<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 13, 1996
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
SCHEDULE 13E-3
AMENDMENT NO. 1
RULE 13-E TRANSACTION STATEMENT
(PURSUANT TO SECTION 13(E) OF THE SECURITIES EXCHANGE ACT OF 1934)
-------------------------
LEVI STRAUSS ASSOCIATES INC.
(NAME OF ISSUER)
LEVI STRAUSS ASSOCIATES INC.
LSAI HOLDING CORP.
LSAI ACQUISITION CORP.
ROBERT D. HAAS
PETER E. HAAS, SR.
(NAME OF PERSONS FILING STATEMENT)
COMMON STOCK, $0.10 PAR VALUE (CUSIP NUMBER OF CLASS OF SECURITIES)
(TITLE OF CLASS OF SECURITIES)
-------------------------
<TABLE>
<S> <C> <C>
JAY A. MITCHELL, ESQ. ROBERT D. HAAS ROBERT D. HAAS
PETER E. HAAS, SR.
LEVI STRAUSS ASSOCIATES INC. LSAI HOLDING CORP. LSAI ACQUISITION CORP.
LEVI'S PLAZA C/O HELLMAN & FRIEDMAN C/O HELLMAN & FRIEDMAN
1155 BATTERY STREET ONE MARITIME PLAZA, SUITE 1200 ONE MARITIME PLAZA, SUITE 1200
SAN FRANCISCO, CA 94111 SAN FRANCISCO, CA 94111 SAN FRANCISCO, CA 94111
</TABLE>
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSONS AUTHORIZED TO RECEIVE
NOTICES AND COMMUNICATIONS ON BEHALF OF THE PERSONS FILING STATEMENT)
-------------------------
COPIES TO:
PATRICIA A. VLAHAKIS, ESQ. ROBERT E. SPATT, ESQ.
WACHTELL, LIPTON, ROSEN & KATZ SIMPSON THACHER & BARTLETT
51 WEST 52ND STREET 425 LEXINGTON AVENUE
NEW YORK, NY 10019 NEW YORK, NY 10017
February 14, 1996
(Date Information Statement First Published, Sent or Given to Security Holders)
This statement is filed in connection with (check the appropriate box):
a. / / The filing of solicitation materials or an information statement
subject to Regulation 14A, Regulation 14C, or Rule 13e-3(c) under the
Securities Exchange Act of 1934.
b. / / The filing of a registration statement under the Securities Act of
1933.
c. / / A tender offer.
d. /X/ None of the above.
Check the following box if the soliciting materials or information
statement referred to in checking box (a) are preliminary copies. / /
CALCULATION OF FILING FEE
================================================================================
TRANSACTION VALUATION AMOUNT OF FILING FEE
- --------------------------------------------------------------------------------
$2,569,943,765/*/ $513,989
- --------------------------------------------------------------------------------
/X/ Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the form or
schedule and the date of its filing.
Filing Parties: Levi Strauss Associates Inc., LSAI Holding Corp., and
LSAI Acquisition Corp.
Form on Registration No.: Schedule 13E-3
Date Filed: February 14, 1996
Amount Previously Paid: $450,559
- --------------------------------------------------------------------------------
* For purposes of calculation of the filing fee only. This transaction relates
to the merger (the "Merger") of a wholly owned subsidiary of LSAI Holding
Corp. ("Holdings") with and into Levi Strauss Associates Inc. (the "Company").
The "Transaction Valuation" amount referenced above is based upon the product
of (i) 9,697,901, the number of outstanding shares of Class E Common Stock,
par value $0.10 per share ("Class E Shares") and Class L Common Stock, par
value $0.10 per share ("Class L Shares" and together with the Class E Shares,
the "Shares") of the Company (not including Shares held in the treasury of the
Company or which, prior to consummation of the Merger, will be owned by
Holdings) and (ii) $265, the cash price per Share to be paid in the Merger. In
accordance with Rule 0-11 under the Securities Exchange Act of 1934, the
filing fee is determined by multiplying the amount calculated pursuant to the
preceding sentence by 1/50th of one percent. On February 14, 1996, a filing
fee of $450,559 was paid in connection with the initial filing of this
Schedule 13E-3. Such filing fee was based upon the exchange of 8,501,095
Shares in the Merger at the same $265 cash price. However, because an
additional 1,196,806 Shares are expected to be exchanged in the Merger, an
additional filing fee of $63,430, equal to 1/50th of one percent of the
product of (i) 1,196,806 and (ii) $265, rounded up to the nearest dollar, has
been paid with the filing of this Amendment No. 1.
<PAGE>
This Amendment No. 1 amends and supplements the Rule 13E-3 Transaction
Statement on Schedule 13E-3 (the "Statement") originally filed by Levi Strauss
Associates Inc., a Delaware corporation ("LSAI" or the "Company"), LSAI Holding
Corp., a Delaware corporation ("Holdings"), and LSAI Acquisition Corp., a
Delaware corporation and a wholly owned subsidiary of Holdings ("Merger Sub") on
February 14, 1996, which Statement relates to an Agreement and Plan of Merger,
dated as of February 8, 1996, among LSAI, Holdings, and Merger Sub (the "Merger
Agreement"), pursuant to which Merger Sub will merge with and into LSAI (the
"Merger" or the "Transaction"), with the result that LSAI will become a wholly
owned subsidiary of Holdings. Capitalized terms used herein without definition
shall have the meanings ascribed thereto in the Statement. The Statement, and
this Amendment No. 1, are also being filed by Mr. Robert D. Haas and Mr. Peter
E. Haas, Sr.; however, neither Robert D. Haas nor Peter E. Haas, Sr. concedes,
by virtue of having filed the Statement or any amendment thereto, that he is or
should be deemed to be engaged in a Rule 13e-3 Transaction in an individual
capacity, or in any manner other than through his interest in Holdings as
described herein. A Supplement to the Information Statement (the
"Supplement"),which amends and supplements the Information Statement filed as
Exhibit (d)(1) to the Statement, is filed with this Amendment No. 1 as Exhibit
(d)(2) to the Statement.
The cross-reference sheet below is being supplied pursuant to General
Instruction F to Schedule 13E-3 and shows the location in the Information
Statement and the Supplement of the information required to be included in
response to the items of this Statement. The information in the Information
Statement and the Supplement, including all appendices thereto, is hereby
expressly incorporated herein by reference and the responses to each item in
this Statement are qualified in their entirety by the information contained in
the Information Statement and the Supplement.
<PAGE>
CROSS-REFERENCE SHEET
ITEM IN
SCHEDULE 13E-3 WHERE LOCATED IN INFORMATION STATEMENT OR SUPPLEMENT*
- -------------- ----------------------------------------------------
Item 1(a) "AVAILABLE INFORMATION" and "CERTAIN INFORMATION REGARDING
LSAI, HOLDINGS AND MERGER SUB -- LSAI"
Item 1(b) Cover Page; "CERTAIN INFORMATION REGARDING LSAI, HOLDINGS
AND MERGER SUB -- Securities of LSAI"
Item 1(c) "CERTAIN INFORMATION REGARDING LSAI, HOLDINGS AND MERGER
SUB -- Market for Shares" and " -- Valuation of Shares"
Item 1(d) "CERTAIN INFORMATION REGARDING LSAI, HOLDINGS AND MERGER
SUB -- Dividends Paid on the Shares"
Item 1(e) **
Item 1(f) "CERTAIN INFORMATION REGARDING LSAI, HOLDINGS AND MERGER
SUB -- Purchases of Shares by LSAI"
Item 2(a) - (d), Appendix D
(g)
Item 2(e) - (f) **
Item 3(a)(1) **
Item 3(a)(2) "SPECIAL FACTORS -- Background of the Merger" and
" -- Purpose, Structure and Reasons for the Merger"
Item 3(b) "SPECIAL FACTORS -- Background of the Merger" and
" -- Purpose, Structure and Reasons for the Merger"
Item 4(a) "THE MERGER"
Item 4(b) "SPECIAL FACTORS -- Background of the Merger", " --Purpose,
Structure and Reasons for the Merger" and " -- Certain
Effects of the Merger; Operations of the Company After the
Merger"
Item 5(a)-(b) **
Item 5(c) "SPECIAL FACTORS -- Purpose, Structure and Reasons for the
Merger" and "THE MERGER -- Terms of the Merger"
Item 5(d) "CERTAIN INFORMATION -- Dividends Paid on the Shares";
"FINANCING OF THE MERGER"
Item 5(e) "SPECIAL FACTORS -- Purpose, Structure and Reasons for the
Merger" and " -- Certain Effects of the Merger; Operations of
the Company After the Merger"
Item 5(f) **
Item 5(g) "SPECIAL FACTORS -- Certain Effects of the Merger;
Operations of the Company After the Merger" and "Current
Information; No Periodic Reporting"
-2-
<PAGE>
Item 6(a)-(c) "FINANCING OF THE MERGER" and, in the Supplement,"Financing
of the Merger"
Item 6(d) **
Item 7(a)-(c) "SPECIAL FACTORS -- Background of the Merger" and
" -- Purpose, Structure and Reasons for the Merger"
Item 7(d) "SPECIAL FACTORS -- Certain Effects of the Merger;
Operations of the Company After the Merger" and
" -- Certain Federal Income Tax Consequences"
Item 8(a) "SPECIAL FACTORS -- Fairness of the Transaction;
Recommendations" and, in the Supplement, "Fairness of the
Merger"
Item 8(b) "SPECIAL FACTORS -- Fairness of the Transaction;
Recommendations", " -- Opinion of Financial Advisor"
and, in the Supplement, "Fairness of the Merger"
Item 8(c) "SPECIAL FACTORS -- Background of the Merger"
Item 8(d) "SPECIAL FACTORS -- Background of the Merger",
" -- Fairness of the Transaction; Recommendations" and
" -- Opinion of Financial Advisor"
Item 8(e) "SPECIAL FACTORS -- Fairness of the Transaction;
Recommendations"
Item 8(f) **
Item 9(a) "SPECIAL FACTORS -- Fairness of the Transaction;
Recommendations" and " -- Opinion of Financial Advisor"
Item 9(b) "SPECIAL FACTORS -- Background of the Merger",
" -- Opinion of Financial Advisor" and, in the Supplement,
"November 1995 Morgan Stanley Valuation"
Item 9(c) "SPECIAL FACTORS -- Opinion of Financial Advisor" and, in
the Supplement, "November 1995 Morgan Stanley Valuation"
-3-
<PAGE>
Item 10(a) "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF LSAI -- Principal Stockholders"
Item 10(b) "CERTAIN INFORMATION REGARDING LSAI, HOLDINGS AND MERGER SUB
-- Purchases of Shares by LSAI" and Appendix E
Item 11 "SPECIAL FACTORS -- Purpose, Structure and Reasons for the
Merger", "THE MERGER" and "CONTRACTS, ARRANGEMENTS OR
UNDERSTANDINGS WITH RESPECT TO SECURITIES OF LSAI"
Item 12(a)-(b) "SPECIAL FACTORS -- Background of the Merger",
" -- Fairness of the Transaction; Recommendations" and, in
the Supplement, "Fairness of the Merger"
Item 13(a) "RIGHTS OF DISSENTING STOCKHOLDERS" and Appendix C
Item 13(b) - (c) **
Item 14(a) ***
Item 14(b) "CERTAIN PRO FORMA FINANCIAL INFORMATION" and "SELECTED PRO
FORMA PROJECTED FINANCIAL INFORMATION"
Item 15 **
Item 16 **
Item 17(a) **
Item 17(b) Appendix B
Item 17(c) Appendix A
Item 17(d) **
Item 17(e) Appendix C
Item 17(f) **
- ----------
* Unless otherwise indicated, all cross-references are to the Information
Statement.
** The Item is inapplicable or the answer thereto is in the negative.
*** The information requested by this Item is not found in the Information
Statement or the Supplement.
-4-
<PAGE>
By this Amendment No. 1, the Statement is hereby amended and supplemented
as set forth below:
ITEM 1. ISSUER AND CLASS OF SECURITY SUBJECT TO THE TRANSACTION.
Section (f) of Item 1 is hereby amended by adding the following
thereto:
(f) Robert D. Haas has made the following purchases of securities of
LSAI since the beginning of LSAI's second full fiscal year
preceding the date of this Statement: 375 Class E Shares at a price
of $114 per Share during the first quarter of fiscal 1994; 1,304
Class E Shares at a price of $129 per Share during the third
quarter of fiscal 1994; 393 Class E Shares at a price of $134 per
Share during the first quarter of fiscal 1995; and 1,221 Class E
Shares at a price of $157 per Share during the third quarter of
fiscal 1995. All of such purchases were made pursuant to LSAI's
Employee Stock Purchase and Stock Award Plan. Peter E. Haas, Sr.
purchased no securities of LSAI during such period.
ITEM 2. IDENTITY AND BACKGROUND.
Item 2 is hereby amended and restated in its entirety as follows:
This Statement is filed jointly by LSAI, the issuer of the
securities which are the subject of the 13e-3 transaction,
Holdings, Merger Sub, Mr. Robert D. Haas and Mr. Peter E. Haas, Sr.
Holdings and Merger Sub are each corporations organized under the
laws of the State of Delaware. Holdings and Merger Sub have been
organized for the purpose of consummating the Transaction and have
no other business activities. The address of each of Holdings and
Merger Sub is c/o Hellman and Friedman, One Maritime Plaza, Suite
1200, San Francisco, California 94111. The business address of
Messrs. Haas is Levi Strauss Associates Inc., Levi's Plaza, 1155
Battery Street, San Francisco, CA, 94111. Neither Robert D. Haas
nor Peter E. Haas, Sr. concedes, by virtue of having filed the
Statement or any amendment thereto, that he is or should be deemed
to be engaged in a Rule 13e-3 Transaction in an individual
capacity, or in any manner other than through his interest in
Holdings as described herein.
(a)-(d), The information set forth in Appendix D to the
(g) Information Statement is incorporated herein by reference.
(e)-(f) Negative.
ITEM 6. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
Item 6 is hereby amended and restated in its entirety as follows:
(a)-(c) The information set forth in (i) the Information Statement under
the caption "FINANCING OF THE MERGER" and (ii) the Supplement
under the subcaption "Financing of the Merger" is incorporated
herein by reference.
(d) Not applicable.
5
<PAGE>
ITEM 7. PURPOSE(S), ALTERNATIVES, REASONS AND EFFECTS.
Section (d) of Item 7 is hereby amended by adding the following
thereto:
(d) Mr. Robert D. Haas, who currently owns shares of Class L Common
Stock, par value $0.10 per share, of LSAI ("Class L Shares"), and
shares of Class E Common Stock, par value $0.10 per share, of LSAI
("Class E Shares," and together with the Class L Shares, the
"Shares"), and Mr. Peter E. Hass, Sr., who currently owns Class L
Shares, will, as a result of the Merger, no longer own such
securities directly and, accordingly, their direct interest in the
net book value and net earnings of LSAI will fall to zero. Messrs.
Haas will continue to hold indirect interests in LSAI through their
respective interests in Holdings following the Merger, although it
is not currently possible to estimate the size of these indirect
interests. To the extent Messrs. Haas hold Shares immediately prior
to the consummation of the Merger, they will receive cash for
those Shares as a result of the Merger (in the case of Robert D.
Haas, all such Shares will be Class E Shares).
ITEM 8. FAIRNESS OF THE TRANSACTION.
Sections (a) and (b) of Item 8 are hereby amended and restated in
their entirety as follows:
(a) The information set forth in (i) the Information Statement under
the caption "SPECIAL FACTORS -- Fairness of the Transaction;
Recommendations" and (ii) the Supplement under the subcaption
"Fairness of the Merger" is incorporated herein by reference.
(b) The information set forth in (i) the Information Statement under
the captions "SPECIAL FACTORS -- Fairness of the Transaction;
Recommendations" and " -- Opinion of the Financial Advisor" and
(ii) the Supplement under the subcaption "Fairness of the
Merger" is incorporated herein by reference.
ITEM 9. REPORTS, OPINIONS, APPRAISALS AND CERTAIN NEGOTIATIONS.
Item 9 is hereby amended and restated in its entirety as follows:
(a) The information set forth in the Information Statement under the
captions "SPECIAL FACTORS -- Background of the Merger,"
"-- Fairness of the Transaction; Recommendations" and "-- Opinion
of Financial Advisor" is incorporated herein by reference.
(b) The information set forth in (i) the Information Statement under
the captions "SPECIAL FACTORS -- Background of the Merger" and " --
Opinion of Financial Advisor" and (ii) the Supplement under the
subscription "November 1995 Morgan Stanley Valuation" is
incorporated herein by reference.
(c) The information set forth in (i) the Information Statement under
the caption "SPECIAL FACTORS -- Opinion of Financial Advisor"
and (ii) the Supplement under the subcaption "November 1995
Morgan Stanley Valuation" is incorporated herein by reference.
-6-
<PAGE>
ITEM 12. PRESENT INTENTION AND RECOMMENDATIONS OF CERTAIN PERSONS WITH
REGARD TO THE TRANSACTION.
Item 12 is hereby amended and restated in its entirety as follows:
(a)-(b) The information set forth in (i) the Information Statement under
the captions "SPECIAL FACTORS -- Background of the Merger", and
" -- Fairness of the Transaction; Recommendations" and (ii) the
Supplement under the subcaption "Fairness of the Merger" is
incorporated herein by reference.
ITEM 14. FINANCIAL INFORMATION.
Section (a) of Item 14 is hereby amended and restated in its
entirety as follows:
(a) The information set forth in LSAI's Annual Report on Form 10-K for
the year ended November 26, 1995; LSAI's Annual Report on Form 10-K
for the year ended November 27, 1994; and LSAI's Annual Report on
Form 10-K for the year ended November 28, 1993; and LSAI's
Quarterly Reports on Form 10-Q for the quarters ended February 26,
1995, May 28, 1995 and August 27, 1995 are incorporated herein by
reference.
ITEM 17. MATERIAL TO BE FILED AS EXHIBITS.
Item 17 is hereby amended by renumbering the existing Exhibit (d)
as Exhibit (d)(1), and by adding the following thereto:
(b)(3) Presentation of Morgan Stanley & Co. Incorporated
(b)(4) Opinion of Morgan Stanley & Co. Incorporated
(d)(2) Supplement to Information Statement.
-7-
<PAGE>
SIGNATURE
---------
AFTER DUE INQUIRY AND TO THE BEST OF ITS KNOWLEDGE AND BELIEF, EACH OF
THE UNDERSIGNED CERTIFIES THAT THE INFORMATION SET FORTH IN THIS AMENDMENT IS
TRUE, COMPLETE AND CORRECT.
LEVI STRAUSS ASSOCIATES INC.
By: /s/ Joseph M. Maurer
------------------------
Name: Joseph M. Maurer
Title: Vice President and Treasurer
LSAI HOLDING CORP.
