0000094845-01-500047.txt : 20011009
0000094845-01-500047.hdr.sgml : 20011009
ACCESSION NUMBER: 0000094845-01-500047
CONFORMED SUBMISSION TYPE: 424B3
PUBLIC DOCUMENT COUNT: 1
FILED AS OF DATE: 20011003
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: LEVI STRAUSS & CO
CENTRAL INDEX KEY: 0000094845
STANDARD INDUSTRIAL CLASSIFICATION: APPAREL & OTHER FINISHED PRODS OF FABRICS & SIMILAR MATERIAL [2300]
IRS NUMBER: 940905160
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1125
FILING VALUES:
FORM TYPE: 424B3
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-55694
FILM NUMBER: 1751488
BUSINESS ADDRESS:
STREET 1: 1155 BATTERY ST
CITY: SAN FRANCISCO
STATE: CA
ZIP: 94111
BUSINESS PHONE: 4155446000
MAIL ADDRESS:
STREET 1: 1155 BATTERY STREET
CITY: SAN FRAINCISCO
STATE: CA
ZIP: 94111
424B3
1
prospectus6.txt
PROSPECTUS SUPPLEMENT NO. 6
File pursuant to Rule 424 (b) (3)
File No. 333-55694
LEVI STRAUSS & CO.
Supplement No. 6 to Prospectus dated March 8, 2001.
The date of this Supplement No. 6 is October 3, 2001
On October 3, 2001, Levi Strauss & Co. filed
with the Securities and Exchange Commission
the attached
Quarterly Report on Form 10-Q.
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 26, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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)
None
(Former Name, Former Address, and Former Fiscal Year, if Changed
Since Last Report)
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 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 October 3, 2001
LEVI STRAUSS & CO.
INDEX TO FORM 10-Q
AUGUST 26, 2001
PAGE
NUMBER
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of August 26, 2001 and November 26, 2000.............. 3
Consolidated Statements of Income for the Three and Nine Months Ended
August 26, 2001 and August 27, 2000................................................. 4
Consolidated Statements of Cash Flows for the Nine Months Ended
August 26, 2001 and August 27, 2000................................................. 5
Notes to the Consolidated Financial Statements....................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations......................................................................... 19
Item 3. Quantitative and Qualitative Disclosures about Market Risk........................... 25
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..................................................... 26
SIGNATURE....................................................................................... 27
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
August 26, November 26,
2001 2000
---- ----
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents...................................................... $ 63,765 $ 117,058
Trade receivables, net of allowance for doubtful accounts of $29,923 in 2001
and $29,717 in 2000......................................................... 576,880 660,128
Inventories:
Raw materials.............................................................. 121,171 120,760
Work-in-process............................................................ 78,674 84,871
Finished goods............................................................. 596,318 446,618
---------- ----------
Total inventories....................................................... 796,163 652,249
Deferred tax assets............................................................ 247,325 250,817
Other current assets........................................................... 134,037 168,621
---------- ----------
Total current assets............................................... 1,818,170 1,848,873
Property, plant and equipment, net of accumulated depreciation of $529,808 in
2001 and $495,986 in 2000......................................................... 528,577 574,039
Goodwill and other intangibles, net of accumulated amortization of $172,877 in
2001 and $164,826 in 2000......................................................... 257,103 264,956
Non-current deferred tax assets...................................................... 420,532 439,692
Other assets ........................................................................ 113,639 78,168
---------- ----------
Total Assets....................................................... $3,138,021 $3,205,728
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Current maturities of long-term debt and short-term borrowings................. $ 109,273 $ 231,290
Accounts payable............................................................... 208,452 268,473
Restructuring reserves......................................................... 53,411 71,595
Accrued liabilities............................................................ 359,813 395,660
Accrued salaries, wages and employee benefits.................................. 180,010 257,021
Accrued taxes.................................................................. 14,281 69,772
---------- ----------
Total current liabilities.......................................... 925,240 1,293,811
Long-term debt, less current maturities.............................................. 2,048,677 1,895,140
Postretirement medical benefits...................................................... 550,331 545,574
Long-term employee related benefits.................................................. 392,103 358,849
Long-term tax liability.............................................................. 175,492 166,854
Other long-term liabilities.......................................................... 21,394 20,588
Minority interest ................................................................... 21,055 23,485
---------- ----------
Total liabilities.................................................. 4,134,292 4,304,301
---------- ----------
Stockholders' Deficit:
Common stock--$.01 par value; authorized 270,000,000 shares; issued and
outstanding: 37,278,238 shares.............................................. 373 373
Additional paid-in capital..................................................... 88,808 88,808
Accumulated deficit............................................................ (1,083,841) (1,171,864)
Accumulated other comprehensive loss........................................... (1,611) (15,890)
---------- ----------
Total stockholders' deficit........................................ (996,271) (1,098,573)
---------- ----------
Total Liabilities and Stockholders' Deficit........................ $3,138,021 $3,205,728
========== ==========
The accompanying notes are an integral part of these financial statements.
