LEVI STRAUSS & CO - 10-K - 20030212 - NOTES_TO_FINANCIAL_STATEMENT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The consolidated financial statements of Levi Strauss &
Co. and its wholly-owned and majority-owned foreign and domestic subsidiaries (“LS&CO.” or “Company”) are prepared in conformity with generally accepted accounting principles in the United States (“U.S.”). All
significant intercompany balances and transactions have been eliminated. LS&CO. is privately held primarily by descendants and relatives of its founder, Levi Strauss.
The Company’s fiscal year consists of 52 or 53 weeks, ending on the last Sunday of November in each
year. The 2002, 2001 and 2000 fiscal years consisted of 52 weeks and ended November 24, 2002, November 25, 2001 and November 26, 2000, respectively. The fiscal year end for certain foreign subsidiaries is November 30 due to certain local statutory
requirements. All references to years relate to fiscal years rather than calendar years.
Certain prior year amounts have been reclassified to conform to the current presentation.
Nature of Operations
The Company is one of the world’s leading branded apparel companies with operations in more than 45 countries and sales in more than
100 countries. The Company designs and markets jeans and jeans-related pants, casual and dress pants, tops, jackets and related accessories, for men, women and children, under the Levi’s
®
and Dockers
®
brands. The
Company markets its Levi’s
®
and Dockers
®
brand products in three geographic regions: the Americas, Europe and Asia Pacific. As of November 24, 2002, the Company employed approximately 12,400 employees.
In October 2002, the Company announced that it
will be introducing a new casual clothing brand, the Levi Strauss Signature
™
brand. The Company created the brand for value-conscious consumers who shop in mass channel retail stores. The Levi Strauss Signature
™
brand
will initially feature a range of denim and non-denim pants and shirts as well as denim jackets. The Company anticipates that the products will be available initially at Wal-Mart locations across the United States beginning in July 2003.
The stockholders’ deficit resulted from a
1996 transaction in which the Company’s stockholders created new long-term governance arrangements, including a voting trust and stockholders’ agreement. As a result, shares of stock of a former parent company, Levi Strauss Associates
Inc., including shares held under several employee benefit and compensation plans, were converted into the right to receive cash. The funding for the cash payments in this transaction was provided in part by cash on hand and in part from proceeds of
approximately $3.3 billion of borrowings under bank credit facilities. The Company’s ability to satisfy its obligations and to reduce its total debt depends on the Company’s future operating performance and on economic, financial,
competitive and other factors, many of which are beyond the Company’s control.
The Company relies on a number of suppliers for its manufacturing processes. The Company’s largest supplier, Cone Mills Corporation, has been the sole supplier of the denim used worldwide for its
501
®
jeans. On May 13, 2002, the Company amended the exclusivity and requirements features of its supply agreement with Cone Mills. The amendment provides that, after March 30, 2003, the Company may purchase these denims from other
suppliers and Cone Mills may sell these denims to other customers. The amendment also allows the Company to purchase these denims for its European business from non-U.S. sources prior to March 30, 2003 if the European Union implements material
tariffs against U.S. produced denim. The amendment does not change any other provisions of the supply agreement.
In 2002, 2001 and 2000, Cone Mills Corporation supplied approximately 22%, 25% and 26%, respectively, of the total volume of fabrics
purchased worldwide by the Company. The loss of Cone Mills Corporation or other principal suppliers could have an adverse effect on the Company’s results of operations.
For 2002, 2001 and 2000, the Company had one customer, J.C. Penney Company, Inc., that represented
approximately 12%, 13% and 12%, respectively, of net sales. No other customer accounted for more than 10% of net sales. A group of key U.S. customers accounts for a significant portion of the Company’s total net sales. Net sales to the
Company’s ten largest customers, all of which are located in the U.S., totaled approximately 45%, 47% and 48% of total net sales during 2002, 2001 and 2000, respectively.
The preparation of
financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the related notes to the financial statements.
Changes in such estimates, based on more accurate future information, may affect amounts reported in future periods.
During 2002, the Company identified the critical accounting policies upon which its financial position and results of operations depend as
those relating to revenue recognition, inventory valuation, restructuring reserves, income tax assets and liabilities, and derivatives and foreign exchange management activities. The Company summarizes its critical accounting policies below.
•
Revenue recognition
. The Company recognizes revenue when the goods are shipped and title passes to the customer provided that:
there are no uncertainties regarding customer acceptance; persuasive evidence of an arrangement exists; the sales price is fixed or determinable; and collectibility is probable. Revenue is recognized net of an allowance for estimated returns,
discounts and retailer promotions and incentives when the sale is recorded.
The Company recognizes allowances for estimated returns, discounts and retailer promotions and incentives when the sale is recorded. Allowances principally relate
to the Company’s U.S. operations and are primarily comprised of volume-based incentives and other returns and discounts. For volume-based retailer incentive programs, reserves for volume allowances are calculated based on a fixed formula
applied to sales volumes. The Company estimates non-volume-based allowances using historical customer claim rates, adjusted as necessary for special customer and product-specific circumstances. Actual allowances may differ from estimates due
primarily to changes in sales volume based on retailer or consumer demand. Actual allowances have not materially differed from estimates.
The Company entered into cooperative advertising programs with certain customers. The majority of cooperative advertising programs were discontinued in the first
quarter of fiscal 2002. The Company recorded payments to customers under cooperative advertising programs as marketing, general and administrative expenses because an identifiable benefit was received in return for the consideration and the Company
could reasonably estimate the fair value of the advertising received. Cooperative advertising expense for 2002, 2001 and 2000 was $3.9 million, $21.5 million and $25.0 million, respectively.
•
Inventory valuation
. The Company values inventories at the lower of cost or market value. Inventory costs are based on standard
costs, which are updated periodically and supported by actual cost data. The Company includes materials, labor and manufacturing overhead in the cost of inventories. In determining inventory market values, substantial consideration is given to the
expected product selling price based on historical recovery rates. In determining its expected selling prices, the Company considers various factors including estimated quantities of slow-moving inventory by reviewing on-hand quantities, outstanding
purchase obligations and forecasted sales. The Company then estimates expected selling prices based on its historical recovery rates for sale of slow-moving inventory through various channels and other factors, such as market conditions and current
consumer preferences. Estimates may differ from actual results due to the quantity and quality and mix of products in inventory, consumer and retailer preferences and economic conditions.
•
Restructuring reserves
. Upon approval of a restructuring plan by management with the appropriate level of authority, the
Company records restructuring reserves for certain costs associated with plant closures and business reorganization activities. Such costs are recorded as a current liability and primarily include employee severance, certain employee termination
benefits, including out-placement services and career counseling, and contractual obligations. The principal components of the reserves relate to employee severance and termination benefits, which the Company estimates based on agreements with the
relevant union representatives or plans adopted by the Company that are applicable to employees not affiliated with unions. These costs are not associated with nor do they benefit continuing activities. Inherent in the estimation of these costs are
assessments related to the most likely expected outcome of the significant actions to accomplish the restructuring. Changing business conditions may affect the assumptions related to the timing and extent of facility closure activities. The Company
reviews the status of restructuring activities on a quarterly basis and, if appropriate, records changes based on updated estimates.
(See “New Accounting Standards” below on the issuance of SFAS 146,
“Accounting for Costs
Associated with Exit or Disposal Activities.”)
Income tax assets and liabilities
. In establishing its deferred income tax assets and liabilities, the Company makes judgments
and interpretations based on the enacted tax laws and published tax guidance that are applicable to its operations. The Company records deferred tax assets and liabilities and evaluates the need for valuation allowances to reduce the deferred tax
assets to realizable amounts. The likelihood of a material change in the Company’s expected realization of these assets is dependent on future taxable income, its ability to use foreign tax credit carryforwards and carrybacks, final U.S. and
foreign tax settlements, and the effectiveness of its tax planning strategies in the various relevant jurisdictions. The Company is also subject to examination of its income tax returns for multiple years by the Internal Revenue Service and other
tax authorities. The Company periodically assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of its provision for income taxes. Changes to the Company’s income tax provision or in the
valuation of the deferred tax assets and liabilities may affect its annual effective income tax rate.
•
Derivatives, foreign exchange, and interest rate management activities
. The Company recognizes all derivatives as assets
and liabilities at their fair values. The fair values are determined using widely accepted valuation models and reflect assumptions about currency fluctuations based on current market conditions. The fair values of derivative instruments used to
manage currency exposures are sensitive to changes in market conditions and to changes in the timing and amounts of forecasted exposures. The Company actively manages foreign currency exposures on an economic basis, using forecasts to develop
exposure positions to maximize the U.S. dollar value over the long-term. Not all exposure management activities and foreign currency derivative instruments will qualify for hedge accounting treatment. Changes in the fair values of those derivative
instruments that do not qualify for hedge accounting are recorded in “Other (income) expense” in the consolidated statement of operations. As a result, net income may be subject to volatility. The derivative instruments that do qualify for
hedge accounting currently hedge the Company’s net investment position in its subsidiaries. For these instruments, the Company documents the hedge designation, by identifying the hedging instrument, the nature of the risk being hedged and the
approach for measuring hedge effectiveness. Changes in fair values of derivative instruments that do qualify for hedge accounting are recorded in the “Accumulated other comprehensive income (loss)” section of Stockholders’ Deficit.
The Company is exposed to interest rate risk. It is the Company’s policy and practice to use derivative instruments, primarily interest rate swaps and options,
to manage and reduce interest rate exposures using a mix of fixed and variable rate debt. For transactions that do not qualify for hedge accounting or in which management has elected not to designate transactions for hedge accounting, changes in
fair value are classified into earnings.
Other Significant Accounting Policies
Cost of Goods Sold
Cost
of goods sold is primarily comprised of cost of materials, labor and manufacturing overhead. Cost of goods sold also includes the cost of inbound freight, internal transfers, and receiving and inspection at manufacturing facilities.
Marketing, General and Administrative Expenses
Marketing, general and administrative expenses are primarily
comprised of costs relating to advertising, marketing, selling, distribution, information resources and other corporate functions. Marketing, general and administrative expenses also include distribution costs, such as costs related to receiving and
inspection at distribution centers, warehousing, shipping, handling and certain other activities associated with the Company’s distribution network. These expenses totaled $183.7 million, $182.0 million and $183.1 million for 2002, 2001 and
2000, respectively. Shipping and handling charges billed to the Company’s customers are insignificant.