By: /s/ Robert D. Haas
------------------------
Name: Robert D. Haas
Title: President
LSAI ACQUISITION CORP.
By: /s/ Robert D. Haas
------------------------
Name: Robert D. Haas
Title: President
ROBERT D. HAAS
By: /s/ Robert D. Haas
------------------------
PETER E. HAAS, SR.
By: /s/ Peter E. Haas, Sr.
------------------------
Date: March 13, 1996
<PAGE>
EXHIBIT INDEX
The Exhibit Index is hereby amended by renumbering the existing Exhibit (d)
as Exhibit (d)(1) and adding the following thereto:
(b)(3) Presentation of Morgan Stanley & Co.
Incorporated
(b)(4) Opinion of Morgan Stanley & Co. Incorporated
(d)(2) Supplement to Information Statement.
<PAGE>
VALUATION OF
LSAI COMMON STOCK
-----------------
December 14, 1995
<PAGE>
CONFIDENTIAL
MATERIAL PRESENTED TO LEVI STRAUSS ASSOCIATES INC.
The following pages contain material that was provided to Levi Strauss
Associates Inc. (the "Company") in connection with a periodic valuation (the
"Valuation") of the Common Stock of the Company. The accompanying material was
prepared for use solely by the Company and not with a view toward public
disclosure under federal or state securities laws. The information contained in
this material was obtained from the Company and other sources without
independent verification by Morgan Stanley & Co. Incorporated or is derived
therefrom. No representation or warranty, express or implied, is made as to the
accuracy or completeness of such information.
Any estimates and projections contained herein, including any financial
projections for the Company which have been prepared by the management of the
Company involve numerous and significant subjective determinations which may or
may not be correct. Because this material was prepared for use solely in the
context of a presentation or presentations to the Company, was not prepared to
comply with the disclosure standards set forth under any securities laws and may
be used by persons not as familiar with the business and affairs of the Company
as the persons at the Company who directed Morgan Stanley to prepare this
report, the Company, Morgan Stanley & Co. Incorporated and their respective
legal and financial advisors and accountants disclaim any responsibility to any
such person relating to the use of any of the material contained herein. Neither
the Company, nor Morgan Stanley & Co. expects to update or otherwise revise the
accompanying materials.
<PAGE>
LEVI STRAUSS ASSOCIATES INC.
- --------------------------------------------------------------------------------
Table of Contents
<TABLE>
<S> <C>
SECTION I EXECUTIVE SUMMARY
SECTION II MORGAN STANLEY'S VALUATION ASSIGNMENT
SECTION III VALUATION METHODOLOGY
SECTION IV COMPANY OVERVIEW
Tab A Business Review
Tab B Consolidated Financial Results/Projections
Tab C Adjustments to Projections
SECTION V FACTOR'S AFFECTING THE VALUE OF LSAI'S COMMON STOCK
Tab D Economic Outlook
Tab E Securities Market Environment
Tab F Apparel Industry Overview
APPENDIX FINANCIAL ANALYSIS
</TABLE>
<PAGE>
EXECUTIVE SUMMARY
-----------------
Levi Strauss Associates Inc. ("LSAI" or the "Company") has asked Morgan Stanley
& Co. Incorporated ("Morgan Stanley") to determine the public market value of
the Class E and Class L Common Stock (collectively, the "Common Stock") of Levi
Strauss Associates Inc. ("LSAI" or the "Company") as of November 30, 1995 (the
"Valuation Date").
This report is a detailed explanation of the information reviewed and the
valuation methodology utilized in forming our opinion. As described more fully
in this valuation appraisal ("Appraisal" or the "Report"), Morgan Stanley has
concluded that the public market value of the Company's common shares as of the
Valuation Date was:
<TABLE>
<CAPTION>
--------------------------------------------
PUBLIC MARKET VALUE
-----------------------
TOTAL EQUITY
DATE PER SHARE VALUE
--------------------------------------------
<S> <C> <C>
November 30, 1995 $189 $10,103MM
--------------------------------------------
</TABLE>
-1-
<PAGE>
VALUATION ASSIGNMENT
--------------------
The Company has asked Morgan Stanley to provide its opinion as to the public
market value of the common shares of LSAI as of November 30, 1995, using certain
assumptions specified by the Company set forth below. In the engagement letter
relating to this assignment (the "Engagement Letter"), Morgan Stanley has been
instructed not to take into account the possibility or nature of the capital
structure transaction currently being contemplated by the Company and the
holders of Class L Common Stock (the "Contemplated Transaction"). It is
understood that this valuation opinion may be used by the Company to evaluate
certain transactions in connection with the Contemplated Transaction and for the
other purposes described in the Engagement Letter. Morgan Stanley has not been
asked to determine, and this valuation opinion does not opine to, the fairness
to the Company, or to any holders of the Class E Common Stock or Class L Common
Stock, of the Contemplated Transaction, or of any other capital structure
transaction.
For purposes of our valuation, Morgan Stanley has relied upon a definition of
public market value as "the price at which shares of LSAI would have traded as
of the Valuation Date, in a public market, had there been such a public market
for LSAI stock on the Valuation Date, without any effect given to an acquisition
or control value, or to a private market discount factor."
REVIEW OF RELEVANT INFORMATION
- ------------------------------
Morgan Stanley believes that a critical component of developing an opinion as to
the value of LSAI's common stock is to be well informed regarding both the
historical performance of the Company as well as its projected performance. In
fact, we base our valuation views primarily on LSAI's projected
-2-
<PAGE>
performance rather than on historical performance. Standard practice and
current financial theory all point to the importance of future earnings and
future ability to pay dividends when valuing equity securities.
In connection with rendering our valuation opinion, Morgan Stanley has performed
the following analyses:
(i) reviewed the consolidated audited financial statements of LSAI for
recent years and interim periods preceding the Valuation Date and
certain other relevant financial and operating data of LSAI made
available to us from published sources and from the internal records
of the Company;
(ii) reviewed financial projections and certain internal financial and
operating information prepared by the management of LSAI relating to
LSAI and its principal operating subsidiaries;
(iii) discussed the business and prospects of LSAI and its operating
subsidiaries with the senior management of LSAI;
(iv) compared the financial information relating to the Company's
business with published financial information concerning certain
companies whose businesses we deem to be comparable, in whole or in
part, to those of the Company;
-3-
<PAGE>
(v) analyzed the market prices and trading characteristics of the common
stock for recent periods up to the Valuation Date of certain
companies whose businesses we deem to be comparable, in whole or in
part, to those of the Company;
(vi) reviewed various securities analysts' reports and earnings
projections regarding firms in the apparel industry and general
apparel industry trends on or about the Valuation Date;
(vii) reviewed the condition of the public securities markets at the
Valuation Date;
(viii) reviewed the current economic condition and prospects for the
domestic economy and selected international economies;
(ix) reviewed the Registration Statement which relates to the Company's
Employee Investment Plan and Employee Long-Term Investment and
Savings Plan (collectively, the "Plans") and the underlying Plan
documents, as well as reviewed the terms of the Common Stock;
(x) performed such other analyses and examinations and conducted such
other discussions as we deemed appropriate; and
-4-
<PAGE>
(xi) discussed with internal Morgan Stanley experts, including equity
research analysts, economists and equity capital market
professionals, the appropriateness of using projected vs. historical
LSAI statistics, certain LSAI economic assumptions and other
questions relevant to specific Morgan Stanley experts.
We have assumed and relied upon, without independent verification, the accuracy
and completeness of the information reviewed by us for purposes of our valuation
opinion. With respect to the financial projections provided to us by the
Company, we assume that they are reasonably prepared on bases reflecting the
best currently available estimates and judgments of the future financial
performance of LSAI.
As discussed earlier, a critical component of Morgan Stanley's valuation
involves developing a thorough understanding of the Company's recent results
and, more important, projected results through extensive due diligence with
LSAI's senior management, the most important of which took place at LSAI's
headquarters on December 4, 1995, prior to rendering our valuation opinion.
During these due diligence sessions, Morgan Stanley discussed LSAI's business
with divisional heads and senior members of the finance staff. Representative
information reviewed by Morgan Stanley included: historical and projected unit
sales, fashion trends, review of new products, review of product mix and
margins, review of customer service initiatives, analysis of product sourcing,
market share, review of distribution channels, status of major customers,
current bookings, and current price points - expected price increases/decreases
and markdowns, if any.
-5-
<PAGE>
Morgan Stanley also reviewed LSAI's overall business strategy during these due
diligence sessions and discussed potential new products, ventures and markets.
In addition, we reviewed with LSAI's senior management the competitive situation
in each of the Company's respective markets, focusing on appropriateness of the
comparable companies, competitor's size, market share vis-a-vis LSAI, principal
products and historical and projected patterns of growth. Senior members of
LSAI's finance staff reviewed, identified and explained all non-recurring items
and discussed any planned changes to the capital structure (e.g., special
dividends, share repurchases, etc.) and the impact these changes could have on
LSAI going forward.
Morgan Stanley's valuation opinion is rendered on the basis of economic and
securities market conditions prevailing as of the Valuation Date, and the
conditions and prospects of the Company, financial and otherwise.
MORGAN STANLEY'S QUALIFICATIONS
- -------------------------------
Morgan Stanley & Co. Incorporated is a global firm providing a wide range of
financial services to corporations, governments, financial institutions and
individual investors. Morgan Stanley was formed in 1935 when U.S. securities
legislation separated commercial banking from investment banking. J.P. Morgan
remained a commercial bank and Morgan Stanley was created to focus on financial
advice and securities underwriting for Fortune 100 corporations, leading foreign
corporations and governments. Currently, our businesses include securities
underwriting, distribution and trading; placement of private and restricted
equity to institutional and private investors; merger, acquisition,
restructuring, real estate, project finance and other corporate advisory
activities; merchant banking and other principal investment activities;
brokerage and research
-6-
<PAGE>
services; asset management; the trading of foreign exchange and commodities as
well as derivatives on a broad range of asset categories; and global custody,
securities clearance services and securities lending.
Today, Morgan Stanley has twenty-five offices worldwide with the head office in
New York. Other North American locations include Chicago, Houston, Los Angeles,
Montreal, San Francisco and Toronto. Overseas European offices include
Frankfurt, London, Luxembourg, Madrid, Milan, Paris and Zurich. In Asia and the
Pacific Rim, Morgan Stanley is supported by offices in Beijing, Hong Kong,
Melbourne, Seoul, Shanghai, Singapore, Taipei and Tokyo. The firm recently
opened offices in Moscow, Sydney, Johannesburg and Bombay.
Morgan Stanley takes a long-term, team-oriented approach to both client coverage
and the execution of transactions. The firm has extensive experience in pricing
and underwriting primary and secondary common stock offerings and in acting
either as agent or principal in transactions of blocks of common stock on
various national securities exchanges and in over-the-counter markets. Morgan
Stanley, through a group of equity private placement specialists, negotiates the
private placement of blocks of common stock which are restricted from public
sale or for which there is no public market. Drawing on this experience in
underwriting, brokerage and market making, Morgan Stanley also provides
evaluations of proposed security transactions, such as the fairness of merger
and acquisition terms for inclusion in a prospectus or proxy statement, and
advises on the structure of, and negotiates, corporate mergers and acquisitions.
Consequently, there is a day-to-day exposure to the securities markets and to
developments affecting market prices, which is important in the valuation of
securities.
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Morgan Stanley also provides appraisals for corporations with respect to the
fair market value of a corporation's securities for estate, tax and ESOP
purposes. Morgan Stanley has been called upon to testify before federal and
state courts and to serve as arbiter under the auspices of the American
Arbitration Association.
INVESTMENT BANKING DIVISION
- ---------------------------
The Investment Banking Division, which has a staff of more than 1,500, raises
capital and provides advice for Morgan Stanley's clients worldwide. The
division is organized into five main groups: Corporate Finance, Mergers,
Acquisitions & Restructuring, Capital Market Services, Project Finance and Real
Estate. Through these groups, Morgan Stanley manages and underwrites public and
private offerings of debt and equity securities in all major markets. The firm
also provides advisory and related services for mergers, acquisitions,
restructurings, project financings, Real estate holdings and other major
financial transactions.
Corporate Finance Services
- --------------------------
Corporate Finance: Corporate Finance is responsible for initiating, developing
and maintaining Morgan Stanley's investment banking relationships with clients
worldwide; for providing financial advice; and, in partnership with other
specialized areas of Morgan Stanley, for executing specific client transactions.
Through a global network of regional and industry specialist teams, the
Corporate Finance Department reaches a wide variety of public and private sector
clients on six continents. U.S.-based professionals are located in New York,
Chicago, Los Angeles, Houston, Menlo Park and San
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Francisco, while approximately 40% of the department's professional staff is
located outside the United States. Regional coverage groups provide a strong
Morgan Stanley presence in Canada, Europe, Latin America, the Middle East,
Africa, the Far East and Australia. Industry groups provide special expertise
in the commercial banking, food and beverage, health care, insurance, media,
natural resources, public utilities, apparel/retail, technology,
telecommunications and transportation sectors. Corporate Finance also has a
group that specializes in advising financial buyers on acquisitions,
divestitures, and debt and equity financings.
Working in close coordination with product specialists throughout the Firm, our
Corporate Finance teams develop creative solutions to meet clients' needs.
These solutions often involve implementing strategic initiatives, including
financings in the global capital markets, domestic and cross-border mergers,
acquisitions and joint ventures, Real estate sales and related services, and
complex corporate restructurings, recapitalization and lease transactions.
Financing Services: Financing Services professionals in New York, London and
Tokyo are responsible for leading and coordinating client teams in the execution
of equity offerings (initial public offerings, reverse leveraged buy-outs and
recapitalizations, convertible securities, derivative securities, common stock
and warrants), complex debt issuances (high-yield offerings and structured
transactions) and other capital market transactions.
Global Infrastructure and Leasing
- ---------------------------------
The Global Infrastructure and Leasing group is headquartered in London, and has
additional professionals in New York, Hong Kong, Sydney and Beijing. It
specializes in complex advisory
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assignments requiring a high level of expertise and a strong presence in
financial markets around the world. Throughout 1995, experienced Project
Finance professionals advised sponsors of infrastructure, power generation, oil
and gas, pipeline, petrochemical, forest products, telecommunications and
transportation projects in North and South America, Europe, the Middle East,
Asia / Pacific and Africa. The Firm continues to act as overall financial
advisor to the Hong Kong government in its $20 billion port and airport
development project.
Mergers, Acquisitions and Restructuring
- ---------------------------------------
Morgan Stanley's Mergers, Acquisitions & Restructuring professionals integrate
extensive transaction experience with a comprehensive understanding of the
regulatory, tactical and structural aspects of complex investment banking
transactions worldwide. This transaction expertise is complemented by a
specialized knowledge of a wide variety of industries and geographic regions. A
close working relationship between Mergers, Acquisitions & Restructuring and
specialists from other areas of the Firm ensures that the analytical skills,
creativity and experienced judgment of Morgan Stanley investment banking
professionals around the world are effectively marshaled in helping our clients
achieve their financial and strategic objectives. The department is comprised
of Mergers, Acquisitions & Restructurings and the Princes Gate Investment Fund.
Mergers and Acquisitions: The Mergers, Acquisitions & Restructuring Group has
more than 150 professionals worldwide, serving clients from offices in New York,
San Francisco, London, Tokyo and Hong Kong. Morgan Stanley's worldwide
leadership in merger, acquisition and strategic advisory services positioned the
firm to benefit from the heightened merger and acquisition activity in 1994 and
the record year to date in 1995. It participated in many of the year's largest
and most
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strategically significant transactions, including acquisitions, divestitures,
mergers, joint ventures, spin-offs and restructurings. In 1994 Morgan Stanley
completed 73 transactions in North America with a combined aggregate value of
more than $59 billion. In the first three quarters of 1995, Morgan Stanley
announced 87 transaction totaling more than $114.7 billion in aggregate value.
For example, Morgan Stanley advised Wellcome plc in its $14.1 billion sale to
Glaxo Holdings plc; First Interstate Bancorp. in its $10.1 billion hostile
defense from Wells Fargo; Chemical Banking Corp. in its $10.0 billion
acquisition of Chase Manhattan Corp.; TSB Group plc in its $8.1 billion merger
with Lloyds Bank plc; Time Warner Inc. In its $7.5 billion acquisition of Turner
Broadcasting System, Inc.; Pharmacia in its $6.5 billion merger with Upjohn; and
AT&T in its $3.3 billion purchase of the remaining 48% of LIN Broadcasting that
it did not already own.
Princes Gate: Princes Gate Investors, L.P. is a private association of
international investors assembled by the Firm to make short- to medium-term
investments in companies requiring funds to facilitate specific strategic
objectives. Princes Gate has notional commitments of $750 million and has
invested approximately $210 million to date.
Capital Market Services
- -----------------------
Morgan Stanley has long been a world leader in public offerings of fixed income
and equity securities. Capital Market Services ("CMS") provides a link between
Morgan Stanley's Investment Banking Division and the Fixed Income and Equity
Divisions by structuring, pricing and managing public offerings and private
placements of debt and equity securities. Our service includes advice on the
structure and timing of offerings, the formation of underwriting syndicates and
the allocation of securities among underwriters. CMS professionals also work
with clients and prospective clients
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to develop sophisticated leasing and financing strategies, to provide advice on
financing opportunities in global capital markets, and to create effective
liability management techniques which will hedge currency and interest rate
exposure. As our clients' financing needs have become more complex and
international in scope, we have developed expertise in a wide range of markets,
currencies and derivative securities, steadily building on our traditional
underwriting strengths. Transaction highlights include financings for the
Tennessee Valley Authority, the Indiantown Cogeneration Power Plant, the New
Jersey Economic Development Authority, the World Bank, New Zealand, the Republic
of Portugal and the Government of France.
In the global non-investment grade debt market, Morgan Stanley lead-managed or
co-managed high-yield financings totaling more than $7 billion in 1994. The
Global High Yield Group lead-managed the largest non-investment grade debt
offering ever for an Asian issuer, a $500 million financing for Indah Kiat Pulp
& Paper Corporation.
In 1994 Morgan Stanley was a managing underwriter for worldwide equity and
equity-related offerings totaling more than $35 billion. While the volume of
equity and equity-related new issues for U.S. issuers declined considerably in
1994, Morgan Stanley raised its volume and market share significantly, lead-
managing more than $10 billion, approximately 15%, of public equity and equity-
linked issues for U.S. issuers.
In the first three quarters of 1995, Morgan Stanley has lead managed over $17
billion in equity and equity related issues. Morgan Stanley lead-managed the
$588 million U.S. tranche of the initial public offering for Royal PTT
Nederland, the Dutch telecommunications service provider. Morgan
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Stanley also led the U.S. tranches of the $467 million offering for SGS-Thompson
Microelectronics, and the $683 million offering for TeleWest Communications.