3
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended Nine Months Ended
------------------ -----------------
August 26, August 27, August 26, August 27,
2001 2000 2001 2000
---- ---- ---- ----
Net sales........................................................ $ 983,508 $1,127,740 $3,023,828 $3,359,221
Cost of goods sold............................................... 584,279 663,418 1,732,170 1,957,328
---------- ---------- ---------- ----------
Gross profit.................................................. 399,229 464,322 1,291,658 1,401,893
Marketing, general and administrative expenses................... 314,482 358,524 976,706 1,048,052
Other operating income........................................... 8,377 10,404 22,916 20,852
---------- ---------- ---------- ----------
Operating income.............................................. 93,124 116,202 337,868 374,693
Interest expense................................................. 55,429 59,406 178,532 177,177
Other (income) expense, net...................................... 13,850 (1,359) 19,617 (30,151)
---------- ---------- ---------- ----------
Income before taxes........................................... 23,845 58,155 139,719 227,667
Provision for taxes.............................................. 8,822 20,354 51,696 79,683
---------- ---------- ---------- ----------
Net income.................................................... $ 15,023 $ 37,801 $ 88,023 $ 147,984
========== ========== ========== ==========
Earnings per share--basic and diluted............................. $ 0.40 $ 1.01 $ 2.36 $ 3.97
========== ========== ========== ==========
Weighted-average common shares outstanding....................... 37,278,238 37,278,238 37,278,238 37,278,238
========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
4
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
-----------------
August 26, August 27,
2001 2000
---- ----
Cash Flows from Operating Activities:
Net income................................................................... $ 88,023 $147,984
Adjustments to reconcile net cash (used for) provided by operating activities:
Depreciation and amortization........................................ 60,810 69,563
(Gain) loss on disposition of property, plant and equipment.......... 1,167 (26,025)
Unrealized foreign exchange gains.................................... (5,143) (6,877)
Decrease in trade receivables........................................ 84,532 74,746
Decrease in income taxes receivables................................. -- 70,000
(Increase) decrease in inventories................................... (135,120) 10,836
Decrease (increase) in other current assets.......................... 31,151 (5,198)
Increase in other long-term assets................................... (35,189) (18,377)
Decrease in net deferred tax assets.................................. 18,310 42,836
Decrease in accounts payable and accrued liabilities................. (100,729) (13,010)
Decrease in restructuring reserves................................... (18,184) (169,043)
(Decrease) increase in accrued salaries, wages and employee benefits. (78,315) 9,358
(Decrease) increase in accrued taxes................................. (54,418) 37,815
Increase in long-term employee benefits.............................. 38,070 22,529
Increase (decrease) in other long-term liabilities................... 8,251 (33,921)
Other, net........................................................... 3,440 (13,924)
---------- --------
Net cash (used for) provided by operating activities.............. (93,344) 199,292
---------- --------
Cash Flows from Investing Activities:
Purchases of property, plant and equipment........................... (14,621) (15,799)
Proceeds from sale of property, plant and equipment.................. 2,903 106,965
(Increase) decrease in net investment hedges......................... (1,664) 52,884
Other, net........................................................... -- 152
--------- --------
Net cash (used for) provided by investing activities.............. (13,382) 144,202
--------- --------
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt............................. 1,801,702 340,500
Repayments of long-term debt......................................... (1,744,955) (799,238)
Net (decrease) increase in short-term borrowings..................... (6,439) 1,549
---------- --------
Net cash provided by (used for) financing activities.............. 50,308 (457,189)
---------- --------
Effect of exchange rate changes on cash...................................... 3,125 (3,675)
---------- --------
Net decrease in cash and cash equivalents......................... (53,293) (117,370)
Beginning cash and cash equivalents.......................................... 117,058 192,816
---------- --------
Ending Cash and Cash Equivalents............................................. $ 63,765 $ 75,446
========== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest............................................................. $ 138,702 $135,052
Income taxes......................................................... 78,664 30,641
Restructuring initiatives............................................ 18,184 169,043
The accompanying notes are an integral part of these financial statements.
5
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1: PREPARATION OF FINANCIAL STATEMENTS
The unaudited consolidated financial statements of Levi Strauss & Co. and
subsidiaries ("LS&CO." or "Company") are prepared in conformity with generally
accepted accounting principles for interim financial information. In the opinion
of management, all adjustments necessary for a fair presentation of the
financial position and operating results for the periods presented have been
included. These unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements of LS&CO. for the
year ended November 26, 2000 included in the annual report on Form 10-K filed by
LS&CO. with the Securities and Exchange Commission (the "SEC") on February 5,
2001.
The consolidated financial statements include the accounts of LS&CO. and
its subsidiaries. All intercompany transactions have been eliminated. Management
believes that, along with the following information, the disclosures are
adequate to make the information presented herein not misleading. Certain prior
year amounts have been reclassified to conform to the current presentation. The
results of operations for the three and nine months ended August 26, 2001 may
not be indicative of the results to be expected for the year ending November 25,
2001.
The Company adopted Statement of Financial Accounting Standards No.("SFAS")
133, "Accounting for Derivative Instruments and Hedging Activities," on the
first day of fiscal year 2001. Due to the adoption of SFAS 133, the Company
reported a net transition gain in other income/expense for the nine months ended
August 26, 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 7 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 4 to
the Consolidated Financial Statements.)
The Financial Accounting Standards Board 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. The Company is required to adopt the
provisions of SFAS 142 on the first day of fiscal year 2003; however, early
application is permitted in which the Company can adopt SFAS 142 on November 26,
2001. The Company has not yet determined if it will adopt this standard early
and is currently evaluating the impact SFAS 142 may have on its financial
position and results of operations.