Advertising Costs
In accordance with Statement of Position (“SOP”) 93-7, “Reporting on Advertising Costs,” the Company expenses advertising costs as incurred. Advertising expense is recorded in marketing, general and
administrative expenses. For 2002, 2001 and 2000 total advertising expense was $307.1 million, $357.3 million and $402.7 million, respectively.
Other operating income represents royalties
earned for the use of the Company’s trademarks in connection with the manufacturing, advertising, distribution and sale of products by the licensees. The Company enters into licensing agreements with the majority of the agreements having a term
of at least one year. The amounts receivable under these licensing agreements are royalties based on sale of products by the licensees. Such amounts are earned and recognized as products are sold by licensees based on licensing rates as set forth in
the licensing agreements. The earnings process is complete when the licensees sell the products.
Royalty income for the years ended November 24, 2002, November 25, 2001 and November 26, 2000 was $34.5 million, $33.4 million and $32.4 million, respectively.
Other (Income) Expense, net
Significant components of other (income) expense, net are
summarized below:
Year Ended
November 24,
2002
Year Ended
November 25,
2001
Year Ended
November 26,
2000
Currency transaction (gains) losses
$
45,029
$
11,985
$
(960
)
Interest income
(7,911
)
(3,555
)
(12,311
)
Gains on disposal of assets
(1,600
)
(1,017
)
(24,683
)
Other
(10,107
)
1,423
(1,062
)
Total
$
25,411
$
8,836
$
(39,016
)
Currency
transaction (gains) losses include gains and losses of our foreign exchange management contracts of $57.4 million and $16.2 million in 2002 and 2001, respectively. The remaining amounts primarily reflect (gains) losses for remeasurement of foreign
currency transactions. The Company adopted SFAS 133 effective the first day of fiscal year 2001.
Minority Interest
Minority interest is included in “Other (income) expense, net,” and includes a 16.4% minority interest of Levi Strauss Japan K.K., the Company’s Japanese affiliate, and a 49.0% minority interest of Levi
Strauss Istanbul Konfeksigon, the Company’s Turkish affiliate.
Earnings Per Share
Basic
earnings per share (“EPS”) is computed by dividing net income by the weighted-average number of common shares outstanding for the period and excludes the dilutive effect of common shares that could potentially be issued. Diluted EPS is
computed by dividing net income by the weighted-average number of common shares outstanding plus all potential dilutive common shares. The Company does not have any potentially dilutive shares. Therefore, basic and diluted EPS are the same. The
weighted-average number of common shares outstanding is 37,278,238 for all periods presented.
The Company considers all highly liquid
investments with an original maturity of three months or less to be cash equivalents. Cash equivalents are stated at amortized cost, which approximates fair market value.
Property, Plant and Equipment
Property, plant and equipment are carried at cost, less accumulated depreciation. The cost is depreciated on
a straight-line basis over the estimated useful lives of the related assets. Buildings are depreciated over 20 to 40 years, and leasehold improvements are depreciated over the lesser of the life of the improvement or the initial lease term.
Machinery and equipment includes furniture and fixtures, automobiles and trucks, and computers, and are depreciated over a range from three to 20 years. Capitalized internal-use software is carried at cost less accumulated amortization and is
amortized over three years on a straight-line basis.
Goodwill
and Other Intangible Assets
Goodwill and
other intangibles are carried at cost, less accumulated amortization. Goodwill resulted primarily from a 1985 acquisition of LS&CO. by Levi Strauss Associates Inc., a former parent company that was subsequently merged into the Company in 1996.
Goodwill is being amortized on a straight-line basis over 40 years through the year 2025. Other intangibles consist primarily of trademarks, which were valued as a result of the 1985 acquisition. Trademarks and other intangibles are being amortized
over the estimated useful lives of the related assets, which range from six to 40 years.
(See “New Accounting Standards” below on the issuance of Statement of Financial Accounting Standards No.
(“SFAS”) 142,
“Goodwill and Other Intangible Assets.”)
Long-Lived Assets
In
accordance with SFAS 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” the Company reviews long-lived assets, including goodwill and other intangibles, for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the carrying amount of an asset exceeds the expected future undiscounted cash flows, the Company measures and records an impairment loss for the excess
of the carrying value of the asset over its fair value.
(See “New Accounting Standards” below on the issuance of SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” for implementation in 2003.)
Translation Adjustment
The functional currency for most of the Company’s
foreign operations is the applicable local currency. For those operations, assets and liabilities are translated into U.S. dollars using period-end exchange rates and income and expense accounts are translated at average monthly exchange rates. Net
changes resulting from such translations are recorded as a separate component of “Accumulated other comprehensive income (loss)” in the consolidated financial statements.
The U.S. dollar is the functional currency for foreign operations in countries with highly inflationary
economies and certain other subsidiaries. The translation adjustments for these entities are included in “Other (income) expense, net.”
Self-Insurance
The Company is partially self-insured for workers’ compensation and certain employee health benefits. Accruals for losses are made
based on the Company’s claims experience and actuarial assumptions followed in the insurance industry. Actual losses could differ from accrued amounts.
Workers’ Compensation
- The Company carries insurance deductibles of $200,000 per occurrence for workers’ compensation.
Insurance has been purchased for significant claims in excess of $200,000 per occurrence up to statutory limits. Aggregate insurance in the amount of $5.0 million was purchased for claims occurring during the period December 1, 2000 through November
30, 2001, in excess of $20.0 million in the aggregate. Aggregate insurance in the amount of $5.0 million is under negotiation for claims occuring during the period December 1, 2001 through November 30, 2002, in excess of $25.0 million in the
aggregate.
Health
Benefits
- The Company provides medical coverage to substantially all eligible active and retired employees and their dependents under a fully self-insured arrangement. There is stop-loss coverage for active salaried employees (as well as those
salaried retirees who retired after June 1, 2001) who have a $2.0 million lifetime limit on their medical coverage. This stop-loss coverage provides payment on the excess of any individual claim incident over $500,000 in any given year.
Securitizations
The Company accounts for securitization of receivables in
accordance with SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.”
New Accounting Standards
The Financial Accounting Standards Board (“FASB”) issued SFAS 142, “Goodwill and Other Intangible Assets,” dated June
2001. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized but instead be reviewed annually for impairment using a fair-value based approach. Intangible assets that have a finite life will
continue to be amortized over their respective estimated useful lives. The Company will adopt the provisions of SFAS 142 during the first quarter of 2003. Goodwill and trademarks have indefinite lives and will no longer be amortized starting
November 25, 2002 but instead will be reviewed periodically for impairment. Amortization expense for goodwill and trademarks for 2002 was $8.8 million and $1.9 million, respectively. The Company believes that the majority of the amortization in
prior periods relates to assets which would not be subject to amortization under SFAS 142.
The FASB issued SFAS 143, “Accounting for Asset Retirement Obligations,” dated June 2001. SFAS 143 changes the way companies recognize and measure retirement obligations that are legal
obligations and result from the acquisition, construction, development, or normal operation of a long-lived asset. The Company will adopt the provisions of SFAS 143 on the first day of fiscal year 2003. The Company does not believe that the adoption
of SFAS 143 will have a material impact on its financial condition or results of operations.
The FASB issued SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” dated August 2001. This statement supercedes SFAS 121, “Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and the accounting and reporting provisions of Accounting Principles Board (“APB”) Opinion No. 30, “Reporting Results of Operations-Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.” SFAS 144 requires that the same accounting model be used for long-lived assets to be disposed of by sale, whether previously held
and used or newly acquired, and it broadens the presentation of discontinued operations to include more disposal transactions. The Company will adopt the provisions of SFAS 144 on the first day of fiscal year 2003. The Company does not believe that
the adoption of SFAS 144 will have a material impact on its financial condition or results of operations.
The FASB issued SFAS 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections,” dated April 2002. SFAS 145 states that gains and losses from extinguishment of debt that do not meet the criteria for classification as extraordinary items in APB Opinion No. 30, “Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” should not be classified as extraordinary items. Accordingly, SFAS 145 rescinds SFAS 4
“Reporting Gains and Losses from Extinguishment of Debt,” and SFAS 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.” SFAS 145 is effective for the Company on the first day of fiscal year 2003. The Company
does not believe SFAS 145 will have a material impact on its financial condition or results of operations, except that certain reclassifications may occur on the statement of income.
The FASB issued SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities,” dated
June 2002. SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. In summary, SFAS 146 requires that the liability and cost shall be recognized and measured initially at its fair value in the
period in which the liability is incurred, except for one-time termination benefits that meet certain requirements. SFAS 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002. The Company does not
believe that the adoption of SFAS 146 will have a material impact on its financial condition or results of operations.
Note 2: Accumulated Other
Comprehensive Income (Loss)
Transition
Adjustments
Additional
Minimum Pension Liability
Cash Flow Hedges
Net Investment Hedges
Cash Flow Hedges
Net
Investment Hedges
Translation Adjustments
Totals
(Dollars in Thousands)
Accumulated other comprehensive income (loss) at November 28, 1999
$
(778
)
$
—
$
—
$
—
$
2,681
$
15,606
$
17,509
Gross changes
1,235
—
—
—
57,341
(70,302
)
(11,726
)
Tax
(457
)
—
—
—
(21,216
)
—
(21,673
)
Other comprehensive income (loss), net of tax
778
—
—
—
36,125
(70,302
)
(33,399
)
Accumulated other comprehensive income (loss) at November 26, 2000
—
—
—
—
38,806
(54,696
)
(15,890
)
Gross changes
—
(828
)
120
4,844
5,029
8,357
17,522
Tax
—
306
(44
)
(1,792
)
(2,408
)
—
(3,938
)
Subtotal
—
(522
)
76
3,052
2,621
8,357
13,584
Reclassification of cash flow hedges to other income/expense (net of tax of
$1,151)
—
522
—
(2,480
)
—
—
(1,958
)
Other comprehensive income, net of tax
—
—
76
572
2,621
8,357
11,626
Accumulated other comprehensive income (loss) at November 25, 2001
—
—
76
572
41,427
(46,339
)
(4,264
)
Gross changes
(135,813
)
—
(120
)
(239
)
(20,759
)
15,058
(141,873
)
Tax
49,860
—
44
88
7,682
—
57,674
Subtotal
(85,953
)
—
(76
)
(151
)
(13,077
)
15,058
(84,199
)
Reclassification of cash flow hedges to other income/expense (net of tax of
$248)
—
—
—
(421
)
—
—
(421
)
Other comprehensive income, net of tax
(85,953
)
—
(76
)
(572
)
(13,077
)
15,058
(84,620
)
Accumulated other comprehensive income (loss) at November 24, 2002
$
(85,953
)
$
—
$
—
$
—
$
28,350
$
(31,281
)
$
(88,884
)
N
OTE
3: R
ESTRUCTURING
R
ESERVES
The following is a description of the actions taken associated with the Company’s reorganization initiatives. Severance and employee benefits relate to severance packages, out-placement services and career counseling for
employees affected by the plant closures and reorganization initiatives. Reductions consist of payments for severance and employee benefits, other restructuring costs and foreign exchange differences. The balance of severance and employee benefits
and other restructuring costs are included under restructuring reserves on the balance sheet.