For Asian and Latin American issuers, Morgan Stanley lead-managed approximately
$2.6 billion of equity and equity-related offerings.
Morgan Stanley Realty
- ---------------------
Morgan Stanley plays an important role in accessing Real Estate capital through
traditional and emerging markets sources for corporations, institutions and
developers. Our Real Estate professionals in New York, London, Tokyo and Hong
Kong provide clients with global resources, expertise and innovative solutions
to achieve their diverse objectives. In 1994, the Morgan Stanley Real Estate
Fund I, L.P. continued as one of the most active Real estate investors in the
United States, having acquired over $2.9 billion of property. Morgan Stanley
also launched a second fund with investments and co-commitments over $900
million, which is among the largest private equity pools targeting investment in
Real estate.
RESEARCH DIVISION
- -----------------
By covering the equity and fixed income markets as well as the overall economy,
our global research department seeks to assist clients in making informed
investment and financing decisions. Portfolio strategy, based on fundamental as
well as market analysis, is used to emphasize important relative trends and to
support country, industry and individual stock recommendations.
As of the Valuation Date, approximately 134 equity analysts, strategists and
economists covered close to 70 industries and 1,660 companies. Equity coverage
provides research on virtually all major industry groups on a global basis,
including autos, banking, capital goods, chemicals, consumer
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goods, health care, insurance, media, natural resources, retailing/apparel,
technology, telecommunications, transportation and utilities. In the United
States alone, Morgan Stanley Research covers approximately 45 retail and apparel
manufacturing companies.
Of particular importance to this valuation is Morgan Stanley's research coverage
of the textiles and apparel industry, led by Josephine Esquivel. A member of
Institutional Investor's 1995 All-America Research Team, Esquivel covers sixteen
textile and apparel companies, including all but two of the comparable companies
used in this valuation. Esquivel joined Morgan Stanley from Lehman Brothers in
February 1995. Since then, she has been critical in our assessment of LSAI's
comparable companies.
Morgan Stanley Capital International (MSCI), the Firm's global financial
information database, provides investors around the world with well-known
publications, benchmark indices (including the World and EAFE(R) Index) and
electronic data on more than 4,000 companies in 45 developed and emerging market
countries through a variety of print, electronic and software vendor-supported
products.
Our fixed income research includes analytical research, credit and high-yield
research, and portfolio strategy. These activities aid in the marketing of the
Firm's fixed income products and services.
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OTHER DIVISIONS
- ---------------
Morgan Stanley also provides various financial and advisory services through
nine other global business units: Equity, Fixed Income, Merchant Banking, Asset
Management, Foreign Exchange, Commodities, Morgan Stanley Services, and Finance,
Administration and Operations.
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VALUATION METHODOLOGY
---------------------
INTRODUCTION TO VALUATION METHODOLOGY
- -------------------------------------
Valuation of a company generally involves the use of three distinct methods: (1)
an analysis of the trading characteristics of publicly-traded comparable
companies; (2) an analysis of the prices paid for similar businesses in private
market transactions (acquisitions or mergers); and (3) an analysis of the
present value of the future stream of dividends or cash flows generated by the
business plus a terminal value. In the valuation of LSAI common stock, we
believe the latter two methods are inappropriate given that they generate a
value for the company which includes a premium necessary to assume control of
the operations (commonly referred to as a "control premium").
Therefore, in the absence of an operative public market for a security such as
LSAI's common stock, we believe that the best alternative for valuing such a
security is to seek guidance from the prices investors are willing to pay for
securities of comparable publicly-traded companies. As such, Morgan Stanley
chose to rely upon this approach in determining the fair market value of LSAI's
common stock.
DETERMINATION OF PUBLIC MARKET VALUE
- ------------------------------------
As discussed in detail starting on page 18, Morgan Stanley first identified a
group of companies we considered comparable to LSAI. We then reviewed the
historical and projected financial performance of the comparable companies. The
financial statistics analyzed included revenues, earnings before interest,
taxes, depreciation, and amortization ("EBITDA"), earnings before interest and
taxes ("EBIT"), cash flow and, most important, net income or earnings. In
addition to income
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statement and cash flow related items, we also reviewed the relative capital
structures of each company. In our opinion, in the current market environment,
profitable companies like LSAI are valued primarily on the basis of projected
earnings. Therefore, we determined at what prices the comparable companies'
shares were trading as a multiple of 1996 projected earnings. These multiples
were applied to LSAI's 1996 projected earnings to arrive at an estimated public
market value of LSAI. As discussed in more detail later, Morgan Stanley
adjusted LSAI's projected earnings for extraordinary items and upside or
downside we identified in LSAI's plan. The public market value per share of
LSAI common stock was then determined based on the total number of common shares
outstanding including all options.
COMPARABLE COMPANIES ANALYSIS
- -----------------------------
Morgan Stanley's selection of the comparable companies, as detailed below,
reflects numerous operating and financial similarities that the comparable
companies share with LSAI. The primary criteria in determining the appropriate
comparables include the following characteristics: comparability of business,
similarity of product lines, strong brand name, distribution channels,
manufacturing, financial health, international presence, size, leverage, and
comparability of end consumer.
SELECTION OF COMPARABLE PUBLICLY TRADED COMPANIES
- -------------------------------------------------
Morgan Stanley identified seven companies, all domestic, publicly traded,
apparel manufacturing and retailing firms, that we believed were the most
comparable to LSAI as of the Valuation Date. Although every company may not be
directly comparable according to each selection criterion, overall this group
represents our best market judgement (arrived at with the assistance of
Josephine
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Esquivel, Morgan Stanley's apparel research analyst who would cover LSAI if it
were a public company) for how we might expect LSAI to trade were it a public
company. The following points detail our selection criteria:
. COMPARABILITY OF BUSINESS - In choosing comparable companies, Morgan
-------------------------
Stanley reviewed the similarity of product lines, size of the business,
whether there were international sales, the strength of the brand name,
distribution channels, manufacturing capability vs. design, financial
characteristics and end consumer. LSAI is the world's largest brand-name
apparel manufacturer.
. SIMILARITY OF PRODUCT LINES - As apparel items become more expensive and
---------------------------
fashion-sensitive, they become more cyclical than moderately priced and
less fashion-sensitive items. Companies with more staple-oriented items
display differences in profit margin, competitive position and market
share, product cycles and business risks from the higher-priced, more
cyclical, fashion-sensitive apparel manufacturers. LSAI's product lines
consist primarily of basic jeans and jeans-related products, as well as
slacks, shirts, jackets, skirts and fleece.
. STRONG BRAND NAME - Manufacturers of branded products are often able to
-----------------
charge higher prices relative to private label manufacturers, leading to
higher margins. Consequently, all else equal, the equity of an apparel
manufacturer of branded products would likely trade at a premium to an
apparel manufacturer of private label products. LSAI has created two of
the world's strongest brand names in apparel, LEVI'S(R) and DOCKERS(R).
-18-
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. DISTRIBUTION CHANNELS - The distribution channels utilized by a company
---------------------
also affects profitability. A company with distribution through retail
outlets and mass merchandisers would likely achieve lower margins than
those companies whose primary means of distribution is through higher
quality outlets and specialty stores. LSAI distributes primarily through
department stores, specialty stores, and national chains.
. MANUFACTURING - Apparel suppliers are also differentiated according to
-------------
their vertical integration, with pure manufacturing companies broadly
characterized as cyclical and economically sensitive. Some apparel
suppliers have less exposure to the manufacturing of products and are tied
more directly to the retail/service marketing side of the apparel industry.
Such differentiation in manufacturing intensity affects the cyclicality and
economic sensitivity of these companies, in turn affecting their trading
behavior. Approximately half of LSAI's products are manufactured by
outside contractors with the balance produced in LSAI owned and operated
facilities.
. FINANCIAL HEALTH - As noted earlier, expected earnings are generally
----------------
considered a critical variable in determining a company's equity value.
Companies that the market believes will show consistent sustainable
earnings growth are the ones most likely to realize premium valuation
multiples. LSAI has achieved a compound annual growth rate in earnings of
15% from 1991 to 1995, higher than all of its comparable companies for
that period.
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. INTERNATIONAL PRESENCE - A company with a profitable international presence
----------------------
will likely trade at a premium to a purely domestic, but otherwise similar,
company. On the other hand, a company with international operations will
tend to have a higher amount of volatility associated with its earnings -
as currency markets and economic influences abroad affect the demand for
that company's products. Over one third of LSAI's revenues are generated
earnings internationally.
. SIZE - In choosing comparable companies, size is important, but not as
----
critical as some of the other factors discussed above. The market may
discount a company for not having the critical mass necessary to overcome
certain operating risks associated with a lack of size. Alternatively, the
growth prospects of a very large company may be lower than those of a
company with relatively lower sales and earnings. LSAI has achieved
consistent growth while maintaining greater size than virtually all of its
comparable companies.
. LEVERAGE - As a company becomes more highly leveraged, it increases its
--------
degree of financial risk. One result of this additional financial risk is
an increased cost of capital for the company. A leveraged company will
often command a lower earnings multiple than a less leveraged, but
otherwise similar, company. LSAI is currently carrying a cash surplus with
no long-term debt.
. COMPARABILITY OF END CONSUMER - The demographic characteristics of a
-----------------------------
company's customer base can significantly affect the company's financial
performance. For example, starting in the early 1980's, the apparel market
in the United States was affected by a major
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demographic development: the maturation of the "baby-boom" generation. For
the apparel industry, this development created reduced demand for jean
manufacturers' products and an increase in demand for higher margin,
conservative casual and active wear apparel. Short term trends in the
fashion industry, as they relate to a particular company's demographic
target group, can also affect financial performance. Thus, we would expect
companies with comparable end consumers to be similarly affected by changes
in fashion trends and demographics. LSAI targets a wide range of end
consumers of varying income and age levels with it diverse product lines.
The Gap Inc. ("Gap"), which we believe is an excellent comparable Company to
LSAI, is a good example to illustrate the application of our selection criteria.
Gap markets basic apparel products similar to LSAI that include jeans and jeans
related products, as well as slacks, shirts, jackets, skirts and fleece. It
enjoys excellent brand name recognition. It has achieved solid earnings growth,
significant size and a growing international presence. Most important, the Gap
competes directly for the same consumer dollar as LSAI and is exposed to similar
risks including raw material cost fluctuations and changes in consumer
demographics, tastes and income.
There are, however, several areas where the Gap differs distinctly from LSAI.
The most obvious difference is method of distribution. Whereas LSAI distributes
primarily through retail outlets such as department stores, the Gap sells its
products almost exclusively through company-owned stores. Another key difference
is the lack of manufacturing by the Gap compared to LSAI. Finally, from a
capital structure perspective, the Gap maintains a significantly higher degree
of leverage than LSAI.
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Despite the aforementioned differences, we feel that the Gap is one of the most
comparable companies to LSAI. This judgement is shared by our research analyst,
Josie Esquivel, with whom we have had extensive discussions on this topic. This
discussion of the Gap illustrates our point that good comparable companies need
not adhere to every selection criterion, but should closely resemble the
business of LSAI on an overall basis.
At each valuation, we reevaluate the comparable companies to ensure that we are
using the most appropriate group. Although we try to maintain consistency in
the group over time, occasionally situations arise with the selected comparable
companies that may make them more or less comparable to LSAI. For instance, in
this valuation, we have excluded Reebok from the calculations of the mean P/E
ratios used in our valuation of LSAI for several reasons. Reebok's price
performance has been contrary to its peer group. The company has experienced
poor financial performance relative to both its own historical performance and
the performance of its peers. Furthermore, Reebok has experienced significant
management upheaval with both the President and CEO resigning this year amid
significant shareholder criticism. For these and other reasons, we believe
Reebok may not be a good comparable company for LSAI at this point in time.
ADJUSTMENTS TO NET INCOME
- -------------------------
Analysts and the market in general focus on the projected normalized earnings
potential of a company. Therefore, Morgan Stanley has eliminated certain
extraordinary or non-recurring gains and losses in determining the appropriate
LSAI net income and other financial statistics.
-22-
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BUSINESS REVIEW
---------------
OVERVIEW OF LSAI
- ----------------
LSAI acquired Levi Strauss & Co. ("LS&CO") in August 1985 (the "Acquisition" or
"LBO") and is the world's largest brand-name apparel manufacturer. LSAI
designs, manufactures and markets apparel for men, women and children, including
jeans, slacks, shirts, jackets, skirts and fleece. The Company's products are
marketed primarily under the LEVI'S(R) and DOCKERS(R) trademarks and are sold in
the United States and throughout North America, South America, Europe, Asia and
Australia.
The Company's revenues are derived mostly from the sale of jeans and jeans-
related products. Jeans include pants of a "jeans-type" construction, that are
made of denim, corduroy, twill and other fabrics. Jeans and jeans-related
products generate approximately three quarters of LSAI's total sales and were
the mainstays of the Company's profitability in the years preceding the
Valuation Date. Casual sportswear (mostly natural fiber tops and pants marketed
under the DOCKERS(R) brand that are not jeans or jeans-related) has also become
an important source of revenues in the U.S. for LSAI.
ORGANIZATIONAL STRUCTURE
- ------------------------
LSAI's current operating structure consists of two principal organizations: Levi
Strauss North America ("LSNA") and Levi Strauss International ("LSI").
LSNA's operating structure is organized along brand lines: LEVI'S(R), DOCKERS(R)
and BRITTANIA(R) Sportswear Ltd. The LEVI'S(R) division markets jeans and
jeans-related products for
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men, women and youth. The DOCKERS(R) division markets DOCKERS(R) products and
casual products for men, women and youth. The Canada and Mexico divisions
market mostly jeans, jeans-related and DOCKERS(R) products. BRITTANIA(R)
Sportswear Ltd. markets the BRITTANIA(R) line of men's and women's jeans, tops
and casual sportswear in the U.S. LEVI'S(R) and DOCKERS(R) men's products are
the Company's most important source of U.S. sales and earnings.
LSI markets jeans and related apparel outside North America and is a major
source of operating income for the Company. Its principal sourcing method is
owned and operated facilities in each country. LSI is organized along
geographic lines consisting of the Europe, Latin America and Asia Pacific
divisions. Europe is the largest non-U.S. division in terms of sales and
profits. Asia Pacific is the second largest LSI division, principally due to
the size of its Japanese operations.
U.S. OPERATIONS
- ---------------
LSAI's U.S. operations include LEVI'S(R), DOCKERS(R) and BRITTANIA(R) which,
along with Canada and Mexico, constitute the LSNA organization. Each U.S.
division maintains its own merchandising, sales and advertising staff.
The Company manufactures and markets basic jeans, branded casual products and
jeans-related products in a wide range of moderately-priced apparel categories.
The 501(R) family of jeans, other basic denim jeans and related jeans products
have traditionally been the Company's key products. In addition to the 501(R)
products, the LEVI'S(R) men's division also markets Silver Tab(TM), Orange
Tab(TM) and Red Tab(TM) product lines. The LEVI'S(R) women's brand markets jeans
and casual sportswear products for the 501(R), Red Tab(TM), Silver Tab(TM), 900
Series(R) and DOCKERS(R) product
-24-
<PAGE>
lines. The LEVI'S(R) Youth brand markets jeans and casual youthwear products
for the 501(R), DOCKERS(R) and LITTLE LEVI'S(TM) product lines. The men's
DOCKERS(R) brand organization manufactures and markets men's casual and dress
slacks and men's knit and woven shirts under the DOCKERS(R) brand name and
LEVI'S(R) ACTION and LEVI'S(R) TRAVELERS product lines. Both the women's and
youth DOCKERS(R) brand markets casual sportswear under the DOCKERS(R) product
line. BRITTANIA(R) Sportswear Ltd. manufactures and markets men's and women's
jeans, tops and casual sportswear under the BRITTANIA(R) and BRITTGEAR(TM)
labels.
The Company plans to launch the Slates(TM) brand in the Fall of 1996. This brand
will add a third component to the Company's presence in the men's pants business
by occupying a position between casual pants and tailored clothing and offering
a younger attitude than traditional dress pants. The target market for this
brand will be male consumers aged forty and over.
Record dollar sales were established for fiscal year 1995 to the LEVI'S(R)
brand. The men's jeans business established record levels of unit and dollar
sales, with favorable comparisons to prior year levels in all major product
categories. Additionally, strong performance in LEVI'S(R) WOMEN'S jeans, the
most successfully selling jeans in the junior market, contributed to the higher
sales. Major areas of growth continue to be in basic jeans related products
(Red Tab(TM) and Orange Tab(TM)), SilverTab(TM) products and shirts.
Sales of DOCKERS(R) brand increased in fiscal year 1995 as a result of the
continued popularity of men's products in North America, specifically the
wrinkle-resistant products. Offsetting these strong sales were the continued
decreased sales of women's and youthwear products.
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<PAGE>
Fiscal year 1995 BRITTANIA(R) product sales decreased from fiscal year 1994. As
demand for men's products has increased slightly, women's products have shown an
overall slowdown in sales.
The Company and its largest competitor in the U.S. jeans market, VF Corporation,
account for approximately one-half of the units sold in the U.S. jeans market.
The Company believes that the combined brand share of its LEVI'S(R) and
BRITTANIA(R) products in the U.S. jeans market is second only to the combined
share of VF Corporation's four principal brands, Wrangler(R), Lee(R), Rustler(R)
and Lee Riders(R). As a result of the changing retail environment, competition
is also emerging from some of the Company's customers who have developed
private-label products (e.g., Arizona Jean Company(R) brand by J.C. Penney
Company, Inc. and Anchor Blue(R) brand by Miller's Outpost). In response to
this retailer competition, the Company is seeking to strengthen relationships
with its consumers by utilizing targeted consumer marketing, the popularity of
Original Levi's Stores and maintaining a presence on the Internet.
The DOCKERS(R) brand has surpassed its traditional competitors, Haggar in
particular, in market share. As these traditional competitors have begun to
lose retail space, specialty stores, catalogs and fully integrated lines are
presenting new competition for the DOCKERS(R) products. Further, import
competition is more prevalent in the casual apparel market than in the jeans
market. Apparel imports have generally lower labor costs and may exert downward
pressure on prices of casual wear products. This situation is limited by U.S.
trade policies that restrict apparel imports through quotas and tariffs.
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<PAGE>
The Company distributes its products through retail stores that satisfy its
account selection criteria and sell directly to the retail consumer. The
Company does not sell its first quality "in season" products to wholesalers,
jobbers or distributors, and maintains a compliance program to enforce its
distribution policy and to control unauthorized diversionary sales of its
products. The principal channels of distribution of the Company's products are
department stores, specialty stores and national chains, including the May
Company, J.C. Penney, Mervyn's and Sears Roebuck & Co. The Company believes
that industry leadership and brand strength of the Company's core products are
maintained through the use of these traditional distribution channels. The
Company distributes BRITTANIA(R) products principally through mass merchant
channels, including Kmart Corporation and Target Stores.