6
LEVI STRAUSS & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(Unaudited)
NOTE 2: COMPREHENSIVE INCOME
The following is a summary of the components of total comprehensive income, net of related income taxes:
Three Months Ended Nine Months Ended
------------------ -----------------
August 26, August 27, August 26, August 27,
2001 2000 2001 2000
---- ---- ---- ----
(Dollars in Thousands)
Net income.......................................................... $15,023 $37,801 $ 88,023 $147,984
------- ------- -------- --------
Other comprehensive income (loss):
Transition adjustments:
Unrealized losses on cash flow hedges........................ -- -- (522) --
Reclassification of cash flow hedges to other
income/expense............................................. 130 -- 391 --
------- ------- -------- --------
Net gains (losses) on cash flow hedges...................... 130 -- (131) --
Net investment hedges........................................ -- -- 76 --
------- ------- -------- --------
Total transition adjustments............................... 130 -- (55) --
------- ------- -------- --------
Foreign currency translation adjustments:
Net investment hedges........................................ (5,403) 6,011 (3,081) 23,207
Foreign currency translations................................ 10,628 12,657 18,009 (20,190)
------- ------- -------- --------
Total foreign currency translation adjustments............. 5,225 18,668 14,928 3,017
------- ------- -------- --------
Unrealized gains (losses) on cash flow hedges.................. (2,163) -- 1,364 --
Reclassification of cash flow hedges to other
income/expense............................................... (953) -- (1,958) --
------- ------- -------- --------
Net gains on cash flow hedges................................ (3,116) -- (594) --
------- ------- -------- --------
Total other comprehensive income........................... 2,239 18,668 14,279 3,017
------- ------- -------- --------
Total comprehensive income.......................................... $17,262 $56,469 $102,302 $151,001
======= ======= ======== ========
The following is a summary of the components of accumulated other comprehensive income (loss) balances:
August 26, November 26,
2001 2000
---- ----
(Dollars in Thousands)
Cumulated transition adjustments:
Beginning balance of cash flow hedges.................. $ -- $ --
Unrealized losses on cash flow hedges................. (522) --
Reclassification of cash flow hedges to other
income/expense...................................... 391 --
------- --------
Ending balance of cash flow hedges..................... (131) --
Net investment hedges.................................. 76 --
------- --------
Total cumulated transition adjustments............... (55) --
------- --------
Cumulated translation adjustments:
Net investment hedges.................................. 36,393 39,474
Foreign currency translations.......................... (37,355) (55,364)
------- --------
Total cumulated translation adjustments.............. (962) (15,890)
------- --------
Beginning balance of cash flow hedges.................. -- --
Unrealized gains on cash flow hedges.................. 1,364 --
Reclassification of cash flow hedges to other
income/expense...................................... (1,958) --
------- --------
Ending balance of cash flow hedges..................... (594) --
------- --------
Accumulated other comprehensive loss..................... $(1,611) $(15,890)
======= ========
7
LEVI STRAUSS & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(Unaudited)
NOTE 3: EXCESS CAPACITY/RESTRUCTURING RESERVES
NORTH AMERICA PLANT CLOSURES
In view of declining sales that started in 1997, the need to bring
manufacturing capacity in line with sales projections and the need to reduce
costs, the Company decided to close some of its owned and operated production
facilities in North America. The Company announced in 1997 the closure of ten
manufacturing facilities and a finishing center in the U.S., which were closed
during 1998 and displaced approximately 6,400 employees. The table below
displays the activity and liability balances of this reserve.
In 1998, the Company announced the closures of two more finishing centers
in the U.S. that were closed during 1999 and displaced approximately 990
employees. The table below displays the activity and liability balances of this
reserve.
The Company announced in February 1999 plans to close 11 manufacturing
facilities in North America. The 11 manufacturing facilities were closed during
1999 and approximately 5,900 employees were displaced. The table below displays
the activity and liability balances of this reserve.
1997 NORTH AMERICA PLANT CLOSURES
Balance Balance
11/26/00 Reductions 8/26/01
-------- ---------- -------
(Dollars in Thousands)
Severance and employee benefits........................................ $ 221 $ (35) $ 186
Other restructuring costs.............................................. 2,226 (473) 1,753
------ ----- ------
Total............................................................... $2,447 $(508) $1,939
====== ===== ======
1998 NORTH AMERICA PLANT CLOSURES
Balance Balance
11/26/00 Reductions 8/26/01
-------- ---------- -------
(Dollars in Thousands)
Severance and employee benefits........................................ $1,449 $(121) $1,328
Other restructuring costs.............................................. 608 (4) 604
------ ----- ------
Total............................................................... $2,057 $(125) $1,932
====== ===== ======
1999 NORTH AMERICA PLANT CLOSURES
Balance Balance
11/26/00 Reductions 8/26/01
-------- ---------- -------
(Dollars in Thousands)
Severance and employee benefits........................................ $19,852 $ (6,965) $12,887
Other restructuring costs.............................................. 34,765 (5,238) 29,527
------- -------- -------
Total............................................................... $54,617 $(12,203) $42,414
======= ======== =======
8
LEVI STRAUSS & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(Unaudited)
CORPORATE REORGANIZATION INITIATIVES
Starting in 1998, the Company instituted various overhead reorganization
initiatives to reduce overhead costs and consolidate operations. The
reorganization initiative instituted in 1998 displaced approximately 770
employees. The table below displays the activity and liability balances of this
reserve.
In conjunction with the overhead reorganization initiatives, the Company
announced restructuring plans during 1999 that are estimated to displace
approximately 730 employees. As of August 26, 2001, approximately 715 employees
had been displaced. The table below displays the activity and liability balances
of this reserve.
1998 CORPORATE REORGANIZATION INITIATIVES
Balance Balance
11/26/00 Reductions 8/26/01
--------- ---------- -------
(Dollars in Thousands)
Severance and employee benefits..................................... $ 100 $ (100) $ -
Other restructuring costs........................................... 1,773 (230) 1,543
------ ------ ------
Total............................................................ $1,873 $ (330) $1,543
====== ====== ======
1999 CORPORATE REORGANIZATION INITIATIVES
Balance Balance
11/26/00 Reductions 8/26/01
-------- ---------- -------
(Dollars in Thousands)
Severance and employee benefits..................................... $2,762 $(1,198) $1,564
====== ======= ======
EUROPE REORGANIZATION AND PLANT CLOSURES
In 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 and as of August 26, 2001, approximately 1,645 employees had been
displaced. The table below displays the activity and liability balances of this
reserve.
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. The production facility closed in
December 1999. As of August 26, 2001, approximately 945 employees were
displaced. The table below displays the activity and liability balances of this
reserve.
9
LEVI STRAUSS & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(Unaudited)
1998 EUROPE REORGANIZATION AND PLANT CLOSURES
Balance Balance
11/26/00 Reductions 8/26/01
-------- ---------- -------
(Dollars in Thousands)
Severance and employee benefits................................... $1,508 $(989) $519
====== ===== ====
1999 EUROPE REORGANIZATION AND PLANT CLOSURES
Balance Balance
11/26/00 Reductions 8/26/01
-------- ---------- -------
(Dollars in Thousands)
Severance and employee benefits................................... $5,691 $(2,831) $2,860
Other restructuring costs......................................... 640 -- 640
------ ------- ------
Total.......................................................... $6,331 $(2,831) $3,500
====== ======= ======
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.
NOTE 4: FINANCING
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 of 1933 (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 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 will be amortized over the term of the Notes. Net proceeds from
the offering were used to repay a portion of the indebtedness outstanding under
the 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.