2002 Reorganization Initiative
In November 2002, the Company announced a reorganization initiative in Europe intended to realign the Company’s resources with our European sales strategy to better service customers and reduce
operating costs. This initiative affects the Company’s operations in several countries and involves moving from a country or regional-based sales organization to a key account structure. The Company recorded an initial charge of $1.6 million
reflecting an estimated displacement of 40 employees. As of November 24, 2002, approximately 10 employees have been displaced. The table below displays the activity and liability balance of this reserve.
The Company announced in March 2002 the closure of two manufacturing plants in Scotland in order to reduce average production costs in Europe. The Company recorded an initial charge in the second quarter of 2002 of $20.5 million
consisting of $3.1 million for asset write-offs, $15.7 million for severance and employee benefits and $1.7 million for other restructuring costs. The charge reflected an estimated displacement of 650 employees, all of whom have been displaced. The
two manufacturing plants were closed by the end of the second quarter of 2002. During the third quarter of 2002 the remaining reserve balance of $2.1 million was reversed due to the earlier than anticipated sale of the manufacturing plants. The
table below displays the activity of this reserve.
The Company announced in April 2002 the closure of six U.S. manufacturing plants. The decision reflected the Company’s continuing shift from a manufacturing to a marketing and product-driven organization. The Company recorded an
initial charge in the second quarter of 2002 of $129.7 million consisting of $22.7 million for asset write-offs, $89.6 million for severance and employee benefits and $17.4 million for other restructuring costs. The charge reflects an estimated
displacement of 3,300 employees at the affected plants and approximately 250 employees at the remaining U.S. finishing facility. The Company closed the six manufacturing plants in three phases: two plants were closed in June 2002, two plants were
closed in July 2002 and the final two plants were closed in September 2002. As of November 24, 2002, approximately 3,295 employees had been displaced at the manufacturing plants and approximately 245 employees had been displaced at the finishing
facility. The table below displays the activity and liability balance of this reserve.
2002 Scotland Plant Closures
Balance
At
11/25/01
Charges
Reductions
Reversals
Balance
At
11/24/02
(Dollars in Thousands)
Severance and employee benefits
$
—
$
15,691
$
(14,703
)
$
(988
)
$
—
Other restructuring costs
—
1,732
(621
)
(1,111
)
—
Total
$
—
$
17,423
$
(15,324
)
$
(2,099
)
$
—
2002 U.S. Plant
Closures
Balance
At
11/25/01
Charges
Reductions
Balance
At
11/24/02
(Dollars in Thousands)
Severance and employee benefits
$
—
$
89,625
$
(40,734
)
$
48,891
Other restructuring costs
—
17,397
(4,199
)
13,198
Total
$
—
$
107,022
$
(44,933
)
$
62,089
2001 Reorganization
Initiatives
In November 2001, the Company
instituted various reorganization initiatives in the U.S. that included simplifying product lines and realigning the Company’s resources to those product lines. The Company recorded an initial charge of $20.3 million in November 2001 reflecting
an estimated displacement of 500 employees. During 2002, the Company reversed charges of $6.7 million from the initial charge of $20.3 million. The reversals were due to changes in the estimated number of employees to be affected from approximately
500 to approximately 335 primarily due to attrition. As of November 24, 2002, approximately 315 employees have been displaced. The table below displays the activity and liability balance of this reserve.
In November
2001, the Company instituted various reorganization initiatives in Japan. These initiatives were prompted by business declines as a result of the prolonged economic slowdown, political uncertainty, major retail bankruptcies and dramatic shrinkage of
the core denim jeans market in Japan. The Company 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, the Company reversed charges
of $0.3 million from the initial charge of $2.0 million. The reversals were primarily due to lower than anticipated contractor costs. The table below displays the activity and liability balances of this reserve.
Corporate Restructuring Initiatives
Balance
At
11/26/00
Charges
Reductions
Balance
At
11/25/01
Reductions
Reversals
Balance
At
11/24/02
(Dollars in Thousands)
Severance and employee benefits
$
—
$
20,331
$
(342
)
$
19,989
$
(11,179
)
$
(6,689
)
$
2,121
Total
$
—
$
20,331
$
(342
)
$
19,989
$
(11,179
)
$
(6,689
)
$
2,121
Japan
Reorganization Initiatives
Balance
At
11/26/00
Charges
Reductions
Balance
At
11/25/01
Reductions
Reversals
Balance
At
11/24/02
(Dollars in Thousands)
Severance and employee benefits
$
—
$
1,657
$
—
$
1,657
$
(1,645
)
$
(12
)
$
—
Other restructuring costs
—
374
(25
)
349
(64
)
(285
)
—
Total
$
—
$
2,031
$
(25
)
$
2,006
$
(1,709
)
$
(297
)
$
—
1997—1999
P
LANT
C
LOSURES
AND
R
ESTRUCTURING
I
NITIATIVES
From 1997 to 1999 the Company closed 29 of its owned and operated production and finishing facilities in North America and Europe and
instituted restructuring initiatives to reduce costs, eliminate excess capacity and align its sourcing strategy with changes in the industry and in consumer demand. For 2002, the Company reversed 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 addition during 2002, the Company transferred $3.2 million of restructuring reserve balances to long-term
liabilities. These transfers primarily represent the costs related to a building lease that will continue until 2007 and soil remediation that is believed to continue for many years. The transfers are included in the “Reductions” column in
the table below.
S
UMMARY
The total balance of the reserves at November 24, 2002 was
$65.6 million compared to $45.2 million at November 25, 2001. The majority of the balances are expected to be utilized by the end of 2003. The following table summarizes the activities and liability balances associated with the 1997 – 2002
plant closures and restructuring initiatives:
Corporate
Restructuring Initiatives
Balance as of
November 25,
2001
Charges
Reversals
Reductions
Balance as of
November 24,
2002
(Dollars in Thousands)
2002 Europe Restructuring Initiative
$
—
$
1,568
$
—
$
202
$
1,366
2002 Scotland Plant Closures
—
17,423
2,099
15,324
—
2002 U.S. Plant Closures
—
107,022
—
44,933
62,089
2001 Corporate Restructuring Initiatives
19,989
—
6,689
11,179
2,121
2001 Japan Restructuring Initiative
2,006
—
297
1,709
—
1997–1999 Plant Closures and Restructuring Initiatives
The U.S. and non-U.S. components of income
before taxes are as follows:
2002
2001
2000
(Dollars in Thousands)
U.S.
$
(75,322
)
$
120,329
$
185,161
Non-U.S.
125,280
119,360
158,519
Total
$
49,958
$
239,689
$
343,680
The
provision for taxes consists of the following:
2002
2001
2000
(Dollars in Thousands)
Federal-U.S.
Current
$
8,673
$
27,010
$
(9,417
)
Deferred
(46,020
)
(2,966
)
23,851
$
(37,347
)
$
24,044
$
14,434
State-U.S.
Current
$
5,139
$
(4,322
)
$
3,758
Deferred
(3,640
)
11,513
6,552
$
1,499
$
7,191
$
10,310
Non-U.S.
Current
$
67,231
$
49,707
$
62,249
Deferred
(6,404
)
7,743
33,295
$
60,827
$
57,450
$
95,544
Total
Current
$
81,043
$
72,395
$
56,590
Deferred
(56,064
)
16,290
63,698
$
24,979
$
88,685
$
120,288
At
November 24, 2002, cumulative non-U.S. operating losses of $206.5 million generated by the Company were available to reduce future non-U.S. taxable income. Approximately $85.5 million of the non-U.S. operating losses expire between the years 2003
and 2012 and the remainder of the non-U.S. losses carry forward indefinitely.
Income taxes related to net investment and cash flow hedges were $(8.1) million, $2.8 million and $21.2 million for 2002, 2001 and 2000, respectively, and are recorded in “Accumulated other
comprehensive income (loss)” in the balance sheet. Income taxes related to additional minimum pension liability were $(49.9) million and $0.5 million for 2002 and 2000, respectively, and are recorded in “Accumulated other
comprehensive income (loss)” in the balance sheet.
Temporary
differences which give rise to deferred tax assets and liabilities at November 24, 2002 and November 25, 2001 were as follows:
2002
Deferred
Tax Assets
(Liabilities)
2001
Deferred
Tax Assets
(Liabilities)
(Dollars in Thousands)
Postretirement benefits
$
217,949
$
215,535
Employee compensation and benefit plans
166,102
163,159
Inventory
25,334
32,955
Depreciation and amortization
(14,887
)
(14,461
)
Foreign exchange gains/losses
(3,200
)
(40,594
)
Restructuring and special charges
55,243
44,752
Tax on unremitted non-U.S. earnings
128,848
146,533
Additional minimum pension liability
49,802
—
Prepaid royalty income
52,459
78,111
Foreign tax credit carryforward
70,539
52,473
Alternative minimum tax credit carryforward
22,774
9,501
Other
57,145
34,811
Less valuation allowance
(32,690
)
(33,221
)
$
795,418
$
689,554
The
$32.7 million and $33.2 million deferred tax valuation allowances at November 24, 2002 and November 25, 2001, respectively, represent the portion of the Company’s consolidated deferred tax assets for which the Company, based upon its
projections as of those dates, does not believe that the realization is more likely than not.