In order to enhance the image and values of the LEVI'S(R) and DOCKERS(R) brands,
the Company has begun implementation of a five-year plan to launch 100 Original
Levi's Stores and 45 Dockers Shops at various locations throughout the U.S. Of
the 100 Original Levi's Stores planned, 50 are to be established through a joint
venture relationship with Designs, Inc., in which the Company has a 30% equity
interest. This venture was established in January 1994. The Original Levi's
Stores sell only LEVI'S(R) and DOCKERS(R) brand products and the Company
believes that by managing these stores directly, management will learn the needs
of both retailers and consumers. Premier "Flagship" stores will be operated
only in key markets and locations most able to help the Company achieve its
primary focus of maintaining a high brand image, such as downtown urban
locations and selected high visibility regional malls. The Company plans to
operate outlet stores dedicated to each brand in key outlet malls outside major
markets.
-27-
<PAGE>
The Company devotes substantial resources to advertising and marketing programs.
In the United States, the Company advertises extensively on radio and television
and in national publications as well as on billboards and other outdoor
displays. It also participates in local co-operative advertising and visual
merchandising programs under which the Company shares advertising costs with
retailers.
In 1995, LEVI'S(R) brand launched a major 501(R) product line campaign entitled
"501 Reasons" and continued several other advertising initiatives supporting
womenswear and youthwear product lines as well as a new LEVI'S(R) brand
trademark campaign. These campaigns continue the LEVI'S(R) brand's commitment
to a strong consumer marketing focus.
During 1995 the DOCKERS(R) brand launched national, regional and outdoor
advertising campaigns for men's, women's and youth DOCKERS(R) products,
respectively. Specifically, in the Fall of 1995, the DOCKERS(R) brand launched
its "Nice Pants" media campaign designed to create a consistent, younger image
for the brand.
The Company is increasing its use of in-store "shop" presentations in which the
Company influences the way its products are presented at the retail level. The
Company assists retailers in displaying products in a manner intended to enhance
the product's image and promote quality, and present a consistent brand message
to the consumer.
INTERNATIONAL OPERATIONS
- ------------------------
The Company markets products in over 40 countries outside the U.S. and explores
and evaluates new markets on an ongoing basis. Currently, the Company has the
largest brand share and strongest
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<PAGE>
brand image in virtually all of its established markets outside of the U.S. The
success in these markets is attributed to the Company's brand image and
reputation, the continuing focus on core jeans products and the quality of its
retail distribution, including stores that sell only LEVI'S(R) products.
International demand for jeans is affected by a variety of factors that vary in
importance in different countries, including socio-economic and political
conditions such as consumer spending rates, unemployment, fiscal policies and
inflation. While adjusting to the ongoing evolution in local markets around the
world, the Company strives to adapt quickly to changing consumer preferences and
to effectively communicate a consistent brand image. In many countries, jeans
are generally perceived as a fashion item rather than a basic, functional
product and, like most fashion apparel items, are higher-priced relative to the
U.S. market.
Core denim jeans, especially the 501(R) family products, continue as key
products in Europe and Canada. In Western Europe, mainly Germany, higher
volumes and more favorable pricing strategies were realized in 1995. The U.K.,
Italy, Poland and Benelux also experienced favorable margins due to the strong
demand for basic jeans products. In the Asia Pacific division, particularly in
Japan, sales have increased during the current year due to that country's
general economic recovery. However, this increase in Japan is also partially
attributable to a higher number of closeouts. Sales in other Asia Pacific
affiliates, namely the Philippines and Korea, have also increased. In Mexico,
the LEVI'S(R) brand continues to be the market share leader with sales remaining
stable in spite of the continuing recession. Brazil maintains the highest level
of sales activity within the Company's
-29-
<PAGE>
Latin America division. The Company entered the Argentina market in late 1995
and expects to further penetrate Latin America during 1996.
During 1995, strong performance for DOCKERS(R) was seen in most European
markets, although Germany did not produce anticipated sales levels. The
DOCKERS(R) line of products was launched in Japan and Australia during 1995,
adding to the list of non-U.S. markets which currently offer DOCKERS(R),
including several western European countries, the Philippines and Hong Kong.
Outside of the U.S., distribution differs from country to country due to
variances in individual retail markets. In some regions the Company's primary
customers are large chain retailers with centralized buying power. In other
countries, the retail industry is comprised of numerous smaller, less
centralized shops. Some non-U.S. customers are stores that sell only the
Company's products and are independent of the Company. The Company also
distributes to approximately 1,100 stores outside the U.S. that sell only
LEVI'S(R) brand products. These stores are strategically positioned in prime
locations around the world and offer a broad selection of premium LEVI'S(R)
products using special retail fixtures and visual merchandising. Considering
the increasingly competitive retail environment, the Company believes these
stores are of strategic importance in enhancing the brand image of LEVI'S(R)
products.
International advertising themes and strategies vary by country depending on the
culture in each country, while maintaining consistency with the global
positioning of the LEVI'S(R) brand. The Company launched the "Clayman"
campaign, the Company's first global commercial, designed to
-30-
<PAGE>
communicate a consistent image for the LEVI'S(R) brand. The Company uses media
and point of sale advertising outside the U.S. Additionally, the Company
sponsors concerts and events.
GLOBAL SOURCING
- ---------------
Apparel manufacturing in less-developed countries continues to affect global
apparel markets, including the U.S. market. These less-developed countries have
lower labor costs, and in some cases, such as in the production of shirts,
access to less expensive fabrics. The Company's U.S. owned and operated
manufacturing base is trying to stay competitive in jeans production by
achieving shorter lead-times, production flexibility, meeting production
requirements through Alternative Manufacturing Systems and Field Redesign,
focusing on quality and aggressive cost reduction and productivity improvement.
The Company's imports into the U.S. have significantly increased in the past
seven years in response to overall sales growth in casual wear apparel. These
products require more sewing and construction time and are, therefore, not as
cost competitive when sourced from the Company's U.S. owned and operated
facilities.
The Company has a few long-term contracts with certain of its manufacturing
sources and competes with other companies for third-party production capacity
and import quota capacity. Although the Company believes that it has
established close relationships with its manufacturing sources, the Company's
future success will depend in some measure upon its ability to maintain such
relationships and, more broadly, to develop and implement a long-term sourcing
plan.
-31-
<PAGE>
The Company established its Global Sourcing Guidelines (GSG) to provide
direction for selecting contractors and suppliers that provide labor and/or
material utilized in the manufacturing and finishing of its products. These
guidelines address issues that contractors and suppliers can control, for
example, sharing the Company's ethical standards and commitment to the
environment, providing workers with a safe and healthy work environment,
maintaining fair employment practices and complying with legal requirements.
The GSG also prohibits operating in countries that would have an adverse effect
on global brand image or trademarks, expose employees or representatives to
unreasonable risks, violate basic human rights, or threaten the Company's
commercial interests due to political or social turmoil. The GSG possibly
limits some of the Company's sourcing options as well as its access to certain
lower cost production.
Textile trade policy of developed countries has increased the cost of importing
apparel products produced in countries with lower labor costs through quotas and
high tariffs. However, this protection of apparel manufacturers in developed
countries, particularly the U.S., Canada, Australia, the European Free Trade
Association countries and the European Union is gradually being reduced.
The General Agreement on Tariffs and Trade (GATT) Uruguay Round agreement was
implemented on January 1, 1995. The major provision of the agreement which may
impact the Company is the phase-out of the textile and apparel quota system, the
Multifiber Arrangement (MFA). Most quotas will be eliminated after 10 years.
The North American Free Trade Agreement (NAFTA) was effective January 1, 1994.
Quota and tariffs are being phased out on apparel products of North American
origin over a six to seven year
-32-
<PAGE>
period. Tariffs on the Company's products produced in Mexico from U.S. fabric
have had immediate duty-free and quota-free access to the U.S. market.
Trade legislation which may significantly impact the Company in 1996 would be
the passage of NAFTA-like preferential tariffs for the Caribbean Basin countries
(CBI countries). This "CBI Parity" Bill was introduced in Congress in 1995 but
has been opposed by Unions and other groups. At this time, the future of this
legislation is uncertain. If it were to pass Congress, the annual savings in
Customs duties for the Company would be between $20 and $30 million per year.
SEASONALITY
- -----------
The apparel industry in the United States has four selling seasons - Spring,
Summer, Fall and Holiday. New styles, fabrics and colors are introduced on a
regular basis, based on anticipated consumer preferences, and are timed to
coincide with these retail selling seasons. Historically, seasonal selling
schedules to retailers have preceded the related retail season by two to eight
months. Outside the U.S., the apparel industry typically has two seasons -
Spring and Fall. The Company's business is impacted by the general seasonal
trends that are characteristic of the apparel industry.
EMPLOYEES
- ---------
LSAI employs approximately 36,500 people, a majority of whom are production
workers. A substantial number of production workers are employed in plants
where the Company has collective bargaining agreements with recognized labor
unions. The Company considers its employees to be an important asset of the
Company and believes that its relationships with employees are satisfactory.
-33-
<PAGE>
CONSOLIDATED FINANCIAL RESULTS/PROJECTIONS
------------------------------------------
REVIEW OF 1994 OPERATING RESULTS
- --------------------------------
The Company achieved record dollar sales in 1994 of $6.1 billion, a 3% increase
over 1993's levels. This increase was mostly the result of a 6% increase in
average unit selling prices that offset a 3% decrease in unit sales.
U.S. dollar sales of $3.7 billion for 1994 were flat with the previous year due
to a 5% increase in average unit selling prices that was offset by a 5% decrease
in unit sales. Contributing to these results were record overall dollar and
unit sales in the LEVI'S(R) brand product line. The U.S. LEVI'S(R) brand
achieved record dollar sales for the LEVI'S(R) men, women and youth product
lines. The DOCKERS(R) product line decrease reflected finishing capacity
limitations during 1994 for wrinkle-free bottoms and the repositioning of the
women's DOCKERS(R) product lines. In the U.S., the Company's top twenty-five
retail customers currently account for approximately 66% of dollar sales, which
represents a two percentage point increase over the previous two years.
Record dollar sales outside the U.S. of $2.4 billion for 1994 increased 8% over
1993, substantially due to record dollar and unit sales in the Europe division,
which experienced significantly higher results in Italy and Germany. Dollar
sales for the Asia Pacific division were flat compared to the prior year mostly
due to the slow economic recovery, increased product competition (particularly
private label) and a market shift to lower margin products, all occurring in
Japan.
-34-
<PAGE>
As a percent of sales, the 1994 gross profit percentage of 40% was two
percentage points higher than 1993 and 1992. In dollars, 1994 gross profit
increased 8% compared to the prior year period, primarily due to lower U.S.
production costs and higher overall average unit selling prices. However, this
was partially offset by the increased consumer demand for lower priced products.
U.S. men's LEVI'S(R) produced a higher percentage of lower margin Orange Tab(TM)
products and a lower percentage of certain higher margin SilverTab(TM) and
501(R) products compared to 1993. LSI continued to record higher gross profit as
a percent of sales than LSNA, mostly due to higher overall average unit selling
prices. Additionally, compared to LSNA, the non-LSI sells a greater proportion
of higher margin denim bottoms. The 1994 gross margin percentage for LSNA was
flat compared to 1993.
As a percent of sales, 1994 marketing, general and administrative expenses were
one percentage point higher than 1993 and 1992 at 25%. Marketing, general and
administrative expenses in dollars for 1994 increased 7% over 1993. This
increase was mostly due to higher advertising, administrative, selling and
information resource expenses.
Interest expense decreased 47% from 1993 primarily due to lower 1994 average
debt balances. Cash flows from operations were used to reduce debt levels over
the last two years, resulting in the lower average debt balances. The average
interest rate was approximately 18% compared to 9% in 1993 and 10% in 1992. The
increase in last year reflects the high interest markets of non-U.S. countries
where most of the Company's debt resides. The average interest rate also
reflects the negative impact of the Company's use of interest rate swap
transactions (which were all terminated by the end of 1994) to hedge interest
rate fluctuations.
-35-
<PAGE>
Net income for 1994 was $321.0 million, a decrease of 35% from 1993.
Contributing to 1994 net income were record sales, lower cost of goods sold,
higher other operating income and lower interest expense. These favorable
results were more than offset by the adoption of SFAS No. 106 and 109, higher
marketing, general and administrative expenses and greater 1994 net foreign
currency translation losses. Excluding the effects of adopting both SFAS Nos.
106 and 109, the Company would have achieved record net income results,
exceeding 1993 net income by 11%.
RESULTS FOR THIRD QUARTER AND YEAR-TO-DATE - 1995
- -------------------------------------------------
Record U.S. dollar sales of $1.1 billion and $2.9 billion for the current
quarter and year-to-date increased 7% and 9%, respectively, over the prior year
periods due to record unit sales. The women's and men's U.S. LEVI'S(R) brand
product lines record results were attributable to increased sales for Red
Tab(TM) products for juniors and Red Tab(TM) and Orange Tab(TM) products for
men. Additionally, the men's DOCKERS(R) brand product line posted record
year-to-date dollar sales reflecting the improved availability of wrinkle-
resistant products.
Record international 1995 third quarter and year-to-date dollar sales of $635.6
million and $1.9 billion increased 14% and 13%, respectively, over the
comparable periods of 1994 mostly due to record dollar and unit sales both in
the Europe and Asia Pacific divisions. The strong performance in Europe
reflects the positive effects of translation rates of certain European
currencies to the U.S. dollar and the continuing demand for the Company's basic
denim products, mainly the 501(R) family of products and other Red Tab(TM)
products. The Asia Pacific division's improved results were mostly attributable
to favorable translation rates of the Japanese Yen to the U.S. dollar and a
third quarter 1995 unit sales increase of 15% (principally in Japan and Korea).
-36-
<PAGE>
As a percent of sales, gross profit for both the current quarter and year-to-
date increased two percentage points compared to the same 1994 periods mostly
due to record unit sales, higher overall average unit selling prices and lower
U.S. production costs.
U.S. production costs for the current quarter and year-to-date were lower than
the prior year primarily due to greater utilization of production capacity at
certain U.S. owned and operated facilities in 1995. Additionally, the Company's
overall efforts directed at cost effectiveness have contributed to the lower
production costs in the current year.
The international businesses continue to record higher gross profit as a percent
of sales than businesses in the U.S., mostly due to higher overall average unit
selling prices and a more favorable product mix; the international businesses
sell a greater proportion of higher margin denim bottoms (predominantly 501(R)
and Red Tab(TM) products). The international businesses outside the U.S.
represented 49% of the Company's 1995 year-to-date profit contribution before
corporate expenses and taxes, compared to 54% in 1994. The lower year-to-date
1995 percentage was primarily due to higher U.S. sales volume throughout the
nine months of 1995 compared to 1994.
Marketing, general and administrative expenses, as a percentage of sales, for
the current quarter and year-to-date were 25% and 26%, respectively, compared to
23% and 24%, respectively, for the prior year periods. In dollars, marketing,
general and administrative expenses for the third quarter and year-to-date 1995
both increased 18% over the comparable 1994 periods. These increases were
mostly due to higher administrative, advertising, selling and distribution
expenses.
-37-
<PAGE>
Current quarter and year-to-date interest expense decreased 17% and 26%,
respectively, from the comparable periods of 1994 primarily due to lower average
debt balances. Debt reductions after the third quarter of 1994 included the
repayment and cancellation of dividend notes payable to Class L stockholders
using cash flows from operations.
The increase in the 1995 third quarter and year-to-date provision for taxes
compared to the prior year periods was primarily due to higher current quarter
and year-to-date earnings. The effective tax rate for both the current quarter
and year-to-date was 39% compared to 40% for the same periods of 1994. The one
percentage point decrease was due to a change in the mix of U.S. and non-U.S.
earnings and a decrease in taxes on the undistributed earnings of non-U.S.
subsidiaries.
The Company has negotiated with U.S. and foreign tax authorities regarding a
mutually acceptable agreement on foreign royalty payments. This Agreement has
resulted in an approximate $100 million one-time reversal of previously recorded
deferred taxes on unremitted foreign earnings. Accordingly, the 1995 effective
tax rate would decrease approximately 11 percentage points compared to 1994.
Record year-to-date 1995 net income of $458.3 million increased $331.8 million
from 1994 substantially due to strong 1995 business performance coupled with the
effects of adopting Statement of Financial Accounting Standards (SFAS) No. 106
"Employers' Accounting for Postretirement Benefits Other Than Pensions" in 1994.
Excluding the effects of adopting both SFAS Nos. 106 and SFAS No. 109
"Accounting for Income Taxes" in 1994, the Company's net income would have
increased 26% over 1994 due to the same reasons noted above for the quarter.
-38-
<PAGE>
FORECAST FOR 1996
- -----------------
As of the Valuation Date, LSAI's sales for the fiscal year ended November 1996
are projected to be $7,414 million, an 11% increase over 1995. Net income is
forecasted to be $559.1 million, a 12% decrease from the plan.
SUMMARY OVERVIEW OF LSAI'S OPERATING UNITS
- ------------------------------------------
LSNA: After strong results in 1995, management projects record levels of unit
- -----
volume to continue in 1996. The core jeans business is expected to remain
strong. The main factor driving LSAI's overall growth is the planned 20
million unit increase in LEVI'S(R) brand volume in the U.S. to a projected total
volume of 185 million units. The 1996 plan also assumes the continued rise of
the LEVI'S(R) for Women (LFW) business representing 10 million of LSNA's 20
million unit increase. LFW's 501(R) volume is projected to double to over four
million units, related to the strong acceptance of the new global fit. In the
LEVI'S(R) Youthwear area, 1996 volume is projected to increase almost 4 million
units, or 13%. All other divisions expect 1996 volume to be higher than 1995,
with the exception of DOCKERS(R). Total brand volume is expected to be down 4%
in 1996 with decreases reflected in both DOCKERS(R) for Men and Youth. In other
businesses, the Slates Brand(TM) launch is expected to add on 1 million units
over what was sold in the Dress Dockers(R), Action Slacks(TM), and Levi's
Travelers(TM) categories in 1995. The continued roll-out of original Levi's
Stores and Dockers Shops accounts for over two million units in volume next
year. Canada, Mexico, and BRITTANIA(R) volumes are all up marginally.
Total sales for LSNA are projected to increase 12% over 1995 to $4,814 million.
Management earnings in 1996 are projected to fall 15% below 1995, largely due to
expenses associated with CSSC. Excluding CSSC and workers compensation credits,
operating earnings are expected to
-39-
<PAGE>
increase approximately 8% in 1996. The 20 million unit increase in LEVI'S(R)
Brand volume is expected to be the chief contributor to this increase.
