S-4/A 1 ds4a.htm FORM S-4/A Form S-4/A
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As filed with the Securities and Exchange Commission on April 22, 2003

Registration No. 333-103206


 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

AMENDMENT NO. 1

TO

FORM S-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933


LEVI STRAUSS & CO.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

2325

 

94-0905160

(State or Other Jurisdiction of Incorporation or Organization)

 

(Primary Standard Industrial Classification Code Number)

 

(I.R.S. Employer
Identification No.)

 


 

1155 Battery Street, San Francisco, California 94111 (415) 501-6000

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 


 

Copies to:

 

Albert F. Moreno, Esq.

 

John D. Wilson, Esq.

 

Hilary A. Fenner, Esq.

Senior Vice President,

 

Shearman & Sterling

 

Assistant General Counsel

General Counsel

 

555 California Street

 

Levi Strauss & Co.

Levi Strauss & Co.

 

San Francisco, California 94104

 

1155 Battery Street

1155 Battery Street

 

(415) 616-1100

 

San Francisco, California 94111

San Francisco, California 94111

     

(415) 501-3535

(415) 501-6284

       

(Name, Address, Including Zip Code, and Telephone

Number, Including Area Code, of Agent for Service)

 


 

Approximate date of commencement of proposed sale to the public:    As soon as practicable after this registration statement becomes effective.

 

If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.    ¨

 

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

 

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

 


 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 



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The information in this prospectus is not complete and may be changed. We may not sell these securities or accept any offer to buy these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject To Completion

 

Prospectus

 

LEVI STRAUSS & CO.

 

Offer to Exchange

 

all outstanding 12¼% Senior Notes due 2012

($575,000,000 principal amount)

 

for

 

12¼% Senior Notes due 2012

($575,000,000 principal amount)

which have been registered under the Securities Act of 1933

 

The exchange offer will expire at 5:00 p.m., New York City time, on                  , 2003, unless extended.

 


 

See “Risk Factors” beginning on page 15 for a discussion of factors that you should consider before tendering your old notes.

 


 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 


 

The date of this prospectus is                  , 2003.


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WHERE YOU CAN FIND MORE INFORMATION

 

We have filed with the Securities and Exchange Commission a registration statement on Form S-4 under the Securities Act of 1933 (the “Securities Act”) relating to the exchange offer that includes important business and financial information about us that is not included in or delivered with this prospectus. This prospectus does not contain all of the information included in the registration statement. This information is available from us without charge to holders of the exchange notes as specified below. If we have made references in this prospectus to any contracts, agreements or other documents and also filed any of those contracts, agreements or documents as exhibits to the registration statement, you should read the relevant exhibit for a more complete understanding of the document or matter involved.

 

We are required to file periodic reports and other information with the Securities and Exchange Commission under the Securities Exchange Act of 1934 (the “Exchange Act”).

 

You may read and copy the registration statement, including the attached exhibits, and any report, statements or other information that we file at the Securities and Exchange Commission’s public reference room at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the operation of the public reference room. Our Securities and Exchange Commission filings will also be available to the public from commercial document retrieval services and at the Securities and Exchange Commission’s Internet site at www.sec.gov.

 

You may request a copy of any of our filings with the Securities and Exchange Commission, or any of the agreements or other documents that constitute exhibits to those filings, at no cost, by writing or telephoning us at the following address or phone number:

 

Levi Strauss & Co.

1155 Battery Street

San Francisco, California 94111

Attention: Treasurer

Telephone: (415) 501-3869 or (415) 501-6000

 

To obtain timely delivery of any of our filings, agreements or other documents, you must make your request to us no later than five business days before the expiration date of the exchange offer. The exchange offer will expire at 5:00 p.m., New York City time on                  , 2003 (the “expiration date”). The exchange offer can be extended by us in our sole discretion. See the caption “The Exchange Offer” for more detailed information.

 

You should rely only on the information provided in this prospectus. No person has been authorized to provide you with different information. The information in this prospectus is accurate as of the date on the front cover. You should not assume that the information contained in this prospectus is accurate as of any other date.

 

Any notes not tendered and accepted in the exchange offer will remain outstanding. To the extent any notes are tendered and accepted in the exchange offer, a holder’s ability to sell untendered notes could be adversely affected. Following consummation of the exchange offer, the holders of notes will continue to be subject to the existing restrictions upon transfer thereof and we will have fulfilled one of our obligations under the registration rights agreements. Holders of notes who do not tender their notes generally will not have any further registration rights under the registration rights agreements or otherwise.

 

Each broker-dealer that receives exchange notes for its own account pursuant to this exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of such exchange notes. The letter of transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an “underwriter” within the meaning of the Securities Act. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of exchange notes received in exchange for old notes where such old notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. We have agreed that, starting on the expiration date and ending on the close of business 180 days after the expiration date, that we will make this prospectus available to any broker-dealer for use in connection with any such resale. See “Plan of Distribution”.

 

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TABLE OF CONTENTS

 

    

Page


Where You Can Find More Information

  

i

Summary

  

1

Forward-Looking Statements

  

14

Risk Factors

  

15

The Exchange Offer

  

28

Use of Proceeds

  

37

Capitalization

  

38

Selected Consolidated Financial Data

  

39

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

42

Business

  

65

Management

  

80

Principal Stockholders

  

89

Material Relationships and Related Party Transactions

  

92

Description of Other Indebtedness

  

93

Description of Exchange Notes

  

97

Important U.S. Federal Income Tax Considerations

  

139

Plan of Distribution

  

143

Experts

  

143

Legal Matters

  

144

Index to Financial Statements

  

F-1

 

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SUMMARY

 

The following information summarizes the detailed information and financial statements included elsewhere in this prospectus. This summary does not contain all of the information that you should consider before exchanging your old notes for exchange notes, and we encourage you to read this prospectus carefully and in its entirety. Unless otherwise indicated or the context otherwise requires, data in this prospectus that refer to a particular year (e.g., 2002) refer to the fiscal year ended on the last Sunday in November of that year.

 

Our Company

 

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® and Dockers® brands. Our products are distributed in the United States primarily through chain retailers and department stores and abroad primarily through department stores and specialty retailers. We also maintain a network of approximately 900 franchised or independently owned stores dedicated to our products outside the United States and operate a small number of company-owned stores. Sales from company-owned stores represented approximately 1% of our total net sales for 2002.

 

We believe there is no other apparel company with a comparable global presence in either the jeans or casual pants segment of the apparel market. Since our founder, Levi Strauss, invented the blue jean in 1873, Levi’s® jeans have become one of the most successful and widely recognized brands in the history of the apparel industry. According to a study conducted by NPDFashionworld in December 2001, in the United States, the Levi’s® brand rated #1 among apparel companies in terms of brand awareness and brand retention (defined as the percent of all past-12-month purchasers who plan to buy the brand in the future). Our Dockers® brand of casual pants, introduced in 1986, is widely recognized in the United States and a growing number of markets abroad. Sales of our Levi’s® brand products and sales of our Dockers® brand products represented approximately 74% and 26%, respectively, of our total net sales for 2002. Jeans, casual and dress pants represented approximately 86% of our total units sold in 2002.

 

In October 2002, we announced that we will be introducing a new casual clothing brand, the Levi Strauss Signature brand. We created the brand for value-conscious consumers who shop in mass channel retail stores. The Levi Strauss Signature brand will initially feature a range of denim and non-denim pants and shirts as well as denim jackets. We anticipate that the products will be available initially at Wal-Mart Stores, Inc. locations across the United States beginning in July 2003. According to data from Knowledge Networks and NPDFashionworld, the mass channel is the largest and fastest growing retail channel in the United States, reaching approximately 160 million shoppers and selling more than 31% of all jeans sold in 2001. Our entry into the mass channel reflects our strategy of reaching consumers in all segments of the population, wherever they buy their clothing, whether it is through high-end specialty stores, department stores, national chains or mass channel retailers.

 

We currently organize our business into three geographic divisions: the Americas, consisting of the United States, Canada and Latin America; Europe, including the Middle East and Africa; and Asia Pacific. We conduct our operations in the United States primarily through Levi Strauss & Co. and outside the United States primarily through foreign subsidiaries owned directly or indirectly by Levi Strauss & Co. In 2002, we had approximately 3,300 retail customers operating more than 20,400 locations in the United States and Canada. In 2002, we had net sales of $4.1 billion, of which the Americas, Europe and Asia Pacific accounted for 65%, 26% and 9%, respectively.

 

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Business Turnaround Update

 

From 1998 to 2002, we experienced a decrease in net sales from $6.0 billion to $4.1 billion due to both industry-wide and company-specific factors. In response, we have taken these actions:

 

    reduced overhead expenses and eliminated excess manufacturing capacity through extensive restructuring initiatives, including, beginning in 1997, closing 37 of our owned and operated production and finishing facilities worldwide;

 

    shifted the vast majority of our production to independent contract manufacturers;

 

    put in place a new management team, including our chief executive officer, our chief financial officer and senior management team members in our Americas, Europe and Asia Pacific divisions;

 

    overhauled our product lines with new fits, fabrics and finishes in our core products, including more relevant fits and styles for women such as Levi’s® Superlow jeans, and introduced new market-leading innovations such as Dockers® Go Khaki pants and Dockers® Mobile pants;

 

    improved our relationships with retailers by providing them with market-right products, better economics, service and collaborative planning, and improved our product presentation at retail by upgrading and rolling out new retail formats;

 

    broadened product availability by opening new franchise or other dedicated stores outside the United States, by entering additional multi-brand specialty stores and image department stores in the United States, by introducing lower-priced Levi’s® and Dockers® products in Europe and Asia, by entering new countries in Asia, and by positioning ourselves to enter the mass channel in the United States;

 

    improved our operational processes by implementing a more disciplined and quicker “go-to-market” process (the steps from initial product concept to placement of the product on the retailer’s shelf), by improving our supply-chain capabilities, by implementing more efficient sales and operational planning, and by implementing demand-driven product replenishment programs; and

 

    created and begun implementing throughout our organization a new operating model, guided by our values, for leading our company through collaborative leadership principles and disciplined business and human resources planning.

 

We believe that through these initiatives we have successfully gained control of our business and are in the process of stabilizing and positioning our company to resume profitable growth. Our actions have enabled us to strengthen the overall financial health of the company. We:

 

    reduced our total debt as of fiscal year end 2002 by more than $800 million since the end of 1999;

 

    achieved positive quarterly net sales growth on a constant currency basis for the last half of 2002 compared to the same period in 2001, despite continued weak economic and retail conditions worldwide; and

 

    lowered our cost of goods sold and operating expenses, while increasing the variability of these costs.

 

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Our Business Strategy

 

Our vision is to market the most appealing and widely-worn casual clothing in the world. We are continuing to execute against the core business strategies underlying our business turnaround. We aim to continue to increase our financial strength and flexibility and resume profitable growth. We are focusing on the following key business strategies:

 

Innovate and lead from the core.

 

We believe that an integrated presentation of new and innovative products and marketing programs targeted to specific consumer and retail segments is crucial to generating consumer demand and increasing sales of our products. We continue to focus on:

 

    updating our core products with market-leading fits, fabrics, finishes and features that draw both on our long heritage of originality in product design and fabrication and on the latest technical innovations;

 

    continually creating product concepts and innovations that we can commercialize across our channels of distribution to appeal to a wide range of consumers in styles and at prices that meet their expectations;

 

    revitalizing our women’s line through targeted products such as Levi’s® Superlow jeans and a design and merchandising process better aligned with the needs of the women’s market; and

 

    executing product-focused marketing programs that integrate advertising, packaging and point of purchase communications to help drive brand equity and sales.

 

Achieve operational excellence.

 

We are implementing processes and initiatives to lower our worldwide sourcing costs, to shorten our time to market, to more effectively and reliably fulfill product demand, and to leverage our global scale. We continue to focus on:

 

    improving our “go-to-market” process through disciplined planning, standardized milestones and metrics, and clear accountability across our brand, marketing, supply chain, sales and other functions around the world;

 

    improving the linkage of product supply to consumer demand through expanding demand-driven replenishment programs based on collaborative data-sharing and planning with our retail customers and responsive value-added services;

 

    reducing product costs by operating a sourcing network consisting largely of independent contract manufacturers, engaging in continual product value engineering and product line rationalization, and pursuing lower cost raw materials and manufacturing sources that meet our quality and other standards; and

 

    improving our business efficiencies and decision-making processes by upgrading over the next several years our global information systems, including rolling out an integrated enterprise resource planning system for finance and supply chain functions in the United States and Asia.

 

Revitalize retailer relationships and improve our presence at retail.

 

We distribute our products in a wide variety of retail formats around the world including chain and department stores, franchise stores dedicated to our brands, specialty retailers, and, beginning in July 2003, a mass channel retailer in the United States. We must ensure that the economics for our retail customers are attractive, that the right products are available and in stock at retail, and that our products are presented in ways that enhance brand appeal and attract consumers. We continue to focus on:

 

    generating better economics for our retail customers by providing market-right products and executing effective pricing, incentive, promotion and service programs;

 

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    improving our collaborative planning with our retail customers and enhancing our sales teams’ capabilities to help customers achieve better product assortment, improved product availability and inventory management, and category growth; and

 

    making our products easier to find and easier to buy through new retailing formats, integrated advertising, packaging and point of purchase materials such as in-store graphics and fixtures, and other sales-area upgrades.

 

Sell where they shop.

 

We want to sell products to consumers where they shop. To do this, we must make relevant products accessible through multiple channels of distribution at price points that meet consumer expectations. We continue to focus on:

 

    entering the mass channel in the United States through the Levi Strauss Signature brand;

 

    opening new franchise or other dedicated stores and entering more multi-brand specialty stores and other accounts;

 

    identifying and executing additional opportunities to grow our sales in existing channels by selling a broader range of products to our current retail customers, obtaining additional floor space and placing products in existing customer locations not currently featuring our products; and

 

    continuing to introduce lower-priced products in Europe and Asia.

 

We believe that our business strategies are directly aligned with industry forces and that we are building the right core capabilities and operating processes to execute these strategies in a manner consistent with our values.

 

Failure to Exchange Your Old Notes

 

The old notes which you do not tender or we do not accept will, following the exchange offer, continue to be restricted securities. Therefore, you may only transfer or resell them in a transaction registered under or exempt from the Securities Act and applicable state securities laws. We will issue the exchange notes in exchange for the old notes under the exchange offer only following the satisfaction of the procedures and conditions described in the caption “The Exchange Offer”.

 

Because we anticipate that most holders of the old notes will elect to exchange their old notes, we expect that the liquidity of the markets, if any, for any old notes remaining after the completion of the exchange offer will be substantially limited. Any old notes tendered and exchanged in the exchange offer will reduce the aggregate principal amount outstanding of the old notes.

 

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The Exchange Offer

 

The $575.0 million unregistered 12¼% senior notes due 2012, which we refer to in this prospectus as the old notes, were issued in three private offerings. In this exchange offer, we are offering to exchange, for your old notes, exchange notes which are identical in all material respects to the old notes except that the exchange notes have been registered under the Securities Act.

 

Registration Rights Agreements

In connection with the issuance of each of the $425.0 million of old notes on December 4, 2002 and the $100.0 million of old notes on January 22, 2003, we entered into registration rights agreements with the initial purchasers in which we agreed, among other things, to complete an exchange offer. In connection with the issuance of an additional $50.0 million of the old notes on January 23, 2003, we granted the purchasers, pursuant to the purchase agreement, the benefits of registration rights identical to those applicable to the $425.0 million and $100.0 million tranches of the old notes. When we refer to “registration rights agreements” in this prospectus, we are referring to all agreements under which we have granted registration rights with respect to the old notes.

 

 

You may exchange your old notes for exchange notes, which have substantially identical terms. The exchange offer satisfies your rights under the registration rights agreements. After the exchange offer is over, you will not be entitled to any exchange or registration rights with respect to your old notes, except under limited circumstances.

 

The Exchange Offer

We are offering to exchange up to $575.0 million aggregate principal amount of 12¼% old notes due 2012 for up to $575.0 million aggregate principal amount of 12¼% exchange notes due 2012.

 

 

You may exchange old notes only in integral multiples of $1,000 principal amount.

 

Purpose and Effect

The purpose of the exchange offer is to give you the opportunity to exchange your old notes for exchange notes that have been registered under the Securities Act. We are subject to the informational requirements of the Exchange Act and file reports and other information with the Securities and Exchange Commission to which each holder of old notes, if any are outstanding after the exchange offer, and exchange notes will have access.

 

Resale

We believe that the exchange notes issued pursuant to the exchange offer in exchange for old notes may be offered for resale, resold and otherwise transferred by you (unless you are an “affiliate” of us within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, so long as you are acquiring the exchange notes in the ordinary course of your business and you have not engaged in, do not intend to engage in, and have no arrangement or understanding with any person to participate in, a distribution of the exchange notes.

 

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Each broker-dealer that receives exchange notes for its own account in exchange for old notes, where such old notes were acquired by the broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such exchange notes. See “Plan of Distribution”.

 

 

Any holder of old notes who:

 

    is our affiliate;

 

    does not acquire exchange notes in the ordinary course of its business; or

 

    exchanges old notes in the exchange offer with the intention to participate, or for the purpose of participating, in a distribution of exchange notes,

 

 

must, in the absence of an exemption, comply with the registration and prospectus delivery requirements of the Securities Act in connection with the resale of the exchange notes.

 

Expiration of the Exchange Offer; Withdrawal of Tender

The exchange offer will expire at 5:00 p.m., New York City time, on              , 2003, or a later date and time to which we may extend it. We do not currently intend to extend the expiration of the exchange offer. You may withdraw your tender of old notes pursuant to the exchange offer at any time before expiration of the exchange offer. Any old notes not accepted for exchange for any reason will be returned without expense to you promptly after the expiration or termination of the exchange offer.

 

Conditions to the Exchange Offer

The exchange offer is subject to customary conditions, which we may waive. Please read the caption “The Exchange Offer—Conditions” for more information regarding the conditions to the exchange offer.

 

Procedures for Tendering Old Notes

If you wish to tender book-entry interests in old notes in the exchange offer, you must transfer your old notes into the exchange agent’s account in accordance with DTC’s Automated Tender Offer Program, or ATOP, system. In lieu of delivering a letter of transmittal to the exchange agent, a computer-generated message, in which you acknowledge and agree to be bound by the terms of the letter of transmittal, must be transmitted by DTC on behalf of you and received by the exchange agent before 5:00 p.m., New York City time, on the expiration date.

 

 

In all other cases, you must manually execute and deliver a letter of transmittal to the exchange agent before 5:00 p.m., New York City time, on the expiration date. See “The Exchange Offer—Exchange Agent” for more information.

 

 

By signing, or agreeing to be bound by, the letter of transmittal, you will represent to us that, among other things:

 

    you acquired your old notes in the ordinary course of your business;

 

 

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    you have no arrangement or understanding with any person or entity to participate in a distribution of the exchange notes;

 

    if you are a broker-dealer that will receive exchange notes for your own account in exchange for old notes that were acquired as a result of market-making activities, that you will deliver a prospectus, as required by law, in connection with any resale of those exchange notes; and

 

    you are not an “affiliate”, as defined in Rule 405 of the Securities Act, of us or, if you are an affiliate, that you will comply with any applicable registration and prospectus delivery requirements of the Securities Act.

 

Special Procedures for Beneficial Owners

If you are a beneficial owner of old notes that are registered in the name of a broker, dealer, commercial bank, trust company or other nominee, and you want to tender old notes in the exchange offer, you should contact the registered holder promptly and instruct the registered holder to tender on your behalf. If you wish to tender on your own behalf, you must, before completing and executing the letter of transmittal and delivering your old notes, either make appropriate arrangements to register ownership of the old notes in your name or obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time and may not be able to be completed before expiration of the exchange offer.

 

Guaranteed Delivery Procedures

If you wish to tender your old notes, and time will not permit your required documents to reach the exchange agent by the expiration date, or the procedure for book-entry transfer cannot be completed on time or certificates for registered notes cannot be delivered on time, you may tender your old notes under the procedures described in “The Exchange Offer—Guaranteed Delivery Procedures”.

 

Effect on Holders of Old Notes

If you are a holder of old notes and you do not tender your old notes in the exchange offer, you will continue to hold your old notes and will be entitled to all the rights and subject to all the limitations applicable to the old notes in the indenture.

 

 

The trading market for old notes could be adversely affected if some but not all of the old notes are tendered and accepted in the exchange offer.

 

Consequences of Failure to Exchange

All untendered old notes will remain subject to the restrictions on transfer provided for in the old notes and in the indenture. Generally, the old notes that are not exchanged for exchange notes pursuant to the exchange offer will remain restricted securities and may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. Other than in connection with the exchange offer, we do not currently anticipate that we will register the old notes under the Securities Act.

