechanisms. The
Company considers its relations with its employees 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 employees 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
In accordance with Statement of Position ("SOP") 93-7, "Reporting on
Advertising Costs," the Company expenses advertising costs as incurred.
Advertising expense is recorded in marketing, general and administrative
expenses. For fiscal years 2001, 2000 and 1999 total advertising expense was
$357.3 million, $402.7 million and $490.2 million, respectively.
OTHER OPERATING INCOME
Royalties from sales of merchandise by licensees of our trademarks are
recognized when earned and are recorded in other operating income.
MINORITY INTEREST
Minority interest is included in other income/expense, net, and includes a
16.4% minority interest of Levi Strauss Japan K.K., the Company's Japanese
affiliate, and a 49.0% minority interest of Levi Strauss Istanbul Konfeksigon,
the Company's Turkish affiliate.
EARNINGS PER SHARE
Basic earnings per share ("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
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 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
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 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 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, which were valued as a result of the 1985 acquisition. Tradenames
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") 142, "GOODWILL AND OTHER INTANGIBLE ASSETS" FOR CHANGES IN FISCAL
YEAR 2003.)
LONG-LIVED ASSETS
In accordance with SFAS 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed 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 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 for the expected
future tax consequences attributable to temporary differences between the
financial statement carrying amounts 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 income in the years in
which those temporary differences are expected to reverse.
TRANSLATION ADJUSTMENT
The functional currency for most of the Company'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 other comprehensive income 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/expense,
net.
SELF-INSURANCE
The Company is partially self-insured for workers' compensation and certain
employee health benefits. Accruals for losses are made based on the Company'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 - (continued)
SECURITIZATIONS
The Company accounts for securitization of receivables in accordance with
SFAS 140, "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 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.)
The Financial Accounting Standards Board ("FASB") issued SFAS 142,
"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 on the first day of fiscal year 2003. Amortization
expense for fiscal year 2001 was $10.7 million. The Company is currently
evaluating the impact adoption may have on its financial position and results of
operations.
51
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The FASB issued SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," dated August 2001. This statement supercedes SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and the accounting and reporting provisions of APB Opinion No.
30, "Reporting Results of 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 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
evaluating the impact SFAS 144 may have on its financial position and results of
operations.
NOTE 2: OTHER COMPREHENSIVE INCOME
TRANSITION
ADJUSTMENTS
-------------------
MINIMUM CASH NET CASH NET
PENSION FLOW INVESTMENT FLOW INVESTMENT TRANSLATION
LIABILITY HEDGES HEDGES HEDGES HEDGES ADJUSTMENTS TOTALS
--------- ------ ---------- ------ ---------- ----------- ------
(DOLLARS IN THOUSANDS)
Accumulated other comprehensive income (loss)
at November 29, 1998 $ -- $ -- $ -- $ -- $(14,100) $ 11,779 $(2,321)
-----------------------------------------------------------------------------
Gross changes (1,235) -- -- -- 26,252 3,042 28,059
Tax 457 -- -- -- (8,686) -- (8,229)
-----------------------------------------------------------------------------
Other comprehensive income (loss), net of tax (778) -- -- -- 17,566 3,042 19,830
-----------------------------------------------------------------------------
Accumulated other comprehensive income (loss)
at November 28, 1999 (778) -- -- -- 3,466 14,821 17,509
-----------------------------------------------------------------------------
Gross changes 1,235 -- -- -- 57,224 (70,185) (11,726)
Tax (457) -- -- -- (21,216) -- (21,673)
-----------------------------------------------------------------------------
Other comprehensive income (loss), net of tax 778 -- -- -- 36,008 (70,185) (33,399)
-----------------------------------------------------------------------------
Accumulated other comprehensive income (loss)
at November 26, 2000 -- -- -- -- 39,474 (55,364) (15,890)
-----------------------------------------------------------------------------
Gross changes -- (828) 120 4,844 12,752 634 17,522
Tax -- 306 (44) (1,792) (2,408) -- (3,938)
-----------------------------------------------------------------------------
Subtotal -- (522) 76 3,052 10,344 634 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 10,344 634 11,626
-----------------------------------------------------------------------------
Accumulated other comprehensive income (loss)
at November 25, 2001 $ -- $ -- $ 76 $ 572 $ 49,818 $(54,730) $(4,264)
=============================================================================
NOTE 3: EXCESS MANUFACTURING CAPACITY/RESTRUCTURING RESERVES
2001 REORGANIZATION INITIATIVES
In November 2001, the Company instituted various reorganization initiatives
in the U.S. that includes simplifying product lines and realigning the Company's
resources. The Company recorded an initial charge of $20.3 million in 2001
reflecting an estimated displacement of 517 employees. As of November 25, 2001
approximately 125 employees have been displaced. The ending balance for this
reserve is displayed in the table below.
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. The Company
recorded an initial charge of $2.0 million in 2001 reflecting 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, 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 initial charges of $61.1 million in 1998 that consisted 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 due to updated estimates. The reversal
was primarily associated with employee benefits and higher sub-lease income than
initially projected. The ending balances for this reserve are displayed in 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.
1998 CORPORATE REORGANIZATION INITIATIVES
BALANCE BALANCE BALANCE
AT AT AT
11/28/99 REVERSALS REDUCTIONS 11/26/00 CHARGES REVERSALS REDUCTIONS 11/25/01
-------- --------- ---------- -------- ------- --------- ---------- --------
(DOLLARS IN THOUSANDS)
Severance and employee benefits......... $ 4,246 $(1,838) $(2,308) $ 100 $ -- $ -- $(100) $ --
Other restructuring costs............... 6,412 (1,897) (2,742) 1,773 -- -- (265) 1,508
------- ------- -------- ------ ---- ------- ------ ------
Total.............................. $10,658 $(3,735) $(5,050) $1,873 $ -- $ -- $(365) $1,508
======= ======= ======== ====== ==== ======= ====== ======
1999 CORPORATE REORGANIZATION INITIATIVES
BALANCE BALANCE BALANCE
AT AT AT
11/28/99 REVERSALS REDUCTIONS 11/26/00 CHARGES REVERSALS REDUCTIONS 11/25/01
-------- --------- ---------- -------- ------- --------- ---------- --------
(DOLLARS IN THOUSANDS)
Severance and employee benefits......... $43,550 $(7,695) $(33,093) $2,762 $ -- $(1,253) $(1,396) $113
Other restructuring costs............... 1,680 (1,268) (412) -- -- -- -- --
------- ------- -------- ------ ---- -------- ------- ----
Total.............................. $45,230 $(8,963) $(33,505) $2,762 $ -- $(1,253) $(1,396) $113
======= ======= ======== ====== ==== ======== ======= ====
53
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
NORTH AMERICA PLANT CLOSURES
Since 1997, the Company has closed 29 of its owned and operated production
and finishing facilities in North America and Europe in order to reduce costs,
eliminate excess manufacturing capacity and align its sourcing strategy with
changes in the industry and in consumer demand. Plant closures were announced in
November 1997, in which ten manufacturing facilities as well as a finishing
center in the U.S. were closed by the end of 1998, displacing approximately
6,400 employees. 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
severance 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 primarily 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.