10
LEVI STRAUSS & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(Unaudited)
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.
SENIOR SECURED CREDIT FACILITY
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 consists of a $700.0 million revolving
credit facility and $350.0 million of term loans. This facility reduces 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.
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 August 26, 2001, the Company was in compliance with the financial covenants
under the facility.
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. 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
consistently accounted for as a secured borrowing.
11
LEVI STRAUSS & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(Unaudited)
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 is accounted for under SFAS 140. The transaction did
not meet the criteria for sales accounting under SFAS 140 and therefore is
accounted for 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 and, accordingly, have not been registered under
the Securities Act and may not be sold in the United States absent registration
or an applicable exemption from the registration requirements 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 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.
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 August 26,
2001, the contracts represent an outstanding notional amount of $425.0 million
and cover a series of variable cash flows through November 2001. The contracts
do not qualify for hedge accounting and therefore the Company reports changes in
fair value in other income/expense (see Note 7 to the Consolidated Financial
Statements). At August 26, 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 the three and nine months ended August 26, 2001, including
the amortization of capitalized bank fees, interest rate swap cancellations and
underwriting fees, was 9.4% and 9.6%, respectively. These interest rates exclude
the write-off of fees that resulted from the replacement of the credit agreement
dated January 31, 2000 (see "Senior Secured Credit Facility" above).
12
LEVI STRAUSS & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(Unaudited)
NOTE 5: COMMITMENTS AND CONTINGENCIES
FOREIGN EXCHANGE CONTRACTS
At August 26, 2001, the Company had U.S. dollar forward currency contracts
to buy $1.0 billion and to sell $515.6 million against various foreign
currencies. The Company also had euro forward currency contracts to buy 119.6
million euro against various foreign currencies and to sell 70.3 million euro
against various foreign currencies. In addition, the Company had U.S. dollar
option contracts to buy $1.5 billion and to sell $841.0 million against various
foreign currencies. The Company also had euro option currency contracts to buy
160.0 million euro against various foreign currencies and to sell 60.0 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 hedge 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 August 26,
2001, the Company had bought U.S. dollar options to sell $347.0 million against
the euro. To finance the option premiums related to these options, the Company
sold options having the obligation to buy $245.7 million against the euro.
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, employee-related, distribution, product liability,
product recall, 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.
13
LEVI STRAUSS & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(Unaudited)
NOTE 6: 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 August 26, 2001 and November 26, 2000 are as follows:
August 26, November 26,
2001 2000
---- ----
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
----- ---------- ----- ----------
(Dollars in Thousands)
DEBT INSTRUMENTS:
Credit facilities.................................. $ (439,009) $(439,009) $(1,000,131) $(1,000,131)
Yen-denominated eurobond placement................. (168,943) (123,333) (184,043) (133,945)
U.S. dollar notes offering......................... (1,195,394) (983,500) (799,606) (628,000)
Euro notes offering................................ (115,397) (101,905) -- --
European receivables-backed securitization......... (42,960) (42,960) (31,148) (31,148)
Domestic receivables-backed securitization......... (110,145) (110,145) -- --
Industrial development revenue refunding bond...... (10,021) (10,021) (10,036) (10,036)
Customer service center equipment financing........ (80,065) (80,065) (86,901) (86,901)
CURRENCY AND INTEREST RATE HEDGES:
Foreign exchange forward contracts................. $ (6,482) $ (6,482) $ 9,830 $ 9,593
Foreign exchange option contracts.................. (1,312) (1,312) 7,309 6,289
Interest rate option contracts..................... (4,643) (4,643) 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.
The fair value estimates presented herein are based on information
available to the Company as of August 26, 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 August 26, 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.
14
LEVI STRAUSS & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(Unaudited)
NOTE 7: 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. 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 Hedging
The primary purpose of the Company's foreign exchange hedging activities
is to maximize the U.S. dollar value over the long term. The Company manages
foreign currency exposures in a way that makes it unlikely to obtain hedge
accounting treatment for all exposure management activities. 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. Derivative instruments utilized in these transactions are being
valued at fair value with changes in fair value classified into earnings. The
Company does not enter into or hold any derivative instruments for trading
purposes.
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 hedge 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 hedges 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 August 26, 2001, the fair value of qualifying net
investment hedges was a $0.5 million net asset of which $0.5 million 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 hedging the
net investment positions in major currencies that do not qualify for hedge
accounting. The fair value of these net investment hedges at August 26, 2001
represented a $1.6 million net asset.
The Company designates a portion of its outstanding yen-denominated
eurobond as a net investment hedge. As of August 26, 2001, a $5.3 million net
asset related to the translation effects of the eurobond was recorded in the
cumulative translation adjustment section of accumulated other comprehensive
income.
15
LEVI STRAUSS & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(Unaudited)
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 $1.3 million net liability as of
August 26, 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 loss of $0.9 million is expected to be
reclassified to earnings in the next sixteen months as the underlying hedged
items affect earnings. For the three months ended August 26, 2001, a net loss of
$0.3 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 during the three months ended August 26,
2001 from accumulated other comprehensive income to other income/expense
amounted to a net gain of $1.5 million. No cash flow hedges were discontinued
during the three months ended August 26, 2001. The Company also enters into
contracts hedging forecasted intercompany royalty flows that do not qualify as
cash flow hedges. The fair value of these instruments as of August 26, 2001 was
a $1.2 million net liability.
The derivative instruments utilized in transactions hedging 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 hedging 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 August
26, 2001, the transition adjustment related to qualifying cash flow hedges
amounted to a net loss of $0.2 million. This net loss is expected to be
reclassified to earnings in the next three months as the underlying hedged items
affect earnings. For the three months ended August 26, 2001, the Company
reclassified a net realized loss of $0.2 million related to transition
adjustment of matured cash flow hedges from accumulated other comprehensive
income to other income/expense.
Interest Rate Hedging
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 debt.
The fair value of the derivative instruments hedging interest rate risk as
of August 26, 2001 was a $4.6 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.
16
LEVI STRAUSS & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(Unaudited)
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 cumulated
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.