 

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Important Federal Income Tax Considerations

The exchange of old notes for exchange notes in the exchange offer will not be a taxable event for U.S. federal income tax purposes. See the caption “Federal Income Tax Considerations” for a more detailed description of the tax consequences of the exchange.

 

Use of Proceeds

We will not receive any cash proceeds from the issuance of exchange notes pursuant to the exchange offer.

 

Exchange Agent

Wilmington Trust Company is the exchange agent for the exchange offer. The address and telephone number of the exchange agent are set forth under the caption “The Exchange Offer—Exchange Agent”.

 

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The Exchange Notes

 

Issuer

Levi Strauss & Co., a Delaware corporation.

 

Securities Offered

$575.0 million aggregate principal amount of 12¼% senior exchange notes due 2012 and registered under the Securities Act.

 

Maturity

December 15, 2012.

 

Interest Payment Dates

December 15 and June 15 of each year, commencing June 15, 2003.

 

Ranking

The exchange notes will be unsecured unsubordinated obligations of Levi Strauss & Co. and will rank equally with all of Levi Strauss & Co.’s other existing and future unsecured and unsubordinated debt. As of February 23, 2003, we had approximately $2.562 billion of debt, of which $637.8 million was secured by most of our assets, including our trademarks and the assets and stock of our material U.S. subsidiaries. That secured debt will have priority over the exchange notes with respect to those assets. Holders of the exchange notes will only be creditors of Levi Strauss & Co. and not of our subsidiaries. As a result, all the existing and future liabilities of our subsidiaries, including any claims of trade creditors, will be effectively senior to the exchange notes. As of February 23, 2003, the liabilities of our subsidiaries were approximately $790 million. For more information on the ranking of the exchange notes, see “Description of Exchange Notes—Ranking”.

 

Optional Redemption

Generally, we may not redeem the exchange notes at our option prior to December 15, 2007. Starting on that date, we may redeem all or any portion of the exchange notes, at once or over time, at redemption prices set forth under “Description of Exchange Notes—Optional Redemption”, after giving the required notice under the indenture governing the exchange notes. At any time and from time to time, prior to December 15, 2005, we may redeem up to a maximum of 33 1/3% of the original aggregate principal amount of the exchange notes with the proceeds of one or more public equity offerings at a redemption price of 112.25% of the principal amount plus accrued and unpaid interest, if any, to the date of redemption.

 

Change in Control

If we experience a change in control, we will be required to make an offer to repurchase the exchange notes at a price equal to 101% of the principal amount plus accrued and unpaid interest, if any, to the date of repurchase. For more detailed information, see “Description of Exchange Notes—Repurchase at the Option of Holders Upon a Change of Control”.

 

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Restrictive Covenants

The indenture contains covenants that limit our ability and the ability of our restricted subsidiaries to, among other things:

 

    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 restricted subsidiaries;

 

    merge or consolidate with any other person; or

 

    sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of our assets or the assets of our restricted subsidiaries.

 

 

If the exchange 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 restricted subsidiaries are and remain in compliance with the indenture governing the exchange notes, we and our restricted subsidiaries will not be required to comply with particular covenants contained in the indenture. For more detailed information on covenants contained in the indenture, see “Description of Exchange Notes—Material Covenants”.

 

Listing; Absence of Established Market for the Exchange Notes

We do not intend to apply for listing of the exchange notes on any securities exchange or for quotation through an automated dealer quotation system. The exchange notes will constitute a new class of securities with no established trading market. For more detailed information, see “Plan of Distribution”.

 


 

Risk Factors

 

See “Risk Factors”, which begins on page 15, for a discussion of certain factors that should be considered by prospective investors in evaluating an investment in the exchange notes.

 


 

General

 

We were incorporated in Delaware in 1971. Our executive offices are located at Levi’s Plaza, 1155 Battery Street, San Francisco, California 94111. Our telephone number is (415) 501-6000. Our website is located at www.levistrauss.com. Our website and the information contained on our website are not part of this prospectus and are not incorporated by reference in this prospectus.

 

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Summary Consolidated Financial Data

 

The following table sets forth our summary consolidated financial data. The following selected statements of income data and cash flow data for fiscal year 2002 and the consolidated balance sheet data at the end of such period is derived from our financial statements that have been audited by KPMG LLP, independent public accountants. The following selected statements of income data and cash flow data for fiscal years 2001, 2000, 1999 and 1998 and the consolidated balance sheet data at the end of such periods are derived from our financial statements that have been audited by Arthur Andersen LLP, independent public accountants. For a discussion of the risks relating to Arthur Andersen LLP’s audit of our financial statements, please see “Risk Factors—Risks relating to Arthur Andersen LLP.” The data as of and for the three months ended February 23, 2003 and February 24, 2002 have been derived from our unaudited consolidated condensed interim financial statements which, in our opinion, contain all adjustments necessary for a fair representation of the financial condition and results of operation for these periods. The results of operations for the three months ended February 23, 2003 may not be indicative of the results to be expected for the year ending November 30, 2003.

 

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 prospectus. Certain prior year amounts have been reclassified to conform to the 2003 presentation.

 

    

Three Months Ended


    

Year Ended


 
    

February 23,

2003


    

February 24, 2002


    

November 24, 2002


    

November 25, 2001


    

November 26, 2000


    

November 28, 1999


    

November 29, 1998


 
    

(Unaudited)

                                    
                  

(Dollars in Thousands)

 

Statements of Income Data:

                                                              

Net sales

  

$

875,088

 

  

$

935,285

 

  

$

4,136,590

 

  

$

4,258,674

 

  

$

4,645,126

 

  

$

5,139,458

 

  

$

5,958,635

 

Cost of goods sold

  

 

515,641

 

  

 

536,701

 

  

 

2,451,785

 

  

 

2,461,198

 

  

 

2,690,170

 

  

 

3,180,845

 

  

 

3,433,081

 

    


  


  


  


  


  


  


Gross profit

  

 

359,447

 

  

 

398,584

 

  

 

1,684,805

 

  

 

1,797,476

 

  

 

1,954,956

 

  

 

1,958,613

 

  

 

2,525,554

 

Marketing, general and administrative expenses

  

 

323,533

 

  

 

298,935

 

  

 

1,332,798

 

  

 

1,355,885

 

  

 

1,481,718

 

  

 

1,629,845

 

  

 

1,834,058

 

Other operating (income)

  

 

(7,316

)

  

 

(6,113

)

  

 

(34,450

)

  

 

(33,420

)

  

 

(32,380

)

  

 

(24,387

)

  

 

(25,310

)

Restructuring charges, net of reversals(1)

  

 

(4,210

)

  

 

—  

 

  

 

124,595

 

  

 

(4,286

)

  

 

(33,144

)

  

 

497,683

 

  

 

250,658

 

Global Success Sharing Plan(2)

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

(343,873

)

  

 

90,564

 

    


  


  


  


  


  


  


Operating income

  

 

47,440

 

  

 

105,762

 

  

 

261,862

 

  

 

479,297

 

  

 

538,762

 

  

 

199,345

 

  

 

375,584

 

Interest expense

  

 

59,679

 

  

 

48,023

 

  

 

186,493

 

  

 

230,772

 

  

 

234,098

 

  

 

182,978

 

  

 

178,035

 

Other (income) expense, net

  

 

27,909

 

  

 

(9,677

)

  

 

25,411

 

  

 

8,836

 

  

 

(39,016

)

  

 

7,868

 

  

 

34,849

 

    


  


  


  


  


  


  


Income (loss) before taxes

  

 

(40,148

)

  

 

67,416

 

  

 

49,958

 

  

 

239,689

 

  

 

343,680

 

  

 

8,499

 

  

 

162,700

 

Income tax expense (benefit)

  

 

(15,658

)

  

 

24,944

 

  

 

24,979

 

  

 

88,685

 

  

 

120,288

 

  

 

3,144

 

  

 

60,198

 

    


  


  


  


  


  


  


Net income (loss)(3)

  

$

(24,490

)

  

$

42,472

 

  

$

24,979

 

  

$

151,004

 

  

$

223,392

 

  

$

5,355

 

  

$

102,502

 

    


  


  


  


  


  


  


 

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Three Months Ended


    

Year Ended


 
   

February 23,

2003


   

February 24, 2002


    

November 24, 2002


    

November 25, 2001


   

November 26, 2000


   

November 28, 1999


   

November 29, 1998


 
   

(Unaudited)

                                 
                

(Dollars in Thousands)

 

Statements of Cash Flow Data:

                                                         

Cash flows from operating activities

 

$

(152,208

)

 

$

35,641

 

  

$

191,748

 

  

$

141,900

 

 

$

305,926

 

 

$

(173,772

)

 

$

223,769

 

Cash flows from investing activities

 

 

(25,941

)

 

 

2,333

 

  

 

(59,353

)

  

 

(17,230

)

 

 

154,223

 

 

 

62,357

 

 

 

(82,707

)

Cash flows from financing activities

 

 

460,339

 

 

 

(27,157

)

  

 

(140,316

)

  

 

(139,890

)

 

 

(527,062

)

 

 

224,219

 

 

 

(194,489

)

Balance Sheet Data:

                                                         

Cash and cash equivalents

 

$

381,434

 

 

$

112,365

 

  

$

96,478

 

  

$

102,831

 

 

$

117,058

 

 

$

192,816

 

 

$

84,565

 

Working capital

 

 

1,190,807

 

 

 

732,055

 

  

 

574,103

 

  

 

651,256

 

 

 

555,062

 

 

 

770,130

 

 

 

637,801

 

Total assets

 

 

3,580,882

 

 

 

2,938,658

 

  

 

3,017,284

 

  

 

2,983,486

 

 

 

3,205,728

 

 

 

3,670,014

 

 

 

3,867,757

 

Total debt

 

 

2,562,486

 

 

 

1,960,548

 

  

 

1,846,977

 

  

 

1,958,433

 

 

 

2,126,430

 

 

 

2,664,609

 

 

 

2,415,330

 

Stockholders’ deficit(4)

 

 

(1,017,910

)

 

 

(897,446

)

  

 

(995,584

)

  

 

(935,943

)

 

 

(1,098,573

)

 

 

(1,288,562

)

 

 

(1,313,747

)

Other Financial Data:

                                                         

EBITDA before restructuring charges, net of reversals(5)

 

$

58,138

 

 

$

123,990

 

  

$

507,077

 

  

$

555,630

 

 

$

596,599

 

 

$

473,257

 

 

$

845,579

 

Capital expenditures

 

 

20,408

 

 

 

6,649

 

  

 

59,088

 

  

 

22,541

 

 

 

27,955

 

 

 

61,062

 

 

 

116,531

 

Ratio of earnings to fixed charges(6)

 

 

 

 

 

1.7x

 

  

 

1.2x

 

  

 

1.8x

 

 

 

2.2x

 

 

 

1.0x

 

 

 

1.7x

 


(1)   We reduced overhead expenses and eliminated excess manufacturing capacity through extensive restructuring initiatives executed since 1997, including closing 37 of our owned and operated production and finishing facilities worldwide and reducing the number of our employees worldwide by approximately 23,600. Due to lower than anticipated costs, we reversed reserve balances relating to these activities of $27.1 million, $26.6 million, and $33.1 million in 2002, 2001 and 2000, respectively, and $4.2 million during the three months ended February 23, 2003. During 1998 and 1999 we did not record any reversals to the restructuring reserves.

 

(2)   In 1996, we 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 1996, 1997 and 1998 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 expenses that had been accrued in prior years, less related miscellaneous expenses, and we did not recognize any expense after 1999. Consequently, no cash payments were, or will be, made under the Global Success Sharing Plan.

 

(3)   Amortization expense for goodwill and trademarks was discontinued starting in the first quarter of 2003 due to a new accounting standard, Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets.” Amortization expense for goodwill and trademarks for the three months ended February 24, 2002 was $2.7 million, and for each of the years 2002, 2001 and 2000 was $10.7 million. A reconciliation of previously reported net income (loss) to amounts adjusted for the exclusion of goodwill and trademark amortization, net of related income tax effect, is as follows:

 

      

Three Months Ended


    

Year Ended


      

February 23, 2003


      

February 24, 2002


    

November 24, 2002


    

November 25, 2001


    

November 26, 2000


      

(Unaudited)

                    
                      

(Dollars in Millions)

Reported net income (loss)

    

$

(24.5

)

    

$

42.5

    

$

25.0

    

$

151.0

    

$

223.4

Goodwill and trademark amortization, net of tax

    

 

—  

 

    

 

1.7

    

 

10.7

    

 

10.7

    

 

10.7

      


    

    

    

    

Adjusted net income (loss)

    

$

(24.5

)

    

$

44.2

    

$

35.7

    

$

161.7

    

$

234.1

      


    

    

    

    

 

(4)   Stockholders’ deficit resulted from a 1996 recapitalization transaction in which our stockholders created new long-term governance arrangements for us, including the voting trust and stockholders’ agreement.

 

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(5)   EBITDA before restructuring charges, net of reversals equals net income before interest expense, income tax expense, depreciation and amortization, other (income) expense, net and restructuring charges, net of reversals. We have previously reported this line item as “EBITDA before net restructuring charges and related expenses” to also exclude from EBITDA expenses incurred in connection with restructuring initiatives, primarily for workers’ compensation and pension enhancements associated with the 2002 plant closures in the United States. We did not incur any such restructuring-related expenses in the first quarter of 2002 or 2003 and do not expect to incur such expenses going forward.

 

     We believe that our investors find EBITDA before restructuring charges, net of reversals, to be a useful analytical tool for measuring our ability to service debt and for measuring our ability to generate cash for other purposes. EBITDA before restructuring charges, net of reversals, is a non-GAAP measure and should not be considered in isolation from, and is not intended to represent an alternative measure of, operating income or cash flow or any other measure of performance determined in accordance with generally accepted accounting principles. Other companies may calculate EBITDA before restructuring charges, net of reversals, differently, and our EBITDA before restructuring charges, net of reversals, calculations are not necessarily comparable with similarly titled amounts for other companies.

 

The calculation for EBITDA before restructuring charges, net of reversals and related expenses is shown below:

 

    

Three Months Ended


    

Year Ended


    

February 23,

2003


    

February 24, 2002


    

November 24, 2002


  

November 25, 2001


    

November 26, 2000


    

November 28, 1999


    

November 29, 1998


    

(Unaudited)

                                
                  

(Dollars in Thousands)

Net income (loss)

  

$

(24,490

)

  

$

42,472

 

  

$

24,979

  

$

151,004

 

  

$

223,392

 

  

$

5,355

 

  

$

102,502

Interest expense

  

 

59,679

 

  

 

48,023

 

  

 

186,493

  

 

230,772

 

  

 

234,098

 

  

 

182,978

 

  

 

178,035

Income tax expense (benefit)

  

 

(15,658

)

  

 

24,944

 

  

 

24,979

  

 

88,685

 

  

 

120,288

 

  

 

3,144

 

  

 

60,198

Depreciation and amortization expense

  

 

14,908

 

  

 

18,228

 

  

 

71,071

  

 

80,619

 

  

 

90,981

 

  

 

120,102

 

  

 

128,773

Other (income) expense, net

  

 

27,909

 

  

 

(9,677

)

  

 

25,411

  

 

8,836

 

  

 

(39,016

)

  

 

7,868

 

  

 

34,849

Restructuring charges, net of reversals

  

 

(4,210

)

  

 

—  

 

  

 

124,595

  

 

(4,286

)

  

 

(33,144

)

  

 

497,683

 

  

 

250,658

Restructuring related expenses

  

 

—  

 

  

 

—  

 

  

 

49,549

  

 

*

 

  

 

*

 

  

 

*

 

  

 

*

Global Success Sharing Plan

  

 

—  

 

  

 

—  

 

  

 

—  

  

 

—  

 

  

 

—  

 

  

 

(343,873

)

  

 

90,564

    


  


  

  


  


  


  

EBITDA before restructuring charges, net of reversals and related expenses

  

$

58,138

 

  

$

123,990

 

  

$

507,077

  

$

555,630

 

  

$

596,599

 

  

$

473,257

 

  

$

845,579

    


  


  

  


  


  


  

 
  *   We did not separately identify restructuring related expenses until 2002.

 

(6)   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.

 

For the three months ended February 23, 2003, there was a deficiency of earnings to fixed charges of $40.1 million.

 

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FORWARD-LOOKING STATEMENTS

 

Except for the historical information contained in this prospectus, certain matters discussed in this prospectus, including (without limitation) statements under “Summary”, “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, contain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Although we believe that, in making any such statements, our expectations are based on reasonable assumptions, any such statement may be influenced by factors that could cause actual outcomes and results to be materially different from those projected.

 

These forward-looking statements include statements relating to our anticipated financial performance and business prospects and/or statements preceded by, followed by or that include the words “believe”, “anticipate”, “intend”, “estimate”, “expect”, “project”, “could”, “plans”, “seeks” and similar expressions. These forward-looking statements speak only as of the date stated, or if no date is stated, the date of this prospectus, 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, even if experience or future events make it clear that any expected results expressed or implied by these forward-looking statements will not be realized. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these expectations may not prove to be correct or we may not achieve the financial results, savings or other benefits anticipated in the forward-looking statements. These forward-looking statements are necessarily estimates reflecting the best judgment of our senior management and involve a number of risks and uncertainties, some of which may be beyond our control, that could cause actual results to differ materially from those suggested by the forward-looking statements, including, without limitation:

 

    changes in the level of consumer spending or preferences in apparel;

 

    changing domestic and international retail environments;

 

    dependence on key distribution channels, customers and suppliers;

 

    risks related to our expected entry into the U.S. mass channel retail market;

 

    the impact of competitive products, price and other competitive pressures in the apparel industry;

 

    changing fashion trends;

 

    our supply chain executional performance;

 

    risks related to the impact of consumer and customer reactions to new products;

 

    the effectiveness of our promotion and incentive programs with retailers;

 

    plant closure execution and consequences;

 

    conditions in the bank loan and capital markets;

 

    trade restrictions and tariffs; and

 

    political or financial instability in countries where our products are manufactured.

 

For more information on these and other factors, see “Risk Factors”. We caution prospective purchasers 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 the risk factors contained throughout this prospectus.

 

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Table Of Contents

RISK FACTORS

 

You should carefully consider the following factors described below and all other information in this prospectus before deciding to exchange your old notes for exchange notes.

 

Risks relating to our substantial debt

 

We have substantial debt and interest payment requirements that may restrict our future operations and impair our ability to meet our obligations under the exchange notes.

 

As of February 23, 2003, our total debt was $2.562 billion and we had $204.9 million of additional borrowing capacity under our 2003 senior secured credit facility and $625.7 million of cash and cash equivalents and restricted cash. Under the 2003 senior secured credit facility, we are required to have funds segregated in an amount sufficient to repay the 6.80% notes due November 1, 2003 at maturity (including any interim scheduled interest payments). As of February 23, 2003, this amount was $244.3 million and is separately identified on the balance sheet as “Restricted Cash.”

 

Our substantial debt may have important consequences. For instance, it could:

 

    make it more difficult for us to satisfy our financial obligations, including those relating to the exchange notes;

 

    require us to dedicate a substantial portion of any cash flow from operations to the payment of interest and principal due under our debt, including the notes, which will reduce funds available for other business purposes;

 

    increase our vulnerability to general adverse economic and industry conditions;

 

    limit our flexibility in planning for or reacting to changes in our business and the industry in which we operate;

 

    place us at a competitive disadvantage compared to some of our competitors that have less financial leverage; and

 

    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 2003 senior secured credit facility 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.

 

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 assure 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 notes indentures and our 2003 senior secured credit facility may limit our activities.

 

The indentures relating to our old notes and the exchange notes and our senior unsecured notes due 2003, 2006 and 2008 and our 2003 senior secured credit facility contain customary restrictions, including covenants limiting our ability to incur additional debt, grant liens, make investments, consolidate, merge or acquire other businesses, sell assets, pay dividends and other distributions, make capital expenditures, and enter into transactions with affiliates. We also are required to meet specified financial ratios under the terms of our senior secured credit facility. These restrictions may make it difficult for us to successfully execute our business strategy or to compete in the worldwide apparel industry with companies not similarly restricted.

 

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Table Of Contents

 

If we are unable to refinance our 2003 senior secured credit facility and our 7.00% notes due 2006 prior to maturity, we may be forced to take actions that would not otherwise be in our long-term economic interest.

 

Our 2003 senior secured credit facility term loans mature on July 31, 2006 and our revolving 2003 senior secured credit facility matures on March 31, 2006, at which time we will be required to repay or refinance the facility. In addition, our 7.00% notes due 2006 mature on November 1, 2006, at which time we will be required to repay or refinance these notes. If we are unable to obtain acceptable replacement financing, we will not be able to satisfy our obligations under our 2003 senior secured credit facility or the 7.00% notes and may be required to take other actions to avoid defaulting under that facility and our 7.00% notes, including selling assets or surrendering assets to our lenders, which would not otherwise be in our long-term economic interest.