1997 NORTH AMERICA PLANT CLOSURES
BALANCE BALANCE BALANCE
AT AT AT
11/28/99 REVERSALS REDUCTIONS 11/26/00 CHARGES REVERSALS REDUCTIONS 11/25/01
-------- --------- ---------- -------- ------- --------- ---------- --------
(DOLLARS IN THOUSANDS)
Severance and employee benefits........... $12,752 $(4,987) $(7,544) $ 221 $ -- $ (164) $ (39) $18
Other restructuring costs................. 2,938 -- (712) 2,226 -- (1,699) (497) 30
------- ------- ------- ------ ---- ------- ----- ---
Total................................. $15,690 $(4,987) $(8,256) $2,447 $ -- $(1,863) $(536) $48
======= ======= ======= ====== ==== ======= ===== ===
1998 NORTH AMERICA PLANT CLOSURES
BALANCE BALANCE BALANCE
AT AT AT
11/28/99 REVERSALS REDUCTIONS 11/26/00 CHARGES REVERSALS REDUCTIONS 11/25/01
-------- --------- ---------- -------- ------- --------- ---------- --------
(DOLLARS IN THOUSANDS)
Severance and employee benefits............. $4,145 $ (13) $(2,683) $1,449 $ -- $(1,325) $(124) $ --
Other restructuring costs................... 1,801 -- (1,193) 608 -- (373) (12) 223
------ ----- ------- ------ ---- ------- ----- ----
Total.................................. $5,946 $ (13) $(3,876) $2,057 $ -- $(1,698) $(136) $223
====== ===== ======= ====== ==== ======= ===== ====
54
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
1999 NORTH AMERICA PLANT CLOSURES
BALANCE BALANCE BALANCE
AT AT AT
11/28/99 REVERSALS REDUCTIONS 11/26/00 CHARGES REVERSALS REDUCTIONS 11/25/01
-------- --------- ---------- -------- ------- --------- ---------- --------
(DOLLARS IN THOUSANDS)
Severance and employee benefits............. $116,237 $ (7,132) $(89,253) $19,852 $ -- $ (5,179) $ (7,350) $ 7,323
Other restructuring costs................... 43,442 (6,149) (2,528) 34,765 -- (16,285) (7,144) 11,336
-------- --------- -------- ------- ---- -------- -------- -------
Total.................................. $159,679 $(13,281) $(91,781) $54,617 $ -- $(21,464) $(14,494) $18,659
======== ========= ======== ======= ==== ======== ======== =======
EUROPE REORGANIZATION AND PLANT CLOSURES
In September 1998 the Company announced plans to close two manufacturing
and two finishing facilities, and reorganize operations throughout Europe,
displacing approximately 1,650 employees. These plans were prompted by decreased
demand for denim jeans products and a resulting over-capacity in the Company's
European owned and operated plants. The production facilities were closed by the
end of 1999. The Company recorded an initial charge of $107.5 million in 1998
that consisted of $10.0 million for asset write-offs and $97.5 million for
severance and employee benefits. As of November 25, 2001, approximately 1,650
employees had been displaced. The ending balance for this reserve is displayed
in the table below.
In conjunction with these plans in Europe, the Company announced in
September 1999 plans to close a production facility and reduce capacity at a
finishing facility in the United Kingdom, to further reduce overhead costs and
consolidate operations. The production facility was closed in December 1999. The
Company recorded an initial charge of $54.7 million in 1999 that consisted of
$4.5 million for asset write-offs, $48.2 million for severance and employee
benefits and $2.0 million for other restructuring costs. In fiscal years 2001
and 2000, $0.4 million and $2.2 million, respectively, of the remaining reserve
balance was reversed due to updated estimates associated with employee benefits.
As of November 25, 2001, approximately 945 employees had been displaced. The
ending balances for this initial charge are displayed in the table below.
1998 EUROPE REORGANIZATION AND PLANT CLOSURES
BALANCE BALANCE BALANCE
AT AT AT
11/28/99 REVERSALS REDUCTIONS 11/26/00 CHARGES REVERSALS REDUCTIONS 11/25/01
-------- --------- ---------- -------- ------- --------- ---------- --------
(DOLLARS IN THOUSANDS)
Severance and employee benefits...... $10,653 $ -- $(9,145) $1,508 $ -- $ -- $(1,283) $225
------- ------- ------- ------ ---- ---- ------- ----
Total........................... $10,653 $ -- $(9,145) $1,508 $ -- $ -- $(1,283) $225
======= ======= ======= ====== ==== ==== ======= ====
1999 EUROPE REORGANIZATION AND PLANT CLOSURES
BALANCE BALANCE BALANCE
AT AT AT
11/28/99 REVERSALS REDUCTIONS 11/26/00 CHARGES REVERSALS REDUCTIONS 11/25/01
-------- --------- ---------- -------- ------- --------- ---------- --------
(DOLLARS IN THOUSANDS)
Severance and employee benefits...... $38,413 $(2,165) $(30,557) $5,691 $ -- $(370) $(3,351) $1,970
Other restructuring costs............ 2,012 -- (1,372) 640 -- -- (161) 479
------- ------- -------- ------ ---- ----- ------- ------
Total........................... $40,425 $(2,165) $(31,929) $6,331 $ -- $(370) $(3,512) $2,449
======= ======= ======== ====== ==== ===== ======= ======
Severance and employee benefits relate to severance packages, out-placement
and career counseling for employees affected by the plant closures, and
reorganization initiatives. Reductions consist of payments for severance and
employee benefits, and other restructuring costs. 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
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
======== ========= ========
At November 25, 2001, cumulative non-U.S. operating losses of $198.2
million generated by the Company were available to reduce future non-U.S.
taxable income. Approximately $103.6 million of the non-U.S. operating losses
expire between the years 2002 and 2011 and the remainder of the non-U.S. losses
carry forward indefinitely.