At November 24, 2002, the Company had a foreign tax credit carryforward of $70.5 million to reduce future U.S. income taxes. An amount of $23.4 million can be carried forward through 2005 and the
remaining amount of $47.1 million can be carried forward through 2007.
The Company’s effective income tax rate for 2002, 2001 and 2000 differs from the statutory federal income tax rate as follows:
2002
2001
2000
Statutory rate
35.0
%
35.0
%
35.0
%
Changes resulting from:
State income taxes, net of federal income tax benefit
2.0
2.0
2.0
Change in valuation allowance
(1.1
)
0.2
0.7
Goodwill and trademarks amortization book and tax bases differences
7.4
1.5
1.1
Adjustments to tax accruals
4.4
(2.1
)
(3.6
)
Other, net
2.3
(0.4
)
(0.2
)
Effective rate
50.0
%
37.0
%
35.0
%
The
consolidated U.S. income tax returns of the Company for 1996 through 1999 are under examination by the Internal Revenue Service (“IRS”). The Company expects this examination to be completed by early 2004. A settlement agreement covering
most issues was reached with the IRS for the years 1990 through 1995 during 2002. The Company expects to make a payment to the IRS of approximately $115 million during the second quarter of 2003. After including potential refunds from prior
years’ overpayments and taking into account the tax effects of the interest deduction from this payment, the Company expects the net cash payment to be approximately $90 million. The Company believes it has made adequate provision for income
taxes and interest for all periods under review.
The components of property, plant
and equipment (“PP&E”) are as follows:
2002
2001
(Dollars in Thousands)
Land
$
32,540
$
33,429
Buildings and leasehold improvements
354,752
406,660
Machinery and equipment
539,422
592,969
Capitalized internal-use software
2,373
—
Construction in progress
31,806
9,300
Total PP&E
960,893
1,042,358
Accumulated depreciation
(478,447
)
(527,647
)
PP&E, net
$
482,446
$
514,711
As of
November 24, 2002, the Company had approximately $2.7 million of PP&E, net, available for sale, consisting primarily of closed facilities.
Depreciation expense for 2002, 2001 and 2000 was $60.1 million, $69.9 million and $80.2 million, respectively. Accumulated depreciation in
2002 was decreased by approximately $109.3 million due to PP&E sales or disposals.
Construction in progress at November 24, 2002 related to various projects. The Company estimates that approximately $70 million in costs will be incurred to complete these projects in 2003. These
projects primarily consist of systems upgrades. Construction in progress at November 25, 2001 primarily consisted of sales office capital improvements.
Note 6: Goodwill and Other Intangible Assets
The components of goodwill and other intangible assets are as follows:
2002
2001
(Dollars in Thousands)
Goodwill
$
351,474
$
351,474
Trademarks and other intangibles
79,416
78,362
Total intangible assets
430,890
429,836
Accumulated amortization related to goodwill
(151,569
)
(142,782
)
Other accumulated amortization
(35,911
)
(32,821
)
Intangible assets, net
$
243,410
$
254,233
Amortization expense for 2002, 2001 and 2000 was $10.9 million, $10.7 million and $10.8 million, respectively.
(See Note 1 to the Consolidated Financial Statements under “New Accounting Standards.”)
Notes payable, at various rates, due in installments through 2006
884
1,088
Subtotal
358,929
1,940,126
Current maturities
(73,959
)
(144,637
)
Total long-term debt
$
1,751,752
$
1,795,489
Short-Term Debt:
Short-term borrowings
$
21,266
$
18,307
Current maturities of long-term debt
73,959
144,637
Total short-term debt
$
95,225
$
162,944
Unused Lines of Credit:
Short-term
$
384,285
$
531,333
1996 Notes Offering
In 1996, the Company issued two series of
notes payable totaling $800.0 million to qualified institutional investors (the “Notes Offering”) in reliance on Rule 144A under the Securities Act of 1933 (the “Securities Act”). The notes are unsecured obligations of the
Company and are not subject to redemption before maturity. The issuance was divided into two series: $350.0 million seven-year notes maturing in November 2003 and $450.0 million ten-year notes maturing in November 2006. The seven- and ten-year notes
bear interest at 6.80% and 7.00% per annum, respectively, payable semi-annually in May and November of each year. Discounts of $8.2 million on the original issue are being amortized over the term of the notes using an approximate effective-interest
rate method. Net proceeds from the Notes Offering were used to repay a portion of the indebtedness outstanding under a 1996 credit facility agreement.
The indenture governing these notes contains customary events of default and restricts the Company’s ability and the ability of its
subsidiaries and future subsidiaries to incur liens; engage in sale and leaseback transactions and engage in mergers and sales of assets.
Notes Exchange Offer
In May 2000, the Company filed a registration statement on Form S-4 under the Securities Act with the SEC relating to an exchange offer of
its 6.80% notes due 2003 and 7.00% notes due 2006 (see “1996 Notes Offering” above). The exchange offer gave holders of these notes the opportunity to exchange these old notes, which were issued on November 6, 1996 under Rule 144A of the
Securities Act, for new notes that are registered under the Securities Act of 1933. The new notes are identical in all material respects to the old notes except that the new notes are registered.
The exchange
offer ended on June 20, 2000. As a result of the exchange offer, all but $20 thousand of the $350.0 million aggregate principal amount of 6.80% old notes due 2003 were exchanged for the 6.80% exchange notes due 2003; and all $450.0 million aggregate
principal amount of the 7.00% old notes due 2006 were exchanged for the 7.00% exchange notes due 2006.
The Company was not obligated by any agreement including its then effective credit facility agreements to engage in the exchange offer.
The Company initiated the exchange offer to give holders of these notes the opportunity to exchange the old notes for registered notes.
(See Note 20 to the Consolidated Financial Statements.)
Senior Notes Offering
On January 18, 2001, the Company issued two series of notes
payable totaling the then-equivalent of $497.5 million to qualified institutional investors in reliance on Rule 144A under the Securities Act and outside the U.S. in accordance with Regulation S under the Securities Act. The notes are unsecured
obligations of the Company and may be redeemed at any time after January 15, 2005. The issuance was divided into two series: U.S. $380.0 million dollar notes (“Dollar Notes”) and 125.0 million euro notes (“Euro Notes”),
(collectively, the “Notes”). Both series of notes are seven-year notes maturing on January 15, 2008 and bear interest at 11.625% per annum, payable semi-annually in January and July of each year. These Notes are callable beginning January
15, 2005. These Notes were offered at a discount of $5.2 million to be amortized over the term of the Notes. Costs representing underwriting fees and other expenses of $14.4 million on the original issue are amortized, using an approximate
effective-interest rate method, over the term of the Notes. Net proceeds from the offering were used to repay a portion of the indebtedness outstanding under the Company’s then effective credit facility.
The indentures governing the Notes contain covenants that
limit the Company’s and its subsidiaries’ ability to incur additional debt; pay dividends or make other restricted payments; consummate specified asset sales; enter into transactions with affiliates; incur liens; impose restrictions on the
ability of a subsidiary to pay dividends or make payments to the Company and its subsidiaries; merge or consolidate with any other person; and sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the
Company’s assets or the assets of the Company’s subsidiaries. If the Company experiences a change in control as defined in the indentures governing the Notes, the Company will be required under the indentures to make an offer to repurchase
the Notes at a price equal to 101% of the principal amount plus accrued and unpaid interest, if any, to the date of repurchase. If the Notes receive and maintain an investment grade rating by both Standard and Poor’s Ratings Service and
Moody’s Investors Service and the Company and its subsidiaries are and remain in compliance with the indentures, then the Company and its subsidiaries will not be required to comply with specified covenants contained in the indentures.
Senior Notes Exchange Offer
In March 2001, the Company, as required under registration
rights agreements it entered into when it issued the Notes, filed a registration statement on Form S-4 under the Securities Act with the SEC relating to an exchange offer for the Notes. The exchange offer gave holders the opportunity to exchange the
Notes for new notes that are registered under the Securities Act. The new notes are identical in all material respects to the old notes except that the new notes are registered under the Securities Act. The exchange offer ended on April 6, 2001. As
a result of the exchange offer, all but $200 thousand of the $380.0 million aggregate principal amount of old Dollar Notes were exchanged for new Dollar Notes, and all but 595 thousand euro of the 125.0 million aggregate principal amount of old Euro
Notes were exchanged for new Euro Notes.
In 1996, the Company issued a
¥ 20 billion principal amount eurobond (equivalent to approximately $180.0 million at the time of issuance) due in November 2016, with interest payable at 4.25% per annum. The bond is redeemable at the option of the Company at a make-whole
redemption price commencing in 2006. Net proceeds from the placement were used to repay a portion of the indebtedness outstanding under a 1996 credit facility agreement.
The agreement governing these bonds contains customary events of default and restricts the Company’s
ability and the ability of its subsidiaries and future subsidiaries to incur liens; engage in sale and leaseback transactions and engage in mergers and sales of assets.
Credit Facilities
On February 1, 2001, the Company entered into a $1.05 billion senior secured credit facility to replace a credit facility dated January
31, 2000 on more favorable terms. The credit facility consisted of a $700.0 million revolving credit facility and $350.0 million of term loans. As of November 24, 2002, the credit facility consists of $5.0 million revolving credit and $110.1 million
of term loans. This facility reduced the Company’s borrowing costs and extended the maturity of the Company’s principal bank credit facility to August 2003.
Collateral includes: domestic inventories, certain domestic equipment, trademarks, other intellectual
property, 100% of the stock in domestic subsidiaries, 65% of the stock of certain foreign subsidiaries and other assets. Borrowings under the facility bear interest at LIBOR or the agent bank’s base rate plus an incremental borrowing spread.
Before the domestic receivables securitization transaction described below, the collateral also included domestic receivables. In connection with the securitization transaction, the lenders under the credit facility released their security interest
in receivables sold in that transaction, and retained security interests in certain related assets. Proceeds from the domestic receivables securitization transaction were used to repay debt under this facility.