 

Since the exchange 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 exchange notes if a default occurs.

 

The exchange notes are general senior unsecured obligations that rank equal in right of payment with all of our existing and future unsecured and unsubordinated debt, including our senior unsecured notes due 2003, 2006 and 2008. The exchange notes are effectively subordinated to all of our secured debt to the extent of the value of the assets securing that debt. As of February 23, 2003, we had $2.562 billion of debt, of which approximately $637.8 million was secured by most of our assets, including our trademarks and the assets and stock of our material U.S. subsidiaries.

 

Because our 2003 senior secured credit facility is a secured obligation, failure to comply with its terms 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, including the holders of our capital stock.

 

The exchange notes are also structurally subordinated to all obligations of our subsidiaries since holders of the exchange notes will only be creditors of Levi Strauss & Co. and not of our subsidiaries. As of February 23, 2003, the liabilities of our subsidiaries were approximately $790 million. The ability of our creditors to participate in any distribution of assets of any of our subsidiaries upon liquidation or bankruptcy will be subject to the prior claims of that subsidiary’s creditors, including trade creditors, and any prior or equal claim of any equity holder of that subsidiary. In 2001, an indirect subsidiary of ours issued notes pursuant to a domestic receivables securitization facility, which notes were secured by U.S. trade receivables we had sold to the subsidiary. In addition, in 2000 several of our European subsidiaries entered into a receivables-backed securitization financing agreement where borrowings are collateralized by a security interest in the receivables of these subsidiaries. The exchange notes are structurally subordinated to the obligations of these subsidiaries under these arrangements. In addition, the ability of our creditors, including you, to participate in distributions of assets of our subsidiaries will be limited to the extent that the outstanding shares of capital stock of any of our subsidiaries are either pledged to secure other creditors, such as under our 2003 senior secured credit facility, or are not owned by us. As a result, you may 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 exchange notes.

 

We conduct our foreign operations through foreign subsidiaries, which in 2002 accounted for approximately 39% of our net sales. As a result, we depend in part upon dividends or other intercompany transfers of funds from our foreign subsidiaries for the funds necessary to meet our debt service obligations, including payments on the exchange notes. We only receive the cash that remains after our foreign subsidiaries satisfy their obligations. If those subsidiaries are unable to pass on the amount of cash that we need, we will be unable to make payments to our noteholders. Any agreements our foreign subsidiaries enter into with other parties, as well as applicable laws and regulations limiting the

 

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Table Of Contents

right and ability of non-U.S. subsidiaries and affiliates to pay dividends and remit earnings to affiliated companies, may restrict the ability of our foreign subsidiaries to pay dividends or make other distributions to us.

 

Our ability to borrow may be adversely affected by changes in our credit ratings.

 

The credit ratings assigned to our indebtedness affect both our ability to borrow and the terms of our borrowings. On August 14, 2002, Moody’s Investors Service downgraded our 2001 bank credit facility from “Ba3” to “B1” and our notes due 2003, 2006 and 2008 from “B2” to “Caa1.” According to a press release announcing the downgrade, Moody’s based this decision on its concerns relating to our level of cash generation, our ability to refinance debt, including our then existing 2001 bank credit facility and our notes maturing in November 2003, and our ability to pay costs associated with plant closures we undertook in 2002. On November 25, 2002, Moody’s upgraded our outlook from negative to stable and announced it would upgrade its ratings for our notes due 2003, 2006 and 2008 to “B3” upon completion of this offering. On January 7, 2003, Moody’s upgraded our senior unsecured debt ratings to “B3” from “Caa1.” The “B2” senior implied rating and the “B1” rating on our then existing 2001 bank credit facility were confirmed.

 

On November 12, 2002, Standard and Poor’s Ratings Service downgraded our long-term corporate credit rating from “BB” to “BB-” and our 2001 bank credit facility from “BB+” to “BB,” while reaffirming our senior unsecured debt rating as “BB-” and upgraded our outlook from negative to stable. According to a press release announcing its action, Standard and Poor’s based this decision on its expectation that our credit measures will not improve significantly in the near term. Standard and Poor’s expressed concerns relating to our entry into the mass channel, including significant execution risk associated with logistics, production and delivery response to serve the mass channel, the potential effect on our brand franchise, and the potential reaction of our existing retailers. Standard and Poor’s also noted that the ratings reflected our leveraged financial profile, the highly competitive nature of our industry, and the inherent fashion risk in our industry.

 

Although these downgrades did not trigger any material obligations or provisions under our contractual relationships, it is possible that these or other rating agencies may further downgrade our credit ratings or change our outlook in the future. The risks associated with our entry into the mass channel, including the potential negative effect on our existing customers or our brands and the significant working capital required, together with our substantial debt have been cited as some of the reasons for the recent revisions in our credit ratings. If we are unable to execute successfully our mass channel initiative, our credit ratings could be further downgraded in the future which could adversely impact our ability to borrow and the terms, including interest rates, of our borrowings. If our credit ratings are further downgraded, we could be required to, among other things, provide additional guarantees, collateral, letters of credit or cash to support our contractual obligations, including hedging obligations and indebtedness, and it could increase our cost of capital, make our efforts to raise capital more difficult and have an adverse impact on our business and financial condition.

 

Risks relating to the industry in which we compete

 

Our sales are heavily influenced by general economic cycles.

 

Apparel is a cyclical industry that is heavily dependent upon the overall level of consumer spending. Purchases of apparel and related goods tend to be highly correlated with cycles in the disposable income of our consumers. Our customers anticipate and respond to adverse changes in economic conditions and uncertainty by reducing inventories and canceling orders. As a result, any substantial deterioration in general economic conditions or increases in interest rates, or the current war with Iraq or future acts of war, terrorist or political events that diminish consumer spending and confidence in any of the regions in which we compete, could reduce our sales and adversely affect our business and financial condition.

 

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Intense competition in the worldwide apparel industry could reduce our sales and prices.

 

We face a variety of competitive challenges from other domestic and foreign jeanswear and casual apparel marketers, fashion-oriented apparel marketers, specialty retailers and retailers of private label jeanswear and casual apparel products, some of which have greater financial and marketing resources than we do. We compete with these companies primarily on the basis of:

 

    developing products with innovative fits, finishes, fabrics and performance features;

 

    anticipating and responding to changing consumer demands in a timely manner;

 

    offering attractively priced products;

 

    maintaining favorable brand recognition;

 

    generating better economics for our retail customers by providing market-right products and executing effective pricing, incentive, promotion and service programs;

 

    ensuring product availability through effective planning and replenishment collaboration with retailers;

 

    providing strong and effective marketing support; and

 

    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, from mass channel retailers developing exclusive labels or expanding the brands they carry and from internet-based competitors, could reduce our sales and prices and adversely affect our business and financial condition.

 

The worldwide apparel industry continues to experience price deflation, which has, and may continue to, affect our results of operations.

 

The worldwide apparel industry has experienced price deflation in recent years. The deflation is attributable to increased competition, increased product sourcing in lower cost countries, growth of the mass merchant channel of distribution, commoditization of the khaki market in the United States and reduced relative spending on apparel and increased value-consciousness on the part of consumers reflecting, in part, general economic conditions. Downward pressure on prices has, and may continue to:

 

    require us to introduce lower-priced products;

 

    require us to reduce wholesale prices on existing products;

 

    result in reduced gross margins;

 

    increase customer demands for allowances, incentives and other forms of economic support that could adversely affect our profitability; and

 

    increase pressure on us to further reduce our production costs 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 and upgraded products.

 

The worldwide apparel industry is characterized by constant product innovation due to changing consumer preferences and by the rapid replication of new products by competitors. As a result, our success depends in large part on our ability to continuously develop, market and deliver innovative products at a pace and intensity competitive with other brands in our segments. In addition, we must create products that appeal to multiple consumer segments at a range of price points. Any failure on our part to regularly develop innovative products and update core products could:

 

    limit our ability to differentiate, segment and price our products;

 

    adversely affect retail and consumer acceptance of our products;

 

    limit sales growth; and

 

    leave us with a substantial amount of unsold inventory, which we may be forced to sell through markdowns.

 

The increasing importance of product innovation in apparel requires us to strengthen our internal research and commercialization capabilities, to rely more on successful commercial relationships with third parties such as fiber, fabric and finishing providers and to compete and negotiate effectively for new technologies and product components. The exposure of our business to changes in consumer preferences is heightened by our increasing reliance on offshore manufacturers, as offshore outsourcing may increase lead times between production decisions and customer delivery. In addition, our focus on tight management of inventory may result, from time to time, in our not having an adequate supply of products to meet consumer demand and cause us to lose sales. Moreover, if we misjudge consumer preferences, our brand image may be significantly impaired.

 

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, weather, supply conditions, government regulation, economic climate and other unpredictable factors. Any raw material price increases could increase our cost of sales and decrease our profitability unless we are able to pass higher prices on to our customers. Moreover, any decrease in the availability of cotton could impair our ability to meet our production requirements in a timely manner.

 

Our business is subject to risks associated with importing products.

 

We import raw materials and finished garments into all of our operating regions. Substantially all of our import operations are subject to tariffs imposed on imported products and quotas imposed by trade agreements. In addition, the countries in which our products are manufactured or imported may from time to time impose additional new quotas, duties, tariffs or other restrictions on our imports or adversely modify existing restrictions. Adverse changes in these import costs and restrictions, or our or our suppliers’ failure to comply with customs or similar laws, could harm our business. We cannot assure that future trade agreements will not provide our competitors with an advantage over us, or increase our costs, either of which could have an adverse effect on our business and financial condition.

 

Our operations are also subject to the effects of international trade agreements and regulations such as the North American Free Trade Agreement and the Caribbean Basin Initiative, and the activities and regulations of the World Trade Organization. Generally, these trade agreements benefit our business by reducing or eliminating the duties and/or quotas assessed on products manufactured in a particular country. However, trade agreements can also impose requirements that adversely affect our business, such as limiting the countries from which we

 

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can purchase raw materials and setting quotas on products that may be imported into the United States from a particular country. In addition, the World Trade Organization may commence a new round of trade negotiations that liberalize textile trade by further eliminating quotas or reducing tariffs. The elimination of quotas on World Trade Organization member countries by 2005 and other effects of these trade agreements could result in increased competition from developing countries which historically have lower labor costs, including China and Taiwan, both of which recently became members of the World Trade Organization. This increased competition could have an adverse effect on our business and financial condition.

 

Our ability to import products in a timely and cost-effective manner may also be affected by problems at ports or issues that otherwise affect transportation and warehousing providers, such as labor disputes. These problems could require us to locate alternative ports or warehousing providers to avoid disruption to our customers. These alternatives may not be available on short notice or could result in higher transit costs, which could have an adverse impact on our business and financial condition.

 

Risks relating to our business

 

We may not have recovered from continuing declines in net sales which have impaired our competitive and financial positions.

 

Our business has declined in recent years. Net sales declined from $6.0 billion in 1998 to $4.1 billion in 2002, a decrease of 30.6%. Our market research indicated that during that period we experienced significant brand equity and market position erosion in all of the regions in which we operate, including a substantial deterioration in the perception of the Levi’s® brand by younger consumers. In response to these trends, we have made extensive strategic, operational and management changes designed to improve our performance, but these changes may not have the desired sustained effect on our business or on our financial condition.

 

In addition, our declining business, and the actions we took in response to that decline, prevented us from repaying the substantial debt we incurred in our 1996 reorganization 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.

 

We may be unable to maintain or increase our sales through our primary distribution channels.

 

In the United States, chain stores and department stores are 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 channel retailers, account for a large portion of sales in jeanswear and casual wear sales in the United States. Our lack of a substantial presence in the vertically integrated specialty store market, where companies such as Gap Inc., Abercrombie & Fitch Co. and American Eagle Outfitters compete, weakens our ability to market to younger consumers. Although we plan on entering the mass channel in the United States through sales of Levi Strauss Signature products to Wal-Mart in 2003, we may not experience the increase in sales we anticipate. Entry into new distribution channels or expansion of existing channels requires investment, imposes new capability and service requirements and creates the risk of reduced sales and support from existing customers.

 

In Europe, we depend heavily on independent jeanswear retailers, which account for approximately half of our sales in that region. Independent retailers in Europe have experienced increasing difficulty competing against large department stores and increasingly prevalent vertically integrated specialty stores. Further competition in the independent retailer channel may adversely affect the sales of our products in Europe. In addition, we do not currently sell products to mass channel retailers in Europe, who participate in a market segment that is growing in importance as consumer value-consciousness and price pressure continue to take hold in the region.

 

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In Asia, we experienced declines in recent years in our core department stores channels in Japan and Australia, our two largest businesses in the region. In 2001, a number of our customers in Japan declared bankruptcy. As a result, we face increasing pressure to open new distribution channels throughout the region. If we are unable to do so, our sales in the region may decline.

 

We also do not have a large portfolio of company-owned stores and internet distribution channels, unlike 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 of our competitors over the distribution and presentation at retail of our products, which we believe has adversely affected our performance and could make it more difficult for us to implement our strategy.

 

Our expected entry into the U.S. mass channel creates risks for us and may not be successful.

 

In October 2002, we announced that we will be introducing a new casual clothing brand, the Levi Strauss Signature brand. We created the brand for value-conscious consumers who shop in mass channel retail stores. We anticipate that the products will be available initially at Wal-Mart locations across the United States beginning in July 2003. We face a number of risks with respect to our mass channel initiative, any of which may adversely affect our sales, business and financial condition.

 

    We will need considerable organizational resources and discipline to ensure that our Levi Strauss Signature products are manufactured and delivered in accordance with the service requirements of Wal-Mart and other mass channel retail customers, while at the same time meeting the requirements of our existing customers. These service requirements will require us to ensure that our products are manufactured in large volumes in accordance with appropriate quality controls and are delivered in a timely manner. If Wal-Mart is dissatisfied with our products or performance for any reason, or if sales are less than expected, Wal-Mart may elect not to continue our arrangement, which could adversely affect our business and financial condition and make it more difficult for us to pursue similar arrangements with other mass channel retailers.

 

    Our existing relationships with our current customers may be adversely affected by our entry into the mass channel if we are unable to continue to meet their service requirements or if they react adversely to our selling our products through another distribution channel. Either of these developments could result in decreased sales of our products to these customers.

 

    Sales of Levi Strauss Signature products through the mass channel may result in reduced sales of our other brands. If these reductions are greater than anticipated, they could have an adverse impact on our sales and margins. In addition, by offering a new less expensive brand in the mass channel, we may adversely affect the perception of our core Levi’s® brand by both consumers who purchase our products and by our current customers who sell our products, which could result in an overall decrease in sales of our products.

 

    Creating and launching a new brand in the mass channel involves considerable investment, particularly in the inventory and organization necessary to meet product launch as well as ongoing service requirements. As a result, our working capital requirements associated with the mass channel will be substantial and will initially be made prior to our receipt of any information regarding actual consumer acceptance of our new brand. In addition, we anticipate that we will not begin generating revenues from sales of Levi Strauss Signature products until the second half of 2003. As a result, we will incur operating expenses and will need considerable working capital until that time and we will not begin recouping investment until after that time.

 

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We depend on a group of key U.S. customers for a significant portion of our sales. A significant adverse change in a customer relationship or in a customer’s financial position could harm our business and financial condition.

 

Net sales to our ten largest customers, all of which are located in the United States, totaled approximately 45% and 47% of total net sales for 2002 and 2001, respectively. One customer, J.C. Penney Company, Inc., accounted for approximately 12% and 13% of net sales for 2002 and 2001, respectively. It is possible that Wal-Mart may become one of our largest customers as a result of purchases of Levi Strauss Signature products. Moreover, we believe that consolidation in the retail industry has centralized purchasing decisions and given customers greater leverage over suppliers like us, and we expect this trend to continue. If this consolidation continues, our net sales and results of operations may be increasingly sensitive to a deterioration in the financial condition of, or other adverse developments with, one or more of our customers.

 

While we have long-standing customer relationships, we do not have long-term contracts with any of them, including J.C. Penney, or our new customer, Wal-Mart. As a result, purchases generally occur on an order-by-order basis, and the relationship, as well as particular orders, can generally be terminated by either party at any time. A decision by a major customer, whether motivated by competitive considerations, financial difficulties, economic conditions or otherwise, to decrease its purchases from us or to change its manner of doing business with us, could adversely affect our business and financial condition. In addition, during recent years, various retailers, including some of our customers, have experienced significant changes and difficulties, including consolidation of ownership, increased centralization of purchasing decisions, restructurings, bankruptcies and liquidations. For example, several of our key retail customers in Japan filed for bankruptcy in 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.

 

Our revenues are dependent on sales of branded jeans products. If our sales of these products significantly decline, our market share and our results of operations will be adversely affected.

 

Our revenues are derived mostly from sales of branded jeans products. Our Levi’s® brand, which consists primarily of denim bottoms, generated approximately 74% of our total net sales in 2002. In 2002, net sales of Levi’s® brand products accounted for approximately 65% of net sales in the Americas, approximately 91% of net sales in Europe and approximately 96% of net sales in Asia Pacific. We expect the relative percentage of our total net sales represented by jeans products will increase following our expected entry in 2003 into the mass channel in the United States with our Levi Strauss Signature brand. Because of our dependence on branded jeans products, any significant decrease in our sales of these products could adversely affect our market share and harm our business and financial condition.

 

Our dependence on independent manufacturers reduces our ability to control the manufacturing process, which could harm our sales, reputation and overall profitability.

 

We have in recent years substantially increased our use of independent contract manufacturers. As a result, we depend on independent contract manufacturers to secure a sufficient supply of raw materials and maintain sufficient manufacturing and shipping capacity in an environment characterized by declining prices, continuing cost pressure and increased demands for product innovation and speed-to-market. This dependence could subject us to difficulty in obtaining timely delivery of products of acceptable quality. In addition, a contractor’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

 

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cancel orders, refuse to accept deliveries, impose non-compliance charges through invoice deductions or other charge-backs, demand reduced prices or reduce future orders, any of which could harm our sales, reputation and overall profitability. We do not have material long-term contracts with any of our independent manufacturers and any of these manufacturers may unilaterally terminate their relationship with us at any time. In addition, the recent trend in the apparel industry towards outsourcing has intensified competition for quality contractors, some of which have long-standing relationships with our competitors. 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 require contractors to meet our standards in terms of working conditions, environmental protection and other matters before we are willing to place business with them. As such, we may not be able to obtain the lowest-cost production. In addition, the labor and business practices of independent apparel manufacturers have received increased attention from the media, non-governmental organizations, consumers and governmental agencies in recent years. Any failure by our independent manufacturers to adhere to labor or other laws or appropriate labor or business practices, and the potential litigation, negative publicity and political pressure relating to any of these events, could harm our business and reputation.

 

We rely on a few key suppliers for a large portion of our fabric purchases. A significant adverse change in a supplier relationship or in a supplier’s financial position could harm our business and financial condition.

 

Three vendors, Cone Mills Corporation, Burlington Industries, Inc. and Galey & Lord, Inc., including its Swift Denim subsidiary, supplied approximately 49% of our total volume of fabric purchases worldwide in 2002. Cone Mills, our largest supplier, supplies various fabrics to us and, until March 30, 2003, was the sole supplier of the denim used for our 501® jeans. Purchases from Cone Mills accounted for approximately 22% of our total fabric purchases in 2002.

 

We do not have long-term supply agreements with any principal suppliers other than Cone Mills, and we compete with other apparel companies for supply capacity and product innovations. We may not be able to obtain adequate supply if there occurs a significant disruption in any of our supplier relationships, including any disruption caused by a change of control, bankruptcy or other financial or operating difficulty of any of our suppliers. We may also not be able to obtain adequate supply if there occurs a significant disruption in the markets for the fabrics or other raw materials we purchase, including disruptions arising from mill closures, consolidation resulting from excess industry capacity, trade restrictions or otherwise. Any of these disruptions could impair our ability to deliver products to customers in a timely manner and harm our business and financial condition.

 

We are implementing substantial changes in our information systems. These actions could disrupt our business.

 

We are installing, on a phased basis over the next four years, an enterprise resource planning system in the United States and Asia. In addition, in the United States we are entering into an arrangement with a third party logistics provider to operate warehouse facilities at three major U.S. ports of entry in order to improve product flows into, and the efficiency of, our U.S. distribution centers, and to facilitate product warehousing and shipment to mass channel and other customers. We are also entering the mass channel with our Levi Strauss Signature products. These actions require us to make substantial modifications to our information technology systems and business processes. We are aware of the inherent risks associated with replacing or upgrading core business systems, including cost, management time and business disruption. We cannot assure that we will successfully launch these new systems and processes or that they will occur without disruption. Any disruptions could have a material adverse effect on our business and financial condition.