LSI: LSI plans modest increases in volume for 1996, projecting a 5% increase
- ----
over 1995 to 76 million units. No new market expansions are planned in Europe,
so all European volume increases will come entirely from existing businesses.
Increased competition in markets such as Germany, where VF Corp. has intensified
its marketing efforts, has limited volume increases in Western Europe. Eastern
Europe volumes are projected to increase 14%, reflecting solid performance in
Poland, Prague, and Hungary. Europe DOCKERS(R) are planned to more than double
1995 unit volume at over 1 million units.
In the Asia Pacific region, LSI projects 4% growth in unit volume from both new
and existing markets. The basic jeans market in Japan appears to have hit
bottom with volume pick-up possible in 1996. New markets in Asia contribute
over one half of the increased units, with double digit growth rates planned for
South Korea and Taiwan. Volume in India is expected to double in 1996.
Total sales for LSI are expected to reach $2,600 million in 1996, an increase of
8%. Management earnings, however, are expected to decrease 2% to $534 million,
due to increases in both advertising and CSI expenses.
-40-
<PAGE>
ADJUSTMENTS TO PROJECTIONS
--------------------------
EXTRAORDINARY ITEMS/ACCOUNTING CHANGES
- --------------------------------------
The principal statistic used in determining our valuation opinion of LSAI's
common stock is projected net income from continuing operations. Therefore,
Morgan Stanley adjusts LSAI's financial statements to exclude any non-recurring
and extraordinary items, including charges related to changes in accounting
method or adoption of new accounting rules (such as FAS 106 and FAS 109).
REORGANIZATION OF NORTH AMERICAN OPERATIONS: CSSC
- -------------------------------------------------
LSAI is continuing the process of reorganizing and re-engineering its North
American operations. Through this process, the Company expects to improve
customer service, formulate stronger relationships with its retail customers and
reduce the time it takes to develop products and fill customer orders. This
reorganization will affect the Company's LEVI'S(R) and DOCKERS(R) U.S.
distribution system, information system, product development process and sales
process. This reorganization does not directly involve the Company's operations
for BRITTANIA(R), Canada or Mexico.
LSAI is upgrading its national distribution network and regionally linking
manufacturing, finishing and distribution facilities. This entails the
modernization, reconfiguration and expansion of facilities, including purchases
of new facilities and equipment. Since 1993 and over the next several years,
the Company plans to incur total capital expenditures of over $400 million to
support the new system. The Company is reserving in 1996 approximately $132
million pre-tax related to its CSSC
-41-
<PAGE>
initiative. This reserve includes charges for plant closures, severance
expenses, the relocation of people and assets, systems upgrades and certain
other expenses.
After extensive discussions with the management of LSAI regarding the nature of
CSSC expenses and with internal Morgan Stanley professionals and external
advisors (primarily equity research analysts and accountants), it is our opinion
that a portion of the CSSC expenses which are one-time, transitional expenses
should be added back to net income. This is based on the belief that
extraordinary or non-recurring items are typically ignored in the valuation of
securities. Accordingly, we have adjusted LSAI's 1996 projected net income
forecast of $559.1 million by $39.2 million ($65 million pre-tax), which
represents non-recurring CSSC expenses other than physical facility and systems
upgrades. We have not adjusted net income for any expenses associated with
LSI's customer services initiatives.
UPSIDE
- ------
In our due diligence sessions with management, LSAI identified several areas of
potential upside to management's current 1996 full year forecast. In LSNA,
management believes $25 million in pre-tax earnings upside could be realized
through the sale of additional volume in the DOCKERS(R) and LEVIS(R) brands.
Furthermore, reductions in LSNA operating expenses could lead to another $20
million in pre-tax earnings.
Management believes there is substantial upside potential for LSI in 1996. By
reducing operating expenditures by 2%, pre-tax earnings could increase by $50
million. Potential additional volume
-42-
<PAGE>
of two million units could increase pre-tax earnings by another $30 million,
bringing total LSI pre-tax upside to $80 million.
In sum, we have added a total of $125 million in pre-tax upside to management
earnings for 1996 ($114 in net earnings). We believe that this is consistent
with the type of adjustments that equity research analysts would make to LSAI's
projected 1996 earnings estimates.
-43-
<PAGE>
ECONOMIC OUTLOOK
----------------
(Source: Morgan Stanley's Economics Department)
-------------------------------------
UNITED STATES
- -------------
With incoming data on final demands generally conforming to our expectations,
and with the recent inventory report showing that this sector will be less of a
drag on growth than earlier, we have left our above-consensus forecast of real
GDP growth for the third quarter unchanged at 2.7%. In our opinion, the US
economy accelerated in the third quarter rather than weakened as most analysts
believe. In our view, the hard evidence of economic strength remains far more
compelling than the anecdotal reports of an economy moving inexorably to the
brink of premature recession. The housing sector is a case in point: home sales,
new construction starts, and actual building outlays are all signs of an upturn
in this key cyclical sector. Personal consumption is also showing signs of
distinct improvement. Based on hard data through August as well as chain-store
and motor-vehicle sales through September, we estimate that personal consumption
expenditures increased about 3.5% in real terms for the third quarter of 1995,
one full percentage point faster than in the first half of the year. With
consumer demand accounting for two-thirds of the economy, this acceleration
should contribute 0.7 percentage points more to real GDP in the second half of
1995 than it did over the past year. Such a moderate pick-up tells us that the
consumer is responding more to income growth than to the so-called burden of
excessive indebtedness.
The case for an accelerating real economy is also validated by improved trends
in industrial production. At the end of the third quarter, this gauge already
stood 4% (annual rate) above that of the second quarter, a sharp turnaround
following the 2.4% annualized decline in the preceding
-44-
<PAGE>
quarter. This suggests that production is now in sync with the underlying pace
of final demand. It also suggests that the bulk of the inventory correction may
now be over.
On the inflation front, the news remains decidedly friendly. Although a
weather-related pop in vegetable prices helped push the headline producer price
index (PPI) up by 0.3% in September, its sharpest increase since January, this
spike in food prices is likely to be reversed, putting a lid on overall PPI
gains in the months ahead. Meanwhile, the core PPI remained well behaved,
holding at just 2.1% on a year-on-year basis.
While we remain steadfast in our disinflation convictions, we do not believe
that the cost compression of the second quarter of 1995 is sustainable. Indeed,
after falling 1.1% in that period, we expect that until labor costs will
increase at a more normal 1.7% rate in the third quarter, before moving up
further to a 2.2% pace through mid-1996. Thus, we expect a more normal labor-
cost trajectory, a confluence of cyclical forces that we believe will impart a
small updrift to the CPI, which we forecast up 2.3% in 1996 compared with 2.9%
increase in 1995.
As for the Fed, positive growth surprises and a skeptical view of the recent
upbeat news on inflation are expected to keep monetary policy on hold through
the rest of this year - a development that should come as a surprise to fixed
income markets that are currently factoring in a 25-50 basis-point Fed easing
over the next few months. In the end, the budget debate will probably be the
wild card for the bond market in the second half of this year. While the near-
religious fervor over multi-year deficit reduction seems to have fueled recent
bullishness, we believe that such expectations are ripe for disappointment, as
market participants finally realize that two thirds of the cuts should occur in
-45-
<PAGE>
the years 2000 to 2002. All in all, the bond bulls are due for a setback in our
view. We expect yields to move forward to the 7% zone by year-end. The good
news is that the persistently powerful forces of disinflation should act to
limit any rise in inflation to the extent of any bond market correction.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
U.S. FORECAST SUMMARY
---------------------
1994 1995E 1996E
------------ -------------- ------------
<S> <C> <C> <C>
Real GDP 4.1% 3.3% 2.8%
Inflation (CPI) 2.6 2.9 3.2
Industrial Production Index 5.4 3.6 2.9
Capacity Utilization 83.4 83.4 82.6
Corporate Profits (After-Tax) 11.3 8.5 4.5
<CAPTION>
1995E 1996E
----------------------- -------------------------
QI QII QIII QIV QI QII QIII QIV
---- ---- ---- ---- ---- ---- ---- ----
(Sequential Quarterly Change at Annual Rates)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real GDP 2.7% 1.3% 4.2% 3.0% 2.5% 2.9% 2.7% 2.4%
Inflation (CPI) 3.1 3.4 2.0 3.0 3.4 3.5 3.3 3.5
Unemployment Rate 5.5 5.7 5.6 5.6 5.8 5.8 5.8 6.0
- --------------------------------------------------------------------------------------
</TABLE>
CANADA
- ------
After a 0.3% quarter-on-quarter drop in GDP growth in the second quarter of this
year, and a possible decline in the third quarter, the pace of economic activity
looks set to pick up as 1995 comes to a close. Exports appear to have rebounded
during the summer, with lumber and industrial goods seeing stronger demand from
the US, Europe and even Japan. With US growth having re-accelerated in the
third quarter and expected to rise further in the fourth quarter, Canada's
chances of a recovery in late 1995 and in 1996 now look bright indeed, in our
view.
EUROPE
- ------
While economic activity was weak during the second quarter and while recent
economic data releases have been soft in many countries, we do not believe that
Europe's recovery is in danger of
-46-
<PAGE>
faltering. In the peripheral countries of Europe, solid gains resulting from
earlier currency depreciations and interest rate cuts are expected to push
growth ahead by 3.3% this year. However, policy tightening - both monetary and
fiscal - by these countries to dampen demand and to fulfill the Maastricht
deficit/GDP criteria are expected to slow growth to 2.9% in 1996, a still
respectable and hardly recessionary growth rate.
If there are downside risks to our forecasts, they are in the core economies of
Europe, which continue to experience the lagged effects of their earlier
currency appreciation. The core also continue to struggle under tight budgets
and a high rate of unemployment. We therefore forecast growth of about 2.3%
this year and 2.5% next year in the core. While these may be disappointing and
below our earlier forecasts, the core in our opinion is not slipping toward
recession. Thus, we continue to believe that solid growth in the periphery, in
Southeast Asia and the dollar-bloc countries will provide enough support for the
core to keep Europe moving forward at a 2.7% pace for 1995 and 2.8% for 1996,
both unchanged from last month. Recently released data have, however, continued
to be soft, suggesting that the risks have begun to tilt toward the downside.
With moderate growth and wage demands held in check by high rates of
unemployment, inflationary pressures in Europe, in our opinion, will be held at
3% in the current and coming year. In addition to being low and stable, we
believe that Europe inflation will become increasingly convergent. With
currencies in the periphery having stabilized or appreciated, inflation appears
to be moderating from the pace seen in the first six months of this year. In
the core, inflation should remain subdued, as commodity prices continue to edge
lower, and as sluggish growth holds labor costs in check. In this
-47-
<PAGE>
low-inflation environment, the outlook for fixed-income assets appears bright,
in our view, although underperformance can be expected in countries subject to
political and fiscal uncertainties.
JAPAN
- -----
Following an anaemic 0.5% expansion during the first two quarters of 1995,
Japan's GDP growth appears to have decelerated further in the third quarter, as
the impact of the year's overshooting in the spring and the financial sector
crisis continue, to work their way through the economy. The government
responded to these inflationary pressures by adopting a broad policy mix of
deflationary measures: monetary and fiscal easing, central bank initiatives to
push the yen lower, and an interim report on resolving the banks' bad debt
problem. The ensuing rise of the stock market and the yen's depreciation in
recent months have helped to ease the sense of despair somewhat, although the
financial-sector crisis continues to loom. The weaker yen and the higher-than-
expected fiscal package have compelled us to be more positive on Japan's growth
in the years ahead.
NON-JAPAN ASIA
- --------------
SOUTHEAST ASIA
The combination of the short-lived rise in the yen and the Southeast Asian
monetary excesses of the last few years has produced the full-blooded climax to
the extended and intensified business cycle of which we have warned for the last
two years. For most Southeast Asia, Malaysia and Thailand in particular, the
climax came during the second and third quarters, at precisely the time when
OECD economies, and the US in particular, were undergoing what we believe to
have been an inventory correction. Those three factors combined have resulted
in trade and current account deficits higher
-48-
<PAGE>
than we had expected, particularly in Malaysia and Thailand, and we have
adjusted our forecasts downward for this year and the next accordingly.
NORTHEAST ASIA
The story is very different in Northeast Asia, especially South Korea and
Taiwan, where external balances and inflationary pressures have been more muted,
auguring well for the life-span of these upswings. But, despite still very
positive prospects for the dominant manufacturing and exporting sector, the lack
of monetary follow-through could pose a threat to our forecast of sustained
growth during 1996.
CHINA
The past quarter has seen China make good progress towards a soft landing, with
RPI inflation declining to under 14%, which is well within the target of 15% set
for the year. The softening of prices has been accompanied by a slackening in
the pace of real GDP growth to 10.3% in the second quarter, down from 11.2% in
the first quarter. As expected, the pace of export growth has cooled off in the
past months, but the trade account was still in surplus to the tune of $28
billion at the end of August. Capital inflows, while more modest than in the
first half of the year, were still very high, with the result that there has
been sustained upward pressure on the renminbi. We expect export performance
and GDP growth to slow down further in the last months of 1995 and in 1996.
Inflation is expected to remain in the 13-15% range.
-49-
<PAGE>
INDIA
The Reserve Bank of India (RBI) unveiled its credit policy for the second half
of the current fiscal year. The most significant of the announced measures was
the liberalization of interest rates on deposits with a maturity of more than
two years. In principal, the partial liberalization of deposit rates should
encourage competition between banks for recourse mobilization. While this
credit policy clearly shows the government's determination to pursue financial
sector reform, it does little to allay concerns regarding the resurgence of
inflation. We expect inflation to accelerate in the coming months, as the
economy picks up momentum on the back of a sharp resurgence in private
investment demand and a higher-than-targeted fiscal deficit.
LATIN AMERICA
- -------------
A much sharper-than-expected second-quarter decline in Mexico and a delayed
reaction to tight money in Brazil has shifted the regional growth pattern once
again in Latin America. We are paring our forecast of overall growth to a bare
0.7% from 1.1%. In 1996, we estimate growth of 2.9%, against our previous
forecast of 2.8%. Regional inflation is the beneficiary of this decline in
growth, as we expect that lower Brazilian inflation will bring it down to 39.1%
from 45.6% in 1995 and to 16.7% from 27.2% in 1996. The amount of red ink in
the regional current balance of payments will be reduced as well, in our view.
Our basic outlook for the region is unchanged: Mexico's recession should end in
the first quarter of next year; lower growth will likely help reforms and
inflation in Brazil; and the Andean countries, except Venezuela, should show
strong growth prospects through 1996.
-50-
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
INTERNATIONAL FORECAST SUMMARY
------------------------------
REAL GDP GROWTH CPI INFLATION
---------------------- ------------------------
1994 1995E 1996E 1994 1995E 1996E
------ ------- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
EUROPE 2.7% 2.8% 2.8% 2.8% 3.1% 3.0%
France 2.9 2.9 2.7 1.7 1.9 2.3
Germany 2.3 2.1 2.4 3.0 2.2 2.1
Italy 2.2 3.1 2.9 3.9 5.2 4.7
United Kingdom 3.8 3.0 3.6 2.5 3.5 3.4
Austria 2.6 2.4 2.6 3.0 2.3 2.2
Belgium 2.2 2.2 2.5 2.4 1.6 1.9
Denmark 4.4 3.6 2.9 2.0 2.1 2.5
Finland 3.9 5.0 3.8 1.1 1.2 2.6
Netherlands 2.5 2.3 2.5 2.8 2.2 2.1
Norway 5.1 4.6 3.5 1.4 2.6 2.4
Spain 2.0 3.2 3.0 4.7 4.9 4.5
Sweden 2.0 3.8 2.6 2.2 2.9 2.7
Switzerland 1.3 1.6 2.0 0.8 1.8 2.0
JAPAN 0.6% 0.3% 1.4% 0.6% -0.3% 0.0%
NON-JAPAN ASIA 8.3% 8.3% 7.7% 12.9% 10.1% 9.4%
LATIN AMERICA 5.0% 1.4% 3.2% 837.2% 44.6% 23.4%
LATIN AMERICA 16.4 28.5 24.9
(EXCL. BRAZIL)
Mexico 4.5 0.7 2.3 7.0 34.3 24.7
Argentina 7.4 -5.0 0.0 4.2 1.7 -2.8
Brazil 5.8 -1.0 4.5 2,502.9 77.3 20.3
Chile 4.2 5.2 6.0 11.4 7.9 7.7
Colombia 5.7 7.0 4.5 22.0 22.1 18.8
Peru 12.7 5.0 5.0 23.7 11.4 10.4
Venezuela -3.3 -0.4 0.5 60.8 61.8 75.3
- -----------------------------------------------------------------------
</TABLE>
-51-
<PAGE>
SECURITIES MARKET ENVIRONMENT
-----------------------------
In 1995, the major market indices have reached record levels. The Dow Jones
Industrial Average, which broke through the 4,000 level on February 23, has
continued to climb steadily closing at 5074.5 on November 30, 1995. The index
is up 16.1% since the May 26, 1995 valuation and 32.3% since the beginning of
the year. This appears largely a result of the economy's soft landing, modest
inflation and the expectation that the Fed will continue to ease interest rates.
Solid corporate profits for the first three quarters of 1995 have also been a
driver behind the recent gains. The market, however, has begun to exhibit
short-term volatility, as uncertainty mounts over valuations in the technology
sector and the possibility of a budget compromise. Investors are closely
watching the outcome of the current budget debate and its implications for the
bond market.
Similar to the equity markets, the bond market has rallied strongly over the
last six months, with long-term interest rates having fallen to their lowest
levels in over two years. Since May 1995, the yield on the 10-year treasury has
declined over 130 basis points. Some investors feel the bond market has over-
reacted and may soon be ripe for a correction.
-52-
<PAGE>
APPAREL INDUSTRY OVERVIEW
-------------------------
The apparel industry, for the most part, consists of brand-name marketers who
must be able to maintain consumers' attention and provide value and innovation,
and private label businesses who compete on price. Certain cyclical,
demographic and consumer preference trends recently have steered demand away
from traditional branded products in late 1994 and 1995, except in footwear,
which has done exceptionally well. Concurrently, private label products have
continued to do well-although many private labels are really house brands.
Brand-name marketers, such as Liz Claiborne, Nike and Gap, advertise directly to
the consumer to maintain a distinct image with shoppers since these entities
charge higher prices for their clothing. Often, these brand-name producers look
to outside contractors to produce garments based on their specifications, in
effect, giving up the potential profits of manufacturing to invest their capital
in marketing.
Private label manufacturers produce basic goods, such as men's work pants, which
have steady orders through the year, but with relatively low profit margins.