The facility contains customary covenants restricting the
Company’s activities as well as those of its subsidiaries, including limitations on the Company’s and its subsidiaries’ ability to sell assets; engage in mergers; enter into operating leases or capital leases; enter into transactions
involving related parties, derivatives or letters of credit; enter into intercompany transactions; incur indebtedness or grant liens or negative pledges on the Company’s assets; make loans or other investments; pay dividends or repurchase stock
or other securities; guaranty third party obligations; make capital expenditures; and make changes in the Company’s corporate structure. The facility also contains financial covenants that the Company must satisfy on an ongoing basis, including
maximum leverage ratios and minimum coverage ratios. As of November 24, 2002, the Company was in compliance with the financial covenants under the facility.
(See Note 20 to the Consolidated Financial Statements.)
Domestic Receivables Securitization Transaction
On July 31, 2001, the Company and several of its subsidiaries
completed a receivables securitization transaction involving receivables generated from sales of products to the Company’s U.S. customers. The transaction involved the issuance by Levi Strauss Receivables Funding, LLC, an indirect subsidiary of
the Company, of $110.0 million in secured term notes. The notes, which are secured by trade receivables originated by Levi Strauss & Co., bear interest at a rate equal to the one-month LIBOR rate plus 0.32% per annum, and have a stated maturity
date of November 2005. Net proceeds of the offering were used to repay a portion of the outstanding debt under the Company’s 2001 bank credit facility. The transaction did not meet the criteria for sales accounting under SFAS 140 and therefore
is accounted for on the balance sheet as a secured borrowing. The purpose of the transaction was to lower the Company’s interest expense and diversify its funding sources. The notes were issued in a private placement transaction in accordance
with Rule 144A under the Securities Act.
Under
the securitization arrangement, collections on receivables remaining after payment of interest and fees relating to the notes are used to purchase new receivables from Levi Strauss & Co. The securitization agreements provide that, in specified
cases, the collections will not be released but will instead be deposited and used to pay the principal amount of the notes. Those circumstances include, among other things, failure to maintain the required level of overcollaterization due to
deterioration in the credit quality, or overconcentration or dilution in respect of, the receivables, failure to pay interest or other amounts which is not cured, breaches of covenants, representations and warranties or events of bankruptcy relating
to the Company and certain of its subsidiaries.
Additionally,
under this arrangement, the Company is required to maintain the level of net eligible U.S. trade receivables at a certain targeted amount. If the targeted amount of net eligible U.S. trade receivables is not met, the trustee under the arrangement
retains cash collections in an amount covering the deficiency. Under the agreements, the retention of cash by the trustee has the effect of reducing the deficiency. Amounts retained in this manner are not available to the Company until released by
the trustee. The trustee receives daily reports comparing the net eligible receivables with the targeted amount and, if appropriate, releases retained cash accordingly. The amount of cash held by the trustee to cover any deficiency would be shown as
“Restricted cash” on the balance sheet.
On April 25, 2002 the Company obtained an amendment to the domestic receivables securitization agreements. Before the amendment, the manner in which sales incentives were treated in the calculation of net eligible U.S. trade
receivables decreased net eligible receivables as well as substantially increased the targeted amount. The amendment revises the way sales incentives are treated in calculating the amount of net eligible receivables. This permits the Company greater
flexibility in offering sales incentives without affecting the securitization calculations and reduces the likelihood and amount of cash being retained. As of November 24, 2002, there was no deficiency and as a result, no restricted cash on the
balance sheet.
Customer Service Center Equipment Financing
In December 1999 the Company entered into a
secured financing transaction consisting of a five-year credit facility secured by owned equipment at customer service centers (distribution centers) located in Nevada, Mississippi and Kentucky. The amount financed in December 1999 was $89.5
million, comprised of a $59.5 million tranche (“Tranche 1”) and a $30.0 million tranche (“Tranche 2”). Borrowings under Tranche 1 have a fixed interest rate equal to the yield of a four-year Treasury note plus an incremental
borrowing spread. Borrowings under Tranche 2 have a floating quarterly interest rate equal to the 90 day LIBOR plus an incremental borrowing spread based on the Company’s leverage ratio at that time. Proceeds from the borrowings were used to
reduce the commitment amounts of the then-existing credit facilities.
European Receivables Securitization Agreements
In February 2000, several of the Company’s European subsidiaries entered into receivable securitization financing agreements with several lenders to borrow up to $125.0 million. During November 2000, 36.5 million euro
(or approximately $30.7 million at time of borrowing) were borrowed under these agreements at initial interest rates of 6.72%. Interest rates under this agreement are variable based on commercial paper market conditions, and the debt ratings of the
underlying conduit. In December 2000, 10.4 million euro (equivalent to approximately $9.3 million at time of borrowing) at an initial interest rate of 6.70% was borrowed under these agreements. In April 2002, 2.5 million British Pounds (equivalent
to approximately $3.6 million at time of borrowing) at an initial interest rate of 1.70% was borrowed under these agreements. Borrowings are collateralized by a security interest in the receivables of these subsidiaries. Proceeds from the borrowings
were used to reduce commitment levels under the Company’s then-effective bank credit facilities. The facilities, which have an annual renewable option upon agreement of all parties, mature on February 28, 2003. The Company will not renew those
facilities. The Company adopted SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” in 2001. The securitizations did not meet the criteria for sales accounting under SFAS 140 and
therefore have been accounted for as a secured borrowing.
Industrial Development Revenue Refunding Bond
In 1995, the City of Canton, Mississippi issued an industrial development revenue refunding bond with a principal amount of $10.0 million, and the proceeds were loaned to the Company to help finance the cost of acquiring a
customer service center in Canton. Interest payments are due monthly at a variable rate based upon the J.J. Kenny Index, reset weekly at a maximum rate of 13.00%, and the principal amount is due June 1, 2003. The bond is secured by a letter of
credit that expires in June 2003. The Company does not anticipate renewing this financing.
As of November 24,
2002, the required aggregate short-term and long-term debt principal payments for the next five years and thereafter are as follows:
Principal
Payments
(Dollars in Thousands)
Year
2003
$
95,225
2004
118,521
2005
56,203
2006
448,173
2007
—
Thereafter
1,128,855
Total
$
1,846,977
Short-Term Credit
Lines and Stand-By Letters of Credit
At
November 24, 2002, the Company had unsecured and uncommitted short-term credit lines available totaling $13.4 million at various rates. These credit arrangements may be canceled by the bank lenders upon notice and generally have no compensating
balance requirements or commitment fees.
At
November 24, 2002 and November 25, 2001, the Company had $213.3 million and $131.7 million, respectively, of standby letters of credit with various international banks, of which $48.5 million and $52.5 million, respectively, serve as guarantees
by the creditor banks to cover U.S. workers’ compensation claims. In addition, $151.5 million of these standby letters of credit under the 2001 bank credit facility support short-term credit lines at November 24, 2002. The Company pays fees on
the standby letters of credit. Borrowings against the letters of credit are subject to interest at various rates.
Interest Rate Contracts
The Company is exposed to interest rate risk. It is the Company’s policy and practice to use derivative instruments, primarily
interest rate swaps and options, to manage and reduce interest rate exposures. The Company currently has no derivative instruments managing interest rate risk outstanding as of November 24, 2002.
Interest Rates on Borrowings
The Company’s weighted average interest rate on average
borrowings outstanding during 2002 and 2001, including the amortization of capitalized bank fees, interest rate swap cancellations and underwriting fees, was 9.14% and 9.47%, respectively. The weighted average interest rate on average borrowings
outstanding excludes interest payable to participants under deferred compensation plans and other miscellaneous items. The 2001 interest rate additionally excludes the write-off of fees that resulted from the replacement of a credit agreement dated
January 31, 2000.
Dividends and Restrictions
Under the terms of the Company’s 2001
bank credit facility, the Company was prohibited from paying dividends to its stockholders. In addition, the terms of certain of the indentures relating to the Company’s unsecured senior notes limit the Company’s ability to pay dividends.
There were no restrictions under the Company’s 2001 bank credit facility or its indentures on the transfer of the assets of the Company’s subsidiaries to the Company in the form of loans, advances or cash dividends without the consent of a
third party.
At November 24, 2002,
the Company had U.S. dollar spot and forward currency contracts to buy $972.9 million and to sell $238.3 million against various foreign currencies. The Company 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. In addition, the Company had no U.S. dollar option contracts outstanding at November 24, 2002. The Company 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.
The Company has entered into option contracts to manage its exposure to numerous foreign currencies. At November 24, 2002, the Company had
bought Swedish Krona options resulting in a net long position against the euro of $29.0 million should the options be exercised.
The Company’s market risk is generally related to fluctuations in the currency exchange rates. The Company is exposed to credit loss
in the event of nonperformance by the counterparties to the foreign exchange contracts. However, the Company believes these counterparties are creditworthy financial institutions and does not anticipate nonperformance.
Other Contingencies
In the ordinary course of its business, the Company has
pending various cases involving contractual matters, employee-related matters, distribution questions, product liability claims, trademark infringement and other matters. The Company does not believe there are any pending legal proceedings that will
have a material impact on the Company’s financial position or results of operations.
The operations and properties of the Company comply with all applicable federal, state and local laws enacted for the protection of the environment, and with permits and approvals issued in connection
therewith, except where the failure to comply would not reasonably be expected to have a material adverse effect on the Company’s financial position or business operations. Based on currently available information, the Company does not consider
there to be any circumstances existing that would be reasonably likely to form the basis of an action against the Company that could have a material adverse effect on the Company’s financial position or business operations.
Note 9: Fair Value of Financial Instruments
The estimated fair value of certain financial instruments has
been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current market exchange.
The carrying amount and estimated fair value (in each case including accrued interest) of the Company’s financial instrument assets and (liabilities) at November 24, 2002 and November 25, 2001 are
as follows:
Quoted
market prices or dealer quotes are used to determine the estimated fair value of foreign exchange contracts, option contracts and interest rate swap contracts. Dealer quotes and other valuation methods, such as the discounted value of future cash
flows, replacement cost and termination cost have been used to determine the estimated fair value for long-term debt and the remaining financial instruments. The carrying values of cash and cash equivalents, trade receivables, current assets,
certain current and non-current maturities of long-term debt, short-term borrowings and taxes approximate fair value.
The fair value estimates presented herein are based on information available to the Company as of November 24, 2002 and November 25, 2001.