 

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The success of our business depends on our ability to attract and retain qualified employees.

 

We need talented and experienced personnel in a number of areas including our core business activities. Our success is dependent upon strengthening our management depth across our business 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 attract and retain qualified employees is 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.

 

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 assure 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 assure that others will not assert rights in, or ownership of, our trademarks and other proprietary intellectual property or that we will be able to successfully resolve those claims. In addition, the laws and enforcement mechanisms of some foreign countries may not allow us to protect our proprietary rights to the same extent as we do in the United States and other countries.

 

Our international operations expose us to political and economic risks.

 

In 2002, we generated approximately 39% of our net sales outside the United States, and a substantial amount of our products came from sources outside of the country of distribution. As a result, we are subject to the risks of doing business abroad, including:

 

    currency fluctuations;

 

    changes in tariffs and taxes;

 

    restrictions on repatriating foreign profits back to the United States;

 

    less protective foreign laws relating to intellectual property;

 

    difficulties in staffing and managing international operations;

 

    political and economic instability, including the impact of war with Iraq; and

 

    disruptions or delays in shipments.

 

The functional currency for most of our foreign operations is the applicable local currency. As a result, fluctuations in foreign currency exchange rates affect the results of our operations and the value of our foreign assets, which in turn may adversely affect reported earnings and the comparability of period-to-period results of operations. For 2002, the decrease in net sales was 2.9% compared to 2001 but would have decreased 3.2% due to the effects of translating non-U.S. currency reported sales results into U.S. dollars. In addition, although we engage in hedging activities to manage our foreign currency exposures, our earnings may be subject to volatility since we are required to record in income the changes in the market values of our exposure management instruments that do not qualify for hedge accounting treatment. Changes in currency exchange rates may also affect the relative prices at which we and foreign competitors sell products in the same market. In addition, changes in the value of the relevant currencies may affect the cost of certain items required in our operations.

 

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Adverse outcomes resulting from examination of our income tax returns may affect our liquidity and annual effective income tax rate.

 

Our consolidated U.S. income tax returns for the years 1986 through 1995 were the subject of an examination by the Internal Revenue Service. In 2001, we reached a settlement with the Internal Revenue Service that covered most of the issues for the years 1986 through 1989. During 2002, we reached a settlement with the Internal Revenue Service on most of the issues for the years 1990 through 1995. As a result, during 2002 we reclassified approximately $90.0 million from long-term tax liabilities into accrued taxes. We anticipate paying the Internal Revenue Service an amount of approximately $115 million during the second quarter of 2003. After taking into account potential refunds from prior years’ overpayments and the tax effects of the interest deduction from this payment, we expect the net cash payment to be approximately $90 million.

 

Our consolidated U.S. income tax returns for the years 1996 to 1999 are presently under examination by the Internal Revenue Service. We have not yet reached a settlement with the Internal Revenue Service for these years. We cannot assure that we will be able to reach a settlement for 1996 to 1999, and for other open issues, on terms that are acceptable to us. In addition, our income tax returns for other years may be the subject of future examination by tax authorities. An adverse outcome resulting from any settlement or future examination may lead to a deficiency in our provision for income taxes on our income statement and adversely affect our liquidity. In addition, changes to our income tax provision or in the valuation of the deferred tax assets and liabilities may affect our annual effective income tax rate.

 

For information concerning a recent lawsuit filed in the Superior Court of the State of California for San Francisco County concerning our U.S. federal income tax liabilities and their treatment in our financial statements, see “Business—Legal Proceedings.”

 

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. We measure our success not only by growth in economic value, but also by our reputation, the quality of our constituency relationships and our commitment to social responsibility. As a result, we cannot assure that the voting trustees will cause us to be operated and managed in a manner that benefits the interests of the voting trustees or our principal equity holders will not diverge from our creditors.

 

Risks relating to Arthur Andersen LLP

 

You may have no effective remedy against Arthur Andersen LLP in connection with a material misstatement or omission in any of our financial statements audited by Arthur Andersen included in this prospectus.

 

Our consolidated financial statements for each of the two fiscal years ended November 25, 2001 were audited by Arthur Andersen LLP, independent certified public accountants. On June 15, 2002, Arthur Andersen was convicted of federal obstruction of justice charges arising from the U.S. government’s investigation of Enron Corp. On August 31, 2002, Arthur Andersen LLP ceased practicing before the SEC.

 

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Because our former key engagement team personnel have since left Arthur Andersen LLP, Arthur Andersen LLP did not participate in the preparation of this report, reissue its audit report with respect to the financial statements included in this report, or consent to the inclusion in this report of its audit report. As a result, holders of our notes may have no effective remedy against Arthur Andersen LLP in connection with a material misstatement or omission in the financial statements included in this prospectus. In addition, even if you were able to assert such a claim, as a result of its recent conviction of Federal obstruction of justice charges and other lawsuits, Arthur Andersen LLP may fail or otherwise have insufficient assets to satisfy claims made by investors that might arise under Federal securities laws or otherwise with respect to its audit report.

 

Issues related to Arthur Andersen LLP may impede our ability to access the capital markets.

 

If the SEC ceases accepting financial statements audited by Arthur Andersen LLP, we would be unable to access the public capital markets unless KPMG LLP, our current independent accounting firm, or another independent accounting firm, is able to audit the financial statements originally audited by Arthur Andersen LLP. In addition, investors in any subsequent offerings for which we use Arthur Andersen LLP’s audit reports will not be entitled to recovery against Arthur Andersen LLP under Section 11 of the Securities Act for any material misstatements or omissions in those financial statements. Furthermore, Arthur Andersen LLP will be unable to participate in the “due diligence” process that would customarily be performed by potential investors in our securities, which process includes having Arthur Andersen LLP perform procedures to assure the continued accuracy of its report on our audited financial statements and to confirm its review of unaudited interim periods presented for comparative purposes. As a result, we may not be able to bring to the market successfully an offering of our securities. Consequently, our financing costs may increase or we may miss attractive market opportunities.

 

Risks relating to the exchange offer

 

There is no established public trading market for the exchange notes, and any market for the exchange notes may be illiquid.

 

The exchange notes are a new issue of securities with no established public trading market. We cannot assure you that a liquid market will develop for the exchange notes, that you will be able to sell your exchange notes at a particular time or that the prices that you will receive when you sell will be favorable. We do not intend to apply for listing of the exchange notes on any securities exchange or for quotation through an automated dealer quotation system. The liquidity of the trading market in the exchange notes and the market price quoted for the exchange notes may be adversely affected by changes in the overall market for high yield securities generally or the interest of securities dealers in making a market in the exchange notes and by changes in our financial performance or prospects or in the prospects for companies in the apparel industry generally. As a result, you cannot be sure that an active public trading market will develop for the exchange notes. This offer to exchange the exchange notes for the old notes does not depend upon any minimum amount of old notes being tendered for exchange.

 

Unless you are an affiliate of us within the meaning of Rule 405 under the Securities Act, you may offer for resale, resell or otherwise transfer exchange notes without compliance with the registration and prospectus delivery provisions of the Securities Act, so long as you acquired the exchange notes in the ordinary course of business and have no arrangement or understanding with respect to the distribution of the exchange notes to be acquired in the exchange offer. If you tender your old notes for the purpose of participating in a distribution of the exchange notes, you must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction.

 

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We may be unable to purchase the exchange notes upon a change in control.

 

Upon a change of control event as defined in the indenture governing the exchange notes, we would be required to offer to purchase the exchange notes in cash at a price equal to 101% of their principal amount, plus accrued and unpaid interest, if any. We would also be required to offer to repurchase our notes due January 15, 2008 on similar terms. A change of control under the terms of the exchange notes will constitute an event of default under our new bank credit facility. If this occurs, then the lenders under the bank credit facility may declare their debt immediately due and payable. Since our bank credit facility is secured, the lenders under the bank credit facility could foreclose on most of our assets and be entitled to be repaid in full from the proceeds of any liquidation of those assets before any holder of the exchange notes. We cannot assure you that we will have the financial resources necessary to repurchase the exchange notes and satisfy our other payment obligations that could be triggered upon a change of control. If we do not have sufficient financial resources to effect a change of control offer for the exchange notes, we would be required to seek additional financing from outside sources to repurchase the exchange notes. We cannot assure you that financing would be available to us at that time on satisfactory terms, or at all. In addition, the terms of the exchange notes may not protect you if we undergo a highly leveraged transaction, reorganization, restructuring, merger or similar transaction that may adversely affect you unless the transaction is included in the definition of a change of control in the indenture.

 

If you do not exchange your old notes, they may be difficult to resell.

 

It may be difficult for you to sell old notes that are not exchanged in the exchange offer, since any old notes not exchanged will remain subject to the restrictions on transfer provided for in Rule 144 under the Securities Act. These restrictions on transfer of your old notes exist because we issued the old notes pursuant to an exemption from the registration requirements of the Securities Act and applicable state securities laws. Generally, the old notes that are not exchanged for exchange notes pursuant to the exchange offer will remain restricted securities and may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. Other than in this exchange offer, we do not intend to register the old notes under the Securities Act.

 

To the extent any old notes are tendered and accepted in the exchange offer, the trading market, if any, for the old notes that remain outstanding after the exchange offer would be adversely affected due to a reduction in market liquidity.

 

Each of the risks described in this section with respect to the exchange notes are equally applicable to the old notes.

 

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THE EXCHANGE OFFER

 

General

 

In connection with the issuance of the each of the $425.0 million and $100.0 million tranches of the old notes, we entered into registration rights agreements with the initial purchasers which provides for the exchange offer. In connection with the issuance of the $50.0 million tranche of the old notes, we granted the purchasers, pursuant to the purchase agreement, the benefits of registration rights identical to those applicable to the $425.0 million and $100.0 million tranches of the old notes. When we refer to “registration rights agreements” in this prospectus, we are referring to all agreements under which we have granted registration rights with respect to the old notes. A copy of each of the registration rights agreements is filed as an exhibit to the registration statement of which this prospectus is a part.

 

Under the registration rights agreements, we agreed to:

 

    file and cause to become effective a registration statement with respect to an offer to exchange the old notes for the exchange notes; or

 

    file and cause to become effective a shelf registration statement with respect to the resale of the old notes.

 

The exchange offer being made hereby, if completed within 210 days after December 4, 2002 will satisfy those requirements under the registration rights agreements. If the exchange offer is not completed within 210 days of December 4, 2002 and a shelf registration statement has not been declared effective, then the interest rates on the old notes will increase by 0.25% per annum during the 90-day period immediately following the expiration of the 180-day period and will increase by 0.25% per annum at the end of each subsequent 90-day period until the exchange offer is completed or a shelf registration statement is declared effective. In no event shall the additional interest exceed 1.00% per annum.

 

Purpose and Effect of the Exchange Offer

 

The exchange offer will give holders of old notes the opportunity to exchange the old notes, which were issued on December 4, 2002, January 22, 2003 or January 23, 2003, for exchange notes that have been registered under the Securities Act. The exchange notes will be identical in all material respects to the old notes. We are subject to the informational requirements of the Exchange Act. To satisfy those requirements, we file reports and other information with the Securities and Exchange Commission that will be made available to the holders of the old notes, if any are outstanding after the exchange offer, and the exchange notes and the general public.

 

The exchange offer is not being made to, nor will we accept tenders for exchange from, holders of old notes in any jurisdiction in which the exchange offer or the acceptance of it would not be in compliance with the securities or blue sky laws of the jurisdiction.

 

Resale of Exchange Notes

 

We believe that exchange notes issued under the exchange offer in exchange for old notes may be offered for resale, resold and otherwise transferred by any exchange note holder without further registration under the Securities Act and without delivery of a prospectus that satisfies the requirements of Section 10 of the Securities Act if:

 

    the holder is not our “affiliate” within the meaning of Rule 405 under the Securities Act;

 

    the exchange notes are acquired in the ordinary course of the holder’s business; and

 

    the holder does not intend to participate in a distribution of the exchange notes.

 

Any holder who exchanges old notes in the exchange offer with the intention of participating in any manner in a distribution of the exchange notes must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction.

 

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This prospectus may be used for an offer to resell, resale or other retransfer of exchange notes. With regard to broker-dealers, only broker-dealers that acquired the old notes as a result of market-making activities or other trading activities may participate in the exchange offer. Each broker-dealer that receives exchange notes for its own account in exchange for old notes, where the old notes were acquired by the broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of the exchange notes. Please read the caption “Plan of Distribution” for more details regarding the transfer of exchange notes.

 

Terms of the Exchange Offer

 

Upon the terms and subject to the conditions set forth in this prospectus and in the letter of transmittal, we will accept for exchange any old notes properly tendered and not withdrawn before expiration of the exchange offer. The date of acceptance for exchange of the old notes and completion of the exchange offer is the exchange date, which will be the first business day following the expiration date unless we extend the date as described in this document. We will issue $1,000 principal amount of exchange notes in exchange for each $1,000 principal amount of old notes surrendered under the exchange offer. The old notes may be tendered only in integral multiples of $1,000. The exchange notes will be delivered on the earliest practicable date following the exchange date.

 

The form and terms of the exchange notes will be substantially identical to the form and terms of the old notes, except the exchange notes:

 

    will be registered under the Securities Act; and

 

    will not bear legends restricting their transfer.

 

The exchange notes will evidence the same debt as the old notes. The exchange notes will be issued under and entitled to the benefits of the same indenture that authorized the issuance of the old notes. For a description of the indenture, see the caption “Description of Exchange Notes”.

 

The exchange offer is not conditioned upon any minimum aggregate principal amount of old notes being tendered for exchange.

 

As of the date of this prospectus, $575.0 million aggregate principal amount of the old notes are outstanding. This prospectus and the letter of transmittal are being sent to all registered holders of old notes. There will be no fixed record date for determining registered holders of old notes entitled to participate in the exchange offer.

 

We intend to conduct the exchange offer in accordance with the applicable requirements of the Securities Act, the Exchange Act, and the rules and regulations of the Securities and Exchange Commission. Old notes that are not exchanged in the exchange offer will remain outstanding and continue to accrue interest and will be entitled to the rights and benefits their holders have under the indenture relating to the old notes and the exchange notes.

 

We will be deemed to have accepted for exchange properly tendered old notes when we have given oral or written notice of the acceptance to the exchange agent. The exchange agent will act as agent for the holders of old notes who surrender them in the exchange offer for the purposes of receiving the exchange notes from us and delivering the exchange notes to their holders. The exchange agent will make the exchange as promptly as practicable on or after the date of acceptance for exchange of the old notes. The exchange date will be the first business day following the expiration date unless it is extended as described in this document. We expressly reserve the right to amend or terminate the exchange offer, and not to accept for exchange any old notes not previously accepted for exchange, upon the occurrence of any of the conditions specified below under the caption “—Conditions”.

 

Holders who tender old notes in the exchange offer will not be required to pay brokerage commissions or fees or, subject to the instructions in the letter of transmittal, transfer taxes with respect to the exchange of old notes. We will pay all charges and expenses, other than applicable taxes described below, in connection with the exchange offer. It is important that you read the caption “—Fees and Expenses” for more details regarding fees and expenses incurred in the exchange offer.

 

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Expiration of the Exchange Offer; Extensions; Amendments

 

The exchange offer will expire at 5:00 p.m., New York City time, on                                 , 2003. The exchange offer can be extended by us in our sole discretion, in which case the term “expiration date” shall mean the latest date and time to which the exchange offer is extended.

 

In order to extend the exchange offer, we will notify the exchange agent orally, confirmed in writing, or in writing, of any extension. We will notify the registered holders of old notes by public announcement of the extension no later than 5:00 p.m., New York City time, on the business day after the previously scheduled expiration of the exchange offer.

 

Without limiting the manner in which we may choose to make public announcements of any delay in acceptance, extension, termination or amendment of the exchange offer, we will have no obligation to publish, advertise, or otherwise communicate any public announcement, other than by making a timely release to a financial news service.

 

Conditions

 

Despite any other term of the exchange offer, we will not be required to accept for exchange any old notes and we may terminate or amend the exchange offer as provided in this prospectus before accepting any old notes for exchange if in our reasonable judgment:

 

    the exchange notes to be received will not be tradeable by the holder, without restriction under the Securities Act and the Exchange Act and without material restrictions under the blue sky or securities laws of substantially all of the states of the United States;

 

    the exchange offer, or the making of any exchange by a holder of old notes, would violate applicable law or any applicable interpretation of the staff of the Securities and Exchange Commission; or

 

    any action or proceeding has been instituted or threatened in any court or by or before any governmental agency with respect to the exchange offer that would reasonably be expected to impair our ability to proceed with the exchange offer.

 

We will not be obligated to accept for exchange the old notes of any holder that has not made to us:

 

    the representations described under the captions “—Purpose and Effect of the Exchange Offer”, “—Procedures for Tendering” and “Plan of Distribution”; and

 

    any other representations that may be reasonably necessary under applicable Securities and Exchange Commission rules, regulations or interpretations to make available to us an appropriate form for registration of the exchange notes under the Securities Act.

 

We expressly reserve the right, at any time or at various times, to extend the period of time during which the exchange offer is open. Consequently, we may delay acceptance of any old notes by giving oral or written notice of an extension to their holders. During an extension, all old notes previously tendered will remain subject to the exchange offer, and we may accept them for exchange. We will return any old notes that we do not accept for exchange for any reason without expense to their tendering holder as promptly as practicable after the expiration or termination of the exchange offer.

 

We expressly reserve the right to amend or terminate the exchange offer and to reject for exchange any old notes not previously accepted for exchange, upon the occurrence of any of the conditions of the exchange offer specified above. By public announcement we will give oral or written notice of any extension, amendment, non-acceptance or termination to the holders of the old notes as promptly as practicable. If we amend the exchange offer in a manner that we consider material, we will disclose the amendment by means of a prospectus supplement.

 

These conditions are solely for our benefit and we may assert them regardless of the circumstances that may give rise to them or waive them in whole or in part at any time or at various times in our sole discretion. If we fail at any time to exercise any of the foregoing rights, this failure will not constitute a waiver of that right. Each of these rights will be deemed an ongoing right that we may assert at any time or at various times.

 

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We will not accept for exchange any old notes tendered, and will not issue exchange notes in exchange for any old notes, if at that time a stop order is threatened or in effect with respect to the registration statement of which this prospectus constitutes a part or the qualification of the indenture under the Trust Indenture Act of 1939.

 

Procedures for Tendering

 

We have forwarded to you, along with this prospectus, a letter of transmittal relating to this exchange offer. Because all of the old notes are held in book-entry accounts maintained by the exchange agent at DTC, a holder need not submit a letter of transmittal if the holder tenders old notes in accordance with the procedures mandated by DTC’s Automated Tender Offer Program (“ATOP”). To tender old notes without submitting a letter of transmittal, the electronic instructions sent to DTC and transmitted to the exchange agent must contain your acknowledgment of receipt of, and your agreement to be bound by and to make all of the representations contained in, the letter of transmittal. In all other cases, a letter of transmittal must be manually executed and delivered as described in this prospectus.

 

Only a holder of record of old notes may tender old notes in the exchange offer. To tender in the exchange offer, a holder must comply with the procedures of DTC, and either:

 

    complete, sign and date the letter of transmittal, or a facsimile of the letter of transmittal; have the signature on the letter of transmittal guaranteed if the letter of transmittal so requires; and deliver the letter of transmittal or facsimile to the exchange agent prior to the expiration date; or

 

    in lieu of delivering a letter of transmittal, instruct DTC to transmit on behalf of the holder a computer-generated message to the exchange agent in which the holder of the old notes acknowledges and agrees to be bound by the terms of the letter of transmittal, which computer-generated message shall be received by the exchange agent prior to 5:00 p.m., New York City time, on the expiration date.

 

In addition, either:

 

    the exchange agent must receive old notes along with the letter of transmittal; or

 

    with respect to the old notes, the exchange agent must receive, before expiration of the exchange offer, timely confirmation of book-entry transfer of old notes into the exchange agent’s account at DTC, according to the procedure for book-entry transfer described below; or

 

    the holder must comply with the guaranteed delivery procedures described below.

 

To be tendered effectively, the exchange agent must receive any physical delivery of the letter of transmittal and other required documents at the address set forth below under the caption “—Exchange Agent” before expiration of the exchange offer. To receive confirmation of valid tender of old notes, a holder should contact the exchange agent at the telephone number listed under the caption “—Exchange Agent”.