Income taxes due to translation gains and losses are recorded in cumulative
translation adjustment, a component of accumulated other comprehensive income,
and were $2.8 million, $21.2 million and $8.7 million for 2001, 2000 and 1999,
respectively.
Temporary differences which give rise to deferred tax assets and
liabilities at November 25, 2001 and November 26, 2000 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
======== ========
The $24.4 million and $24.0 million deferred tax valuation allowances at
November 25, 2001 and November 26, 2000, respectively, represent the portion of
the Company'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.
The Company's effective income tax rate for fiscal years 2001, 2000 and
1999 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%
==== ==== =====
The consolidated U.S. income tax returns of the Company for 1986 through
1999 are under examination by the Internal Revenue Service ("IRS"). A settlement
agreement covering most issues was reached with the IRS for the years 1986
through 1989 and a payment was made to the IRS during 2001. 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 5: PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment ("PP&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
========= ==========
As of November 25, 2001, the Company had approximately $10.0 million of
PP&E, net, available for sale, consisting primarily of closed facilities.
Depreciation expense for 2001, 2000 and 1999 was $69.9 million, $80.2
million and $108.7 million, respectively. Accumulated depreciation in fiscal
year 2001 was reduced by approximately $38.0 million due to PP&E sales or
disposals.
Construction in progress at November 25, 2001 related to various projects.
It is estimated that approximately $10.0 million in costs will be incurred to
complete these projects in 2002. These projects primarily consist of sales
office capital improvements. Construction in progress at November 26, 2000
related to sales office capital improvements, sourcing projects, internally
developed software and facilities infrastructure.
NOTE 6: GOODWILL AND 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.
Amortization expense for 2001, 2000 and 1999 was $10.7 million, $10.8
million and $11.4 million, respectively.
58
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
NOTE 7: DEBT AND LINES OF CREDIT
Debt and lines of credit are summarized below:
2001 2000
---- ----
(DOLLARS IN THOUSANDS)
LONG-TERM DEBT:
Unsecured:
Notes:
6.80%, due 2003...........................$ 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
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
In 1996, the Company issued two series of notes payable totaling $800.0
million to qualified institutional investors (the "Notes Offering") in reliance
on Rule 144A under the Securities Act of 1933 (the "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
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 Notes 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
On January 18, 2001, the Company issued two series of notes payable
totaling the 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") and 125.0 million euro notes ("Euro Notes"), (collectively, the
"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's then effective credit facility.
The indentures governing the 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 the assets of the Company'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's
Ratings Service and Moody'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
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
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
On February 1, 2001, the Company entered into a $1.05 billion senior
secured credit facility to replace its existing credit facility 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, the
credit facility consists of $625.0 million revolving credit and $252.6 million
of term loans. This facility reduced the Company's borrowing costs and extends
the maturity of the Company'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'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'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 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'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
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, the Company was in compliance with the financial covenants
under the facility.
Effective January 29, 2002, the Company entered into an amendment 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.)
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
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'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 secured 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'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
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") and a $30.0 million tranche ("Tranche 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'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
In February 2000, several of the Company'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. Borrowings are collateralized by a security interest in
the receivables of these subsidiaries. The Company adopted SFAS 140, "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
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 on June 15, 2002, which the Company has the
opportunity to extend or renew.
PRINCIPAL SHORT-TERM AND LONG-TERM DEBT PAYMENTS
As of November 25, 2001, 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
At November 25, 2001, the Company had unsecured and uncommitted short-term
credit lines available totaling $10.7 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 25, 2001 and November 26, 2000, the Company had $131.7 million
and $193.4 million, respectively, of standby letters of credit with various
international banks, of which $52.5 million and $52.5 million, respectively,
serve as guarantees by the creditor banks to cover U.S. workers' compensation
claims. In addition, $66.0 million of these standby letters of credit under the
secured bank credit facility support short-term credit lines at November 25,
2001. 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
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.
The Company has entered into interest rate option contracts to reduce or
neutralize the exposure to changes in variable interest rates. 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. 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's weighted average interest rate on average borrowings
outstanding during 2001 and 2000, including the amortization of capitalized bank
fees, interest rate swap cancellations and underwriting fees, was 9.47% and
9.50%, respectively. The 2001 interest rate excludes the write-off of fees that
resulted from the replacement of the credit agreement dated January 31, 2000,
interest on deferred compensation and other miscellaneous items (SEE "CREDIT
FACILITIES" ABOVE AND NOTE 15 TO THE CONSOLIDATED FINANCIAL STATEMENTS).
NOTE 8: COMMITMENTS AND CONTINGENCIES
FOREIGN EXCHANGE CONTRACTS
At November 25, 2001, the Company had U.S. dollar forward currency
contracts to buy $1.2 billion and to sell $718.5 million against various foreign
currencies. The Company also had euro forward currency contracts to buy 221.8
million euro against various foreign currencies and to sell 78.7 million euro
against various foreign currencies. In addition, the Company had U.S. dollar
option contracts to buy $544.0 million and to sell $514.8 million against
various foreign currencies. The Company also had euro option currency contracts
to buy 50.0 million euro against various foreign currencies and to sell 25.0
million euro against various foreign currencies. These contracts are at various
exchange rates and expire at various dates through December 2002.
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, the Company had bought U.S. dollar options resulting in a net long
position against the euro of $53.9 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'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
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'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'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's financial position or business operations.
NOTE 9: 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's financial instrument assets and (liabilities)
at November 25, 2001 and November 26, 2000 are as follows:
NOVEMBER 25, 2001 NOVEMBER 26, 2000
------------------------ ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
-------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
DEBT INSTRUMENTS:
U.S. dollar notes offering......................... $(1,193,012) $(932,138) $ (799,606) $ (628,000)
Euro notes offering................................ (114,378) (85,719) -- --
Yen-denominated eurobond placement................. (164,413) (113,115) (184,043) (133,945)
Credit facilities.................................. (252,748) (252,748) (1,000,131) (1,000,131)
Domestic receivables-backed securitization......... (110,081) (110,081) -- --
Customer service center equipment financing........ (80,278) (81,970) (86,901) (86,356)
European receivables-backed securitization......... (41,366) (41,366) (31,148) (31,148)
Industrial development revenue refunding bond...... (10,015) (10,015) (10,036) (10,036)
CURRENCY AND INTEREST RATE CONTRACTS:
Foreign exchange forward contracts................. $ 13,797 $ 13,797 $ 9,830 $ 9,593
Foreign exchange option contracts.................. 4,328 4,328 7,309 6,289
Interest rate option contracts..................... (2,266) (2,266) 457 (789)
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, 2001 and November 26, 2000. These
amounts have not been updated since those dates and, therefore, the current
estimates of fair value at dates subsequent to November 25, 2001 and November
26, 2000 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 10: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company adopted SFAS 133, "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 amount of $87
thousand in other income/expense. This 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'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 other comprehensive income.