These amounts have not been updated since those dates and, therefore, the current estimates of fair value at dates subsequent to November 24, 2002 and November 25, 2001 may differ substantially from these amounts. In addition, the aggregation of the
fair value calculations presented herein do not represent and should not be construed to represent the underlying value of the Company.
Note 10: Derivative Instruments and Hedging Activities
The Company adopted SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” on
the first day of fiscal year 2001. SFAS 133 requires all derivatives to be recognized as assets or liabilities at fair value. Due to the adoption of SFAS 133, the Company reported a net transition gain of $87 thousand in “Other (income)
expense, net” for the three months ended February 25, 2001. The transition amount was not recorded on a separate line item as a change in accounting principle, net of tax, due to the minimal impact on the Company’s results of operations.
In addition, the Company recorded a transition amount of $0.7 million (or $0.4 million net of related income taxes) that reduced “Accumulated other comprehensive income (loss).”
The Company manages foreign
currency exposures primarily to maximize the U.S. dollar value over the long term. The Company attempts to take a long-term view of managing exposures on an economic basis, using forecasts to develop exposure positions and engaging in active
management of those exposures with the objective of protecting future cash flows and mitigating risks. As a result, not all exposure management activities and foreign currency derivative instruments will qualify for hedge accounting treatment. For
derivative instruments utilized in these transactions, changes in fair value are classified into earnings. The Company holds derivative positions only in currencies to which it has exposure. The Company has established a policy for a maximum
allowable level of losses that may occur as a result of its currency exposure management activities. The maximum level of loss is based on a percentage of the total forecasted currency exposure being managed.
The Company uses a variety of derivative instruments,
including forward, swap and option contracts, to protect against foreign currency exposures related to sourcing, net investment positions, royalties and cash management.
The derivative instruments used to manage sourcing exposures do not qualify for hedge accounting treatment
and are recorded at their fair value. Any changes in fair value are included in “Other (income) expense, net.”
The Company manages its net investment position in its subsidiaries in major currencies by using forward, swap and option contracts. Some
of the contracts hedging these net investments qualify for hedge accounting and the related gains and losses are consequently categorized in the cumulative translation adjustment in the “Accumulated other comprehensive income (loss)”
section of Stockholders’ Deficit. At November 24, 2002, the fair value of qualifying net investment hedges was a $0.1 million net liability with the corresponding unrealized loss recorded in the cumulative translation adjustment section of
“Accumulated other comprehensive income (loss).” At November 24, 2002, $1.5 million realized loss has been excluded from hedge effectiveness testing. In addition, the Company holds derivatives managing the net investment positions in major
currencies that do not qualify for hedge accounting. The fair value of these derivatives at November 24, 2002 represented a $0.4 million net asset, and changes in their fair value are included in “Other (income) expense, net.”
The Company designates a portion of its
outstanding yen-denominated eurobond as a net investment hedge. As of November 24, 2002, a $5.3 million net asset related to the translation effects of the yen-denominated eurobond was recorded in the cumulative translation adjustment section of
“Accumulated other comprehensive income (loss).”
As of November 24, 2002, the Company holds no derivatives hedging forecasted intercompany royalty flows that qualify as cash flow hedges. The amount of matured cash flow hedges reclassified during the fiscal year ending November 24,
2002 from “Accumulated other comprehensive income (loss)” to “Other (income) expense, net” amounts to a net gain of $0.7 million. The Company also enters into contracts managing forecasted intercompany royalty flows that do not
qualify as cash flow hedges, and are recorded at their fair value. Any changes in fair value are included in “Other (income) expense, net.”
The derivative instruments utilized in transactions managing cash management exposures are currently marked to market at their fair value
and any changes in fair value are recorded in “Other (income) expense, net.” The Company offsets relevant daily cash flows by currency among its affiliates. As a result, the Company hedges only its net foreign currency exposures with
external parties.
The Company also entered into
transactions managing the exposure related to the Euro notes issued on January 18, 2001. These derivative instruments are currently marked to market at their fair value and any changes in fair value are recorded in “Other (income) expense,
net.”
Interest Rate Management
The Company is exposed to interest rate risk. It is the
Company’s policy and practice to use derivative instruments, primarily interest rate swaps and options, to manage and reduce interest rate exposures using a mix of fixed and variable rate debt. The Company currently has no derivative
instruments managing interest rate risk outstanding as of November 24, 2002.
Due to the adoption of SFAS 133, the Company adjusted the carrying value of the outstanding interest rate derivatives to their fair value, which resulted in a net loss of $1.2 million and was recorded
in “Other (income) expense, net” during the first quarter of fiscal year 2001.
The tables
below give an overview of the realized and unrealized gains and losses associated with our foreign exchange management activities and reported in “Other (income) expense, net,” “Accumulated other comprehensive income (loss)
(“Accumulated OCI”)” balances and the fair values of derivative instruments reported as an asset or liability. Accumulated OCI is a section of Stockholders’ Deficit.
The Company is
obligated under operating leases for facilities, office space and equipment. At November 24, 2002, obligations under long-term leases are as follows:
Minimum
Lease
Payments
(Dollars in
Thousands)
2003
$
64,211
2004
58,375
2005
55,051
2006
52,646
2007
47,887
Remaining years
189,832
Total minimum lease payments
$
468,002
The
amounts shown for total minimum lease payments on operating leases have not been reduced by estimated future income of $11.9 million from non-cancelable subleases. The amounts shown for total minimum lease payments on operating leases have not been
increased by estimated future operating expense and property tax escalations.
In general, leases relating to real estate include renewal options of up to approximately 20 years, except for the San Francisco headquarters office lease, which contains multiple renewal options of up
to 78 years. Some leases contain escalation clauses relating to increases in operating costs. Certain operating leases provide the Company with an option to purchase the property after the initial lease term at the then prevailing market value.
Rental expense for 2002, 2001 and 2000 was $76.2 million, $74.0 million and $78.1 million, respectively.
The
Company has several non-contributory defined benefit retirement plans covering substantially all employees. It is the Company’s policy to fund its retirement plans based on actuarial recommendations, consistent with applicable laws and income
tax regulations. Plan assets, which may be denominated in foreign currencies and issued by foreign issuers, are invested in a diversified portfolio of securities including stocks, bonds, real estate investment funds and cash equivalents. Benefits
payable under the plans are based on either years of service or final average compensation. The Company retains the right to amend, curtail or discontinue any aspect of the plans at any time.
The Company also sponsors other retirement plans, primarily
for foreign employees. Expense for these plans in 2002, 2001, and 2000 totaled $6.7 million, $6.2 million, and $5.0 million, respectively.
The Company maintains two plans that provide postretirement benefits, principally health care, to substantially all domestic retirees and
their qualified dependents. These plans have been established with the intention that they will continue indefinitely. However, the Company retains the right to amend, curtail or discontinue any aspect of the plans at any time. Under the
Company’s current policies, employees become eligible for these benefits when they reach age 55 with 15 years of credited service. The plans are contributory and contain certain cost-sharing features, such as deductibles and coinsurance. The
Company’s policy is to fund postretirement benefits as claims and premiums are paid. In November 2000, the Company announced a plan change for those who retire after March 31, 1989. These changes were effective January 1, 2001 and resulted in
increased contributions from retirees for medical coverage and the elimination of any dental subsidies.
The Company instituted early retirement programs offered to those affected by the Company’s reorganization initiatives (
see Note 3
to the Consolidated Financial Statements
). A reduced benefit is payable under the programs based on reduced years of age and service. These programs resulted in the recognition of net curtailment gains and losses resulting from early retirement
incentives.
Pension Benefits
Postretirement Benefits
November 24,
2002
November 25,
2001
November 24,
2002
November 25,
2001
(Dollars in Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year
$
661,700
$
602,060
$
561,227
$
519,117
Service cost
14,540
15,249
5,918
6,040
Interest cost
48,814
47,443
40,874
38,576
Plan participants’ contributions
277
271
3,152
2,404
Plan amendments
(2,682
)
—
(2,989
)
(21,131
)
Actuarial loss
55,218
35,440
193,362
51,475
Net curtailment (gain) loss
10,237
19
(12,287
)
—
Settlement gain
—
(177
)
—
—
Special termination benefits
—
—
11,868
—
Benefits paid*
(36,119
)
(38,604
)
(39,202
)
(35,254
)
Benefit obligation at end of year
751,985
661,701
761,923
561,227
Change in plan assets:
Fair value of plan assets at beginning of year
565,657
639,950
—
—
Actual return on plan assets
(46,808
)
(70,334
)
—
—
Employer contribution
26,952
34,374
36,050
32,850
Plan participants’ contributions
274
271
3,152
2,404
Benefits paid*
(36,116
)
(38,604
)
(39,202
)
(35,254
)
Fair value of plan assets at end of year
509,959
565,657
—
—
Funded status
(242,026
)
(96,044
)
(761,923
)
(561,227
)
Unrecognized actuarial loss
174,853
22,198
203,733
20,254
Unrecognized prior service cost
4,632
11,220
(31,659
)
(44,746
)
Net amount recognized
$
(62,541
)
$
(62,626
)
$
(589,849
)
$
(585,719
)
*
Pension benefits are primarily paid by a trust. The Company pays postretirement benefits.
Global capital
market developments resulted in negative returns on the Company’s retirement benefit plan assets and a decline in the discount rates used to estimate the liability. As a result, the Company was required to record an additional minimum pension
liability of $137.0 million and an intangible asset of $1.1 million for plans where the accumulated benefit obligation exceeded the fair market value of the respective plan assets. The additional minimum pension liability and intangible asset was
included in the Company’s accumulated other comprehensive loss ($86.0 million after tax).
Pension Benefits
Postretirement Benefits
2002
2001
2002
2001
(Dollars in Thousands)
Amounts recognized in the consolidated balance sheets consist of:
Pension
benefit plans with projected benefit obligations exceeding the fair value of plan assets were as follows:
Pension Benefits
2002
2001
(Dollars in Thousands)
Aggregate fair value of plan assets
$
509,959
$
375,273
Aggregate projected benefit obligation
$
751,985
$
472,556
Pension
benefit plans with accumulated benefit obligations exceeding the fair value of plan assets were as follows:
Pension Benefits
2002
2001
(Dollars in Thousands)
Aggregate fair value of plan assets
$
495,785
$
—
Aggregate accumulated benefit obligation
$
685,826
$
52,777
For
postretirement benefits measurement purposes, a 15.0% and 7.5% annual rate of increase in the per capita cost of covered health care and Medicare Part B benefits, respectively, were assumed for 2002-2003, declining gradually to 5.0% by the year
2010-2011 and remaining at those rates thereafter.