 

The tender by a holder that is not withdrawn before expiration of the exchange offer will constitute an agreement between that holder and us in accordance with the terms and subject to the conditions set forth in this prospectus and in the letter of transmittal. Only a registered holder of old notes may tender the old notes in the exchange offer. If a holder completing a letter of transmittal tenders less than all of the old notes held by this holder, this tendering holder should fill in the applicable box of the letter transmittal. The amount of old notes delivered to the exchange agent will be deemed to have been tendered unless otherwise indicated.

 

If old notes, the letter of transmittal or any other required documents are physically delivered to the exchange agent, the method of delivery is at the holder’s election and risk. Rather than mail these items, we recommend that holders use an overnight or hand delivery service. In all cases, holders should allow sufficient time to assure delivery to the exchange agent before expiration of the exchange offer. Holders should not send the letter of transmittal or old notes to us. Holders may request their respective brokers, dealers, commercial banks, trust companies or other nominees to effect the above transactions for them.

 

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Any beneficial owner whose old notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact the registered holder promptly and instruct it to tender on the owner’s behalf. If the beneficial owner wishes to tender on its own behalf, it must, prior to completing and executing the letter of transmittal and delivering its old notes, either:

 

    make appropriate arrangements to register ownership of the old notes in the owner’s name; or

 

    obtain a properly completed bond power from the registered holder of old notes.

 

The transfer of registered ownership may take considerable time and may not be completed prior to the expiration date.

 

If the applicable letter of transmittal is signed by the record holder(s) of the old notes tendered, the signature must correspond with the name(s) written on the face of the old note without alteration, enlargement or any change whatsoever. If the applicable letter of transmittal is signed by a participant in DTC, the signature must correspond with the name as it appears on the security position listing as the holder of the old notes.

 

A signature on a letter of transmittal or a notice of withdrawal must be guaranteed by an eligible guarantor institution. Eligible guarantor institutions include banks, brokers, dealers, municipal securities dealers, municipal securities brokers, government securities dealers, government securities brokers, credit unions, national securities exchanges, registered securities associations, clearing agencies and savings associations. The signature need not be guaranteed by an eligible guarantor institution if the old notes are tendered:

 

    by a registered holder who has not completed the box entitled “Special Registration Instructions” or “Special Delivery Instructions” on the letter of transmittal; or

 

    for the account of an eligible institution.

 

If the letter of transmittal is signed by a person other than the registered holder of any old notes, the old notes must be endorsed or accompanied by a properly completed bond power. The bond power must be signed by the registered holder as the registered holder’s name appears on the old notes and an eligible institution must guarantee the signature on the bond power.

 

If the letter of transmittal or any old notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, these persons should so indicate when signing. Unless we waive this requirement, they should also submit evidence satisfactory to us of their authority to deliver the letter of transmittal.

 

We will determine in our sole discretion all questions as to the validity, form, eligibility, including time of receipt, acceptance and withdrawal of tendered old notes. Our determination will be final and binding. We reserve the absolute right to reject any old notes not properly tendered or any old notes the acceptance of which would, in the opinion of our counsel, be unlawful. We also reserve the right to waive any defects, irregularities or conditions of tender as to particular old notes. Our interpretation of the terms and conditions of the exchange offer, including the instructions in the letter of transmittal, will be final and binding on all parties.

 

Unless waived, any defects or irregularities in connection with tenders of old notes must be cured within the time that we determine. Although we intend to notify holders of defects or irregularities with respect to tenders of old notes, neither we, the exchange agent nor any other person will incur any liability for failure to give notification. Tenders of old notes will not be deemed made until those defects or irregularities have been cured or waived. Any old notes received by the exchange agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned by the exchange agent without cost to the tendering holder, unless otherwise provided in the letter of transmittal, as soon as practicable following the expiration date.

 

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In all cases, we will issue exchange notes for old notes that we have accepted for exchange under the exchange offer only after the exchange agent timely receives:

 

    old notes or a timely book-entry confirmation that old notes have been transferred into the exchange agent’s account at DTC; and

 

    a properly completed and duly executed letter of transmittal and all other required documents or a properly transmitted agent’s message.

 

Holders should receive copies of the applicable letter of transmittal with the prospectus. A holder may obtain additional copies of the applicable letter of transmittal for the old notes from the exchange agent at its offices listed under the caption “—Exchange Agent”. By signing the letter of transmittal, or causing DTC, to transmit an agent’s message to the exchange agent, each tendering holder of old notes will represent to us that, among other things:

 

    any exchange notes that the holder receives will be acquired in the ordinary course of its business;

 

    the holder has no arrangement or understanding with any person or entity to participate in the distribution of the exchange notes;

 

    if the holder is not a broker-dealer, that it is not engaged in and does not intend to engage in the distribution of the exchange notes;

 

    if the holder is a broker-dealer that will receive exchange notes for its own account in exchange for old notes that were acquired as a result of market-making activities or other trading activities, that it will deliver a prospectus, as required by law, in connection with any resale of those exchange notes (see the caption “Plan of Distribution”); and

 

    the holder is not an “affiliate”, as defined in Rule 405 of the Securities Act, of us or, if the holder is an affiliate, it will comply with any applicable registration and prospectus delivery requirements of the Securities Act.

 

DTC Book-entry Transfer

 

The exchange agent has established an account with respect to the old notes at DTC for purposes of the exchange offer.

 

With respect to the old notes, the exchange agent and DTC have confirmed that any financial institution that is a participant in DTC may utilize the DTC Automated Tender Offer Program procedures to tender old notes.

 

With respect to the old notes, any participant in DTC may make book-entry delivery of old notes by causing DTC to transfer the old notes into the exchange agent’s account in accordance with DTC’s Automated Tender Offer Program procedures for transfer.

 

However, the exchange for the old notes so tendered will only be made after a book-entry confirmation of such book-entry transfer of old notes into the exchange agent’s account, and timely receipt by the exchange agent of an agent’s message and any other documents required by the letter of transmittal. The term “agent’s message” means a message, transmitted by DTC and received by the exchange agent and forming part of a book-entry confirmation, which states that DTC has received an express acknowledgment from a participant tendering old notes that are the subject of the book-entry confirmation that the participant has received and agrees to be bound by the terms of the letter of transmittal, and that we may enforce that agreement against the participant.

 

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Guaranteed Delivery Procedures

 

Holders wishing to tender their old notes but whose old notes are not immediately available or who cannot deliver their old notes, the letter of transmittal or any other required documents to the exchange agent or cannot comply with the applicable procedures described above before expiration of the exchange offer may tender if:

 

    the tender is made through an eligible guarantor institution;

 

    before expiration of the exchange offer, the exchange agent receives from the eligible guarantor institution either a properly completed and duly executed notice of guaranteed delivery, by facsimile transmission, mail or hand delivery, or a properly transmitted agent’s message and notice of guaranteed delivery:

 

—setting forth the name and address of the holder and the registered number(s) and the principal amount of old notes tendered;

 

—stating that the tender is being made by guaranteed delivery; and

 

—guaranteeing that, within three New York Stock Exchange trading days after expiration of the exchange offer, the letter of transmittal, or facsimile thereof, together with the old notes or a book-entry transfer confirmation, and any other documents required by the letter of transmittal will be deposited by the eligible guarantor institution with the exchange agent; and

 

    the exchange agent receives the properly completed and executed letter of transmittal, or facsimile thereof, as well as all tendered old notes in proper form for transfer or a book-entry transfer confirmation, and all other documents required by the letter of transmittal, within three New York Stock Exchange trading days after expiration of the exchange offer.

 

Upon request to the exchange agent, a notice of guaranteed delivery will be sent to holders who wish to tender their old notes according to the guaranteed delivery procedures set forth above.

 

Withdrawal of Tenders

 

Except as otherwise provided in this prospectus, holders of old notes may withdraw their tenders at any time before expiration of the exchange offer.

 

For a withdrawal to be effective: the exchange agent must receive a computer-generated notice of withdrawal transmitted by DTC, on behalf of the holder in accordance with the standard operating procedures of DTC, or a written notice of withdrawal, which may be by telegram, telex, facsimile transmission or letter, at one of the addresses set forth below under the caption “—Exchange Agent”.

 

Any notice of withdrawal must:

 

    specify the name of the person who tendered the old notes to be withdrawn;

 

    identify the old notes to be withdrawn, including the principal amount of the old notes to be withdrawn; and

 

    where certificates for old notes have been transmitted, specify the name in which the old notes were registered, if different from that of the withdrawing holder.

 

If certificates for old notes have been delivered or otherwise identified to the exchange agent, then, prior to the release of those certificates, the withdrawing holder must also submit:

 

    the serial numbers of the particular certificates to be withdrawn; and

 

    a signed notice of withdrawal with signatures guaranteed by an eligible institution, unless the withdrawing holder is an eligible institution.

 

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If old notes have been tendered pursuant to the procedure for book-entry transfer or the blocking procedures described above, any notice of withdrawal must specify the name and number of the account at DTC to be credited with the withdrawn old notes and otherwise comply with the procedures of the facility.

 

We will determine all questions as to the validity, form and eligibility, including time of receipt, of notices of withdrawal, and our determination shall be final and binding on all parties. We will deem any old notes so withdrawn not to have been validly tendered for exchange for purposes of the exchange offer. We will return any old notes that have been tendered for exchange but that are not exchanged for any reason to their holder without cost to the holder. In the case of old notes tendered by book-entry transfer into the exchange agent’s account at DTC, according to the procedures described above, those old notes will be credited to an account maintained with DTC, for old notes, as soon as practicable after withdrawal, rejection of tender or termination of the exchange offer. You may retender properly withdrawn old notes by following one of the procedures described under the caption “—Procedures for Tendering” above at any time on or before expiration of the exchange offer.

 

A holder may obtain a form of the notice of withdrawal from the exchange agent at its offices listed under the caption “—Exchange Agent”.

 

Exchange Agent

 

Wilmington Trust Company, has been appointed as exchange agent for the exchange offer. You should direct questions and requests for assistance, requests for additional copies of this prospectus or of the letter of transmittal and requests for the notice of guaranteed delivery or the notice of withdrawal to the exchange agent addressed as follows:

 

By Registered or Certified Mail:

 

By Hand or Overnight Delivery:

Wilmington Trust Company

 

Wilmington Trust Company

Corporate Trust Reorganization Services

 

Corporate Trust Reorganization Services

Rodney Square North

 

Rodney Square North

1100 North Market Street

 

1100 North Market Street

Wilmington DE 19890-1615

 

Wilmington DE 19890-1615

Attention: Aubrey Rosa

 

Attention: Aubrey Rosa

 

By Facsimile Transmission (for Eligible Institutions Only):

 

(302) 636-4145

 

To Confirm by Telephone or for Information Call:

 

(302) 636-6472

 

Delivery of the letter of transmittal to an address other than as shown above or transmission via facsimile other than as set forth above does not constitute a valid delivery of the letter of transmittal.

 

Fees and Expenses

 

We will bear the expenses of soliciting tenders. The principal solicitation is being made by mail; however, we may make additional solicitations by telegraph, telephone or in person by our officers and regular employees and those of our affiliates.

 

We have not retained any dealer-manager in connection with the exchange offer and will not make any payments to broker-dealers or others soliciting acceptances of the exchange offer. We will, however, pay the exchange agent reasonable and customary fees for its services and reimburse it for its related reasonable out-of-pocket expenses.

 

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We will pay the cash expenses to be incurred in connection with the exchange offer, including the following:

 

    Securities and Exchange Commission registration fees;

 

    fees and expenses of the exchange agent and trustee;

 

    our accounting and legal fees; and

 

    our printing and mailing costs.

 

Transfer Taxes

 

We will pay all transfer taxes, if any, applicable to the exchange of old notes under the exchange offer. The tendering holder, however, will be required to pay any transfer taxes, whether imposed on the registered holder or any other person, if:

 

    certificates representing old notes for principal amounts not tendered or accepted for exchange are to be delivered to, or are to be issued in the name of, any person other than the registered holder of old notes tendered;

 

    exchange notes are to be delivered to, or issued in the name of, any person other than the registered holder of the old notes;

 

    tendered old notes are registered in the name of any person other than the person signing the letter of transmittal; or

 

    a transfer tax is imposed for any reason other than the exchange of old notes under the exchange offer.

 

If satisfactory evidence of payment of transfer taxes is not submitted with the letter of transmittal, the amount of any transfer taxes will be billed to the tendering holder.

 

Accounting Treatment

 

We will record the exchange notes in our accounting records at the same carrying value as the old notes, which is the aggregate principal amount, as reflected in our accounting records on the date of exchange. Accordingly, we will not recognize any gain or loss for accounting purposes in connection with the exchange offer. We will record the expenses of the exchange offer as incurred.

 

Other

 

Participation in the exchange offer is voluntary, and you should carefully consider whether to accept. We urge you to consult your financial and tax advisors in making your own decision on what action to take.

 

We may in the future seek to acquire untendered old notes in open market or privately negotiated transactions, through subsequent exchange offers or otherwise. However, we have no present plans to acquire any old notes that are not tendered in the exchange offer or to file a registration statement to permit resales of any untendered old notes.

 

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USE OF PROCEEDS

 

We will not receive any cash proceeds from the issuance of the exchange notes under the exchange offer. In consideration for issuing the exchange notes as contemplated by this prospectus, we will receive the old notes in like principal amount, the terms of which are identical in all material respects to the exchange notes. The old notes surrendered in exchange for the exchange notes will be retired and canceled and cannot be reissued. Accordingly, the issuance of the exchange notes will not result in any increase in our indebtedness or capital stock.

 

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CAPITALIZATION

 

The following table sets forth our cash and cash equivalents and capitalization as of February 23, 2003. This table should be read in conjunction with our historical financial statements and the related notes included in this prospectus.

 

    

February 23, 2003


 
    

(Dollars in Thousands)

 

Cash and cash equivalents

  

$

625,706

(1)

    


Total debt (including current portion):

        

2003 senior secured credit facility: (2)

        

Revolving credit facility

  

 

—  

 

Term loan facility

  

 

375,000

 

Short-term borrowings

  

 

17,500

 

6.80% senior unsecured notes due 2003

  

 

228,504

 

7.00% senior unsecured notes due 2006

  

 

448,268

 

11.625% Dollar denominated senior unsecured notes due 2008

  

 

376,907

 

11.625% Euro denominated senior unsecured notes due 2008

  

 

134,408

 

4.25% Yen-denominated eurobond due 2016

  

 

165,289

 

12.25% senior unsecured notes due 2012

  

 

571,297

 

Domestic receivables-backed securitization

  

 

110,000

 

Customer service center equipment financing

  

 

69,941

 

Industrial development revenue refunding bond

  

 

10,000

 

European receivables-backed securitization financing agreement

  

 

54,540

 

Notes payable, at various rates, due through 2006

  

 

832

 

    


Total debt

  

 

2,562,486

 

Total stockholders’ deficit

  

 

(1,017,910

)

    


Total capitalization

  

$

1,544,576

 

    



(1)   Includes restricted cash of $244.3 million, which is an amount sufficient to repay the 6.80% notes due November 1, 2003 at maturity (including any interim scheduled interest payments).
(2)   Consists of a $375.0 million revolving credit facility and a $375.0 million Tranche B term loan facility. At February 23, 2003 total availability under the revolving credit facility was $204.9 million, with the remaining $170.1 million representing standby letters of credit. See “Description of Other Indebtedness” for more information on the 2003 senior secured credit facility.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

 

The following table sets forth our selected consolidated financial data. The following selected statements of income data and cash flow data for fiscal year 2002 and the consolidated balance sheet data at the end of such period is derived from our financial statements that have been audited by KPMG LLP, independent public accountants. The following selected statements of income data and cash flow data for fiscal years 2001, 2000, 1999 and 1998 and the consolidated balance sheet data at the end of such periods are derived from our financial statements that have been audited by Arthur Andersen LLP, independent public accountants. For a discussion of the risks relating to Arthur Andersen LLP’s audit of our financial statements, please see “Risk Factors—Risks relating to Arthur Andersen LLP.” The data as of and for the three months ended February 23, 2003 and February 24, 2002 have been derived from our unaudited consolidated condensed interim financial statements which, in our opinion, contain all adjustments necessary for a fair representation of the financial condition and results of operation for these periods. The results of operations for the three months ended February 23, 2003 may not be indicative of the results to be expected for the year ending November 30, 2003.

 

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 prospectus. Certain prior year amounts have been reclassified to conform to the 2003 presentation.

 

    

Three Months Ended


    

Year Ended


 
    

February 23,

2003


    

February 24, 2002


    

November 24, 2002


    

November 25, 2001


    

November 26, 2000


    

November 28, 1999


    

November 29, 1998


 
    

(Unaudited)

                                    
                  

(Dollars in Thousands)

 

Statements of Income Data:

                                                              

Net sales

  

$

875,088

 

  

$

935,285

 

  

$

4,136,590

 

  

$

4,258,674

 

  

$

4,645,126

 

  

$

5,139,458

 

  

$

5,958,635

 

Cost of goods sold

  

 

515,641

 

  

 

536,701

 

  

 

2,451,785

 

  

 

2,461,198

 

  

 

2,690,170

 

  

 

3,180,845

 

  

 

3,433,081

 

    


  


  


  


  


  


  


Gross profit

  

 

359,447

 

  

 

398,584

 

  

 

1,684,805

 

  

 

1,797,476

 

  

 

1,954,956

 

  

 

1,958,613

 

  

 

2,525,554

 

Marketing, general and administrative expenses

  

 

323,533

 

  

 

298,935

 

  

 

1,332,798

 

  

 

1,355,885

 

  

 

1,481,718

 

  

 

1,629,845

 

  

 

1,834,058

 

Other operating (income)

  

 

(7,316

)

  

 

(6,113

)

  

 

(34,450

)

  

 

(33,420

)

  

 

(32,380

)

  

 

(24,387

)

  

 

(25,310

)

Restructuring charges, net of reversals(1)

  

 

(4,210

)

  

 

—  

 

  

 

124,595

 

  

 

(4,286

)

  

 

(33,144

)

  

 

497,683

 

  

 

250,658

 

Global Success Sharing Plan(2)

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

(343,873

)

  

 

90,564

 

    


  


  


  


  


  


  


Operating income

  

 

47,440

 

  

 

105,762

 

  

 

261,862

 

  

 

479,297

 

  

 

538,762

 

  

 

199,345

 

  

 

375,584

 

Interest expense

  

 

59,679

 

  

 

48,023

 

  

 

186,493

 

  

 

230,772

 

  

 

234,098

 

  

 

182,978

 

  

 

178,035

 

Other (income) expense, net

  

 

27,909

 

  

 

(9,677

)

  

 

25,411

 

  

 

8,836

 

  

 

(39,016

)

  

 

7,868

 

  

 

34,849

 

    


  


  


  


  


  


  


Income (loss) before taxes

  

 

(40,148

)

  

 

67,416

 

  

 

49,958

 

  

 

239,689

 

  

 

343,680

 

  

 

8,499

 

  

 

162,700

 

Income tax expense (benefit)

  

 

(15,658

)

  

 

24,944

 

  

 

24,979

 

  

 

88,685

 

  

 

120,288

 

  

 

3,144

 

  

 

60,198

 

    


  


  


  


  


  


  


Net income (loss)(3)

  

$

(24,490

)

  

$

42,472

 

  

$

24,979

 

  

$

151,004

 

  

$

223,392

 

  

$

5,355

 

  

$

102,502

 

    


  


  


  


  


  


  


 

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Table Of Contents
   

Three Months Ended


    

Year Ended


 
   

February 23,

2003


   

February 24, 2002


    

November 24, 2002


    

November 25, 2001


   

November 26, 2000


   

November 28, 1999


   

November 29, 1998


 
   

(Unaudited)

                                 
                

(Dollars in Thousands)

 

Statements of Cash Flow Data:

                                                         

Cash flows from operating activities

 

$

(152,208

)

 

$

35,641

 

  

$

191,748

 

  

$

141,900

 

 

$

305,926

 

 

$

(173,772

)

 

$

223,769

 

Cash flows from investing activities

 

 

(25,941

)

 

 

2,333

 

  

 

(59,353

)

  

 

(17,230

)

 

 

154,223

 

 

 

62,357

 

 

 

(82,707

)

Cash flows from financing activities

 

 

460,339

 

 

 

(27,157

)

  

 

(140,316

)

  

 

(139,890

)

 

 

(527,062

)

 

 

224,219

 

 

 

(194,489

)

Balance Sheet Data:

                                                         

Cash and cash equivalents

 

$

381,434

 

 

$

112,365

 

  

$

96,478

 

  

$

102,831

 

 

$

117,058

 

 

$

192,816

 

 

$

84,565

 

Working capital

 

 

1,190,807

 

 

 

732,055

 

  

 

574,103

 

  

 

651,256

 

 

 

555,062

 

 

 

770,130

 

 

 

637,801

 

Total assets

 

 

3,580,882

 

 

 

2,938,658

 

  

 

3,017,284

 

  

 

2,983,486

 

 

 

3,205,728

 

 

 

3,670,014

 

 

 

3,867,757

 

Total debt

 

 

2,562,486

 

 

 

1,960,548

 

  

 

1,846,977

 

  

 

1,958,433

 

 

 

2,126,430

 

 

 

2,664,609

 

 

 

2,415,330

 

Stockholders’ deficit(4)

 

 

(1,017,910

)

 

 

(897,446

)

  

 

(995,584

)

  

 

(935,943

)

 

 

(1,098,573

)

 

 

(1,288,562

)

 

 

(1,313,747

)

Other Financial Data:

                                                         

EBITDA before restructuring charges, net of reversals(5)

 

$

58,138

 

 

$

123,990

 

  

$

507,077

 

  

$

555,630

 

 

$

596,599

 

 

$

473,257

 

 

$

845,579

 

Capital expenditures

 

 

20,408

 

 

 

6,649

 

  

 

59,088

 

  

 

22,541

 

 

 

27,955

 

 

 

61,062

 

 

 

116,531

 

Ratio of earnings to fixed charges(6)

 

 

 

 

 

1.7x

 

  

 

1.2x

 

  

 

1.8x

 

 

 

2.2x

 

 

 

1.0x

 

 

 

1.7x

 


(1)   We reduced overhead expenses and eliminated excess manufacturing capacity through extensive restructuring initiatives executed since 1997, including closing 37 of our owned and operated production and finishing facilities worldwide and reducing the number of our employees worldwide by approximately 23,600. Due to lower than anticipated costs, we reversed reserve balances relating to these activities of $27.1 million, $26.6 million, and $33.1 million in 2002, 2001 and 2000, respectively, and $4.2 million during the three months ended February 23, 2003. During 1998 and 1999 we did not record any reversals to the restructuring reserves.