These producers, competing in an international market, are under considerable
competitive pressure from producers in other countries with labor cost
advantages, usually the major expense in this segment. In addition, basic goods
producers have little leverage with their major retail clients.
A third category, in-house private label, has grown dramatically in recent
years. An example is J.C. Penny's Arizona brand of jeans. The in-house private
label brands are competitively priced versus
-53-
<PAGE>
more established brands thus consumers perceive they are buying a brand name at
a value price. These "brands" are expected to continue to do well as long as
consumers are value-oriented.
Demographic trends have begun to work against the apparel industry. The largest
buyer of apparel, women aged 25-34, have begun to decline as a percentage of the
work force. Demand has also declined as the baby boomers have aged and become
more value conscious and less fashion-trend driven. However, there has been a
baby boomlet, which has increased the number of persons under the age of 15.
This has and should continue to help children's wear makers for the next five
years. In addition, the trend to casual Fridays in the work place is helping
providers of casual wear, including Gap, DOCKERS(R) and others.
Industry trends indicate that larger players have an advantage. As retailing
continues to consolidate, only bigger manufacturers are able to commit to the
large orders from these major chains. Also, retailers are increasingly
demanding that their suppliers provide "quick response" and "just-in-time"
deliveries. In response, garment manufacturers have had to invest heavily in
computer equipment that directly links them to their retail accounts.
Production strategies must be able to adjust quickly and many manufacturers will
likely have to carry more inventory risk in the future in order to accommodate
short delivery dates. Larger players will have the necessary capital to invest
in these changes. In addition, global sourcing is becoming a necessity in order
to compete as margins erode. Only the larger players have the ability to source
efficiently on a global basis.
With limited prospects for domestic growth, many companies are looking for
opportunities abroad to grow sales. For fashion merchandise, the market
penetration could be limited since tastes in
-54-
<PAGE>
fashion apparel differ from one country to the next. However, basic clothing
such as fleecewear, jeans, and T-shirts, however, could have a large
international market. American basics are popular in Europe and Asia. Many
brand-name basic products are currently being built into major international
franchises, similar to what Nike has done. Some manufacturers of basic apparel,
including VF Corp., Russell Corp., and Fruit of the Loom, already have plants in
Europe and derive a substantial portion of their sales from overseas.
Recent earnings comparisons of leading publicly traded apparel companies show
that some companies have fared better than others during the past six months.
Denim, denim jeans, men's apparel, fleece, T-shirts and athletic footwear
segments have all done well relative to the more fashion-oriented segments.
Basic apparel makers, such as VF Corp., Russell Corp., and Fruit of the Loom,
reported mixed results for 1995. Liz Claiborne and other manufacturers of
women's brand name apparel sold through department and specialty stores,
experienced moderate earnings declines from last year as women's apparel sales
have remained weak.
Apparel analysts are expecting relatively weak results for the industry as a
whole in the near term. Eroding margins due to increasing raw material prices
(cotton and polyester) and the inability to pass on these price increases due to
sluggish consumer demand will equate to flat earnings growth for the year. The
standouts will be athletic footwear manufacturers and certain niche players,
such as Nike and Russell Corp., which continue to have strong growth prospects
both domestically and overseas.
-55-
<PAGE>
STOCK PRICE PERFORMANCE OF SELECTED APPAREL COMPANIES
- -----------------------------------------------------
The selected comparable apparel companies have divided into two camps over the
past six months. Gap, Liz and Nike have shown dramatic gains (31%, 62% and 48%,
respectively) as they have differentiated themselves from the pack in terms of
brand appeal, market dominance and growth prospects. Fruit of the Loom, Reebok
and Russell have significantly underperformed the market, posting share price
declines over this period. VF Corp. has remained flat due to lower projected
earnings and announced restructuring plans.
-56-
<PAGE>
LEVI STRAUSS ASSOCIATES INC.
- --------------------------------------------------------------------------------
Valuation Summary
($MM except per share amounts)
<TABLE>
<S> <C>
----------------------------------------------------------
Aggregate Value/(1)/ $9,133
Equity Value 10,103
Equity Value Per Share/(2)/ 189
----------------------------------------------------------
----------------------------------------------------------
Multiple of 1995E:
Net Income ($635)/(3)/ 15.9x
EBIT ($1,006)/(4)/ 9.1
EBDIT ($1,108)/(5)/ 8.2
----------------------------------------------------------
----------------------------------------------------------
Multiple of 1996E:
Net Income ($673)/(6)/ 15.0x
EBIT ($1,019)/(4)/ 9.0
EBDIT ($1,126)/(5)/ 8.1
----------------------------------------------------------
</TABLE>
Notes: (1) Aggregate value equals Equity Value plus Net Debt.
(2) Based on 53.3MM fully-diluted shares outstanding.
(3) Excludes after-tax accounts of $44.9MM for CSSC expenses, $13.9MM
for CSI expenses, $100MM for tax settlements, and $20MM for workers
compensation.
(4) Earnings before interest and taxes.
(5) Earnings before depreciation, amortization, interest, and taxes.
(6) Includes estimated after-tax upside of $75.3MM and excludes $39.2MM
of after-tax CSSC expenses.
<PAGE>
LEVI STRAUSS ASSOCIATES INC.
- --------------------------------------------------------------------------------
Comparable Company Price, Earnings and P/E Multiples
1996
----
<TABLE>
<CAPTION>
---------------------------------------- ---------------------------------
Stock Price 1996E EPS (1)
---------------------------------------- ---------------------------------
Company 05/26/95 11/30/95 % Change(3) 5/95 11/95 % Change(3)
- -------------------- --------- -------- ----------- -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Fruit of the Loom $27.00 $19.38 (28.2) % $2.59 $1.73 (33.1) %
Gap Inc. 34.50 45.25 31.2 2.68 2.58 (3.7)
Liz Claiborne 18.13 29.38 62.1 1.64 1.76 7.5
Nike, Inc. 39.19 (2) 58.00 48.0 3.16 (2) 3.72 17.5
Reebok 32.63 26.13 (19.9) 3.57 3.10 (13.2)
Russell Corp. 28.63 26.63 (7.0) 2.52 1.86 (26.1)
VF Corp. 52.13 52.00 (0.2) 5.01 4.56 (9.0)
--------- ---------
17.6 % (7.8) %
---------------------------------------- ----------------------------------
---------------------------------------- ----------------------------------
Levi Strauss(4) $157 $189 20.6 % NA $12.63 NA
---------------------------------------- ----------------------------------
<CAPTION>
-------------------------------------
1996E P/E
-------------------------------------
Company 05/26/95 11/30/95(3) % Change(3)
- -------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Fruit of the Loom 10.4 x 11.2 x 7.3 %
Gap Inc. 12.9 17.5 36.2
Liz Claiborne 11.1 16.7 50.7
Nike, Inc. 12.4 15.6 26.0
Reebok 9.1 8.4 (7.8)
Russell Corp. 11.4 14.3 25.9
VF Corp. 10.4 11.4 9.6
--------- ------- --------
11.1 x 14.5 x 26.0 %
-------------------------------------
-------------------------------------
Levi Strauss(4) NA x 15.0 x NA
-------------------------------------
</TABLE>
1995
----
<TABLE>
<CAPTION>
----------------------------------------- ---------------------------------
Stock Price 1996E EPS (1)
---------------------------------------- ---------------------------------
Company 05/26/95 11/30/95 % Change(3) 5/95 11/95 % Change(3)
- -------------------- --------- -------- ----------- -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Fruit of the Loom $27.00 $19.38 (28.2) % $2.10 $1.14 (45.4) %
Gap Inc. 34.50 45.25 31.2 2.33 2.24 (3.6)
Liz Claiborne 18.13 29.38 62.1 1.48 1.53 3.1
Nike, Inc. 39.19 (2) 58.00 48.0 2.77 (2) 3.10 11.9
Reebok 32.63 26.13 (19.9) 3.19 2.76 (13.2)
Russell Corp. 28.63 26.63 (7.0) 2.18 1.38 (36.6)
VF Corp. 52.13 52.00 (0.2) 4.52 4.10 (9.3)
--------- ---------
17.6 % (13.3) %
---------------------------------------- ---------------------------------
---------------------------------------- ---------------------------------
Levi Strauss(4) $157 $189 20.6 % $11.84 $11.95 0.9 %
---------------------------------------- ---------------------------------
<CAPTION>
-------------------------------------
1996E P/E
-------------------------------------
Company 05/26/95 11/30/95(3) % Change(3)
- -------------------- ----------- -------- -----------
<S> <C> <C> <C>
Fruit of the Loom 12.9 x 16.9 x 31.5 %
Gap Inc. 14.8 20.2 36.0
Liz Claiborne 12.2 19.2 57.2
Nike, Inc. 14.1 18.7 32.3
Reebok 10.2 9.5 (7.7)
Russell Corp. 13.1 19.3 46.7
VF Corp. 11.5 12.7 10.0 %
---------- --------- -------
12.7 x 17.8 x 35.6 %
-------------------------------------
-------------------------------------
Levi Strauss(4) 13.3 x 15.9 x 19.6 %
-------------------------------------
</TABLE>
Notes:
- -------------------------------------------------------------------------------
(1) EPS estimates are from L/B/E/S are as of 5/27/95 and 11/24/95.
Estimates have been calendarized to a November fiscal year end.
(2) Adjusted for two-for-one stock split.
(3) Reebok excluded from mean.
(4) See "Analysis of Historical Results and Projections" Exhibit for detail of
LSAI EPS calculations.
<PAGE>
LEVI STRAUSS ASSOCIATES INC.
- --------------------------------------------------------------------------------
Historical Comparison Of Operations/(1)/
Sales Growth
1991-1995E CAGR 1993-1995E CAGR
--------------- ---------------
VFC 14.5% GPS 14.2%
GPS 13.9% FTL 13.2%
NKE 10.8% RML 12.5%
FTL 10.5% NKE 10.0%
RML 10.1% RBK 8.9%
LSAI 7.3% VFC 8.6%
RBK 5.5% LSAI 6.5%
LIZ 0.5% LIZ (3.0%)
Net Income Growth
1991-1995E CAGR 1993-1995E CAGR
--------------- ---------------
LSAI 15.0% GPS 14.0%
GPS 12.5% LSAI 13.6%
VFC 12.2% NKE 4.6%
NKE 5.8% VFC 4.0%
RBK (0.7%) LIZ (2.0%)
RML (2.3%) RBK (3.0%)
FTL (13.6%) RML (16.4%)
LIZ (18.1%) FTL (29.5%)
Note: (1) Projections from Morgan Stanley Research estimates (FTL from Value
Line).
<PAGE>
LEVI STRAUSS ASSOCIATES INC.
- --------------------------------------------------------------------------------
Comparison Of Operations/(1)/
Projected Sales Growth Projected Net Income Growth
1996E/1995E 1996E/1995E
- ---------------------- ---------------------------
GPS 17.1% FTL 51.0%
NKE 13.7% RML 34.7%
VFC 11.8% NKE 19.8%
LSAI 11.0% GPS 15.2%
RML 8.7% LIZ 15.1%
RBK 7.3% RBK 12.1%
LIZ 7.0% VFC 11.2%
FTL 7.0% LSAI 5.7%
1996E EBIT Margin 1996E Net Income Margin
- --------------------- ---------------------------
NKE 13.9% LSAI 9.1%
LSAI 13.7% NKE 8.3%
GPS 12.5% GPS 7.8%
FTL 12.0% RBK 6.2%
RML 11.3% LIZ 6.0%
RBK 10.5% RML 5.8%
VFC 10.3% VFC 5.3%
LIZ 9.2% FTL 4.6%
Note: (1) Projections from Morgan Stanley Research estimates (FTL from Value
Line).
<PAGE>
LEVI STRAUSS ASSOCIATES INC.
- --------------------------------------------------------------------------------
Valuation Parameters
Multiple Price per Share
-------- ---------------
17.5x (1996E EPS(1) - GPS) $221
17.8x (1996E EPS(2) - Mean) $213
16.7x (1996E EPS(1) - LIZ) $211
15.6x (1996E EPS(1) - NKE) $197
15.0x (1996E EPS(1)) $189
14.5x (1996E EPS(1)(4) - Mean) $183
14.3x (1996E EPS(1) - RML) $181
15.0x (1996E EPS(3) - No upside) $168
11.4x (1996E EPS(1) - VFC) $144
11.2x (1996E EPS(1) - FTL) $142
8.4x (1996E EPS(1) - RBK) $107
Notes:(1) Assumes Levi's 1996 estimated net income is $12.63 per share based on
53.3MM full diluted shares outstanding. Includes $73.3MM of after-tax
upside and excludes after-tax CSSC expenses of $39.2MM.
(2) Based on Levi's 1995E EPS and mean P/E multiple of 17.8x (excludes
Reebok).
(3) Excludes $75.3MM of after-tax upside applied to 1996E net income.
(4) Reebok excluded from mean P/E calculation.
<PAGE>
LEVI STRAUSS ASSOCIATES INC.
- --------------------------------------------------------------------------------
Summary of Historical Equity Value and Projected Earnings/(1)/
($ Millions)
Multiple of
Estimated Net Share Equity Value Projected Earnings
Date Income Price(2) (in millions) (in millions)(1)
- ---- ------------- -------- ------------- ------------------
9/90 11.4x $42 $2,626 $260
11/90 8.7x $37 $2,305 $295
2/91 13.5x $51 $3,178 $259
5/91 13.9x $74 $3,874 $298
11/91 14.3x $84 $4,455 $330
5/92 16.0x $122 $6,473 $405
11/92 15.8x $119 $6,292 $399
5/93 15.2x $138 $7,312 $480
11/93 13.8x $114 $6,094 $439
5/94 13.2x $129 $6,859 $520
11/94 12.7x $134 $7,125 $562
5/95 13.3x $157 $8,358 $630
12/95 15.0x $189 $10,103 $674
Notes: (1) For 9/90 - 11/91, defined as Adjusted Net income; includes 75% of
projected acquisition expense and excludes preferred dividends. For
5/92, 11/92, 5/93, 11/93, 5/94, 11/94, 5/95 and 12/95 defined as Net
income before extraordinary items.
(2) Based on 62.2MM fully diluted shares outstanding for 9/90; 62.3MM
fully diluted shares outstanding for 11/90 and 2/91; 52.4MM fully
diluted shares outstanding for 5/91; 53.0MM outstanding for 11/91;
53.1MM outstanding for 5/92; 52.9MM for 11/92; 53.0MM for 5/93;
53.1MM for 11/93, 5/94 and 11/94, 53.2MM for 5/95 and 53.3MM for
12/95.
<PAGE>
LEVI STRAUSS ASSOCIATES INC.
- --------------------------------------------------------------------------------
ANALYSIS OF HISTORICAL RESULTS AND PROJECTIONS
($ MILLIONS)
- ---------------------------
INCOME STATEMENT
- ---------------------------
<TABLE>
<CAPTION>
1992 1993 1994 1995
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Sales $5,570.3 $5,892.5 $6,074.3 $6,678.7
% Growth 5.8% 3.1% 10.0%
Cost of Goods Sold 3,431.5 3,638.2 3,632.4 3,959.5
------------ ------------ ------------- ------------
Gross Profit $2,138.8 $2,254.3 $2,441.9 $2,719.2
% Sales 38.4% 38.3% 40.2% 40.7%
Selling, General and Administrative $1,309.4 $1,394.2 $1,493.2 $1,669.7
% Sales 23.5% 23.7% 24.6% 25.0%
Other Operating Expense (Income) 152.1 8.4 (20.5) 43.6
------------ ------------ ------------ ------------
EBIT $677.4 $851.7 $969.1 $1,005.9
% Sales 12.2% 14.5% 16.0% 15.1%
Stock Option Charge 158.0 0.0 0.0 0.0
CSSC Expenses 4.6 40.1 32.3 71.6
CSI Expenses 0.0 0.0 6.1 23.5
------------ ------------ ------------ ------------
Adjusted EBIT $840.0 $891.8 $1,007.5 $1,101.0
% Sales 15.1% 15.1% 16.6% 16.5%
Net Interest (Income) 53.3 37.1 19.8 (44.0)
Other Expense (Income) (7.5) (16.7) 18.4 23.5
------------ ------------ ------------ ------------
EBT $631.6 $831.3 $930.9 $1,026.4
Taxes 270.7 338.9 373.3 292.6
Marginal Tax Rate 42.9% 40.8% 40.1% 28.5%
Extraordinary Items 0.0 0.0 (236.5) 0.0
------------ ------------ ------------ ------------
Net Income $360.8 $492.4 $321.1 $733.8
% Growth 36.5% -34.8% 128.5%
Accounting Adjustments 0.0 0.0 236.5 0.0
Stock Compensation Charge 115.0 0.0 9.7 0.0
Workers Compensation 0.0 0.0 0.0 (57.3)
Tax Settlement 0.0 0.0 0.0 (100.0)
CSI Expense 0.0 0.0 0.0 13.9
CSSC Expense 0.0 0.0 0.0 44.9
------------ ------------ ------------ ------------
Net Income Excluding Extraordinary Items $475.8 $492.4 $567.3 $635.3
Preferred Dividends 1.9 0.0 0.0 0.0
------------ ------------ ------------ ------------
Net Income to Common Shareholders $473.9 $492.4 $567.3 $635.3
% Growth 3.9% 15.2% 12.0%
Net Income per share $9.13 $9.29 $10.68 $11.95
% Growth 1.8% 14.9% 11.9%
Average Common Shares Outstanding (mm) 51.9 53.0 53.1 53.2
Other Statistics:
Depreciation/Amortization $97.4 $111.8 $115.0 $101.9
EBDIT 774.8 963.6 1,084.1 1,107.8
% Sales 13.9% 16.4% 17.8% 16.6%
<CAPTION>
1996E % Change
------------------------------------------ -------------------------------
Dec '95 s. MS MS MS Frcst MS Frcst v
Forecastcst Adjustments (m) Forecast vs. 95Actuals vs. Dec Frcst
------------- --------------- ----------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Sales $7,414.6 $7,414.6 11.0% 0.0%
% Growth 11.0% 11.0%
Cost of Goods Sold 4,489.8 4,489.8
------------- --------------- -----------
Gross Profit $2,924.8 $2,924.8
% Sales 39.4% 39.4%
Selling, General and Administrativ $2,009.4 2,009.4
% Sales 27.1% 27.1%
Other Operating Expense (Income) 21.5 (103.5)
------------- --------------- -----------
EBIT $894.0 $125.0 $1,019.0 1.3% 14.0%
% Sales 12.1% 13.7%
Stock Option Charge 0.0 0.0
CSSC Expenses 132.0 132.0
CSI Expenses 61.6 61.6
------------- --------------- -----------
Adjusted EBIT $1,087.6 $1,212.6 10.1% 11.5%
% Sales 14.7% 16.4%
Net Interest (Income) (59.1) (59.1)
Other Expense (Income) 24.9 24.9
------------- --------------- -----------
EBT $928.2 $1,053.2 2.6% 13.5%
Taxes 369.1 49.7 418.8
Marginal Tax Rate 39.8% 39.8%
Extraordinary Items 0.0 0.0
------------- --------------- -----------
Net Income $559.1 $75.3 $634.4 -13.5% 13.5%
% Growth -23.8% -13.5%
Accounting Adjustments 0.0 0.0 0.0
Stock Compensation Charge 0.0 0.0 0.0
Workers Compensation 0.0 0.0 0.0
Tax Settlement 0.0 0.0 0.0
CSI Expense 0.0 0.0 0.0
CSSC Expense 0.0 39.2(2) 39.2
------------- --------------- -----------
Net Income Excluding Extraordinary $559.1 $573.6 6.0% 20.5%
Preferred Dividends 0.0 0.0
------------- --------------- -----------
Net Income to Common Shareholders $559.1 $114.5 $673.6 6.0% 20.5%
% Growth -12.0% 6.0%
Net Income per share $10.48 $2.15 $12.63 5.7% 20.5%
% Growth -12.3% 5.7%
Average Common Shares Outstanding 53.3 53.3
Other Statistics:
Depreciation/Amortization $107.3 $107.3
EBDIT 1,001.3 125.0 1,126.3 1.7% 12.5%
% Sales 13.5% 15.2%
</TABLE>
Notes:
- --------------------------------------------------------------------------------
(1) Includes $125MM in pre-tax upside adjustments allocated as follows $25MM for
higher potential volume in Dockerss and Levis, $50MM for potential decreases
in LSI operating expenditures, $30MM for higher potential LSI volume, and
$20MM for potential decreases in LSNA operating expenses.