-------------------------------- -------------------------- ------------------------ -----------------------------------------------
Three Months Ended Nine Months Ended
August 26, 2001 August 26, 2001 At August 26, 2001
-------------------------------- -------------------------- ------------------------ -----------------------------------------------
Other (income)/expense Other (income)/expense OCI gain/(loss) CTA gain/(loss)
-------------------------------- -------------------------- ------------------------ ----------------------- -----------------------
(Dollars in Thousands) Realized Unrealized Realized Unrealized Realized Unrealized Realized Unrealized
-------------------------------- ----------- -------------- ----------- ------------ ---------- ------------ ---------- ------------
Foreign Exchange Hedging:
Sourcing $12,985 $ 12,387 $10,488 $19,143 $-- $ -- $ -- $ --
Net Investment 1,736 (3,970) 2,381 (1,419) -- -- 52,112 497
Yen Bond -- 1,829 -- (7,569) -- -- -- 5,277
Royalties (323) (1,290) (6,785) 3,734 -- (943) -- --
Cash Management (10,179) 5,597 (8,751) 994 -- -- -- --
Transition Adjustments 207 -- 621 -- -- (207) -- 120
Euro Notes Offering (6,307) (315) 1,929 845 -- -- -- --
-------------------------------- ----------- -------------- ----------- ------------ ---------- ------------ ---------- ------------
Interest Rate Hedging $ -- $(1,008) $ -- $ 3,854 $ -- $ --
Transition Adjustments -- -- -- 1,246 -- --
-------------------------------- ----------- -------------- ----------- ------------ ----------------------- -----------------------
------------------------------ ----------------
At August 26,
2001
------------------------------ ----------------
Fair value
asset/(liability)
------------------------------ ----------------
(Dollars in Thousands)
------------------------------ ----------------
Foreign Exchange Hedging:
Sourcing $(4,017)
Net Investment 2,139
Royalties (2,549)
Cash Management (2,522)
Euro Notes Offering (845)
------------------------------ ----------------
Interest Rate Hedging $(4,643)
------------------------------ ----------------
17
LEVI STRAUSS & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(Unaudited)
NOTE 8: BUSINESS SEGMENT INFORMATION
Asia All
Americas Europe Pacific Other Consolidated
-------- ------ ------- ----- ------------
(Dollars in Thousands)
THREE MONTHS ENDED AUGUST 26, 2001:
Net sales....................................... $689,892 $222,515 $71,101 $ -- $983,508
Earnings contribution........................... 74,161 33,530 6,027 -- 113,718
Interest expense................................ -- -- -- 55,429 55,429
Corporate and other expense, net................ -- -- -- 34,444 34,444
Income before income taxes...................... -- -- -- -- 23,845
THREE MONTHS ENDED AUGUST 27, 2000:
Net sales....................................... $802,637 $235,869 $89,234 $ -- $1,127,740
Earnings contribution........................... 132,524 33,916 10,623 -- 177,063
Interest expense................................ -- -- -- 59,406 59,406
Corporate and other expense, net................ -- -- -- 59,502 59,502
Income before income taxes...................... -- -- -- -- 58,155
Asia All
Americas Europe Pacific Other Consolidated
-------- ------ ------- ----- ------------
(Dollars in Thousands)
NINE MONTHS ENDED AUGUST 26, 2001:
Net sales....................................... $2,034,171 $756,524 $233,133 $ -- $3,023,828
Earnings contribution........................... 270,370 147,905 31,078 -- 449,353
Interest expense................................ -- -- -- 178,532 178,532
Corporate and other expense, net................ -- -- -- 131,102 131,102
Income before income taxes...................... -- -- -- -- 139,719
NINE MONTHS ENDED AUGUST 27, 2000:
Net sales....................................... $2,255,279 $817,529 $286,413 $ -- $3,359,221
Earnings contribution........................... 304,623 175,689 37,176 -- 517,488
Interest expense................................ -- -- -- 177,177 177,177
Corporate and other expense, net................ -- -- -- 112,644 112,644
Income before income taxes...................... -- -- -- -- 227,667
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected items
in our consolidated statements of operations, expressed as a percentage of net
sales (amounts may not total due to rounding).
Three Months Ended Nine Months Ended
------------------ -----------------
August 26, August 27, August 26, August 27,
2001 2000 2001 2000
---- ----- ----- -----
MARGIN DATA:
Net sales..................................................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold............................................ 59.4 58.8 57.3 58.3
----- ----- ----- -----
Gross profit.................................................. 40.6 41.2 42.7 41.7
Marketing, general and administrative expenses................ 32.0 31.8 32.3 31.2
Other operating income........................................ 0.9 0.9 0.8 0.6
----- ----- ----- -----
Operating income.............................................. 9.5 10.3 11.2 11.2
Interest expense.............................................. 5.6 5.3 5.9 5.3
Other (income) expense, net................................... 1.4 (0.1) 0.6 (0.9)
----- ----- ----- -----
Income before taxes........................................... 2.4 5.2 4.6 6.8
Income tax expense............................................ 0.9 1.8 1.7 2.4
----- ----- ----- -----
Net income.................................................... 1.5% 3.4% 2.9% 4.4%
===== ===== ===== =====
NET SALES SEGMENT DATA:
Geographic
Americas............................................. 70.1% 71.2% 67.3% 67.1%
Europe............................................... 22.6 20.9 25.0 24.3
Asia Pacific......................................... 7.2 7.9 7.7 8.5
Net sales. Net sales for the three months ended August 26, 2001 decreased
12.8% to $983.5 million, as compared to $1,127.7 million for the same period in
2000. Net sales for the nine months ended August 26, 2001 decreased 10.0% to
$3,023.8 million, as compared to $3,359.2 million for the same period in 2000.
These decreases reflect volume declines primarily due to weak economies and
retail markets in the U.S. and Japan and the impact of a weaker euro and yen. If
currency exchange rates were unchanged from the prior year periods, net sales
for the three months ended August 26, 2001 would have declined approximately
10.7% and net sales for the nine months ended August 26, 2001 would have
declined approximately 7.5% from the same periods in 2000.