 

(2)   In 1996, we 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 1996, 1997 and 1998 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 expenses that had been accrued in prior years, less related miscellaneous expenses, and we did not recognize any expense after 1999. Consequently, no cash payments were, or will be, made under the Global Success Sharing Plan.

 

(3)   Amortization expense for goodwill and trademarks was discontinued starting in the first quarter of 2003 due to a new accounting standard, Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets.” Amortization expense for goodwill and trademarks for the three months ended February 24, 2002 was $2.7 million, and for each of the years 2002, 2001 and 2000 was $10.7 million. A reconciliation of previously reported net income (loss) to amounts adjusted for the exclusion of goodwill and trademark amortization, net of related income tax effect, is as follows:

 

      

Three Months Ended


    

Year Ended


      

February 23, 2003


      

February 24, 2002


    

November 24, 2002


    

November 25, 2001


    

November 26, 2000


      

(Unaudited)

                    
                      

(Dollars in Millions)

Reported net income (loss)

    

$

(24.5

)

    

$

42.5

    

$

25.0

    

$

151.0

    

$

223.4

Goodwill and trademark amortization, net of tax

    

 

—  

 

    

 

1.7

    

 

10.7

    

 

10.7

    

 

10.7

      


    

    

    

    

Adjusted net income (loss)

    

$

(24.5

)

    

$

44.2

    

$

35.7

    

$

161.7

    

$

234.1

      


    

    

    

    

 

(4)   Stockholders’ deficit resulted from a 1996 recapitalization transaction in which our stockholders created new long-term governance arrangements for us, including the voting trust and stockholders’ agreement.

 

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Table Of Contents

 

(5)   EBITDA before restructuring charges, net of reversals equals net income before interest expense, income tax expense, depreciation and amortization, other (income) expense, net and restructuring charges, net of reversals. We have previously reported this line item as “EBITDA before net restructuring charges and related expenses” to also exclude from EBITDA expenses incurred in connection with restructuring initiatives, primarily for workers’ compensation and pension enhancements associated with the 2002 plant closures in the United States. We did not incur any such restructuring-related expenses in the first quarter of 2002 or 2003 and do not expect to incur such expenses going forward.

 

     We believe that our investors find EBITDA before restructuring charges, net of reversals, to be a useful analytical tool for measuring our ability to service debt and for measuring our ability to generate cash for other purposes. EBITDA before restructuring charges, net of reversals, is a non-GAAP measure and should not be considered in isolation from, and is not intended to represent an alternative measure of, operating income or cash flow or any other measure of performance determined in accordance with generally accepted accounting principles. Other companies may calculate EBITDA before restructuring charges, net of reversals, differently, and our EBITDA before restructuring charges, net of reversals, calculations are not necessarily comparable with similarly titled amounts for other companies.

 

The calculation for EBITDA before restructuring charges, net of reversals and related expenses is shown below:

 

    

Three Months Ended


    

Year Ended


    

February 23,

2003


    

February 24, 2002


    

November 24, 2002


  

November 25, 2001


    

November 26, 2000


    

November 28, 1999


    

November 29, 1998


    

(Unaudited)

                                
                  

(Dollars in Thousands)

Net income (loss)

  

$

(24,490

)

  

$

42,472

 

  

$

24,979

  

$

151,004

 

  

$

223,392

 

  

$

5,355

 

  

$

102,502

Interest expense

  

 

59,679

 

  

 

48,023

 

  

 

186,493

  

 

230,772

 

  

 

234,098

 

  

 

182,978

 

  

 

178,035

Income tax expense (benefit)

  

 

(15,658

)

  

 

24,944

 

  

 

24,979

  

 

88,685

 

  

 

120,288

 

  

 

3,144

 

  

 

60,198

Depreciation and amortization expense

  

 

14,908

 

  

 

18,228

 

  

 

71,071

  

 

80,619

 

  

 

90,981

 

  

 

120,102

 

  

 

128,773

Other (income) expense, net

  

 

27,909

 

  

 

(9,677

)

  

 

25,411

  

 

8,836

 

  

 

(39,016

)

  

 

7,868

 

  

 

34,849

Restructuring charges, net of reversals

  

 

(4,210

)

  

 

—  

 

  

 

124,595

  

 

(4,286

)

  

 

(33,144

)

  

 

497,683

 

  

 

250,658

Restructuring related expenses

  

 

—  

 

  

 

—  

 

  

 

49,549

  

 

*

 

  

 

*

 

  

 

*

 

  

 

*

Global Success Sharing Plan

  

 

—  

 

  

 

—  

 

  

 

—  

  

 

—  

 

  

 

—  

 

  

 

(343,873

)

  

 

90,564

    


  


  

  


  


  


  

EBITDA before restructuring charges, net of reversals and related expenses

  

$

58,138

 

  

$

123,990

 

  

$

507,077

  

$

555,630

 

  

$

596,599

 

  

$

473,257

 

  

$

845,579

    


  


  

  


  


  


  

 
  *   We did not separately identify restructuring related expenses until 2002.

 

(6)   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.

 

For the three months ended February 23, 2003, there was a deficiency of earnings to fixed charges of $40.1 million.

 

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Table Of Contents

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

 

Overview

 

From 1998 to 2002, we experienced a decrease in net sales from $6.0 billion to $4.1 billion due to both industry-wide and company-specific factors. Industry-wide factors included changing customer preferences and 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 response, we have completed several significant strategic, operational and management initiatives, including closing 37 of our owned and operated production and finishing facilities worldwide, shifting the vast majority of our production to independent contract manufacturers, putting in place a new management team, overhauling our product lines and introducing new products, improving our relationships with retailers, broadening our product availability, improving our operational processes and implementing a new operating model based on disciplined and integrated planning and execution.

 

We believe that through these initiatives we have successfully gained control of our business and are in the process of stabilizing and positioning our company to resume profitable growth. Our actions have enabled us to strengthen the overall financial health of the company. We have:

 

    reduced our total debt as of fiscal year end 2002 by more than $800 million since the end of 1999;

 

    achieved positive quarterly net sales growth on a constant currency basis for the last two quarters of 2002 compared to the same quarters in the prior year, despite continued weak economic and retail conditions worldwide; and

 

    lowered our cost of goods sold and operating expenses, while increasing the variability of these costs.

 

In October 2002, we announced that we will be introducing a new casual clothing brand, the Levi Strauss Signature brand. We created the brand for value-conscious consumers who shop in mass channel retail stores. The Levi Strauss Signature brand will initially feature a range of denim and non-denim pants and shirts as well as denim jackets. We anticipate that the products will be available initially at Wal-Mart locations across the United States beginning in July 2003.

 

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Table Of Contents

 

Results of Operations

 

The following table summarizes, for the periods indicated, selected items in our consolidated statements of income, expressed as a percentage of net sales (amounts may not total due to rounding).

 

      

Three Months Ended


      

Year Ended


 
      

February 23,

2003


      

February 24, 2002


      

November 24,

2002


      

November 25,

2001


      

November 26,

2000


 

Net sales

    

100.0

%

    

100.0

%

    

100.0

%

    

100.0

%

    

100.0

%

Cost of goods sold

    

58.9

 

    

57.4

 

    

59.3

 

    

57.8

 

    

57.9

 

      

    

    

    

    

Gross profit

    

41.1

 

    

42.6

 

    

40.7

 

    

42.2

 

    

42.1

 

Marketing, general and administrative expenses

    

37.0

 

    

32.0

 

    

32.2

 

    

31.8

 

    

31.9

 

Other operating (income)

    

(0.8

)

    

(0.7

)

    

(0.8

)

    

(0.8

)

    

(0.7

)

Restructuring charges, net of reversals

    

(0.5

)

    

—  

 

    

3.0

 

    

(0.1

)

    

(0.7

)

      

    

    

    

    

Operating income

    

5.4

 

    

11.3

 

    

6.3

 

    

11.3

 

    

11.6

 

Interest expense

    

6.8

 

    

5.1

 

    

4.5

 

    

5.4

 

    

5.0

 

Other (income) expense, net

    

3.2

 

    

(1.0

)

    

0.6

 

    

0.2

 

    

(0.8

)

      

    

    

    

    

Income loss before taxes

    

(4.6

)

    

7.2

 

    

1.2

 

    

5.6

 

    

7.4

 

Income tax expense benefit

    

(1.8

)

    

2.7

 

    

0.6

 

    

2.1

 

    

2.6

 

      

    

    

    

    

Net income loss

    

(2.8

)%

    

4.5

%

    

0.6

%

    

3.5

%

    

4.8

%

      

    

    

    

    

Net Sales Segment Data:

                                            

Geographic

                                            

Americas

    

58.8

%

    

64.3

%

    

65.1

%

    

67.1

%

    

67.8

%

Europe

    

31.4

 

    

27.9

 

    

26.4

 

    

25.0

 

    

23.8

 

Asia Pacific

    

9.9

 

    

7.8

 

    

8.5

 

    

7.9

 

    

8.4

 

 

Three Months Ended February 23, 2003 as Compared to Three Months Ended February 24, 2002

 

Consolidated net sales. Net sales for the three months ended February 23, 2003 decreased 6.4% to $875.1 million, as compared to $935.3 million for the same period in 2002. If currency exchange rates were unchanged from the prior year period, net sales would have decreased approximately 11.2% for the three months ended February 23, 2003.

 

The decrease for the three months ended February 23, 2003 compared to the prior year period reflects the weak retail and economic climates, declining consumer confidence and pricing pressures in most markets in which we operate. Political and economic uncertainty coupled with anxiety about war and terrorism have also made the first quarter of 2003 more challenging than we had expected. After a weak holiday season, we believe consumer spending levels continued to be down significantly, resulting in lower than anticipated retailer orders.

 

Despite the continuation of weak economic and retail conditions in most major markets around the world, we anticipate that 2003 constant currency net sales will increase between 2% to 5% compared to 2002. We expect this to be driven by new products and retail programs in our existing core Levi’s® and Dockers® business. In addition, we will be introducing the Levi Strauss Signature brand, which we expect to be available at Wal-Mart locations across the United States beginning in the third quarter of 2003. We anticipate that the majority of our net sales growth in 2003 will be in the second half of the year.

 

Americas net sales. In the Americas, net sales for the three months ended February 23, 2003 decreased 14.5% to $514.2 million, as compared to $601.3 million for the same period in 2002. If currency exchange rates were unchanged from 2002, net sales would have declined 14.1% for the three months ended February 23, 2003 compared to the same period in 2002. We believe that the combination of a weak holiday season and a slowdown

 

43


Table Of Contents

in consumer spending in January and February 2003 left retailers with high overall inventory levels. We believe this had a negative effect on replenishment orders, particularly as retailers worked to reduce excess inventory related to their private label products.

 

In this uncertain economic and geopolitical climate, we believe we must focus on continuing to produce innovative products and offering competitive margins to our retail customers using wholesale price reductions and sales incentives. At the same time, we will focus on cutting costs to enhance earnings and cash flow without jeopardizing growth strategies.

 

Europe net sales. In Europe, net sales for the three months ended February 23, 2003 increased 5.3% to $274.4 million, as compared to $260.6 million for the same period in 2002. On a constant currency basis, net sales would have decreased by approximately 11.1% for the three months ended February 23, 2003 compared to the same period in 2002.

 

We are facing similar challenges in Europe as in the Americas. A sluggish economic and retail environment, low consumer confidence and high retail inventories after a weak holiday season, particularly in key countries such as Germany, Italy and the United Kingdom, resulted in fewer replenishment orders. We also are continuing to see intense price pressures across Europe.

 

In the context of this weak external environment in Europe, we continue to focus on maintaining a steady stream of product innovation and expanding our product price points. For example, we have launched the Levi’s® 580 series, an “entry” or lower price point line.

 

Asia Pacific net sales. In our Asia Pacific region, net sales for the three months ended February 23, 2003 increased 18.0% to $86.6 million, as compared to $73.3 million for the same period in 2002. If exchange rates were unchanged from the prior year period, net sales would have increased approximately 11.6% for the three months ended February 23, 2003. In some countries, we reported double-digit net sales increases for the three months ended February 23, 2003 compared to the same period in 2002, offsetting lower sales in other countries that are facing difficult retail conditions. In Japan, which accounted for approximately 52% of our business in Asia during the first quarter of 2003, net sales for the three months ended February 23, 2003 increased approximately 25.0% on a constant currency basis compared to the same period in 2002. Sales growth reflected the positive impact of our new products, improved retail presentation and our ability to reach more consumers with a broader range of price points in an environment of economic weakness and apparel price deflation across much of the region. The results in Japan also reflected the opening of additional independently owned retail stores dedicated to the Levi’s® brand.

 

Gross profit. Gross profit for the three months ended February 23, 2003 was $359.4 million compared with $398.6 million for the same period in 2002. Gross profit as a percentage of net sales, or gross margin, for the three months ended February 23, 2003 decreased to 41.1% compared to 42.6% for the same period in 2002. Gross margin for the three months ended February 23, 2003 was affected by deploying the savings from our 2002 plant closures into product innovation and better margins for our retail customers.

 

Our gross margin for the three months ended February 23, 2003 benefited from foreign currency exchange gains of approximately $8 million related to the strength of the euro. Because the cost of our fabric is dollar-denominated, the strength of the euro resulted in lower sourcing costs than in the first quarter of 2002. In addition, our gross margin for the three months ended February 23, 2003 does not include, as in prior periods, postretirement medical benefits related to manufacturing employees. Because we have closed most of our manufacturing plants in the U.S., these costs are now reflected in marketing, general and administrative expenses of approximately $10 million for the three months ended February 23, 2003. Also, improvements in the process of identifying obsolete core inventory resulted in a reduction of inventory valuation reserves by approximately $5 million as of February 23, 2003.

 

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Cost of goods sold is primarily comprised of cost of materials, labor and manufacturing overhead. Cost of goods sold also includes the cost of inbound freight, internal transfers, and receiving and inspection at manufacturing facilities as these costs vary with product volume. We include substantially all the costs related to receiving and inspection at distribution centers, warehousing and other activities associated with our distribution network in marketing, general and administrative expenses. Our gross margins may not be comparable to those of other companies in our industry, since some companies may include costs related to their distribution network in cost of goods sold.

 

In response to demanding market conditions, we will continue to invest in product innovations and better margins for our U.S. retail customers. In light of continuing demanding retail market conditions, we currently expect that our gross margins for the full year 2003 to be at the lower end of our previously announced target of 40% to 42%.

 

Marketing, general and administrative expenses. Marketing, general and administrative expenses for the three months ended February 23, 2003 increased 8.2% to $323.5 million compared to $298.9 million for the same period in 2002. These expenses as a percentage of sales for the three months ended February 23, 2003 increased to 37.0% compared to 32.0% for the same period in 2002.

 

The dollar increase in marketing, general and administrative expenses for the three months ended February 23, 2003 was attributable to several factors that occurred during 2003. These factors included the translation impact of the weak dollar of approximately $13 million, postretirement medical benefits related to manufacturing employees as discussed above under “Gross profit” of approximately $10 million and a catch-up adjustment to recognize rent expense on a straight-line basis over the lease terms resulting in a non-recurring, non-cash charge of approximately $21 million. We believe that the cumulative effect of the non-recurring, non-cash charge is not material to our historical operations in any period or to the trend of reported results of operations. These factors were partially offset by a decline in total incentive compensation expense of approximately $28 million, of which $24 million related to our long-term incentive compensation program.

 

Advertising expense for the three months ended February 23, 2003 increased 4.1% to $68.8 million, compared to $66.1 million for the same period in 2002. Advertising expense as a percentage of sales for the three months ended February 23, 2003 increased to 7.9%, compared to 7.1% for the same period in 2002, in line with our previously estimated 2003 full year range of 7% to 8%.

 

Marketing, general and administrative expenses also include distribution costs, such as costs related to receiving and inspection at distribution centers, warehousing, shipping, handling and certain other activities associated with our distribution network. These expenses for the three months ended February 23, 2003 and February 24, 2002 were $45.3 million and $43.1 million, respectively.

 

We expect full year 2003 marketing, general and administrative expenses as a percent of sales to be at the higher end of our previously communicated range of 32% to 34%.

 

Other operating income. Licensing income for the three months ended February 23, 2003 of $7.3 million increased 19.7%, as compared to $6.1 million for the same period in 2002. The increase reflects an increase in sales of licensed accessories primarily for hosiery, footwear and small leather goods.

 

Restructuring charges, net of reversals. In the first quarter of 2003, we reversed $4.2 million of restructuring charges from prior years’ restructuring initiatives. (See “Restructuring Charges” below for further details.)

 

Operating income. Operating income for the three months ended February 23, 2003 was $47.4 million compared to $105.8 million for the same period in 2002. The decrease in operating income for the three months ended February 23, 2003 was primarily attributable to the impact of lower sales and gross margins, and an increase in marketing, general and administrative expenses.

 

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Interest expense. Interest expense for the three months ended February 23, 2003 increased 24.3% to $59.7 million compared to $48.0 million for the same period in 2002. The higher interest expense was primarily due to the first quarter 2003 issuance of $575 million of senior notes due 2012 at an interest rate of 12.25% and higher bank debt as a result of entering into the 2003 senior secured credit facility. The weighted average cost of borrowings for the three months ended February 23, 2003 and February 24, 2002 was 10.30% and 9.30%, respectively. The weighted average interest rate on average borrowings outstanding excludes interest payable to participants under unfunded deferred compensation plans and other miscellaneous items.

 

Other (income) expense, net. Significant components of other (income) expense, net are summarized below:

 

    

Three Months Ended


 
    

February 23, 2003


    

February 24, 2002


 
    

(Dollars in Thousands)

 

Currency transaction (gains) losses

  

$

26,451

 

  

$

(5,931

)

Interest (income)

  

 

(1,491

)

  

 

(450

)

(Gains) losses on disposal of assets

  

 

(4,159

)

  

 

204

 

Loss on early extinguishment of debt

  

 

8,827

 

  

 

—  

 

Other

  

 

(1,719

)

  

 

(3,500

)

    


  


Total

  

$

27,909

 

  

$

(9,677

)

    


  


 

Currency transaction (gains) losses include gains and losses of our foreign exchange management contracts of $36.4 million and $0.8 million for the three months ending February 23, 2003 and February 24, 2002, respectively. The remaining amounts primarily reflect (gains) losses for remeasurement of foreign currency transactions. Interest income for the three months ended February 23, 2003 was predominately due to an increase in cash investments as a result of our 2003 refinancing activities. The net gain on disposal of assets for the three months ended February 23, 2003 was primarily related to the sale of fixed assets associated with our 2002 U.S. plant closures. The loss on early extinguishment of debt for the three months ended February 23, 2003 primarily relates to our senior secured credit facility refinancing and, to a lesser extent, the repurchase of our 6.80% notes due November 2003.