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 any
changes in fair value are included in other income/expense.
The Company manages its net investment position in its subsidiaries in
major currencies by using forward, swap and option contracts. Part 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 other comprehensive income section of
stockholders' deficit. At November 25, 2001, the fair value of qualifying net
investment hedges was a $5.8 million net asset that was recorded in the
cumulative translation adjustment section of accumulated other comprehensive
income. There were no gains or losses 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 hedges at November 25, 2001 represented a $0.3 million net
asset.
The Company designates a portion of its outstanding yen-denominated
eurobond as a net investment hedge. As of November 25, 2001, a $6.8 million net
asset related to the translation effects of the eurobond was recorded in the
cumulative translation adjustment section of accumulated other comprehensive
income.
65
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The Company holds 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 for the year ended November
25, 2001 from accumulated other comprehensive income to other income/expense
amounted to a net gain of $3.9 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. The fair
value of these instruments as of November 25, 2001 was a $0.2 million net
liability.
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.
The Company also entered into transactions managing the exposure related to
the Euro Notes 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
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.
The fair value of the derivative instruments managing interest rate risk 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.
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/expense 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 reported in other income/expense, realized and unrealized other
comprehensive income ("OCI") balances, realized and unrealized cumulative
translation adjustments ("CTA") balances, and the fair values of derivative
instruments reported as an asset or liability. OCI and CTA are components of the
accumulated other comprehensive income section of stockholders' deficit.
_________________________________________________________________________________________________________
YEAR ENDED
NOVEMBER 25, 2001 AT NOVEMBER 25, 2001
_________________________________________________________________________________________________________
OTHER (INCOME)/EXPENSE OCI GAIN/(LOSS) CTA GAIN/(LOSS)
_________________________________________________________________________________________________________
(DOLLARS IN THOUSANDS) REALIZED UNREALIZED REALIZED UNREALIZED REALIZED UNREALIZED
_________________________________________________________________________________________________________
Foreign Exchange Management:
Sourcing $10,696 $4,176 $-- $ -- $ -- $ --
Net Investment 2,146 (60) -- -- 53,314 5,664
Yen Bond -- (8,798) -- -- -- 6,780
Royalties (8,044) 2,537 -- 908 -- --
Cash Management (2,228) (790) -- -- -- --
Transition Adjustments 828 -- -- -- -- 120
Euro Notes Offering 5,738 1,169 -- -- -- --
_________________________________________________________________________________________________________
Interest Rate Management $ -- $1,476 $ -- $ --
Transition Adjustments -- 1,246 -- --
_________________________________________________________________________________________________________
_____________________________________________________
AT NOVEMBER 25,
2001
_____________________________________________________
FAIR VALUE
ASSET/(LIABILITY)
_____________________________________________________
(DOLLARS IN THOUSANDS)
_____________________________________________________
Foreign Exchange Management:
Sourcing $10,950
Net Investment 6,068
Royalties 729
Cash Management (738)
Euro Notes Offering (1,169)
_____________________________________________________
Interest Rate Management $(2,266)
_____________________________________________________
67
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
NOTE 11: LEASES
The Company is obligated under operating leases for facilities, office
space and equipment. At November 25, 2001, 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
========
The amounts shown for total minimum lease payments on operating leases have
not been reduced by estimated future income of $12.3 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 2001,
2000 and 1999 was $74.0 million, $78.1 million and $86.1 million, respectively.
NOTE 12: PENSION AND POSTRETIREMENT BENEFIT PLANS
The Company has numerous non-contributory defined benefit retirement plans
covering substantially all employees. It is the Company'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 2001, 2000, and 1999 totaled $6.2 million,
$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'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'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 various reorganization initiatives (SEE NOTE 3 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. These
programs resulted in the recognition of net curtailment gains and losses and
early retirement incentives.
68
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
PENSION BENEFITS POSTRETIREMENT BENEFITS
--------------------------- ----------------------------
NOVEMBER 25, NOVEMBER 26, NOVEMBER 25, NOVEMBER 26,
2001 2000 2001 2000
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year....... $602,060 $669,440 $ 519,117 $ 525,065
Service cost.................................. 15,249 18,661 6,040 7,006
Interest cost................................. 47,443 43,678 38,576 34,943
Plan participants' contributions.............. 271 267 2,404 1,596
Plan amendments............................... -- -- (21,131) (27,740)
Actuarial (gain) loss*........................ 35,440 (74,274) 51,475 10,577
Net curtailment (gain) loss................... 19 (18,184) -- --
Settlement gain............................... (177) (187) -- --
Benefits paid**............................... (38,604) (37,341) (35,254) (32,330)
-------- -------- --------- ---------
Benefit obligation at end of year............. 661,701 602,060 561,227 519,117
-------- -------- --------- ---------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year 639,950 572,576 -- --
Actual return on plan assets.................. (70,334) 91,631 -- --
Employer contribution......................... 34,374 12,817 32,850 30,734
Plan participants' contributions.............. 271 267 2,404 1,596
Benefits paid**............................... (38,604) (37,341) (35,254) (32,330)
-------- -------- --------- ---------
Fair value of plan assets at end of year...... 565,657 639,950 -- --
-------- -------- --------- ---------
Funded status................................. (96,044) 37,890 (561,227) (519,117)
Unrecognized actuarial (gain) loss............ 22,198 (136,912) 20,254 (31,221)
Unrecognized prior service cost............... 11,220 13,306 (44,746) (27,740)
-------- -------- --------- ---------
Net amount recognized......................... $(62,626) $(85,716) $(585,719) $(578,078)
======== ======== ========= =========
<FN>
- --------------
* Foreign currency exchange gains/losses are included in this line item.
** Pension benefits are paid by a trust. Postretirement benefits are paid by the
Company.