(2) Represents pre-tax CSSC add-back of $65MM (49.2% of total CSSC expenses of
$132MM). None of $61.6MM in CSI expenses has been added back.
<PAGE>
LEVI STRAUSS ASSOCIATES INC.
- --------------------------------------------------------------------------------
Relative Price Performance of Comparable Companies
<TABLE>
<CAPTION>
May 26, 1995 to November 30 1995
Fruit of Liz
the Loom The Gap Claiborne Nike Reebok Russell VF Corp.
-------- ------- --------- ----- ------ ------- --------
FTL GPS LIZ NKE RBK RML VFC
<S> <C> <C> <C> <C> <C> <C> <C>
26-May-95 100.0 100.0 100.0 100.0 100.0 100.0 100.0
29-May-95 100.0 100.0 100.0 100.0 100.0 100.0 100.0
30-May-95 98.1 98.6 97.9 99.5 100.4 100.0 101.0
31-May-95 98.6 99.6 97.9 100.6 102.7 101.3 102.2
01-Jun-95 97.2 97.5 97.9 100.5 103.8 100.0 101.2
02-Jun-95 97.2 96.4 97.9 102.4 106.5 99.6 100.2
05-Jun-95 96.8 99.3 100.0 100.8 108.0 100.4 99.3
06-Jun-95 99.1 98.2 100.7 100.8 107.3 99.6 100.2
07-Jun-95 98.1 98.6 99.3 102.2 106.9 99.6 100.2
08-Jun-95 98.1 102.2 98.6 101.6 107.3 100.0 100.0
09-Jun-95 98.6 103.3 98.6 101.8 107.7 97.8 99.5
12-Jun-95 100.5 106.5 100.7 105.1 110.3 97.8 101.0
13-Jun-95 87.5 106.9 102.8 104.8 110.0 96.9 101.4
14-Jun-95 85.2 105.8 103.4 104.0 108.4 95.2 100.7
15-Jun-95 82.4 103.3 106.2 106.4 108.8 95.2 99.8
16-Jun-95 81.5 104.3 106.9 107.7 108.8 96.9 100.2
19-Jun-95 79.6 103.3 104.8 109.1 109.6 95.2 100.2
20-Jun-95 80.6 102.9 106.9 107.2 108.8 96.9 101.2
21-Jun-95 77.8 102.5 112.4 107.2 107.3 97.4 101.0
22-Jun-95 77.3 102.2 113.1 108.6 108.0 99.1 102.2
23-Jun-95 76.9 101.4 111.0 107.5 106.5 97.8 100.7
26-Jun-95 76.4 99.3 113.1 106.9 106.1 96.5 100.2
27-Jun-95 75.0 101.1 113.8 105.6 104.6 97.4 100.7
28-Jun-95 75.5 101.8 114.5 106.2 104.2 99.6 101.2
29-Jun-95 78.2 102.9 113.8 106.5 104.2 99.6 102.6
30-Jun-95 78.2 101.1 117.2 107.2 104.2 100.4 103.1
03-Jul-95 77.8 103.6 116.6 107.2 104.6 99.6 103.8
04-Jul-95 77.8 103.6 116.6 107.2 104.6 99.6 103.8
05-Jul-95 78.2 105.8 122.1 107.7 106.1 100.0 104.6
06-Jul-95 77.8 99.3 120.0 109.4 108.4 101.3 103.8
07-Jul-95 79.2 100.7 124.8 109.1 108.4 103.1 104.1
10-Jul-95 81.0 100.4 132.4 111.0 108.8 101.7 105.5
11-Jul-95 81.5 98.9 126.9 111.2 109.6 102.6 105.5
12-Jul-95 81.5 98.9 124.1 109.3 109.2 101.7 105.3
13-Jul-95 81.0 98.6 127.6 110.0 107.3 99.6 104.8
14-Jul-95 81.0 98.6 128.3 110.7 107.7 100.0 105.3
17-Jul-95 81.5 101.4 128.3 111.3 105.7 99.1 105.0
18-Jul-95 80.6 101.1 131.0 110.0 105.0 97.4 104.8
19-Jul-95 81.5 100.7 126.9 107.0 103.1 96.1 104.8
20-Jul-95 83.3 106.9 124.8 109.4 105.4 94.8 105.0
21-Jul-95 82.9 105.1 125.5 109.6 104.6 95.6 106.0
24-Jul-95 83.3 104.0 129.7 110.4 106.1 97.8 107.0
25-Jul-95 83.3 102.9 128.3 112.1 106.5 98.3 106.2
26-Jul-95 84.7 102.9 125.5 113.4 107.3 98.3 106.5
27-Jul-95 85.6 102.9 127.6 115.9 111.9 100.4 107.4
28-Jul-95 85.6 102.9 126.9 116.9 111.5 100.0 106.5
31-Jul-95 85.6 101.1 126.2 115.3 110.0 98.7 106.0
01-Aug-95 86.1 99.6 126.2 116.4 110.7 98.3 107.2
02-Aug-95 86.1 98.6 124.1 118.0 110.7 99.6 108.6
03-Aug-95 85.6 97.8 125.5 117.9 110.3 96.9 108.9
04-Aug-95 85.6 96.4 126.9 119.5 111.9 96.5 108.6
07-Aug-95 85.2 94.9 127.6 122.6 112.3 96.5 109.4
08-Aug-95 85.2 94.6 124.8 120.1 109.6 98.3 109.1
09-Aug-95 85.6 92.8 125.5 120.1 110.0 96.9 108.9
10-Aug-95 84.3 96.7 126.2 118.2 109.6 96.1 107.4
11-Aug-95 86.1 94.9 124.1 116.7 109.2 96.5 106.5
14-Aug-95 85.2 96.4 124.8 117.2 108.0 96.9 106.5
15-Aug-95 87.5 96.0 124.1 115.8 107.3 96.9 107.0
16-Aug-95 88.9 96.0 123.4 117.9 107.3 96.5 107.4
17-Aug-95 89.8 94.9 123.4 119.3 108.0 96.9 108.4
18-Aug-95 91.2 95.3 125.5 118.3 108.8 96.1 107.7
21-Aug-95 91.7 94.9 126.9 119.0 109.2 98.3 106.5
22-Aug-95 90.7 95.3 126.2 118.2 109.2 96.5 106.5
23-Aug-95 89.4 94.6 125.5 118.5 108.4 96.5 106.0
24-Aug-95 88.4 93.8 124.1 120.6 106.1 98.5 106.5
25-Aug-95 87.5 93.8 126.9 120.3 106.9 96.5 106.2
28-Aug-95 88.9 93.1 128.3 120.6 106.5 98.3 107.0
29-Aug-95 88.4 93.1 129.7 119.1 106.9 98.3 107.0
30-Aug-95 88.4 92.8 129.0 120.6 107.3 97.8 105.8
31-Aug-95 87.0 93.5 125.5 118.2 108.8 96.1 105.0
01-Sep-95 87.5 94.6 127.6 118.0 106.5 96.5 106.0
04-Sep-95 87.5 94.6 127.6 118.0 106.5 96.5 106.0
05-Sep-95 88.4 96.4 128.3 118.2 107.3 97.4 106.2
06-Sep-95 87.0 96.7 128.3 117.5 106.5 97.4 106.2
07-Sep-95 87.0 98.0 127.6 116.4 105.7 96.5 107.7
08-Sep-95 87.5 98.7 130.3 116.9 105.7 96.5 107.4
11-Sep-95 86.1 97.8 133.1 116.6 105.7 96.9 107.9
12-Sep-95 86.1 102.2 133.8 116.6 105.0 97.4 107.0
13-Sep-95 85.2 102.9 131.7 119.0 104.2 96.1 107.2
14-Sep-95 87.0 102.5 131.0 119.3 105.4 97.8 109.4
15-Sep-95 84.3 102.2 130.3 118.0 104.2 96.5 98.8
18-Sep-95 82.4 102.5 133.1 127.1 103.8 94.8 93.3
19-Sep-95 85.2 104.7 133.8 132.7 105.4 96.1 95.9
20-Sep-95 83.8 104.3 137.2 133.2 106.9 95.2 97.6
21-Sep-95 81.9 103.3 142.8 131.4 108.5 95.2 95.9
22-Sep-95 80.1 103.6 139.3 134.4 107.3 93.9 95.2
25-Sep-95 80.1 103.6 140.0 140.3 107.7 93.0 97.4
26-Sep-95 79.6 102.5 140.7 137.2 107.3 92.6 98.3
27-Sep-95 76.4 104.0 140.7 137.2 106.9 91.3 97.6
28-Sep-95 77.8 104.7 141.4 141.8 106.5 90.4 97.8
29-Sep-95 76.4 104.3 139.3 141.8 105.0 89.1 97.8
02-Oct-95 77.3 104.3 142.8 148.8 104.2 87.3 98.6
03-Oct-95 77.8 104.3 140.7 146.7 103.4 87.3 98.1
04-Oct-95 77.3 103.6 140.7 142.6 101.1 88.2 97.8
05-Oct-95 77.3 110.9 143.4 141.9 102.7 90.0 98.1
06-Oct-95 77.8 110.5 143.4 141.6 103.8 91.3 98.1
09-Oct-95 77.3 111.2 144.1 141.6 103.8 90.4 98.6
10-Oct-95 76.4 110.5 146.2 140.2 102.7 90.4 98.3
11-Oct-95 77.3 111.2 146.2 138.3 101.9 90.8 97.8
12-Oct-95 75.5 113.4 144.8 139.1 101.9 81.2 97.6
13-Oct-95 75.5 112.3 140.7 140.3 102.7 82.1 97.1
16-Oct-95 75.0 110.5 137.9 140.2 101.9 82.5 92.6
17-Oct-95 74.1 109.8 137.2 139.9 102.7 82.5 93.8
18-Oct-95 69.9 106.2 136.6 143.1 105.4 82.1 93.0
19-Oct-95 70.8 110.9 138.6 143.4 105.4 82.1 92.1
20-Oct-95 67.6 109.4 131.0 141.5 108.0 85.6 91.8
23-Oct-95 66.2 109.4 142.1 141.9 107.7 86.0 91.8
24-Oct-95 63.9 106.9 147.6 145.0 110.3 86.5 90.9
25-Oct-95 63.0 108.0 151.0 143.7 108.0 86.9 91.1
26-Oct-95 63.0 107.6 151.0 142.4 105.4 84.3 90.2
27-Oct-95 66.7 108.7 153.1 142.7 105.0 84.3 91.1
30-Oct-95 66.7 109.8 157.2 145.5 105.4 86.5 91.1
31-Oct-95 64.4 114.1 156.6 144.5 104.2 86.5 91.8
01-Nov-95 62.0 111.6 153.8 148.7 104.2 86.5 92.6
02-Nov-95 65.3 122.5 157.2 151.8 106.9 88.2 93.3
03-Nov-95 63.0 121.4 160.0 151.2 105.0 87.8 93.0
06-Nov-95 65.7 124.6 163.4 153.1 104.2 87.8 92.8
07-Nov-95 65.7 125.0 159.3 153.1 103.4 88.2 93.3
08-Nov-95 69.0 127.2 157.9 153.7 103.8 88.2 93.3
09-Nov-95 66.7 137.7 159.3 154.4 102.7 89.1 92.8
10-Nov-95 66.2 135.1 159.3 152.5 100.8 89.1 91.4
13-Nov-95 67.6 132.6 161.4 153.7 101.9 90.0 93.3
14-Nov-95 66.7 135.5 157.2 155.7 101.9 90.8 93.5
15-Nov-95 65.7 130.8 155.2 159.5 101.5 92.1 95.0
16-Nov-95 65.7 135.1 158.6 156.9 99.6 92.1 95.7
17-Nov-95 65.7 142.8 155.9 153.4 96.2 92.8 95.9
20-Nov-95 65.3 141.7 157.2 155.7 95.8 92.6 95.9
21-Nov-95 64.4 140.2 157.2 152.8 88.1 92.6 97.1
22-Nov-95 66.2 139.1 156.6 151.5 85.1 92.6 96.4
23-Nov-95 66.2 139.1 156.6 151.5 85.1 92.6 96.4
24-Nov-95 67.1 139.1 157.9 153.1 85.8 93.9 96.9
27-Nov-95 70.8 144.6 160.7 149.0 87.4 93.0 98.8
28-Nov-95 69.9 147.5 162.8 146.4 87.0 92.1 99.8
29-Nov-95 69.9 140.2 161.4 149.0 86.2 92.6 99.3
30-Nov-95 71.8 131.2 162.1 148.0 80.1 93.0 99.8
</TABLE>
<PAGE>
LEVI STRAUSS ASSOCIATES INC.
- --------------------------------------------------------------------------------
Selected Market Multiples of Comparable Retail Clothing Companies
($MM, except per share data)
<TABLE>
<CAPTION>
Price As % EPS Projections(2)
---------------------------------
L12M Price of 52 Week Market Aggregate 3 yr Proj.
------------------
Company as of 11/30/95 High Low Value Value (1) L12M 1995E 1996E Growth
- ------------------ ----- -------- ---- --- ------- ----------- ---- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fruit of the Loom 09/30 $19.38 69.8% 117.4% $1,470 $2,970 $0.67 $1.14 $1.73 12.5 %
Gap Inc. 07/29 45.25 88.7% 156.7% 6,516 6,267 2.03 2.24 2.58 18.0
Liz Claiborne (4) 09/30 29.38 98.7% 204.3% 2,175 1,866 1.44 1.53 1.76 10.0
Nike, Inc. 08/31 58.00 92.6% 182.3% 8,292 8,457 3.14 3.10 3.72 17.0
Reebok (5) 09/30 26.13 65.3% 101.5% 1,974 2,311 2.81 2.76 3.10 13.0
Russell Corp. 10/01 26.63 83.9% 121.0% 1,037 1,409 1.67 1.38 1.86 15.0
VF Corp. 09/30 52.00 91.0% 117.5% 3,315 4,226 4.03 4.10 4.56 12.0
- ------------------------------------------------------------------------------------------------------------------------------------
Mean (6)
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Levi Strauss (7) 11/30 $189 $189 $114 $10,103 $9,133 $11.95 $11.95 $12.63 NA
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
LEVI STRAUSS ASSOCIATES INC.
- --------------------------------------------------------------------------------
Selected Market Multiples of Comparable Retail Clothing Companies
($MM, except per share data)
<TABLE>
<CAPTION>
Equity Value as a Multiple of: 1996PE/ Aggregate Value as a Multiple of: (3)
---------------------------------------------- ----------------------------------------
L12M 1995E 1996E L12M L12M Proj. 1996E L12M 1996E L12M 1996E
Company EPS EPS EPS Book CFlow Growth Sales EBDIT EBDIT EBIT EBIT
- ------------------ --- --- --- ---- ----- ------ ----- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fruit of the Loom 29.0 x 16.9 x 11.2 x 1.2 x 6.5 x 90% 1.1 x 6.8 x 6.0 x 11.3 x 9.5
Gap Inc. 22.3 20.2 17.5 4.6 14.4 97% 1.2 9.6 NA 13.4 9.9
Liz Claiborne (4) 20.4 19.2 16.7 2.2 15.9 NM 0.8 9.3 7.3 11.5 9.1
Nike, Inc. 18.5 18.7 15.6 3.9 16.4 92% 1.3 9.8 NA 10.8 9.1
Reebok (5) 9.3 9.5 8.4 2.0 8.0 NM 0.6 5.5 5.0 6.1 6.0
Russell Corp. 15.9 19.3 14.3 1.6 7.7 95% 1.1 7.3 6.5 11.1 9.8
VF Corp. 12.9 12.7 11.4 1.8 7.6 95% 0.7 6.2 5.6 8.1 7.2
- ------------------------------------------------------------------------------------------------------------------------------------
Mean (6) 19.8 x 17.8 x 14.5 x 2.6 x 11.4 x 94% 1.1x 8.2 x 6.4 x 11.0 x 9.1 x
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Levi Strauss (7) 15.9 x 15.9 x 15.0 x 4.4 x 13.7 x NA 1.2 x 8.2 x 8.1 x 9.1 x 9.0 x
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
- --------------------------------------------------------------------------------
(1) Defined as market value of equity plus total debt less cash.
(2) Institutional Brokers Estimate System (I/B/E/S) estimates as of November
24, 1995. Estimates have been calendarized to a November year end. L12M
indicates most recent earnings announcement. EPS growth rates per Morgan
Stanley Equity Research, except Fruit of the Loom and Gap, Inc. which are
taken from I/B/E/S.
(3) Projected Sales, EBDIT, and EBIT from Morgan Stanley Research estimates,
except Fruit of the Loom projections, which are from Value Line.
(4) Excludes pre-tax restructuring charge of $30MM.
(5) Excludes pre-tax restructuring charge of $18MM.
(6) Reebok excluded from all mean calculations.
(7) Levi's trading analysis assumes a share price of $189 calculated using
the 1996E fully diluted EPS of $12.63 and 1996E P/E of 15.0x. The shares
used to calculate fully diluted EPS equals 53.3MM, and includes Class E
and L shares and exercisable options. 1996E numbers exclude $39.2MM one-
time after-tax CSSC expenses and include $75.3MM after-tax upside
adjustment.