Although net sales levels decreased from the prior year periods, we are
seeing positive developments across several dimensions of our business where
improvements are needed. They include our experience with new products, our
service levels, our relations with customers and presentation of our products at
retail. In addition, we continued to maintain our margins and control our
operating expenses and, during the third quarter of fiscal year 2001, we reduced
our debt.
Before the terrorist attacks of September 11, 2001, we had expected a
decline in net sales for the full fiscal year in the high single digits on a
constant currency basis. This expectation reflected continuing poor retail and
economic conditions in the U.S. and Japan, coupled with some positive indicators
for the fourth fiscal quarter of 2001. Those indicators included sell-through
data, early experience with new products such as our Levi's(R) Superlow jeans
and planned advertising activities for the quarter.
19
Since the terrorist attacks, several retailers have issued warnings that
they may have to cut their earnings outlook, and there are widespread
expressions of concern about the U.S. and European economies. We believe the
events of September 11th create considerable uncertainty about the world economy
in general and the retail apparel environment, and retailer and consumer buying
behavior specifically, and add greater risk to our expectations for the balance
of the year. In addition, we currently anticipate difficult retail and economic
conditions to continue into 2002, along with the continued need for executional
improvements, including bringing greater focus on core products and innovation
to the U.S. product line. As a result, we believe our net sales will decline in
2002, and we are planning our production and operating expenses accordingly.
In the Americas, net sales for the three months ended August 26, 2001
decreased 14.0% to $689.9 million, as compared to $802.6 million for the same
period in 2000. Net sales for the nine months ended August 26, 2001 decreased
9.8% to $2,034.2 million, as compared to $2,255.3 million for the same period in
2000. These decreases were primarily attributable to the weak economy and retail
apparel market in the U.S. We also believe retailers are reducing their
open-to-buy and overall inventory levels in response to the weak apparel market.
However, where we have introduced updated and relevant products, supporting them
with the right advertising and retail programs, our data shows good sell-through
to consumers. This is the case with our Levi's(R) Superlow jeans and Dockers(R)
Mobile(TM) pant.
In Europe, net sales for the three months ended August 26, 2001 decreased
5.7% to $222.5 million, as compared to $235.9 million for the same period in
2000. Net sales for the nine months ended August 26, 2001 decreased 7.5% to
$756.5 million, as compared to $817.5 million for the same period in 2000. The
net sales decreases for the three and nine months ended August 26, 2001 were
primarily due to the effects of translation to U.S. dollar reported results. The
net sales decrease for the nine months ended August 26, 2001 was also due to a
decline in volume. On a constant currency basis, net sales would have increased
by approximately 0.6% for the three months ended August 26, 2001 compared to the
same period in 2000, and would have decreased approximately 0.7% for the nine
months ended August 26, 2001 compared to the same period in 2000. We believe the
constant currency results indicate that our business in Europe is beginning to
stabilize, reflecting the impact of our innovative products, such as Levi's(R)
Engineered Jeans(TM), marketing, retail presentation programs, and improved
delivery performance.
In our Asia Pacific region, net sales for the three months ended August 26,
2001 decreased 20.3% to $71.1 million, as compared to $89.2 million for the same
period in 2000. Net sales for the nine months ended August 26, 2001 decreased
18.6% to $233.1 million, as compared to $286.4 million. These decreases were
primarily driven by the economic uncertainty in Japan and the effects of
translation to U.S. dollar reported results. If exchange rates were unchanged
from the prior year periods, the net sales decreases would have been
approximately 10.3% for the three months ended August 26, 2001 and 9.2% for the
nine months ended August 26, 2001 compared to the same periods in 2000. In
Japan, which accounts for approximately 55% of our business in Asia, difficult
business conditions have resulted in retail consolidation, closure of retail
store locations and bankruptcies, including four of our key retail customers.
Gross profit. Gross profit for the three months ended August 26, 2001
totaled $399.2 million compared with $464.3 million for the same period in 2000.
Gross profit as a percentage of net sales, or gross margin, for the three months
ended August 26, 2001 decreased to 40.6%, as compared to 41.2% for the same
period in 2000. Gross profit for the nine months ended August 26, 2001 totaled
$1,291.7 million, compared to $1,401.9 million. Gross margin increased for the
nine months ended August 26, 2001 to 42.7%, as compared to 41.7% for the same
period in 2000. The gross margin decline for the three months ended August 26,
2001 was primarily due to costs of approximately $8.0 million associated with
production down time we took in our domestic plants in response to the weak
retail market, as well as costs of approximately $3.0 million attributed to a
product recall in Europe. In late August, we recalled a limited collection of
"glossy finish" Levi's(R) jeans, shirts and jackets that were on the market for
just under one month and accounted for less than one percent of our Levi's brand
volume in Europe. The gross margin improvement for the nine months ended August
26, 2001 was primarily due to lower sourcing and fabric costs, and reduced
inventory markdowns. The Caribbean Basin Initiative trade act was a key reason
for the sourcing cost improvements. We anticipate that our full year gross
margin for 2001 will be within our target range of 40% to 42%.
20
Marketing, general and administrative expenses. Marketing, general and
administrative expenses for the three months ended August 26, 2001 decreased
12.3% to $314.5 million as compared to $358.5 million for the same period in
2000. Marketing, general and administrative expenses as a percentage of sales
for the three months ended August 26, 2001 increased slightly to 32.0% as
compared to 31.8% for the same period in 2000. Marketing, general and
administrative expenses for the nine months ended August 26, 2001 decreased 6.8%
to $976.7 million as compared to $1,048.1 million for the same period in 2000.
Marketing, general and administrative expenses as a percentage of sales for the
nine months ended August 26, 2001 increased slightly to 32.3% as compared to
31.2% for the same period in 2000.