</FN>
PENSION BENEFITS POSTRETIREMENT BENEFITS
---------------- -----------------------
2001 2000 2001 2000
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Amounts recognized in the consolidated balance sheets consist of:
Prepaid benefit cost........................................... $ 5,519 $ 3,282 $ -- $ --
Accrued benefit cost (including short-term).................... (72,962) (95,635) (585,719) (578,078)
Intangible asset............................................... 4,817 6,637 -- --
-------- -------- --------- ---------
Net amount recognized............................................... $(62,626) $(85,716) $(585,719) $(578,078)
======== ======== ========= =========
WEIGHTED-AVERAGE ASSUMPTIONS:
Discount rate....................................................... 7.5% 8.0% 7.5% 8.0%
Expected return on plan assets...................................... 9.0% 9.0% -- --
Rate of compensation increase....................................... 6.0% 6.0% -- --
For postretirement benefits measurement purposes, a 13.0% and 6.5%
annual rate of increase in the per capita cost of covered health care and
Medicare Part B benefits, respectively, are assumed for 2002, declining
gradually to 5.0% and 2.5% by the year 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:
1-PERCENTAGE- 1-PERCENTAGE-
POINT POINT
INCREASE DECREASE
------------- -------------
(DOLLARS IN THOUSANDS)
Effect on total of service and interest cost components.......... $ 6,004 $ (5,236)
Effect on the postretirement benefit obligation.................. 98,822 (79,808)
NOTE 13: EMPLOYEE INVESTMENT PLANS
The Company maintains three employee investment plans. The Employee
Investment Plan of Levi Strauss & Co. ("EIP") and the Levi Strauss & Co.
Employee Long-Term Investment and Savings Plan ("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") 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 2001, 2000 and
1999 were $13.1 million, $12.8 million and $14.4 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 contributions made by employees to all funds
maintained under the qualified plans up to the first 10% of eligible
compensation. 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.
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.
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. The Company may match 50% of the 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 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 up to 75% of these employee contributions that are
deposited to the 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 connection with the January 1, 2001 changes in the
EIP, the Company changed the CAP to provide that eligible employees will be able
to participate in the CAP after reaching certain salary and contribution
thresholds in the EIP.
In November 2001, the Company announced changes to the CAP 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%. The level of
the matching contribution will be determined at year end based upon business
performance results.
NOTE 14: EMPLOYEE COMPENSATION PLANS
ANNUAL INCENTIVE PLAN
The Annual Incentive Plan ("AIP") is intended to reward individual and team
contributions to the Company's objectives during the year. The amount of
incentive earned 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. Provisions for AIP are recorded in accrued
salaries, wages and employee benefits. Total amounts charged to expense for
2001 and 2000 were $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
Leadership Shares ("LS") was introduced in early 1999. LS replaced the
executive Long-Term Incentive Plan ("LTIP") with 1999 LS grants partially based
on individual executive performance during fiscal year 1998. It places greater
emphasis on an individual's ability to contribute and affect the Company's
long-term strategic objectives. LS is a performance unit plan which grants units
or "shares" at an initial value of $0 each. These "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 LS plan, the Company establishes a five-year financial
performance target for each grant based on, among other things, its performance
and expected shareholder value growth at comparable companies. The actual value
of the units is determined based on performance against these measures.
Performance at the target level will yield a per unit value of $25. If
performance does not meet a threshold standard, then the units will have no
value. Performance above target yields correspondingly larger unit values; there
is no limit on maximum award potential.
A competitive level of five-year Company financial performance 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. The
Company accounts for the expense related to LS on a straight-line basis based on
estimates of future performance against plan targets.
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.
These incentives were awarded as performance units with each grant's unit value
measured based on the Company's three-year cumulative earnings performance and
return on investment against pre-established targets. Awards were based on an
individual's grade level, salary and performance and are paid in one-third
annual increments beginning in the year following the three-year performance
cycle of the grant. Existing LTIP units that were previously granted will be
paid out according to the plan schedule.
The Special Long-Term Incentive Plan ("SLTIP") was intended to provide
incentive and reward performance over time for certain key senior employees.
Awards under this plan have the same grant unit value, vesting period and
pay-out cycle as grants made under LTIP. There will be no more grants under
SLTIP. A Long-Term Performance Plan ("LTPP"), which awarded grants in 1994 and
1995, finished paying out in 2000.
Total net amounts charged to expense for these long-term incentive plans in
2001 and 2000 were $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 Cash Performance Sharing Plan 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 5,500 U.S. employees. The total amounts
charged to expense for this plan in 2001 and 2000 were $1.8 million and $9.2
million, respectively. In 1999, the Company did not meet certain earnings
criteria established by the plan and therefore no expense was recognized.
72
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
KEY EMPLOYEE RECOGNITION AND COMMITMENT PLAN
The Key Employee Recognition and Commitment Plan ("KEP") was adopted in
1996 and was designed to recognize and reward key employees for making
significant contributions to the Company's future success. Units awarded to
employees under the plan 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. 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 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 KEP.
SPECIAL DEFERRAL PLAN
The Special Deferral Plan ("SDP") was adopted during 1996 and was designed
to replace the Company's Stock Appreciation Rights Plan ("SARs"). Existing SARs
were transferred in the SDP at a value of $265 per share. 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 2001 and 2000, cash disbursements for SDP grants were $1.2 million
and $9.8 million, respectively. The amounts charged (net of forfeitures) to
expense for the plan in 2001, 2000 and 1999 were $0.4 million, $1.0 million and
$(2.3) million, respectively.
NOTE 15: 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
======== ========
Included in the liability for workers' compensation are accrued expenses
related to the Company's program that provides for early identification and
treatment of employee injuries. Changes in the Company's safety programs,
medical and disability management and the long-term effects of statutory changes
have decreased workers' compensation costs substantially from historical trends.
Provisions for workers' compensation of $21.0 million and $13.6 million were
recorded during fiscal years 2001 and 2000, respectively. Reclassifications to
current liabilities represented a reduction of approximately $27.3 million in
fiscal year 2001 and $28.0 million in fiscal year 2000. Long-term performance
programs include accrued liabilities for LS and LTIP (SEE NOTE 14 TO THE
CONSOLIDATED FINANCIAL STATEMENTS). Deferred compensation represents
non-qualified agreements 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
12 TO THE CONSOLIDATED FINANCIAL STATEMENTS).
NOTE 16: 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 17: 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. 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, for a
target value of $45,000 per year (SEE NOTE 14 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 six 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.'s LS 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 units in both 2001 and 2000. In 2001, Ms.
Blackwell, Mr. Gaither and Ms. Pineda each received payments of $9,727 under
LTIP. In 2000, Ms. Blackwell, Mr. Gaither and Ms. Pineda each received payments
of $30,637 under LTIP and LTPP combined.