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects to postretirement
benefits:
U.S.
1-Percentage-Point
Increase
U.S.
1-Percentage-Point
Decrease
(Dollars in Thousands)
Effect on total of service and interest cost components
The Company maintains three employee investment plans. The Employee Investment Plan of Levi Strauss & Co. (“EIP”) and the Levi Strauss & Co. Employee Long-Term Investment and Savings Plan (“ELTIS”) are two
qualified plans that cover eligible compensated Home Office employees and U.S. field employees. The Capital Accumulation Plan of Levi Strauss & Co. (“CAP”) is a non-qualified, self-directed investment program for highly compensated
employees (as defined by the Internal Revenue Code).
Total amounts charged to expense for these plans in 2002, 2001, and 2000 were $13.3 million, $10.9 million, and $9.2 million, respectively.
EIP/ELTIS
Under EIP and ELTIS, eligible employees may contribute and direct up to 15% of their annual compensation to various investments among a
series of mutual funds. The Company may match the contributions made by employees to all funds maintained under the qualified plans. Employees are always 100% vested in the Company match. The EIP and the ELTIS allow employees a choice of either
pre-tax or after-tax contributions. The ELTIS also includes a company profit sharing provision with payments made at the sole discretion of the board of directors.
In December 2000, the Company announced changes to the EIP plan that were effective January 1, 2001. These
changes allow eligible employees to contribute and direct up to 15% of their annual compensation to various investments among a series of mutual funds. The Company may match contributions made by employees to all funds maintained under the qualified
plans up to the first 10% of eligible compensation.
In November 2001, the Company announced changes to the EIP that were effective December 2001. The changes provide that the Company may match eligible employee contributions on a graded scale from 0% to 75% for EIP. The level of the
matching contribution will be determined at year end based upon business performance results.
The ELTIS was changed effective April 1, 2001 to allow eligible employees to contribute up to 15% of their annual compensation to the Plan. The Company may match 50% of the contributions made by
employees to all funds maintained under the qualified plan up to the first 10% of eligible compensation.
CAP
The CAP allows eligible employees to contribute on an after-tax basis up to 10% of their eligible compensation to an individual retail brokerage account. The Company may match these contributions made by employees in cash to
each employee’s account. Employees are always 100% vested in the Company match. All investment decisions, related commissions and charges, investment results and tax reporting requirements are the responsibility of the employee, not the
Company. Associated with the changes in the EIP plan above that were effective January 1, 2001, eligible employees will be eligible to participate in the CAP plan after reaching certain contribution thresholds in the EIP plan and salary thresholds.
In November 2001, the Company announced changes
to the CAP that were effective December 2001. The changes provide that the Company may match eligible employee contributions on a graded scale from 0% to 115% for CAP. The level of the matching contribution will be determined at year end based upon
business performance results.
Note 14: Employee
Compensation Plans
Annual Incentive Plan
The Annual Incentive Plan (“AIP”)
is intended to reward individual contributions to the Company’s objectives during the year. The amount of the cash bonus earned depends on business unit and corporate financial results as measured against pre-established targets and also
depends upon the performance and salary grade level of the individual. Provisions for the AIP are recorded in accrued salaries, wages and employee benefits. Total amounts charged to expense for 2002, 2001 and 2000 were $48.4 million, $25.6 million
and $65.1 million, respectively.
The Leadership Shares Plan (“LS”)
was introduced in early 1999 and replaces the Long-Term Incentive Plan (“LTIP”). The LS places greater emphasis on an individual’s ability to contribute to and affect the Company’s long-term strategic objectives. It is a
performance unit plan pursuant to which units or “shares” may be granted at an initial value of $0 each. These “shares” are not stock and do not represent equity interests in the Company.
The unit value is determined by an internal measure in the
form of Leadership Value Added (“LVA”). LVA measures earnings less taxes and capitals charges. The Company establishes a competitive five-year LVA target for each grant based on expected shareholder value growth at comparable companies.
The actual unit value is determined based on cumulative performance against this measure. Performance at the target level will yield a unit value of $25. If performance does not meet the minimum threshold, then the units will have no value.
Performance above target yields correspondingly larger unit values, with no limit on maximum value.
The number of units granted to executives is tied to competitive external long-term incentive pay so that the Company will pay its
executives at competitive levels when the Company achieves competitive growth. The shares vest in one-third increments at the end of the third, fourth and fifth fiscal years of the performance period. Payments are made based on cumulative LVA
performance. The Company accounts for the expense related to the LS on a straight-line basis based on estimates of future performance against plan targets.
The LTIP was a long-term incentive plan that ended for all employees during 1999. These incentives were awarded as performance units with
each grant’s unit value measured based on the Company’s three-year cumulative earnings performance and return on investment against pre-established targets. Awards were based on an individual’s grade level, salary and performance and
were paid in one-third annual increments beginning in the year following the three-year performance cycle of the grant. Final payments under the LTIP were made in 2002. Although there are outstanding grants, they will have no value based on weak
performance against the pre-set targets. Accordingly, no further payments will be made under the LTIP.
The Special Long-Term Incentive Plan (“SLTIP”) was intended to provide incentive and reward performance over time for certain
key senior employees. Awards under the SLTIP have the same grant unit value, vesting period and pay-out cycle as grants made under the LTIP. There will be no more grants under the SLTIP. A Long-Term Performance Plan (“LTPP”), pursuant to
which awards were made in 1994 and 1995, were paid out in 2000.
Total net amounts charged to expense for these long-term incentive plans in 2002, 2001 and 2000 were $69.9 million, $53.2 million and $72.7 million, respectively.
Other Compensation Plans
Cash Performance Sharing Plan
The Company through its Cash Performance Sharing Plans awards a cash payment to production employees worldwide based on a percentage of
annual salary and certain earnings and revenue criteria. The largest individual plan is the U.S. Field Profit Sharing Plan that covers approximately 2,700 U.S. employees. The total amounts charged to expense for this plan in 2002, 2001 and 2000 were
$3.2 million, $1.8 million and $9.2 million, respectively.
Key Employee Recognition and Commitment Plan
The Key Employee Recognition and Commitment Plan (“KEP”) was adopted in 1996 and was designed to recognize and reward key employees for making significant contributions to the Company’s future success. Units
awarded to employees under the KEP are subject to a four-year vesting period, which commenced in 1997. Units are exercisable in one-third increments at the end of 2001 through 2003 upon reaching a certain minimum cumulative earnings threshold at
each fiscal year-end. Participating employees may elect to defer the exercise of each one-third increment until final payment in 2004. Payments may occur earlier under certain circumstances. Unit values will be directly related to the excess over
the threshold of the cumulative cash flow (defined as earnings before interest, taxes, depreciation, amortization and certain other items) generated by the Company at the end of 2001 through 2003. The Company did not recognize any KEP expense in
2002, 2001 or 2000. In 1999, the Company lowered its estimate of financial performance through the year 2003 and, consequently, decreased the KEP accrual rate to 0% and reversed prior years KEP accruals totaling $13.6 million. There will be no more
grants under the KEP.
The Special Deferral Plan (“SDP”)
was adopted during 1996 and was designed to replace the Company’s Stock Appreciation Rights Plan (“SARs”). Existing SARs were transferred in to the SDP at a value of $265 per share. Grants were made under the SDP in 1992 and 1994,
both of which are fully vested. The SDP bases the appreciation/depreciation of units on certain tracked mutual funds or the prime rate, at the election of the employee. There will be no more grants under SDP.
During 2002, 2001 and 2000, cash disbursements for SDP grants
were $2.6 million, $1.2 million and $9.8 million, respectively. The amounts charged (net of forfeitures) to expense for the SDP in 2002, 2001 and 2000 were $0 million, $0.4 million and $1.0 million, respectively. The final payments under the
SDP were made in 2002.
Note 15: Long-Term Employee
Related Benefits
Balances for long-term
employee related benefits are as follows:
2002
2001
(Dollars in Thousands)
Workers’ compensation
$
59,512
$
41,685
Long-term performance programs
137,514
132,563
Deferred compensation
87,630
94,793
Pension programs
242,762
115,710
Total
$
527,418
$
384,751
Included
in the liability for workers’ compensation are accrued expenses related to the Company’s program that provides for early identification and treatment of employee injuries. Changes in the Company’s safety programs, medical and
disability management and the long-term effects of statutory changes have decreased workers’ compensation costs substantially from historical trends. Provisions for workers’ compensation of $24.3 million and $21.0 million were
recorded during 2002 and 2001, respectively. In addition, in 2002, the Company recorded a one-time provision of $17.9 million associated with the 2002 plant closures. Workers’ compensation current liabilities represented approximately $26.8
million in 2002 and $33.0 million in 2001. Long-term performance programs include accrued liabilities for LS and LTIP (
see Note 14 to the Consolidated Financial Statements
). Deferred compensation represents non-qualified plans under which
certain employees may defer income. The pension programs include the accrued benefit cost for the qualified pension plans and the liability accrued for the non-qualified pension programs
(see Note 12 to the Consolidated Financial Statements).
Note 16: Common Stock
The Company has a capital structure consisting of 270,000,000
authorized shares of common stock, par value $.01 per share, of which 37,278,238 shares are issued and outstanding.
Directors of the Company who are also
stockholders or employees do not receive compensation for their services as directors. Directors who are not stockholders or employees (Angela Glover Blackwell, James C. Gaither, Peter A. Georgescu, Patricia Salas Pineda, T. Gary Rogers and G. Craig
Sullivan) receive annual compensation of approximately $90,000. This amount includes an annual retainer fee of $36,000, meeting fees of $1,000 per meeting day attended and long-term variable pay in the form of 1,800 Leadership Shares, with a
target value of $45,000 per year (
see Note 14 to the Consolidated Financial Statements
). The actual amount for each of the above payments varies depending on the years of service, the number of meetings attended and the actual value of the
granted units upon vesting. Directors, in their first five years of service, receive a cash amount equivalent to the target value of their long-term variable pay or $45,000. This amount is decreased by approximately 1/3 each year at the start of
actual payments from the LS Plan. Directors who are not employees or stockholders also receive travel accident insurance while on Company business and are eligible to participate in a deferred compensation plan.