The dollar decreases in marketing, general and administrative expenses for
the three and nine months ended August 26, 2001 were primarily due to our
continuing cost containment efforts, including lower levels of incentive plan
accruals and advertising expenses, as well as lower volume-related costs. The
lower levels of incentive plan accruals include a reversal of costs associated
with an employee long-term incentive plan as a result of forfeitures of $12.0
million for the three months ended August 26, 2001 and $18.0 million for the
nine months ended August 26, 2001. Marketing, general and administrative
expenses for the three and nine months ended August 27, 2000 also included a
reversal of employee benefit costs of approximately $24.0 million due to changes
in the demographic profile of our workforce. We continue to look for
opportunities to streamline our organization, in line with our core product
focus and related initiatives to reduce business complexity.
Advertising expense for the three months ended August 26, 2001 decreased
13.1% to $84.5 million, as compared to $97.3 million for the same period in
2000. Advertising expense as a percentage of sales for the three months ended
August 26, 2001 was flat at 8.6% compared to the same period in 2000.
Advertising expense for the nine months ended August 26, 2001 decreased 12.0% to
$252.0 million, as compared to $286.3 million for the same period in 2000.
Advertising expense as a percentage of sales for the nine months ended August
26, 2001 decreased slightly to 8.3%, as compared to 8.5% for the same period in
2000. Advertising expense as a percentage of sales for the three and nine month
periods in 2001 is consistent with our annual target range of 8% to 9%. We
expect to be within our target range for fiscal year 2001.
Other operating income. Licensing income for the three months ended August
26, 2001 of $8.4 million decreased 19.5%, as compared to $10.4 million for the
same period in 2000. The decrease for the three months ended August 26, 2001 was
primarily due to the timing of licensing income accruals. Licensing income for
the nine months ended August 26, 2001 of $22.9 million increased 9.9%, as
compared to $20.9 million for the same period in 2000. This increase was
primarily due to an increase in licensed merchandise such as outerwear, shoes,
belts, headwear and handbags.
Operating income. Operating income for the three months ended August 26,
2001 of $93.1 million decreased 19.9%, as compared to $116.2 million from the
same period in 2000. The decrease was primarily due to lower sales, partially
offset by lower marketing, general and administrative expenses. Operating income
for the nine months ended August 26, 2001 of $337.9 million decreased 9.8%, as
compared to $374.7 million from the same period in 2000. The decrease was
primarily due to lower sales, partially offset by an improved gross margin and
lower marketing, general and administrative expenses.
Interest expense. Interest expense for the three months ended August 26,
2001 decreased 6.7% to $55.4 million, as compared to $59.4 million for the same
period in 2000. The decrease was primarily due to lower market interest rates
and lower average debt levels. The average cost of borrowings for the three
months ended August 26, 2001 and August 27, 2000 were 9.4% and 10.0%,
respectively. Interest expense for the nine months ended August 26, 2001
increased 0.8% to $178.5 million, as compared to $177.2 million for the same
period in 2000. The increase was due to a write-off of fees related to the
credit agreement replaced by a new credit facility in February 2001 (see Note 4
to the Consolidated Financial Statements). Excluding the fee write-off, interest
expense would have been 5.3% lower than the same period in 2000 primarily due to
lower average debt levels, partially offset by higher interest rates associated
with the senior notes issued January 18, 2001. The average cost of borrowings
for the nine months ended August 26, 2001 and August 27, 2000 were 9.6% and
9.4%, respectively, excluding the write-off of fees.
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Other income/expense, net. Other expense, net for the three months ended
August 26, 2001 was $13.9 million, as compared to income of $1.4 million for the
same period in 2000. Other expense, net for the nine months ended August 26,
2001 was $19.6 million, as compared to income of $30.2 million for the same
period in 2000. The expenses for the three and nine months ended August 26, 2001
were primarily due to net losses from foreign currency exposures and the
contracts to hedge foreign currency exposures. These net losses are primarily
due to foreign currency and market value fluctuations, which introduces an
element of volatility in our income statement quarter-to-quarter. (See Note 7 to
the Consolidated Financial Statements.) In addition, the income for the nine
months ended August 27, 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.
Income tax expense. Income tax expense for the three months ended August
26, 2001 decreased 56.7% to $8.8 million as compared to $20.4 million for the
same period in 2000. Income tax expense for the nine months ended August 26,
2001 decreased 35.1% to $51.7 million as compared to $79.7 million for the same
period in 2000. The decrease in income taxes for both periods in 2001 was
primarily due to lower income before taxes. Our effective tax rate for the three
and nine month periods in 2001 was 37% compared to 35% for the same periods in
2000.
Net income. Net income for the three months ended August 26, 2001 decreased
60.3% to $15.0 million from $37.8 million for the same period in 2000. Net
income for the nine months ended August 26, 2001 decreased 40.5% to $88.0
million from $148.0 million for the same period in 2000. These decreases were
primarily due to lower sales and the impact of currency volatility on our
foreign currency hedging activities, partially offset by lower marketing,
general and administrative expenses and, for the nine months ended August 26,
2001, higher gross margins. The nine months ended August 27, 2000 results also
included a gain from the sale of office buildings.
RESTRUCTURING AND EXCESS CAPACITY REDUCTION
Since 1997, we have closed 29 of our owned and operated production and
finishing facilities in North America and Europe and instituted restructuring
initiatives in order to reduce costs, eliminate excess capacity and align our
sourcing strategy with changes in the industry and in consumer demand. The total
balance of the reserves at August 26, 2001 was $53.4 million compared to $71.6
million at November 26, 2000. (See Note 3 to the Consolidated Financial
Statements.)
LIQUIDITY AND CAPITAL RESOURCES
Our principal capital requirements have been to fund working capital and
capital expenditures. As of August 26, 2001, total cash and cash equivalents
were $63.8 million, a $53.3 million decrease from the $117.1 million cash
balance reported as of November 26, 2000.
Cash used for/provided by operations. Cash used for operating activities
for the nine months ended August 26, 2001 was $93.3 million, as compared to cash
provided by operating activities of $199.3 million for the same period in 2000.
The use of cash for the nine months ended August 26, 2001 was primarily
attributable to payments on annual incentive programs, an increase in inventory
and the payment of income taxes on an Internal Revenue Service settlement.