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 years 2001, 2000 and 1999. At
November 25, 2001 and November 26, 2000, 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
2001, 2000 and 1999 and received in fees approximately $91,000, $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 18: 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) and Dockers(R) 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 840 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 company-owned facilities and
independent manufacturers.
74
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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 of Significant Accounting Policies." Regional
profits exclude net interest expense, special compensation program expenses,
excess capacity/restructuring charges/reversals and expenses that are controlled
at the corporate level. Management financial information for the Company is as
follows:
ASIA
AMERICAS EUROPE 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
Excess capacity/restructuring charges (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 FOREIGN
STATES COUNTRIES CONSOLIDATED
------ --------- ------------
GEOGRAPHIC INFORMATION:
Net sales................................................. $2,656,745 $1,601,929 $4,258,674
Deferred tax assets....................................... 637,758 36,460 674,218
Long-lived assets......................................... 1,122,208 349,987 1,472,195
ASIA
AMERICAS EUROPE 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
Excess capacity/restructuring (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 FOREIGN
STATES 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
75
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
ASIA
AMERICAS EUROPE PACIFIC ALL OTHER CONSOLIDATED
-------- ------ ------- --------- ------------
(DOLLARS IN THOUSANDS)
1999:
Net sales from external customers......................... $3,420,326 $1,360,782 $ 358,350 $ -- $5,139,458
Intercompany sales........................................ 50,584 1,045,119 38,923 -- 1,134,626
Depreciation and amortization expense..................... 86,078 27,474 6,550 -- 120,102
Earnings contribution..................................... 279,900 242,700 28,500 -- 551,100
Interest expense.......................................... -- -- -- 182,978 182,978
Excess capacity/restructuring charges..................... -- -- -- 497,683 497,683
Global Success Sharing Plan (reversal).................... -- -- -- (343,873) (343,873)
Corporate and other expenses.............................. -- -- -- 205,813 205,813
Income before income taxes........................... -- -- -- -- 8,499
Total regional assets..................................... 4,701,974 1,625,396 576,533 -- 6,903,903
Elimination of intercompany assets........................ -- -- -- -- 3,233,889
Total assets......................................... -- -- -- -- 3,670,014
Expenditures for long-lived assets........................ 36,578 20,518 3,966 -- 61,062
UNITED FOREIGN
STATES COUNTRIES CONSOLIDATED
------ --------- ------------
GEOGRAPHIC INFORMATION:
Net sales................................................. $3,201,809 $1,937,649 $5,139,458
Deferred tax assets....................................... 676,707 77,500 754,207
Long-lived assets......................................... 1,273,304 423,026 1,696,330
For 2001, 2000 and 1999, the Company had one customer, J. C. Penney
Company, Inc., that represented approximately 13%, 12% and 11%, 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 19: 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
========== ========== ========== ==========
During the fourth quarter of 2001 the Company recorded the reversal of
$26.6 million of prior 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 3 TO THE
CONSOLIDATED FINANCIAL STATEMENTS.)
During the fourth quarter of 2000, 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, in connection with physical inventories, actuarial studies of
postretirement benefits and workers' compensation, and reviews of other
liabilities, the Company recorded adjustments related to warranty provisions,
physical inventory provisions and postretirement benefits in the fourth quarter
of 2000 that resulted in 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 portion 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 beginning 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 10. DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is information concerning our directors and executive
officers as of January 1, 2002.
Name Age Office and Position
---- --- -------------------
Peter E. Haas, Sr. .................................. 83 Director, Chairman of the Executive Committee
Robert D. Haas....................................... 59 Director, Chairman of the Board of Directors
Philip A. Marineau................................... 55 Director, President and Chief Executive Officer
Angela Glover Blackwell.............................. 56 Director
Robert E. Friedman................................... 52 Director
Tully M. Friedman.................................... 59 Director
James C. Gaither..................................... 64 Director
Peter A. Georgescu................................... 62 Director
Peter E. Haas, Jr. .................................. 54 Director
Walter J. Haas....................................... 52 Director
F. Warren Hellman.................................... 67 Director
Patricia Salas Pineda................................ 50 Director
T. Gary Rogers....................................... 59 Director
G. Craig Sullivan.................................... 61 Director
R. John Anderson..................................... 50 Senior Vice President and President, Levi Strauss Asia Pacific
David G. Bergen...................................... 46 Senior Vice President and Chief Information Officer
William B. Chiasson.................................. 49 Senior Vice President and Chief Financial Officer
Karen Duvall......................................... 38 Senior Vice President, Worldwide Supply Chain
Joseph Middleton..................................... 46 Senior Vice President and President, Levi Strauss Europe,
Middle East and Africa
Albert F. Moreno..................................... 58 Senior Vice President, General Counsel and Assistant
Secretary
Fred Paulenich....................................... 37 Senior Vice President, Worldwide Human Resources
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 E. HAAS, SR. became Chairman of the Executive Committee of our Board
of Directors in 1989 after serving as Chairman of our Board since 1981. He has
been a member of our Board 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 D. HAAS is the Chairman of our 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 A. 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 President and Chief Operating Officer of Dean Foods
Company. From 1972 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, 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's domestic and cultural divisions. Ms. Blackwell was the
founder of Oakland, California's Urban Strategies Council, a nonprofit
organization focused on reducing persistent urban poverty.
80
ROBERT E. FRIEDMAN, a director since 1998, is founder and Chairman of the
Board 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 M. 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 C. 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 A. 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 and Briggs & Stratton, Inc.
PETER E. 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 J. HAAS, a director since 1995, served as Chairman and Chief
Executive Officer of the Oakland A'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, 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 DN&E Walter & Co., WPP Group plc and Sugar
Bowl Corporation.
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, a director since 1998, is Chairman of the Board and Chief
Executive Officer of Dreyer'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, a director since 1998, is Chairman of the Board 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'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.
R. 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) brand in 1995.
81
DAVID G. 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 B. 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, 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, 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) 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 F. 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 Board of Directors of Xcel Energy, Inc.
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
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. 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. 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. 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 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: 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 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 Ms.
Blackwell, Mr. R. Friedman, Mr. P.E. Haas, Sr., Mr. W.J. Haas and Ms.
Pineda.
Mr. R.D. Haas and Mr. Marineau are ex-officio members of all standing
committees of the Board of Directors.
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. 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, for a target value of $45,000 per year. The actual
amount for each payment 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 six 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.'s 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 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 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.
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.
Mr. Gaither is senior counsel of the law firm Cooley Godward LLP. Cooley Godward
provided legal services to us in 2001 and received approximately $91,000 in
fees.