Messrs. Gaither, Georgescu, Rogers and Sullivan, and Ms.
Blackwell and Ms. Pineda each received 1,800 Leadership Shares in 2002, 2001 and 2000. In 2002, Ms. Blackwell, Mr. Gaither and Ms. Pineda each received payments of $1,462 under the Long-Term Incentive Plan (“LTIP”). In 2001, Ms. Blackwell,
Mr. Gaither and Ms. Pineda each received payments of $9,727, under LTIP. In 2000, Mr. Gaither, Ms. Blackwell and Ms. Pineda each received payments of $30,637 under the LTIP and Long-Term Performance Plan combined.
Other Transactions
F. Warren Hellman, a director of the Company, is chairman and
a general partner of Hellman & Friedman LLC, an investment banking firm that has provided financial advisory services to the Company in the past. The Company did not pay any fees to Hellman & Friedman LLC during 2002, 2001 and 2000. At
November 24, 2002 and November 25, 2001, Mr. Hellman and his family, other partners, and former partners of Hellman & Friedman LLC beneficially owned an aggregate of less than 5% of the outstanding common stock of the Company.
James C. Gaither, a director of the Company, is a senior
counsel of the law firm Cooley Godward LLP. The firm provided legal services to the Company in 2002, 2001 and 2000 and received in fees approximately $18,000, $91,000 and $60,000, respectively.
Note 18: Business Segment Information
The Company manages its apparel business, based on geographic
regions consisting of the Americas, which includes the U.S., Canada and Latin America; Europe, the Middle East and Africa; and Asia Pacific. All Other consists of functions that are directed by the corporate office and are not allocated to a
specific geographic region. Under Geographic Information for all periods presented, no single country other than the U.S. had net sales exceeding 10% of consolidated net sales.
The Company designs and markets jeans and jeans-related pants, casual and dress pants, tops, jackets and
related accessories, for men, women and children, under the Company’s Levi’s
®
and Dockers
®
brands. Its products are distributed in the U.S. primarily through chain retailers and department stores and abroad
through department stores, specialty retailers and franchised stores. The Company also maintains a network of approximately 900 franchised or independently owned stores dedicated to its products outside the U.S. and operates a small number of
company-owned stores in ten countries. The Company obtains its products from a combination of independent manufacturers and company-owned facilities.
The Company evaluates performance and allocates resources based on regional profits or losses. The accounting policies of the regions are
the same as those described in Note 1, “Summary of Significant Accounting Policies.” Regional profits exclude net interest expense, special compensation program expenses, restructuring charges, net of reversals and expenses that are
controlled at the corporate level. Management financial information for the Company is as follows:
For
2002, 2001 and 2000, the Company had one customer, J. C. Penney Company, Inc., that represented approximately 12%, 13% and 12%, respectively, of net sales. No other customer accounted for more than 10% of net sales.
During
the fourth quarter of 2002 the Company recorded a restructuring charge of $1.6 million for a European restructuring initiative. The restructuring charge was offset by reversals of $1.5 million for prior years’ restructuring costs. During the
third quarter of 2002 the Company recorded reversals of $16.6 million of prior restructuring costs. During the second quarter of 2002 the Company recorded restructuring charges of $150.2 million for plant closures in the U.S. and Europe. The
Company recorded a reversal of $9.1 million of prior years’ restructuring costs. (
See Note 3 to the Consolidated Financial Statements.)
During the fourth quarter of 2001 the Company recorded the reversal of $26.6 million of prior years’ restructuring costs. This
reversal was based on updated estimates. The Company also had charges of $22.4 million for various reorganization initiatives in the U.S. and Japan.
(See Note 3 to the Consolidated Financial Statements.)
On December 4, 2002, the Company issued $425.0 million in
notes to qualified institutional buyers in reliance on Rule 144A under the Securities Act. These notes are unsecured obligations that rank equally with all of the Company’s other existing and future unsecured and unsubordinated debt. These
notes are 10-year notes maturing on December 15, 2012 and bear interest at 12.25% per annum, payable semi-annually in arrears on December 15 and June 15, commencing on June 15, 2003. These notes are callable beginning December 15, 2007. These notes
were offered at a discount of $6.0 million to be amortized over the term of the notes using an approximate effective-interest rate method. Costs representing underwriting fees and other expenses of approximately $12.6 million are amortized
over the term of notes. Approximately $125.0 million of the net proceeds from the offering were used to repay remaining indebtedness under the Company’s 2001 bank credit facility as of the close of business on December 3, 2002. A portion of the
net proceeds were used to pay $72.8 million of the 6.80% notes due November 1, 2003. The Company intends to use the remaining net proceeds to either (i) refinance (whether through payment at maturity, repurchase or otherwise) a portion of the $350
million aggregate principal amount of our 6.80% notes due November 1, 2003, or other outstanding indebtedness, or (ii) for working capital or other general corporate purposes.
On January 22, 2003 and on January 23, 2003, the Company issued an additional $100.0 million of these notes
at a premium of $3.0 million and an additional $50.0 million of these notes at a discount of $0.7 million. Both the discount and premium will be amortized over the term of the notes using an approximate effective-interest rate method. The notes
issued in these additional offerings were issued under the same indenture as, have the same terms as, and constitute the same issue of, the December 2002 notes. The Company intends to use a portion of the remaining net proceeds from the December
2002 notes issuance, plus the $47.3 million net proceeds from the issuance of an additional $50.0 million of these notes and the $99.8 million net proceeds from the issuance of an additional $100.0 million of these notes to refinance (whether
through payment at maturity, repurchase or otherwise) all of the remaining aggregate principal amount of our 6.80% notes due November 1, 2003. Any remaining proceeds will be used to refinance other outstanding indebtedness or for working capital or
other general corporate purposes. On January 22, 2003, the Company purchased approximately $27.0 million of the 6.80% notes due November 1, 2003.
The indenture governing these notes contain covenants that limit the Company’s and its subsidiaries’ ability to incur additional
debt; pay dividends or make other restricted payments; consummate specified asset sales; enter into transactions with affiliates; incur liens; impose restrictions on the ability of a subsidiary to pay dividends or make payments to the Company and
its subsidiaries; merge or consolidate with any other person; and sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the Company’s assets or its subsidiaries’ assets. If the Company experiences a
change in control as defined in the indenture governing the notes, then the Company will be required under the indenture to make an offer to repurchase the notes at a price equal to 101% of the principal amount plus accrued and unpaid interest, if
any, to the date of repurchase. If these notes receive and maintain an investment grade rating by both Standard and Poor’s and Moody’s and the Company and its subsidiaries are and remain in compliance with the indenture, then the Company
and its subsidiaries will not be required to comply with specified covenants contained in the indenture.
Senior Secured Credit Facility
On January 31, 2003, the Company entered into a new $750.0 million senior secured credit facility to replace the 2001 credit facility that matures in August 2003. The credit facility consists of a
$375.0 million revolving credit facility and a $375.0 million Tranche B term loan facility. The Company will use the borrowings under the new bank credit facility for working capital or general corporate purposes.
The $375.0
million revolving credit facility matures on March 31, 2006. The Company’s Tranche B term loan facility is subject to repayment based on a specified scheduled amortization, with the final payment of all amounts outstanding thereunder being due
on July 31, 2006. The Company is required to make principal amortization payments on the Tranche B term loan facility at a quarterly rate beginning in May 2003, with the substantial majority of the quarterly payments being due from the quarter
ending in November 2005. The Company’s bank credit facility also requires mandatory prepayments in certain events, such as if there are asset sales. The interest rate for the Company’s revolving credit facility varies, for Eurodollar Rate
Loans, from 3.25% to 4.00% over the Eurodollar Rate (as defined in the credit agreement) or, for Base Rate Loans, from 2.25% to 3.00% over the higher of (i) the Citibank base rate and (ii) the Federal Funds rate plus 0.50% (the “Base
Rate”), with the exact rate depending upon the Company’s performance under specified financial criteria. The interest rate for the Company’s Tranche B term loan facility is 4.00% over the Eurodollar Rate or 3.00% over the Base Rate.
The bank credit facility also requires that the Company set aside sufficient funds to satisfy all principal and interest payments on the outstanding 6.80% notes due November 2003 and allows for repurchase of these bonds prior to their maturity.
The Company’s bank credit facility is
guaranteed by certain of its material domestic subsidiaries and is secured by domestic inventories, certain domestic equipment, trademarks, other intellectual property, 100% of the stock in certain domestic subsidiaries, 65% of the stock of certain
foreign subsidiaries and other assets. Excluded from the assets securing the bank credit facility are all of the Company’s most valuable real property interests and all of the capital stock and debt of its affiliates in Germany and the United
Kingdom and any other affiliates that become restricted subsidiaries under the indenture governing the Company’s notes due 2003 and 2006.
The bank credit facility contains customary covenants restricting the Company’s activities as well as those of its subsidiaries,
including limitations on the Company’s, and its subsidiaries’, ability to sell assets; engage in mergers; enter into capital leases or certain leases not in the ordinary course of business; enter into transactions involving related parties
or derivatives; incur indebtedness or grant liens or negative pledges on the Company’s assets; make loans or other investments; pay dividends or repurchase stock or other securities; guaranty third party obligations; make capital expenditures;
and make changes in the Company’s corporate structure. The credit agreement also contains financial covenants that the Company must satisfy on an ongoing basis, including maximum leverage ratios and minimum coverage ratios.
The credit agreement contains customary events of default,
including payment failures; failures to satisfy other obligations under the credit agreements; material judgments; pension plan terminations or specified underfunding; substantial voting trust certificate or stock ownership changes; specified
changes in the composition of the Company’s board of directors; and invalidity of the guaranty or security agreements. If an event of default occurs, the Company’s lenders could terminate their commitments, declare immediately payable all
borrowings under the credit facilities and foreclose on the collateral, including the Company’s trademarks.
The following is a pro forma table as of November 24, 2002, of the required aggregate short-term and long-term debt principal payments for
the next five years and thereafter that includes the senior notes offering and the senior secured credit facility.
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