Inventory, primarily first quality basic products, increased during the nine
months ended August 26, 2001 primarily due to lower sales in the U.S. We are
focusing on managing inventory levels to be more in line with sales but we do
not expect to be able to work through the entire excess by year-end. In
addition, we took production down time of approximately $8.0 million in the
third quarter of fiscal year 2001 to help manage our inventories and expect our
total down time cost to be approximately $15.0 million by the end of this fiscal
year. Inventory consists primarily of first quality basic products in which we
do not expect significant markdowns of that inventory.
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Other long-term assets increased during the nine months ended August 26,
2001 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
entered into in February 2001. Net deferred tax assets and restructuring
reserves decreased during the nine months ended August 26, 2001 primarily due to
spending related to the restructuring initiatives. Accrued salaries, wages, and
employee benefits decreased during the nine months ended August 26, 2001
primarily due to the payment of annual employee incentives. Long-term employee
benefits increased primarily due to increased accruals for long-term employee
incentive plans. Accrued taxes decreased during the nine months ended August 26,
2001 primarily due to a payment of approximately $40.0 million to the Internal
Revenue Service in connection with an examination of our income tax returns for
the years 1986 - 1989.
Cash used for/provided by investing activities. Cash used for investing
activities during the nine months ended August 26, 2001 was $13.4 million, as
compared to cash provided by investing activities of $144.2 million during the
same period in 2000. Cash used for investing activities during the nine months
ended August 26, 2001 resulted primarily from purchases of property, plant and
equipment. Cash provided by investing activities during the nine months ended
August 27, 2000 was primarily attributable to proceeds received from the sale of
office buildings. We expect that capital expenditures for fiscal year 2001 will
not exceed the 2000 fiscal year-end level of $28.0 million.
Cash provided by/used for financing activities. Cash provided by financing
activities for the nine months ended August 26, 2001 was $50.3 million, as
compared to cash used for financing activities of $457.2 million for the same
period in 2000. Cash provided by financing activities during the nine months
ended August 26, 2001 was primarily from the senior notes issued in January and
the domestic receivables securitization transaction completed in July (see Note
4 to the Consolidated Financial Statements).
Financial Condition
Credit Agreement. 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 consists 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.
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 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.
The facility contains customary covenants restricting our activities as
well as those of our subsidiaries, including limitations on our 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 will also contain financial
covenants that we must satisfy on an ongoing basis, including maximum leverage
ratios and minimum coverage ratios. As of August 26, 2001, we were in compliance
with the financial covenants under the facility.
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.
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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. (See Note 4 to the Consolidated Financial
Statements.)
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.
Domestic 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 is accounted for under SFAS 140.
The transaction did not meet the criteria for sales accounting under SFAS 140
and therefore is accounted for 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 and, accordingly, have not been registered under
the Securities Act and may not be sold in the United States absent registration
or an applicable exemption from the registration requirements 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 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.
NEW ACCOUNTING STANDARDS
We adopted Statement of Financial Accounting Standards No. ("SFAS") 133,
"Accounting for Derivative Instruments and Hedging Activities," on the first day
of fiscal year 2001. Due to the adoption of SFAS 133, we reported a net
transition gain in other income/expense for the nine months ended August 26,
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. (See Note 7 to the Consolidated Financial Statements.)
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. (See Note 4 to the Consolidated Financial
Statements.)
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The Financial Accounting Standards Board 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 are required to adopt the provisions
of SFAS 142 on the first day of fiscal year 2003; however, early application is
permitted in which we can adopt SFAS 142 on November 26, 2001. We have not yet
determined if we will adopt this standard early and are currently evaluating the
impact SFAS 142 may have on our financial position and results of operations.
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
This Form 10-Q includes forward-looking statements about retail conditions;
sales performance and trends; inventory position and management; debt repayment
and liquidity; gross margins; product innovation and new product development in
our brands; expense levels including overhead and advertising expense; retail
relationships and developments including sell-through; presentation of product
at retail and marketing collaborations; marketing and advertising initiatives;
and other matters. We have based these forward-looking statements on our current
assumptions, expectations and projections about future events. When used in this
document, 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 these words.
These forward-looking statements are subject to risks and uncertainties
including, without limitation, risks related to the impact of changing domestic
and international retail environments; changes in the level of consumer spending
or preferences in apparel; impact of the terrorist attacks in the U.S. on
September 11, 2001; dependence on key distribution channels, customers and
suppliers; changing fashion trends; our supply chain executional performance;
internal impact of organizational developments; ongoing competitive pressures in
the apparel industry; trade restrictions; political or financial instability in
countries where our products are manufactured; and other risks detailed in our
annual report on Form 10-K for the year ended November 26, 2000, registration
statements and other filings with the Securities and Exchange Commission. Our
actual results might differ materially from historical performance or current
expectations. 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.
ITEM 3. 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 risk with the objective of reducing fluctuations in actual and
anticipated cash flows by entering into a variety of derivative instruments
including spot, forward, options and swaps. We currently do not hedge 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
investments and royalty flows from affiliates.
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.
For more information about market risk, see Notes 4, 5 and 7 to the
Consolidated Financial Statements.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(A) EXHIBITS:
10.1 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. Filed herewith.
10.2 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. Filed
herewith.
10.3 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. Filed
herewith.
10.4 Receivables Purchase Agreement, dated as of July 31, 2001,
is 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. Filed herewith.
10.5 Parent Undertaking, dated as of July 31, 2001, made by
the Registrant in favor of Levi Strauss Receivables Funding,
LLC. Filed herewith.
10.6 Consent and Release Agreement, dated as of July 31, 2001,
is 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.
Filed herewith.
(B) REPORTS ON FORM 8-K:
Current Report on Form 8-K on July 31, 2001 filed pursuant to Item 5 of
the report and relating to completion, on July 31, 2001, by Levi
Strauss & Co. and various of its subsidiaries of a receivables
securitization transaction involving receivables generated from sales
of products to the Company's U.S. customers.
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."
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SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: October 3, 2001 Levi Strauss & Co.
------------------
(Registrant)
By: /s/ William B. Chiasson
-----------------------
William B. Chiasson
Senior Vice President and Chief Financial Officer
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