83
ITEM 11. 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.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------- --------------------
ALL OTHER
NAME/PRINCIPAL POSITION YEAR SALARY BONUS (1) LTIP PAYOUTS (2) COMPENSATION(3)
- --------------------------------------------------------------------------------------------------------------------
Philip A. Marineau 2001 $1,000,000 $ 450,000 $ -- $ 233,284
President and Chief Executive 2000 1,000,000 2,250,000 -- 1,173,761
Officer(4) 1999 153,846 -- -- 3,172,234
Robert D. Haas 2001 798,077 350,000 -- 180,433
Chairman of the Board 2000 1,050,000 1,800,000 -- 78,750
1999 1,248,462 -- 187,000 90,000
William B. Chiasson 2001 512,539 163,000 -- 359,740
Senior Vice President and 2000 475,969 661,650 -- 351,558
Chief Financial Officer 1999 450,449 -- -- --
Joseph Middleton(5) 2001 461,185 167,000 -- 55,908
Senior Vice President and 2000 411,002 446,661 -- 56,528
President, Levi Strauss Europe, 1999 320,450 -- 8,514 43,255
Middle East and Africa
R. John Anderson(6) 2001 383,413 163,000 -- 41,129
Senior Vice President and 2000 351,211 420,000 -- 56,785
President, Levi Strauss, 1999 280,347 -- 12,386 36,688
Asia Pacific Division
James Lewis 2001 173,077 -- -- 3,467,362
Senior Vice President and 2000 432,692 412,500 -- 816,243
President, Levi Strauss Americas(7) 1999 -- -- -- --
______________________________
<FN>
(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 amount of incentive earned depends upon the
performance and salary grade level of the individual. The plan is funded
based on corporate, group, division and affiliate financial results against
pre-established targets. We did not pay any bonuses for 1999 performance.
(2) For the year 2001, this column reflects amounts earned during 2001 under
our Leadership Shares Plan. The amounts shown for 2001 relate to the 1999
to 2003 measurement period for Leadership Shares units vesting in 2001. We
did not meet threshold performance for the 1999 grants. As a result, the
units are valued at $0, and we will not make payments with respect to these
units. For the years 1999 and 2000, the amounts shown reflect compensation
earned under our Long-Term Incentive Plan, a performance unit plan replaced
by our Leadership Shares Plan. Under the Long-Term Incentive Plan, we
granted performance units to participants with an initial target value. At
the end of a three-year measurement period, we determined the actual per
unit value based on our estimated relative shareholder return and return on
investment over that period. Once valued, we paid out the unit value in
cash in equal installments over a three-year period. Interest at the prime
rate is added to the second and third installments. The 1998 grant was
valued at $0 per unit due to performance during that period. Messrs.
Marineau, Chiasson and Lewis were not employed by us at the time grants
were made under this plan.
84
(3) For Mr. Marineau, Mr. Haas and Mr. Chiasson, the amounts shown include
contributions we made on their behalf to our Capital Accumulation Plan. The
Capital Accumulation Plan is a non-qualified investment plan that permits
eligible employees to contribute up to 10% of their pay, on an after-tax
basis, to an individual retail brokerage account established in the
employee's name. We established the Capital Accumulation Plan because
Internal Revenue Code rules limit savings opportunities under tax-qualified
plans for a number of our employees. For the three years shown here, we
matched approximately 75% of the employee's contributions. Beginning in
2002, contributions under this plan will be dependent on business
performance. We may match up to 10% of eligible employee contributions on a
graded scale from 0% to 115%. The level of the matching contribution will
be determined at the end of the year based upon business performance using
the same measures as are used for the Annual Incentive Plan. The 1999
amount shown for Mr. Marineau reflects a $3.0 million signing bonus under
his employment agreement and reimbursement of relocation expenses. The 2000
amount shown for Mr. Marineau reflects relocation-related income of
$1,095,877 as well as a Capital Accumulation Plan contribution of $77,885.
The 2001 amount shown for Mr. Marineau includes a Capital Accumulation Plan
contribution of $229,327 and reimbursement of additional relocation
expenses of $3,958. The 2000 amount shown for Mr. Chiasson reflects a
special payment of $326,250 to replace forfeited long-term grants from a
previous employer and a Capital Accumulation Plan match of $25,308. The
2001 amount also reflects a special payment of $326,250 to replace
forfeited long-term grants from a previous employer and a Capital
Accumulation Plan contribution of $34,490. The 1999 amount shown for Mr.
Middleton consists of a goods and services allowance due to his foreign
assignment. The 2000 amount shown for Mr. Middleton consists of a goods and
services allowance of $29,303 and compensation for losses due to exchange
rate fluctuations of $27,225. The 2001 amount shown reflects a goods and
services allowance of $45,074 and compensation for losses due to exchange
rate fluctuations of $10,834. The 1999, 2000 and 2001 amounts shown for Mr.
Anderson consist of goods and services allowances due to his foreign
assignment. The 2000 amount shown for Mr. Lewis reflects a hiring bonus of
$614,398 and relocation-related expenses of $201,845. The 2001 amount shown
for Mr. Lewis includes an additional hiring bonus of $990,017,
relocation-related expenses of $116,933, a payment for accrued paid time
off, and a separation payment made under the terms stipulated in his
employment agreement of two times his base salary plus target bonus, or
$2,325,000.
(4) Mr. Marineau joined us on September 27, 1999.
(5) Mr. Middleton is a United Kingdom citizen who lives and works in Brussels,
Belgium. Our approach for these global assignee employees is to keep
individuals whole to their home country while they are on assignment. To
achieve this goal, we offset expenses related to a foreign assignment so
that the individuals are not disadvantaged because of the assignment. This
covers all areas that are affected by a foreign assignment, including
salary, cost of living, taxes, housing, benefits, savings, schooling and
other miscellaneous expenses. The amounts shown reflect amounts paid in
British pounds, converted into U.S. dollars using the average exchange rate
for the year reported.
(6) Mr. Anderson is an Australian citizen who lives and works in Singapore.
We take the same global assignee approach with Mr. Anderson as we do with
Mr. Middleton. The amounts shown reflect amounts paid in Australian
dollars, converted into U.S. dollars using the average exchange rate for
the year reported.
(7) We had an employment agreement with James Lewis, our former Senior Vice
President and President, Levi Strauss Americas. Mr. Lewis left us on
February 9, 2001. The agreement provided for a minimum base salary of
$750,000 per year with a bonus target equal to 55% of base salary. For
fiscal year 2000, which was the first year of Mr. Lewis' employment, he was
guaranteed under the agreement to earn at least his target bonus amount.