 

Income tax expense (benefit). Income tax benefit was $(15.7) million for the three months ended February 23, 2003 compared to income tax expense of $24.9 million for the same period in 2002. Our effective income tax rate was 39% for the three months ended February 23, 2003 compared to 37% for the same period in 2002. The lower effective income tax rate in 2002 was due to a projected reversal of prior years’ accruals.

 

Net income (loss). Net loss for the three months ended February 23, 2003 was $(24.5) million compared to net income of $42.5 million for the same period in 2002. The net loss for the three months ended February 23, 2003 reflected lower sales, higher marketing, general and administrative expenses, higher interest expense and the impact of currency volatility on our foreign exchange management.

 

Year Ended November 24, 2002 as Compared to Year Ended November 25, 2001

 

Consolidated Net Sales.    Net sales in 2002 decreased 2.9% to $4,136.6 million, as compared to $4,258.7 million in 2001. If currency exchange rates were unchanged from 2001, net sales would have decreased approximately 3.2% for 2002 compared to 2001. The decrease primarily reflected the impact of the weak retail and economic climates in many of the markets in which we operate. In the first half of 2002 we were in the early stages of introducing many of the products and programs whose marketplace impact we believed would increase over time. In the second half of 2002, net sales stabilized as these products and programs began to take hold.

 

Americas Net Sales.    In the Americas, net sales in 2002 decreased 5.7% to $2,692.1 million, as compared to $2,856.1 million in 2001. If currency exchange rates were unchanged from 2001, net sales would have

 

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decreased approximately 4.9% for 2002 compared to 2001. This decrease primarily reflected the challenging U.S. retail and economic climate. The decline was mitigated by a number of factors in the Americas that continued to improve and have a positive impact during the year. These factors include:

 

    positive reactions from both retailers and consumers to our overhauled product lines, including new fits, fabrics and finishes in core products;

 

    a revitalized women’s jeans product line, including Levi’s® Superlow jeans;

 

    new market leading innovations, such as Dockers® Go! Khakis with Stain Defender;

 

    more effective product-focused advertising; and

 

    new retailer programs resulting in improved economics for our customers, including lower wholesale prices on selective products, volume incentives, and better service.

 

We regularly explore entry into new customers and development of new brands and products for both existing and potential customers. For example, we entered Pacific Sunwear, a multi-brand specialty store, and entered a number of image department stores including the Bloomingdales unit of Federated Department Stores, Inc., Nordstrom Inc. and Saks Incorporated.

 

Europe Net Sales.    In Europe, net sales in 2002 increased 2.5% to $1,093.1 million, as compared to $1,066.3 million in 2001. On a constant currency basis, net sales would have decreased 1.4% for 2002, compared to 2001. Net sales reflected a competitive and challenging marketplace, particularly in the United Kingdom, Italy and Germany where we experienced weak consumer demand, high retail inventories and increasing apparel price deflation. We stabilized our performance in Europe despite the challenging economic environment by taking various actions including:

 

    introduction of new products and finishes, such as the “Shaped and Worn” vintage-inspired jeans products;

 

    the roll-out of lower entry-priced products in both the Levi’s® and Dockers® brands;

 

    wholesale price reductions on selective products;

 

    aggressive promotions of 501® and 525 jeans in core finishes; and

 

    the continued upgrade of the presentation of our products at retail.

 

Asia Pacific Net Sales.    In our Asia Pacific region, net sales in 2002 increased 4.5% to $351.4 million, as compared to $336.2 million in 2001. If exchange rates were unchanged from 2001, net sales would have increased approximately 6.4% for 2002 compared to 2001. Sales growth reflected the positive impact of our product innovation, marketing programs and improved retail distribution in an environment characterized by economic weakness and apparel price deflation across much of the region.

 

In Japan, which accounted for approximately 53% of our business in Asia during 2002, net sales in 2002 increased approximately 4.0% compared to the prior year period on a constant currency basis. The results in Japan reflected the positive impact of our premium and super premium product lines, entry into the standard or lower priced segment, and the opening of additional independently-owned retail stores dedicated to the Levi’s® brand.

 

Gross Profit.    Gross profit in 2002 was $1,684.8 million compared to $1,797.5 million in 2001. Gross margin decreased in 2002 to 40.7%, as compared to 42.2% in 2001.

 

Gross margin in 2002 was adversely affected by expenses of $49.5 million associated with plant closures in the United States and Scotland. Most of those expenses were for workers’ compensation and pension enhancements in the United States. Excluding these restructuring related expenses, gross margin for 2002 would have been 41.9% compared to 42.2% for 2001.

 

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Our gross margins benefited from our lower sourcing and fabric costs and the favorable impact of foreign currency movements as well as lower inventory markdown expenses. Negatively affecting our margins were retailer promotions and incentives in the United States, which were recorded as a reduction of net sales, selective wholesale price reductions in the United States and Europe, entry into lower priced segments in all regions, and more expensive finishes, particularly in Europe.

 

Our largest supplier, Cone Mills Corporation, had been the sole supplier of the denim used worldwide for our 501® jeans. On May 13, 2002, we amended the exclusivity and requirements features of our supply agreement with Cone Mills. The amendment provides that, as of March 30, 2003, we may purchase these denims from other suppliers and Cone Mills may sell these denims to other customers. The amendment also allowed us to purchase these denims for our European business from non-U.S. sources prior to March 30, 2003 if the European Union implements significant tariffs against U.S. produced denim. The amendment does not change any other provisions of the supply agreement.

 

Marketing, general and administrative expenses.    Marketing, general and administrative expenses in 2002 decreased 1.7% to $1,332.8 million compared to $1,355.9 million in 2001. These expenses as a percentage of sales in 2002 increased to 32.2% compared to 31.8% in 2001. The dollar decrease in marketing, general and administrative expenses in 2002 was primarily due to lower advertising expense and our continuing cost containment efforts, partially offset by higher employee incentive plan accruals. In addition, expenses in 2001 included a reversal of prior period accruals, in the amount of $18.0 million, associated with an employee long-term incentive plan as a result of changes in employee turnover assumptions based on actual experience.

 

Advertising expense in 2002 decreased 14.0% to $307.1 million, as compared to $357.3 million in 2001. Advertising expense as a percentage of sales in 2002 decreased to 7.4%, as compared to 8.4% in 2001. The decrease in advertising expense reflected lower media costs and our strategic decision to shift some of our U.S. advertising spending into sales incentive programs with retailers. The cost of those programs was recorded as a reduction of net sales. Cooperative advertising expense for 2002 and 2001 was $3.9 million and $21.5 million, respectively.

 

Marketing, general and administrative expenses also include distribution costs, such as costs related to receiving and inspection at distribution centers, warehousing, shipping, handling and certain other activities associated with our distribution network. These expenses totaled $183.7 million and $182.0 million for 2002 and 2001, respectively.

 

Other operating income.    Royalty income in 2002 increased to $34.5 million as compared to $33.4 million in 2001. The increase reflected an expansion of licensed accessory categories.

 

Restructuring charges, net of reversals.    In 2002, we recorded charges of $151.7 million associated with plant closures in the United States and Scotland and a restructuring initiative in Europe. These charges were offset by reversals of $27.1 million in 2002, based on updated estimates. In 2001, we reversed charges of $26.6 million primarily due to updated estimates related to prior years’ restructuring initiatives. This reversal was offset by recorded charges of $22.4 million associated with various overhead restructuring initiatives in 2001 that resulted in workforce reductions in the United States and Japan. (See “Restructuring Charges” below for further details.)

 

Operating income.    Operating income in 2002 was $261.9 million, as compared to $479.3 million in 2001. This decrease was primarily due to lower gross profit and the net restructuring charge of $124.6 million. This decrease was slightly offset by lower marketing, general and administrative expenses.

 

Interest expense.    Interest expense in 2002 decreased 19.2% to $186.5 million, as compared to $230.8 million in 2001. This lower interest expense was primarily due to lower average debt levels combined with lower market interest rates. In addition, interest expense in 2001 included the write-off of fees totaling $10.8 million

 

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related to our prior credit agreement dated January 31, 2000. We replaced that credit agreement with a new credit facility on February 1, 2001. The weighted average cost of borrowings for 2002 and 2001 was 9.14% and 9.47%, respectively, excluding the write-off of fees.

 

Other (income) expense, net.    Other (income) expense, net in 2002 was a net expense of $25.4 million, as compared to a net expense of $8.8 million for the same period in 2001. This increase in net expense was primarily due to higher net losses from derivative instruments used for foreign currency management activities, including sourcing, that do not qualify for hedge accounting. The increase in net expense was partially offset by a refund for a legal settlement associated with custom duties in Mexico and the related interest income on the refund.

 

Income tax expense.    At November 24, 2002, we calculated that our effective income tax rate for 2002 was 50% compared to 37% for 2001. The increase in our annual effective income tax rate was primarily due to the combined effects of the computational impact of expenses not deductible for tax purposes and lower earnings for 2002 resulting from the restructuring charges and related expenses. Income tax expense in 2002 was $25.0 million compared to $88.7 million in 2001.

 

We reached a settlement on most issues with the Internal Revenue Service during 2002 in connection with the examination of our income tax returns for the years 1990 to 1995. We have completed an evaluation of the impact of this settlement on our deferred tax assets as well as accrued taxes and long-term tax liabilities. As a result of this review, we reclassified approximately $90.0 million from long-term liabilities to accrued taxes to reflect the estimated impact of the settlement and our deferred tax assets were increased for Internal Revenue Service audit adjustments for benefits reversing in future years. Our consolidated U.S. income tax returns for 1996 to 1999 are under examination by the Internal Revenue Service. We expect this examination to be completed by early 2004.

 

Net income.    Net income in 2002 was $25.0 million compared to $151.0 million in 2001. The decrease in 2002 was primarily attributable to lower earnings resulting from the net restructuring charges of $124.6 million and related expenses of $49.5 million, lower net sales and higher net losses from derivative instruments in 2002. The impact of these factors was partially offset by lower interest expense and lower marketing, general and administrative expenses.

 

Year Ended November 25, 2001 as Compared to Year Ended November 26, 2000

 

Consolidated Net Sales.    Total net sales in 2001 decreased 8.3% to $4.3 billion, as compared to $4.6 billion in 2000. If currency exchange rates were unchanged from the prior year period, net sales for 2001 would have declined approximately 6.5%. This decrease reflected volume declines primarily due to weak economies and retail markets in the United States 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 2001 as compared to 9.6% in 2000 and 13.7% in 1999. We believed that the narrowed sales decline, in view of the then current economic and retail environment, reflected ongoing progress in our business turnaround and efforts to improve performance.

 

We anticipated difficult retail and economic conditions to continue into 2002, along with the need for continued executional improvements, including greater focus on core products and innovation to the U.S. product line. As a result, in 2001, we believed our 2002 constant currency net sales would decline in the low single digits and we planned our production and operating expenses accordingly.

 

Americas Net Sales.    In the Americas, net sales in the United States accounted for approximately 93% of our Americas net sales in 2001. Net sales in the Americas decreased 9.3% to $2.9 billion, as compared to $3.1 billion in 2000, due primarily to a drop in volume. This decrease was primarily attributable to the weak economy

 

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and retail apparel market in the United States. We believed retailers were 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 introduced updated and relevant products, such as our Levi’s® Superlow jeans and Dockers® Mobile pant, supported by the right advertising and retail programs, our data showed improved sell-through to consumers. Our performance in the United States also reflected our targeted retailer promotions and incentives that drove sales volumes during the fourth quarter of 2001.

 

Europe Net Sales.    In Europe, net sales decreased 3.5% to $1.07 billion, as compared to $1.1 billion in 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 2001 compared to the prior year period. In 2001, we believed the constant currency results indicated that our business in Europe was beginning to stabilize as indicated by modest growth in net sales on a constant currency basis for the last three consecutive quarters of 2001 compared to 2000. We believed this reflected the impact of our updated and innovative products, retail presentation programs and improved delivery performance in the region for 2001.

 

Asia Pacific Net Sales.    In the Asia Pacific region, net sales decreased 14.3% to $336.2 million, as compared to $392.4 million in 2000. If exchange rates were unchanged from the prior year period, the reported net sales decrease would have been approximately 5.0% in 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 accounted for approximately 55% of our business in Asia in 2001, difficult business conditions 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 2001 compared to 2000.

 

Gross profit.    Gross profit in 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 2001, as compared to 42.1% in 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 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.

 

Marketing, general and administrative expenses.    Marketing, general and administrative expenses for 2001 decreased 8.5% to $1.4 billion, as compared to $1.5 billion for 2000. Marketing, general and administrative expenses as a percentage of sales for 2001 decreased slightly to 31.8% as compared to 31.9% in 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 included a reversal of $18.0 million associated with forfeitures under an employee long-term incentive plan in 2001. Marketing, general and administrative expenses for 2000 also included a pension curtailment benefit of $18.0 million. In 2001, we continued to look for opportunities to streamline our organization, in line with our core product focus and related initiatives to reduce business complexity.

 

Advertising expense for 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 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 2001 was consistent with our 2001 target range of 8% to 9%.

 

Other operating income.    For 2001, licensing income increased 3.2% to $33.4 million, as compared to $32.4 million for the same period in 2000. This increase was primarily due to an increase in royalties from sales of merchandise, such as outerwear, shoes, belts, headwear and handbags, by licensees of our trademarks.

 

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Restructuring charges, net of reversals.    For 2001, we reversed charges of $26.6 million primarily due to updated estimates related to prior years’ restructuring initiatives. This reversal was offset by recorded charges of $22.4 million associated with various overhead restructuring initiatives in 2001 that resulted in workforce reductions in the United States and Japan. In 2000, we reversed charges of $33.1 million primarily due to updated estimates related to prior years’ restructuring initiatives.

 

Operating income.    For 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 2001 as compared to a $33.1 million reversal of restructuring charges in 2000.

 

Interest expense.    Interest expense for 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 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 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 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 2001 was $88.7 million compared to $120.3 million for the same period in 2000. The decrease for 2001 was primarily due to lower earnings than in 2000, partially offset by a higher effective tax rate of 37% in 2001 compared to 35% in 2000. The lower tax rate in 2000 was due to a reevaluation of potential tax assessments.

 

Net income.    Net income for 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 2001. Included in 2000 was 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.

 

Restructuring Charges

 

Since late 1997 we have implemented extensive restructuring activities to reduce overhead expenses and eliminate excess manufacturing capacity, as well as closing 37 manufacturing facilities worldwide between 1997 and 2002, including closing in 2002 two manufacturing plants in Scotland and six manufacturing plants in the United States. The U.S. closures reflected our continuing shift from a manufacturing to a marketing and product-driven organization. We closed the plants in Scotland in order to reduce average production costs in Europe. We believe these actions will improve our competitiveness and enable us to invest more resources in product, marketing and retail initiatives. These actions also increase the variable nature of our cost structure, which we believe will help us maintain strong gross margins in a highly competitive and price deflationary environment. We do not anticipate closing any more manufacturing or finishing facilities in the near future, although we cannot assure that we will not take further restructuring initiatives in the future.

 

The following is a summary of the actions taken and related charges associated with these restructuring activities. Restructuring charges include certain costs associated with plant closures and business reorganization activities and are recorded upon approval of, and commitment to, a restructuring plan by executive management. These costs primarily include employee severance, certain employee termination benefits and contractual obligations. Our restructuring charges also include property, plant and equipment write-offs. These costs are not associated with, nor do they benefit, continuing activities. We review and evaluate these activities periodically.

 

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Table Of Contents

 

    From 1997 to 1999, we closed 29 of our owned and operated production and finishing facilities in North America and Europe and instituted restructuring initiatives to reduce costs, eliminate excess capacity and align our sourcing strategy with changes in the industry and in consumer demand. For 2002, we reversed aggregate charges of $18.0 million from initial charges of $530.9 million. These reversals were primarily due to lower than anticipated employee benefits and other plant closure related costs.

 

    In November 2001, we instituted various reorganization initiatives in the United States that included simplifying product lines and realigning our resources to those product lines. We recorded an initial charge of $20.3 million in November 2001 reflecting an estimated displacement of 500 employees. During 2002, we reversed charges of $6.7 million from the initial charge of $20.3 million. This reversal was due to a change in the estimate of the number of employees to be affected from approximately 500 to approximately 335 primarily due to attrition. During the first quarter of 2003, we reversed $0.2 million for lower than anticipated severance and benefit costs due to attrition.

 

    In November 2001, we instituted various reorganization initiatives in Japan. These initiatives were prompted by business declines as a result of the prolonged economic slowdown, political uncertainty, major retail bankruptcies and dramatic shrinkage of the core denim jeans market in Japan. We recorded an initial charge of $2.0 million in November 2001. The charge reflected an estimated displacement of 22 employees, all of whom have been displaced. During 2002, we reversed charges of $0.3 million from the initial charge of $2.0 million.

 

    For the plant closures in Scotland, we recorded an initial charge in the second quarter of 2002 of $20.5 million, consisting of $3.1 million for asset write-offs, $15.7 million for severance and employee benefits and $1.7 million for other restructuring costs. The charge reflected an estimated displacement of 650 employees, all of whom have been displaced. The two manufacturing plants were closed by the end of the second quarter of 2002. During the third quarter of 2002, we reversed the remaining balance of $2.1 million due to the earlier than anticipated sale of the manufacturing plants.

 

    For the six plant closures in the United States, we recorded an initial charge in the second quarter of 2002 of $129.7 million, consisting of $22.7 million for asset write-offs, $89.6 million for severance and employee benefits and $17.4 million for other restructuring costs. The charge reflects an estimated displacement of 3,300 employees at the affected plants and approximately 250 employees at our remaining U.S. finishing facility, where we anticipated needing to reduce our capacity due to decreased inflow of products from our manufacturing facilities. We closed the six manufacturing plants in three phases: two plants were closed in June 2002, two plants were closed in July 2002 and the final two plants were closed in September 2002. During the first quarter of 2003, we reversed a charge of $0.8 million due to lower than anticipated employee benefit costs. We also reversed $3.2 million of other restructuring costs during the period resulting from lower than anticipated costs to sell the Blue Ridge, Georgia facility and exit our lease for the Brownsville, Texas facility.

 

    In November 2002, we announced a reorganization initiative in Europe that includes realigning our resources with our European sales strategy to better service customers and reduce operating costs. This strategy affects our operations in several countries and involves our moving from a country or regional-based sales organization to a key account structure. We recorded an initial charge of $1.6 million reflecting an estimated displacement of 40 employees. As of February 23, 2003, approximately 35 employees have been displaced. We expect to record additional employee displacement costs in the remainder of 2003 that are part of this initiative once labor negotiations are complete.

 

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The following table summarizes the plant closures and restructuring charges and the resulting cash and non-cash reductions. Non-cash reductions include reversals and asset write-offs.

 

   

Initial

Provision


 

Cash

Reductions


 

Non-cash

Reductions


  

Balance as of

November 24,

2002


  

Balance as of February 23, 2003


   

(Dollars in Thousands)

1997 to 1999 Plant Closures and Restructuring Initiatives

 

$

1,135,133

 

$

937,102

 

$

198,031

  

$

—  

  

$

—  

2001 Japan Restructuring Initiative

 

 

2,031

 

 

1,734

 

 

297

  

 

—  

  

 

—  

2001 Corporate Restructuring Initiatives

 

 

20,331

 

 

11,521

 

 

6,689

  

 

2,121

  

 

1,053

2002 U.S. Plant Closures

 

 

129,676

 

 

44,933

 

 

22,654

  

 

62,089

  

 

38,072

2002 Scotland Plant Closures

 

 

20,477

 

 

15,324

 

 

5,153

  

 

—  

  

 

—  

2002 Europe Restructuring Initiative

 

 

1,568

 

 

202

 

 

—  

  

 

1,366

  

 

794

   

 

 

  

  

Total

 

$

1,309,216

 

$

1,010,816

 

$

232,824

  

$

65,576

  

 $

39,919

   

 

 

  

  

 

The total balance of the reserves at November 24, 2002 was $65.6 million, of which $52.4 million represented reserves for severance and employee benefits. The total balance of the reserves at February 23, 2003 was $39.9 million. We expect to utilize the majority of the remaining reserve balances during the remainder of 2003.

 

Liquidity and Capital Resources

 

Our principal capital requirements have been to fund working capital and capital expenditures. As of February 23, 2003, total cash and cash equivalents and restricted cash were $625.7 million, a $529.2 million increase from the $96.5 million cash balance reported as of November 24, 2002. The increase reflected the issuance of the 12.25% senior unsecured notes due 2012 and the 2003 senior secured credit facility. Under the 2003 senior secured credit facility, we are required to have funds segregated in an amount sufficient to repay the 6.80% notes due November 1, 2003 at maturity (including any interim scheduled interest payments). As of February 23, 2003, this amount was $244.3 million and is separately identified on the balance sheet as “Restricted Cash.”