Under the agreement, Mr. Lewis received a one-time lump sum of $300,000 net
of taxes to assist with relocation expenses. As provided by the terms of
his employment agreement, Mr. Lewis received as a result of his departure a
lump-sum separation payment equal to two times his base salary plus annual
bonus at target.
85
</FN>
LONG-TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR (2001)
ESTIMATED FUTURE PAYOUTS (1)
----------------------------------
NUMBER OF LEADERSHIP PERFORMANCE
NAME/PRINCIPAL POSITION SHARES AWARDED PERIOD (2) MINIMUM ($) TARGET
- --------------------------------------------------------------------------------------------------------------------
Philip A. Marineau 200,000 5 years -- $5,000,000
President and Chief Executive
Officer
Robert D. Haas 90,000 5 years -- 2,250,000
Chairman of the Board
William B. Chiasson 55,000 5 years -- 1,375,000
Senior Vice President and
Chief Financial Officer
Joseph Middleton 55,000 5 years -- 1,375,000
Senior Vice President and
President, Levi Strauss Europe,
Middle East and Africa
R. John Anderson 55,000 5 years -- 1,375,000
Senior Vice President and
President, Levi Strauss,
Asia Pacific Division
James Lewis -- 5 years -- --
Senior Vice President and
President, Levi Strauss Americas
______________________________
<FN>
(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
threshold standard, then the units will have no value. Performance above
target yields correspondingly larger unit values; there is no limit on
maximum award potential.
(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.
86
</FN>
PENSION PLAN TABLE
The following table shows the estimated annual benefits payable upon
retirement under our U.S. home office pension plan, benefit restoration plans
and deferred compensation plan to persons in various compensation and
years-of-service classifications prior to mandatory offset of Social Security
benefits:
- -------------------------------------------------------------------------------------------------------------
COVERED YEARS OF SERVICE
COMPENSATION 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, the credited years of
service for Messrs. Marineau, Haas, Chiasson and Lewis were 2, 28, 3, and 0,
respectively. The 2001 compensation covered by the pension plan, benefit
restoration plan and deferred compensation plan for Messrs. Marineau, Haas,
Chiasson and Lewis were $3.25 million, $2.6 million, $644,869 and $0,
respectively. Mr. Lewis did not receive a full credited year of service.
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 annually. We also
contribute 20% of Mr. Middleton'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's benefit under these combined plans, to be paid
in lump sums upon retirement, is estimated to be approximately $1.53 million if
he retires at age 55, or approximately $4.62 million if he retires at age 65.
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 terminates in September 2002 but extends automatically after
this date until terminated by either Mr. Marineau or us. We may terminate the
agreement upon Mr. Marineau'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 If we terminate without cause or if Mr. Marineau terminates for
good reason, Mr. Marineau will be entitled to: (i) severance
payments equal to three times the sum of his base salary as of the
termination date plus his most recent target or, if greater,
annual bonus, (ii) amounts accrued or earned under our
compensation and benefit plans and (iii) an amount in respect of
the Leadership Shares units granted in the one-time grant
described above.
o If we terminate for cause or if Mr. Marineau terminates for other
than good reason, then the agreement will terminate without our
having further obligations to Mr. Marineau other than for amounts
accrued or earned under our compensation and benefit programs
(which does not include unvested Leadership Shares units or target
bonus amounts not payable as of the date of termination).
o If we terminate for any reason other than cause or if Mr. Marineau
terminates for good reason within 12 months after a change in
control (as defined in the agreement), Mr. Marineau will be
entitled to: (i) severance payments equal to three times the sum
of his base salary as of the termination date plus his most recent
target or, if greater, annual bonus, (ii) amounts accrued or
earned under our compensation and benefit plans, (iii) an amount
in respect of the Leadership Shares units granted in the one-time
grant described above, (iv) full and immediate vesting in all
outstanding Leadership Shares grants; (v) full and immediate
vesting in his supplemental pension benefit; and (vi) if any
amounts paid are treated as parachute payments (as defined in
Section 280G(b)(2) of the Internal Revenue Code), an amount equal
to the applicable excise tax and any taxes on this reimbursement
payment.
88
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 trust 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, 2002, by:
o Each of our directors and each of our five most highly compensated
officers;
o Each person known by us to own beneficially more than 5% of our voting
trust certificates; and
o All of our directors and officers as a group.
Under the rules of the Commission, a person is deemed to be a "beneficial
owner" of a security if that person has or shares "voting power", which includes
the power to vote or to direct the voting of the security, or "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
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%
<FN>
(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.
90
(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 166 record holders of voting trust certificates.
</FN>
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 January 1, 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
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' 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' 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
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 bank credit
facilities prohibit repurchases without the consent of the lenders, and the
indentures relating to our 11.625% notes due 2008 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,
1999 or 1998.
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
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.
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% of our outstanding stock.
He is not currently receiving compensation from us for his service as a trustee.
All of the other trustees each beneficially owns more than 1% of our outstanding
stock.
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.
91
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 Commission this
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
92
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 2001, 2000
and 1999, for which we paid fees of approximately $91,000, $60,000 and $165,000,
respectively, in those years.
93
PART IV
ITEM 14. 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
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) Reports on Form 8-K
Current Report on Form 8-K on September 19, 2001 filed pursuant to Item
5 of the report and containing a copy of the Company's press release
titled "Levi Strauss & Co. Reports Third-Quarter Financial Results."
Current Report on Form 8-K on January 16, 2002 filed pursuant to Item 5
of the report and containing a copy of the Company's press release
titled "Levi Strauss & Co. Announces Fourth-Quarter and Fiscal 2001
Financial Results."
Current Report on Form 8-K on January 30, 2002 filed pursuant to Item 5
of the report relating to amendments to the Company's credit agreement.
99
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LEVI STRAUSS & CO.
By: /s/ WILLIAM B. CHIASSON
______________________________
William B. Chiasson
Senior Vice President and
Chief Financial Officer
Date: JANUARY 30, 2002
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 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
------------------ Date: January 30, 2002
Robert D. Haas
/s/ PHILIP A. MARINEAU Director, President and Chief
---------------------- Executive Officer
Philip A. Marineau Date: 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 President and Controller
-------------------- (Principal Accounting Officer)
Gary W. Grellman Date: January 30, 2002
101
SCHEDULE II
LEVI STRAUSS & CO. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(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
SUPPLEMENTAL INFORMATION
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. *
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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.
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