 

During 2003, we expect to have between $200 million and $300 million of the following primary cash requirements:

 

    Working capital requirements associated with our mass channel launch and seasonal requirements;

 

    Net cash payments of approximately $90 million to the Internal Revenue Service as a result of a tax settlement;

 

    Net cash payments of approximately $70 million resulting from plant closures in 2002 and other restructuring initiatives; and

 

    Capital expenditures of approximately $70 million.

 

We anticipate that we will meet these obligations primarily through these financings and from cash provided by operations. We will obtain additional liquidity through our revolving 2003 senior secured credit facility, which will also be used to support letters of credit, and through cash on hand.

 

Total debt, other cash obligations and commitments.    As of February 23, 2003, our total debt was $2.562 billion, compared with $1.847 billion as of November 24, 2002.

 

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As of February 23, 2003, our 2003 senior secured credit facility consisted of $375.0 million of term loans and a $375.0 million revolving credit facility. There were no outstanding borrowings under the revolving credit facility. Total availability under the revolving credit facility was reduced by $170.1 million of letters of credit allocated under the revolving credit facility, yielding a net availability of $204.9 million. Included in the $170.1 million of letters of credit at February 23, 2003 were $131.8 million of standby letters of credit with various international banks, of which $51.2 million serve as guarantees by the creditor banks to cover U.S. workers’ compensation claims. We pay fees on the standby letters of credit and borrowings against letters of credit are subject to interest at various rates.

 

At February 23, 2003, we had unsecured and uncommitted short-term credit lines available totaling $17.4 million at various rates. These credit arrangements may be canceled by the bank lenders upon notice and generally have no compensating balance requirements or commitment fees.

 

We have other current cash obligations for various liabilities categorized on the balance sheet as accounts payable, accrued liabilities, accrued salaries, wages and employee benefits and accrued taxes for our normal business operations. During 2002, we reached a settlement with the Internal Revenue Service on most of the issues in connection with the examination of our income tax returns for the years 1990 through 1995. As a result, during 2002 we reclassified approximately $90 million from long-term tax liabilities into accrued taxes. We made a payment of approximately $115 million to the Internal Revenue Service in March 2003. After taking into account potential refunds from prior years’ overpayments and the tax effects of the interest deduction from paying this settlement, we expect the net cash payment to be approximately $90 million.

 

We have numerous noncontributory pension plans covering substantially all of our employees. Our pension plan assets are principally invested in equity securities and fixed income securities. Based on the fair value of plan assets and interest rates estimated as of November 24, 2002, we recorded a charge of $86.0 million, net of tax of $49.9 million to stockholders’ deficit. This charge reflects the after tax additional minimum pension liability due to pension obligations exceeding assets. As a result of the projected deficit, we expect to make additional pre-tax contributions to the pension plans during the next four fiscal years, including expected cash contributions of approximately $20 to $25 million in 2003.

 

We previously announced that we expected our 2003 year end debt level less cash on hand to approximate year end 2002 levels of $1.85 billion and that peak borrowings, net of cash on hand, during 2003 would be approximately $200 to $300 million higher than the 2002 year end level. The peak debt level principally results from seasonal working capital requirements and growth associated with our entry into the mass channel in the United States, which will occur in the third quarter of 2003. In light of continuing weak economic and retail conditions worldwide, it is likely that our debt level at the end of 2003 will be higher than our previously communicated expected debt level, and that the peak borrowing level may also exceed the previously communicated range.

 

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Table Of Contents

 

We have no material off-balance sheet debt obligations or unconditional purchase commitments other than operating lease commitments. Our total short-term and long-term debt principal payments as of February 23, 2003 and minimum operating lease payments for facilities, office space and equipment as of November 24, 2002 for the next five years and thereafter are as follows:

 

    

Principal Payments*


  

Minimum Operating Lease Payments


Year


  

(Dollars in Thousands)

2003

  

$

319,271

  

$

64,211

2004

  

 

122,271

  

 

58,375

2005

  

 

150,422

  

 

55,051

2006

  

 

722,509

  

 

52,646

2007

  

 

—  

  

 

47,887

Thereafter

  

 

1,248,013

  

 

189,832

    

  

Total

  

$

2,562,486

  

$

468,002

    

  


*   The principal payments include $228.5 million of the outstanding 6.80% notes due November 1, 2003. Under the 2003 senior secured credit facility, we are required to have funds segregated in an amount sufficient to repay the 6.80% notes due November 1, 2003 at maturity (including any interim scheduled interest payments). As of February 23, 2003, this amount was $244.3 million and is separately identified on the balance sheet as “Restricted Cash.”

 

Supply contracts. We do not have any material long-term raw materials supply contracts except for our supply agreement with Cone Mills Corporation relating to the denim used in 501® jeans. The supply agreement does not obligate us to purchase any minimum amount of goods. We typically conduct business with our raw material suppliers, garment manufacturing and finishing contractors on an order-by-order basis.

 

Cash used for/provided by operating activities. Cash used for operating activities for the three months ended February 23, 2003 was $152.2 million, as compared to cash provided by operating activities of $35.6 million for the same period in 2002. Trade receivables decreased during the three months ended February 23, 2003 primarily due to lower sales than in the three months ended November 24, 2002. Inventories increased during the three months ended February 23, 2003 primarily due to seasonal needs and preparation for our entry into the mass channel. Net deferred tax assets increased during the three months ended February 23, 2003 primarily due to tax benefits associated with the 2003 first quarter loss and the tax effects of the interest expense deduction from the audit settlement paid in March 2003 to the Internal Revenue Service. The increase in net deferred tax assets was partially offset by lower retail sales promotions and incentive activities, lower prepaid royalty income and spending associated with restructuring initiatives. Other long-term assets increased during the three months ended February 23, 2003 reflecting capitalized bank and underwriting fees in conjunction with our recent debt refinancing. Accounts payable and accrued liabilities decreased during the three months ended February 23, 2003 primarily due to lower spending than in the three months ended November 24, 2002 as a result of the seasonality of our business.

 

Restructuring reserves decreased during the three months ended February 23, 2003 due to payments related to prior years’ restructuring initiatives. Accrued salaries, wages and employee benefits decreased during the three months ended February 23, 2003 primarily due to payments in the first quarter of 2003 for our employee incentive compensation plans. This was partially offset by a reclassification from long-term employee benefits to accrued salaries, wages and employee benefits for expected payments in 2004 for our long-term employee incentive compensation plan. Accrued taxes decreased during the three months ended February 23, 2003 primarily due to tax payments and reversal of timing differences. Other long-term liabilities increased primarily due to a non-cash charge relating to a cumulative effect of a change in accounting for rent expense.

 

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Table Of Contents

 

Cash provided by operating activities in 2002 was $191.7 million, as compared to $141.9 million in the same period in 2001. Trade receivables increased during 2002 primarily due to higher net sales in November 2002 compared to November 2001. Inventory decreased during 2002. We achieved the inventory reduction through retailer promotional and incentive programs and better inventory management. For the first half of 2003, we anticipate inventory to be higher than at year end 2002 as we prepare for the launch of the Levi Strauss Signature brand beginning in July 2003. Net deferred tax assets increased during 2002 primarily due to timing of unrealized foreign exchange gains/losses and the additional minimum pension liability.

 

Restructuring reserves increased during 2002 primarily due to restructuring charges associated with the United States plant closures. Accrued salaries, wages, and employee benefits increased during 2002 primarily due to higher employee incentive costs than in 2001. Accounts payable and accrued liabilities decreased during 2002 primarily due to lower contractor and advertising accruals. Accrued taxes increased and long-term tax liabilities decreased during 2002 primarily due to the reclassification of approximately $90.0 million in anticipation of the settlement payment to the Internal Revenue Service in connection with an examination of our income tax returns for the years 1990 to 1995. Long-term employee benefits increased primarily due to an increase in our pension liability for anticipated contributions over the next four years.

 

Cash provided by operating activities in 2001 was $141.9 million, as compared to $305.9 million in the same period in 2000. Trade receivables decreased during 2001 primarily due to lower net sales. Inventory decreased during 2001, primarily in the fourth quarter. We achieved the inventory reduction through reduced production levels and increased retailer promotional and incentive activities in the United States.

 

Other current assets decreased during 2001 primarily due to reimbursements of income and payroll taxes for overpayments made in 2000. Other long-term assets increased during 2001 primarily due to the capitalization of underwriting and other fees for the senior notes due 2008 issued in January 2001 and fees associated with the credit facility we entered into on February 1, 2001. Net deferred tax assets decreased during 2001 primarily due to inventory adjustments and tax on unremitted foreign earnings.

 

Restructuring reserves decreased during 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 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 2001 primarily due to lower accruals for contractors and raw material purchases resulting from lower production needs. Accrued taxes decreased during 2001 primarily due to a payment of approximately $40 million in the first quarter of 2001 to the Internal Revenue Service in connection with an examination of our income tax returns for the years 1986 to 1989.

 

Cash used for/provided by investing activities.    Cash used for investing activities during the three months ended February 23, 2003 was $25.9 million compared to cash provided by investing activities of $2.3 million during the same period in 2002. Cash used for investing activities for the three months ended February 23, 2003 resulted primarily from purchases of property, plant and equipment and realized losses on net investment hedges, partially offset by proceeds received on sales of property, plant and equipment. The purchases primarily related to systems enhancements. The proceeds received on the sale of property, plant and equipment arose mainly from the sale of assets associated with the U.S. plant closures. We expect capital spending of approximately $70 million for fiscal year 2003, primarily for systems enhancements.

 

Cash used for investing activities during 2002 was $59.4 million as compared to $17.2 million during 2001. Cash used for investing activities for 2002 resulted primarily from purchases of property, plant and equipment and realized losses on net investment hedges, partially offset by proceeds received on sales of property, plant and equipment. The purchases primarily related to sales office capital improvements and systems upgrades. The proceeds received on the sale of property, plant and equipment during 2002 arose mainly from the sale during the first quarter of 2002 of an idle distribution center located in Nevada.

 

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Table Of Contents

 

Cash used for investing activities during 2001 was $17.2 million, as compared to cash provided by investing activities of $154.2 million during the same period in 2000. Cash used for investing activities during the year resulted primarily from purchases of property, plant and equipment. In 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 expenditures for 2001 were $22.5 million, as compared to $28.0 million for 2000.

 

Cash provided/by used for financing activities.    Cash provided by financing activities for the three months ended February 23, 2003 was $460.3 million, compared to cash used for financing activities of $27.2 million for the same period in 2002. Cash provided by financing activities during the three months ended February 23, 2003 primarily reflected the issuance of the 12.25% senior unsecured notes due 2012 and the 2003 Tranche B term loan facility.

 

Cash used for financing activities for 2002 was $140.3 million as compared with $139.9 million in 2001 and $527.1 million in 2000. We used cash in 2002 primarily for repayment of existing debt. In fiscal 2001, cash used for financing activities was primarily for repayment of existing debt offset by the senior notes issued in January 2001 and the U.S. receivables securitization transaction completed in July 2001. In 2000, cash used for financing activities was for repayment of existing debt.

 

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.”

 

Effects of Inflation

 

We believe that inflation in the regions where most of our sales occur has not had a significant effect on our net sales or profitability.

 

Market Risk Disclosure

 

Derivative Financial Instruments.    We are exposed to market risk primarily related to foreign exchange, interest rates and, indirectly through fabric prices, the price of cotton. We actively manage foreign currency and interest rate risks with the objective of reducing fluctuations in actual and anticipated cash flows by entering into a variety of derivative instruments including spot, forwards, options and swaps. We are exposed to credit loss in the event of nonperformance by the counterparties to the foreign exchange contracts. However, we believe these counterparties are creditworthy financial institutions and do not anticipate nonperformance. We currently do not manage our exposure to the price of cotton with derivative instruments. We hold derivative positions only in currencies to which we have exposure.

 

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Table Of Contents

 

The tables below give an overview of the fair values of derivative instruments reported as an asset or liability and the realized and unrealized gains and losses associated with our foreign exchange management activities reported in “Other (income) expense, net.” The derivatives expire at various dates through August 2003.

 

    

February 23,

2003


    

November 24,

2002


      

November 25, 2001


 

Risk Exposures


  

Fair value asset

(liability)


    

Fair value

asset (liability)


      

Fair value

asset (liability)


 
    

(Dollars in Thousands)

 

Foreign Exchange Management

                            

Sourcing

  

$

(2,384

)

  

$

(3,636

)

    

$

10,976

 

Net Investment

  

 

(1,092

)

  

 

303

 

    

 

6,068

 

Royalties

  

 

49

 

  

 

1,189

 

    

 

729

 

Cash Management

  

 

(51

)

  

 

(82

)

    

 

1,521

 

Euro Notes Offering

  

 

(783

)

  

 

(625

)

    

 

(1,169

)

    


  


    


Total

  

$

(4,261

)

  

$

(2,851

)

    

$

18,125

 

    


  


    


Interest Rate Management

  

$

—  

 

  

$

—  

 

    

$

(2,266

)

    


  


    


 

   

Three Months Ended

February 23, 2003


    

Three Months Ended

February 24, 2002


    

Year Ended November 24, 2002


    

Year Ended November 25, 2001


 
   

Other (income) expense, net


    

Other (income) expense, net


    

Other (income) expense, net


    

Other (income) expense, net


 
   

Realized


  

Unrealized


    

Realized


    

Unrealized


    

Realized


    

Unrealized


    

Realized


    

Unrealized


 
   

(Dollars in Thousands)

 

Foreign Exchange Management

                                                                    

Sourcing

 

$

18,596

  

$

(1,253

)

  

$

(5,480

)

  

$

6,285

 

  

$

60,716

 

  

$

13,851

 

  

$

10,696

 

  

$

4,176

 

Net Investment

 

 

2,089

  

 

230

 

  

 

654

 

  

 

(3,655

)

  

 

10,132

 

  

 

(116

)

  

 

2,146

 

  

 

(60

)

Royalties

 

 

1,677

  

 

1,140

 

  

 

3,442

 

  

 

(3,694

)

  

 

3,372

 

  

 

(1,037

)

  

 

(8,044

)

  

 

2,537

 

Cash Management

 

 

7,989

  

 

(31

)

  

 

2,669

 

  

 

76

 

  

 

(18,172

)

  

 

(683

)

  

 

(2,228

)

  

 

(790

)

Transition Adjustments

 

 

—  

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

828

 

  

 

—  

 

Euro Notes Offering

 

 

5,785

  

 

160

 

  

 

1,318

 

  

 

(837

)

  

 

(10,167

)

  

 

(545

)

  

 

5,738

 

  

 

1,169

 

   

  


  


  


  


  


  


  


Total

 

$

36,136

  

$

246

 

  

$

2,603

 

  

$

(1,825

)

  

$

45,881

 

  

$

11,470

 

  

$

9,136

 

  

$

7,032

 

   

  


  


  


  


  


  


  


Interest Rate Management

 

$

—  

  

$

—  

 

  

$

2,266

(1)

  

$

(2,266

)

  

$

2,266

(1)

  

$

(2,266

)

  

$

—  

 

  

$

1,476

 

Transition Adjustments

 

 

—  

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

1,246

 

   

  


  


  


  


  


  


  


Total

 

$

36,136  

  

$

246

 

  

$

2,603

 

  

$

(2,266

)

  

$

2,266

 

  

$

(2,266

)

  

$

—  

 

  

$

2,722

 

   

  


  


  


  


  


  


  



(1)   Recorded as an increase to interest expense.

 

Foreign Exchange Risk.    Foreign exchange market risk exposures are primarily related to cash management activities, raw material and finished goods purchases (sourcing), net investment positions and royalty flows from affiliates.

 

We use a variety of derivative instruments, including forward, swap and option contracts, to protect against foreign currency exposures related to sourcing, net investment positions, royalties and cash management.

 

We calculate our maximum allowable level of loss based on a percentage of the total forecasted currency exposures. The allowable percentage loss depends on various elements including our leverage ratio as defined in our foreign exchange policy. We implemented this policy in 2001. For 2002 and 2003, the policy permitted a 6% loss against a set of benchmark rates. The allowable loss for 2003, 2002 and 2001 was approximately $25 million, $45 million and $30.0 million, respectively.

 

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Table Of Contents

 

At February 23, 2003, we had U.S. dollar spot and forward currency contracts to buy $634.4 million and to sell $199.9 million against various foreign currencies. We had no option contracts outstanding at February 23, 2003. At November 24, 2002, we had U.S. dollar spot and forward currency contracts to buy $972.9 million and to sell $238.3 million against various foreign currencies. We also had euro forward currency contracts to buy 7.9 million euro against various foreign currencies and to sell 9.9 million euro against various foreign currencies. We had no U.S. dollar option contracts outstanding at November 24, 2002. We had euro option currency contracts to sell 30.0 million euro against various foreign currencies. These contracts are at various exchange rates and expire at various dates through August 2003.

 

We entered into option contracts to manage our exposure to numerous foreign currencies. At November 24, 2002, we bought Swedish Krona options resulting in a net long position against the euro of $29.0 million should the options be exercised.

 

The following table presents notional amounts, average exchange rates and fair values for forward and swap contracts by currency. All amounts are stated in U.S. dollar equivalents. The notional amount represents the total net position outstanding as of the stated date. A positive amount represents a long position in U.S. dollar versus the exposure currency, while a negative amount represents a short position in U.S. dollar versus the exposure currency. The net position is the sum of all buy transactions minus the sum of all sell transactions. The unrealized gain (loss) is the fair value of the outstanding position. The average forward rate is the forward rate weighted by the total of the transacted amounts. All transactions will mature before August 2003.

 

Outstanding Forward and Swap Transactions

(Dollars in Thousands Except Average Rates)

 

    

As of November 24, 2002


      

As of November 25, 2001


 

Currency


  

Average

Forward Rate


  

Notional

Amount


    

Fair

Value


      

Average

Forward

Rate


  

Notional

Amount


    

Fair

Value


 

Australian Dollar

  

0.56

  

$

22,863

 

  

$

(388

)

    

0.51

  

$

24,488

 

  

$

(629

)

Argentine Peso

  

—  

  

 

—  

 

  

 

—  

 

    

0.94

  

 

1,847

 

  

 

(116

)

Brazilian Real

  

3.43

  

 

518

 

  

 

22

 

    

—  

  

 

—  

 

  

 

—  

 

Canadian Dollar

  

1.57

  

 

9,482

 

  

 

98

 

    

1.57

  

 

12,713

 

  

 

334

 

Swiss Franc

  

1.49

  

 

(16,639

)

  

 

5

 

    

1.66

  

 

(11,996

)

  

 

(19

)

Danish Krona

  

7.49

  

 

15,115

 

  

 

(12

)

    

8.33

  

 

11,879

 

  

 

(133

)

Euro

  

0.99

  

 

415,527

 

  

 

(1,764

)

    

0.89

  

 

180,309

 

  

 

8,662

 

British Pound

  

1.57

  

 

150,500

 

  

 

—  

 

    

1.42

  

 

114,831

 

  

 

805

 

Hungarian Forint

  

237.55

  

 

(12,616

)

  

 

(160

)

    

227

  

 

5,867

 

  

 

46

 

Japanese Yen

  

122.69

  

 

37,797

 

  

 

1,136

 

    

120.48

  

 

43,283

 

  

 

4,029

 

Mexican Peso

  

10.14

  

 

11,243

 

  

 

33

 

    

9.36

  

 

7,095

 

  

 

(133

)

Norwegian Krona

  

7.33

  

 

7,025

 

  

 

17

 

    

9.02

  

 

5,730

 

  

 

(55

)

New Zealand Dollar

  

0.50

  

 

(5,921

)

  

 

3

 

    

0.41

  

 

(3,008

)

  

 

26

 

Swedish Krona

  

9.19

  

 

87,888

 

  

 

(1,834

)

    

10.63

  

 

54,209

 

  

 

829

 

Singapore Dollar

  

1.76

  

 

1,045

 

  

 

3

 

    

1.81

  

 

(8,269

)

  

 

(96

)

Taiwan Dollar

  

35.07

  

 

6,301

 

  

 

(62

)

    

34.86

  

 

3,979

 

  

 

(38

)

South African Rand

  

9.27

  

 

4,584

 

  

 

52

 

    

9.57

  

 

2,808

 

  

 

285

 

         


  


         


  


Total

       

$

734,712

 

  

$

(2,851

)

         

$

445,765

 

  

$

13,797

 

         


  


         


  


 

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Table Of Contents

 

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 expired before December 2002.

 

Outstanding Options Transactions

(Dollars in Thousands Except Average Rates)

 

    

As of November 24, 2002


  

As of November 25, 2001


 

Currency


  

Average

Strike Rate


  

Notional

Amount


    

Fair

Value


  

Average

Strike Rate


  

Notional

Amount