<PAGE>
LEVI STRAUSS ASSOCIATES INC.
- --------------------------------------------------------------------------------
Operating Statistics of Comparable Retail Clothing Companies
($MM, except per share data)
<TABLE>
<CAPTION>
L12M L12M Cash L12M
L12M L12M EBDIT Cash Flow L12M EBIT Net Debt/
Company Revenues EBDIT(1) Margin Flow(2) Margin EBIT Margin Book Cap(3)
- -------------------- -------- -------- ------ ------- ------ ---- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fruit of the Loom $2,478.3 $434.4 17.5 % $224.5 9.1 % $262.6 10.6 % 55.3 %
Gap Inc. 3,915.3 651.8 16.6 453.3 11.6 469.0 12.0 (21.5)
Liz Claiborne (4) 2,099.2 200.3 9.5 136.9 6.5 161.8 7.7 (45.6)
Nike, Inc. 5,205.1 860.5 16.5 506.1 9.7 784.1 15.1 7.3
Reebok (5) 3,439.3 420.3 12.2 246.9 7.2 380.4 11.1 25.6
Russell Corp. 1,156.4 194.1 16.8 134.6 11.6 126.3 10.9 37.1
VF Corp. 5,080.9 686.2 13.5 434.2 8.5 519.8 10.2 32.6
- ------------------------------------------------------------------------------------------------------------------------------------
Mean (6) 15.1 % 9.5 % 11.1 % 10.9 %
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
LEVI STRAUSS ASSOCIATES INC. $6,678.7 $1,107.8 16.6 % $735.0 11.0 % $1,005.9 15.1 % (72.7)%
- ------------------------------------------------------------------------------------------------------------------------------------
Net 5-Year 5-Year 5-Year
L12M NET Income CAGR CAGR CAGR
Company INCOME Margin Revenues EBDIT Net Inc.
- -------------------- ------ ------ -------- ----- --------
<S> <C> <C> <C> <C> <C>
Fruit of the Loom $51.0 2.1 % 10.5 % 0.0 % (13.6)%
Gap Inc. 294.9 7.5 13.9 14.2 12.5
Liz Claiborne (4) 108.8 5.2 0.5 (14.9) (18.1)
Nike, Inc. 458.5 8.8 10.8 6.9 5.8
Reebok (5) 227.8 6.6 5.5 (0.8) (0.7)
Russell Corp. 66.2 5.7 10.1 1.8 (2.3)
VF Corp. 267.8 5.3 14.5 14.3 12.2
- -------------------------------------------------------------------------------------------------------------------------
Mean (6) 5.8 % 10.1 % 3.7 % -0.6 %
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Levi Strauss $635.3 9.5 % 7.3 % 7.8 % 15.0 %
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
- -------------------------------------------------------------------------------
(1) Earnings before depreciation amortization, interest, taxes and other non-
recurring items.
(2) Net income plus non-cash charges.
(3) Net debt (long term + short term + minority interest + preferred - cash)
divided book value plus net debt.
(4) Excludes pre-tax restructuring charge of $30MM.
(5) Excludes pre-tax restructuring charge of $18MM.
(6) Reebok excluded from all mean calculations.
<PAGE>
LEVI STRAUSS ASSOCIATES INC.
- --------------------------------------------------------------------------------
Credit Statistics
<TABLE>
<CAPTION>
Senior L12M
Debt Rating Net Debt/ Net Debt/ L12M EBIT/ Cash Flow/
Company Moody's/S&P Book Cap. (1) Market Cap. (2) Interest Net Debt (3)
- ---------- ----------- ------------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Fruit of the Loom Baa2/BBB+ 55.3 % 50.5 % 2.3 x 14.8 %
Gap Inc. N.R./N.R. (21.5) (4.0) N.M N.M
Liz Claiborne (4) N.R./N.R. (45.6) (16.6) N.M N.M
Nike, Inc. N.R./N.R. 7.3 1.9 25.4 147.4
Reebok A3/A- 25.6 14.6 23.8 55.9
Russell Corp. N.R./N.R. 37.1 26.4 6.0 35.9
VF Corp. (4) A3/A- 32.6 21.5 7.6 44.6
-----------------------------------------------------------------------------------------------
MEAN(5) 10.9 % 13.3 % 6.9 x 40.4 %
-----------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Levi Strauss (6) N.R. / N.R. (72.7)% (10.6)% N.M. N.M.
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
- --------------------------------------------------------------------------------
(1) Net total debt divided by shareholders equity plus net total debt.
(2) Net total debt divided by market value plus net total debt.
(3) Cash flow, defined as net income plus depreciation and deferred taxes, as a
percentage of total debt.
(4) Long-term debt includes redeemable preferred stock.
(5) Reebok excluded from mean calculations.
(6) Market ratio assumes a P/E ratio of 15.9x 1995E EPS.
<PAGE>
January 11, 1996
Levi Strauss Associates Inc.
1155 Battery Street
San Francisco, CA 94111
Attn: George B. James
Senior Vice President and
Chief Financial Officer
Dear George:
You have asked us to determine the fair market value of the Class E and
Class L Common Stock (collectively, the "Common Stock") of Levi Strauss
Associates Inc. ("LSAI" or the "Company") as of November 30, 1995 (the
"Valuation Date"), using certain assumptions specified by the Company as set
forth below. In our engagement letter relating to this assignment (the
"Engagement Letter"), you instructed us not to take into account the possibility
or nature of the capital structure transaction currently being contemplated by
the Company and the holders of Class L Common Stock (the "Contemplated
Transaction"). It is understood that this valuation opinion may be used by the
Company to evaluate certain transactions in connection with the Contemplated
Transaction and for the other purposes described in the Engagement Letter. We
have not been asked to determine, and this valuation opinion does not opine to,
the fairness to the Company, or to any holders of the Class E Common Stock or
Class L Common Stock, of the Contemplated Transaction, or of any other capital
structure transaction.
You have requested us to provide a valuation opinion based on the following
definition of fair market value: fair market value is defined as the price at
which shares of Common Stock would trade, as of the Valuation Date, in a public
market, had there been such a public market for the stock on the Valuation Date,
and without giving consideration to an acquisition or control premium, or to a
private market discount factor.
For the purposes of this opinion we have:
(i) reviewed the consolidated audited financial statements of LSAI
for recent years and interim periods to date and certain other
relevant financial and operating data of LSAI made available to
us from published sources and from the internal records of the
Company;
<PAGE>
Levi Strauss Associates Inc.
January 11, 1996
Page 2
(ii) reviewed certain internal financial and operating information
(including financial projections) prepared by the management of
LSAI relating to LSAI and its principal operating subsidiaries;
(iii) discussed the business and prospects of LSAI and its operating
subsidiaries with the senior management of LSAI;
(iv) compared the financial information relating to the Company's
business with published financial information concerning certain
companies whose businesses we deemed to be comparable, in whole
or in part, to those of the Company;
(v) analyzed the market prices and trading characteristics of the
common stock for recent periods up to the Valuation Date of
certain companies whose businesses we deemed to be comparable, in
whole or in part, to those of the Company;
(vi) reviewed various securities analysts' reports and earnings
projections regarding firms in the apparel industry and general
apparel industry trends on or about the Valuation Date;
(vii) reviewed the condition of the securities markets at the Valuation
Date;
(viii) reviewed the Registration Statements which relates to the
Company's Employee Investment Plan and Employee Long-Term
Investment and Savings Plan (collectively, the "Plans") and the
underlying Plan documents, as well as reviewed the terms of the
Common Stock;
(ix) performed such other analyses and examinations and conducted such
other discussions as we have deemed appropriate.
We have assumed and relied upon without independent verification the
accuracy and completeness of the information reviewed by us for purposes of this
opinion. With respect to the financial projections provided to us by the
Company, we have assumed that they have been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the future
financial performance of the Company.
This opinion is rendered on the basis of economic and securities market
conditions prevailing as of the Valuation Date, and the conditions and
prospects, financial and
<PAGE>
Levi Strauss Associates Inc.
January 11, 1996
Page 3
otherwise, of the Company as they have been represented to us as of the
Valuation Date. The valuation of any security is subject to uncertainties and
contingencies, all of which are difficult to predict and beyond the control of
the firm preparing such valuation. Consequently, the valuation opinion expressed
herein is not necessarily indicative of the prices at which a share of Common
Stock may actually trade in the public markets at any future time. In addition,
the market price of a share of Common Stock will fluctuate with changes in
prevailing interest rates, conditions in the public securities market, and the
condition and prospects, financial and otherwise, of the Company and other
factors which generally influence the prices of securities.
Morgan Stanley performs for the Company analyses of the value of large
blocks of the Class L Common Stock which give consideration to a private market
discount factor due to the lack of liquidity for such blocks.
It is understood that (i) we have not considered whether our valuation of
the Class E Common Stock constitutes "adequate consideration" as that term is
defined in Section 3(18) of the Employee Retirement Income Security Act of 1974,
as amended and that such determination will be made solely by the Trustee of the
Plans and (ii) all fiduciary decisions concerning the Plans will be made by the
Trustee or other named fiduciaries, including but not limited to decisions
concerning purchases or sales of Class E Common Stock.
Based upon the foregoing, and such other factors as we deem relevant, we
are of the opinion that the fair market value of a share of Common Stock as of
November 30, 1995, based on certain assumptions specified by the Company as set
forth above, was $189 based on 52,842,342 shares of Common Stock and 404,750
stock options issued and outstanding as of the Valuation Date.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By: /s/ Gordon G. Dean
------------------------------
Gordon G. Dean
Principal
<PAGE>
LEVI STRAUSS ASSOCIATES INC.
Levi's Plaza 1155 Battery Street P.O. Box 7061 San Francisco, California
94120-7061 415/544-7008
March 13, 1996
Dear Stockholder:
This letter amends and supplements the Information Statement of Levi Strauss
Associates Inc. (the "Information Statement") dated February 14, 1996, which
was previously circulated to stockholders of the Company. Capitalized terms
used in this letter without definition have the meanings given them in the
Information Statement.
FAIRNESS OF THE MERGER
Counsel to the Goldman family has indicated that, given the family's
substantial disagreement with respect to the $265 per Share price to be paid in
the Merger, members of the Goldman family presently intend to exercise
dissenters' rights of appraisal in connection with the Merger. Dissenters'
rights are described beginning at page 27 of the Information Statement. As
described there, an appraisal proceeding can result in a price higher or lower
than $265 per Share being paid with respect to dissenting shares.
A total of approximately 6.6 million Class L Shares, or approximately 12% of
the outstanding Shares, are held by Goldman family members and related trusts.
It is not known which of the trusts or direct stockholders in the Goldman
family will actually exercise dissenters' rights, or, as a result, how many
Class L Shares, if any, would be involved in the appraisal proceeding. As
described in "Background of the Merger" beginning at page 4 of the Information
Statement, members of the Goldman family have expressed dissatisfaction with
the proposed transactions, including the price proposed to be paid in the
Merger.
AS PREVIOUSLY DISCLOSED, HOLDINGS, MERGER SUB AND THE COMPANY, AND THEIR
RESPECTIVE BOARDS OF DIRECTORS, AS WELL AS ROBERT D. HAAS AND PETER E. HAAS,
SR. IN THEIR CAPACITIES AS PERSONS FILING THE SCHEDULE 13E-3, BELIEVE THAT THE
MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, THE HOLDERS OF SHARES (OTHER
THAN THE CLASS L SHARES BEING CONTRIBUTED TO HOLDINGS).
In making their respective determinations, the Boards of Directors of
Holdings, Merger Sub and the Company, as well as Robert D. Haas and Peter E.
Haas, Sr., considered and relied upon the factors considered by the Special
Committee and enumerated under "SPECIAL FACTORS--Fairness of the Merger;
Recommendations" on page 9 of the Information Statement. In light of the number
and variety of such factors, the Boards of Directors of Holdings, Merger Sub
and the Company, as well as Robert D. Haas and Peter E. Haas, Sr., did not find
it practicable to assign relative weights to the foregoing factors, and,
accordingly, did not do so.
The possible decision by members of the Goldman family to seek dissenters'
rights does not affect the $265 price to be paid for all other Shares in the
Merger.
NOVEMBER 1995 MORGAN STANLEY VALUATION
As described in the Information Statement under "CERTAIN INFORMATION
REGARDING LSAI, HOLDINGS AND MERGER SUB--Valuations of Shares," in recent
years, the Company has generally obtained, twice a year, valuations of the
Shares from Morgan Stanley. Morgan Stanley's most recent valuation, dated as of
November 30, 1995 (the "November 30 Valuation"), valued the Shares at $189 per
Share. Additional information about the November 30 Valuation appears below.
<PAGE>
In performing such valuations, Morgan Stanley is instructed to value the
Shares at "fair market value," defined as the price at which the Shares would
have traded, as of the valuation date, in a public market if such public market
had existed, without giving effect to any acquisition or control value, or to a
private market discount factor, and, with respect to the November 30 Valuation,
without taking into account the possibility of the expected merger proposal.
UNRELATED TO MORGAN STANLEY'S NOVEMBER 30 VALUATION, DILLON READ HAS
PREVIOUSLY RENDERED AN OPINION TO THE SPECIAL COMMITTEE TO THE EFFECT THAT THE
MERGER CONSIDERATION TO BE RECEIVED BY THE HOLDERS OF SHARES (OTHER THAN CLASS
L SHARES HELD BY OR TO BE REINVESTED IN HOLDINGS) IS FAIR TO SUCH HOLDERS FROM
A FINANCIAL POINT OF VIEW, AS OF THE DATE OF SUCH OPINION. THE COMPANY,
HOLDINGS AND MERGER SUB BELIEVE THAT THE DILLON READ OPINION AND THE ANALYSES
UNDERLYING SUCH OPINION--AND NOT MORGAN STANLEY'S NOVEMBER 30 VALUATION--IS THE
MORE RELEVANT ANALYSIS REGARDING THE FAIRNESS OF THE MERGER CONSIDERATION.
STOCKHOLDERS ARE URGED TO READ THE FOLLOWING INFORMATION CONCERNING THE
NOVEMBER 30 VALUATION IN LIGHT OF THE FOREGOING, AND IN CONJUNCTION WITH THE
OPINION OF DILLON READ AND THE DESCRIPTION OF DILLON READ'S ANALYSES SET FORTH
IN THE INFORMATION STATEMENT.
A copy of the Morgan Stanley financial analysis discussed below has been
filed as an exhibit to the Schedule 13E-3 filed with the Commission with
respect to the Merger, may be inspected and copied at the Commission as set
forth in "AVAILABLE INFORMATION" and may be obtained by LSAI stockholders
directly from LSAI at no charge.
In connection with rendering its valuation opinion, Morgan Stanley: (1)
reviewed the consolidated audited financial statements of LSAI for recent years
and interim periods preceding November 30, 1995 and certain other relevant
financial and operating data of LSAI made available from published sources and
from the internal records of the Company; (2) reviewed financial projections
and certain internal financial and operating information prepared by the
management of LSAI relating to LSAI and its principal operating subsidiaries;
(3) discussed the business and prospects of LSAI and its operating subsidiaries
with the senior management of LSAI; (4) compared the financial information
relating to the Company's business with published financial information
concerning certain companies whose businesses Morgan Stanley deemed to be
comparable, in whole or in part, to those of the Company; (5) analyzed the
market prices and trading characteristics of the common stock for recent
periods up to November 30, 1995 of certain companies whose businesses Morgan
Stanley deemed to be comparable, in whole or in part, to those of the Company;
(6) reviewed various securities analysts' reports and earnings projections
regarding firms in the apparel industry and general apparel industry trends on
or about November 30, 1995; (7) reviewed the condition of the public securities
markets at November 30, 1995; (8) reviewed the current economic condition and
prospects for the domestic economy and selected international economies; (9)
reviewed the registration statement which relates to the Plans and the
underlying Plan documents, as well as reviewed the terms of the Shares; (10)
performed such other analyses and examinations and conducted such other
discussions as Morgan Stanley deemed appropriate; and (11) discussed with
internal Morgan Stanley experts the appropriateness of using projected versus
historical LSAI statistics, certain economic assumptions and other questions
relevant to specific Morgan Stanley experts.
In connection with the foregoing, Morgan Stanley assumed and relied upon,
without independent verification, the accuracy and completeness of the
information reviewed by Morgan Stanley for purposes of Morgan Stanley's
valuation opinion. With respect to the financial projections provided to Morgan
Stanley by the Company, Morgan Stanley assumed that such projections were
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the future financial performance of LSAI. In addition, Morgan
Stanley's opinion is based on economic, monetary and market conditions existing
on the date thereof.
Modifications to Projections. In connection with its valuation analysis,
Morgan Stanley made certain modifications to LSAI management's financial
projections based on due diligence performed by Morgan
2
<PAGE>
Stanley. Morgan Stanley considered a variety of factors that related to
management's historical projections. Specifically, for 1996, Morgan Stanley
added back to net income certain portions of the Customer Service Supply Chain
(CSSC) one-time transitional expenses which were considered to be non-recurring
events that should not affect valuation. For 1996, Morgan Stanley modified
management's projections by altering assumptions as to two operating measures:
higher sales volumes and lower operating expenses for Levi Strauss North
America and Levi Strauss International, divisions of the Company. Overall,
Morgan Stanley added $125 million in pre-tax earnings ($114 million in net
earnings) to management's 1996 earnings estimates. Reference is made to the
Morgan Stanley financial analysis included as an exhibit to the Schedule 13E-3
for a more detailed summary of Morgan Stanley's modifications of management's
projections.
In rendering its opinion, Morgan Stanley utilized the valuation method
summarized below.
Comparable Company Trading Analysis. Morgan Stanley identified seven public
apparel companies which Morgan Stanley deemed most similar to the Company: VF
Corp.; Nike, Inc.; GAP Inc.; Russell Corporation; Liz Claiborne Inc.; Fruit of
the Loom Inc. ("Fruit of the Loom"); and Reebok International Ltd. ("Reebok").
Using publicly available information, Morgan Stanley analyzed, based upon
market trading values, multiples of certain financial criteria (such as net
income; projected net income, which had been modified as described above;
latest twelve months' book value; latest twelve months' cash flow; 1996
revenues; latest twelve months' and 1996 EBITDA; and latest twelve months' and
1996 EBIT) used to value the public apparel companies which Morgan Stanley had
identified as comparable to the Company for the purpose of this analysis.
Applying such financial multiples of earnings used to value the comparable
companies to the Company's 1995 net income, estimated 1996 net income and
adjusted estimated 1996 net income, Morgan Stanley calculated a value of $189
per Share. Morgan Stanley then compared the ratios of the comparable companies
(based on the financial criteria listed above) to the ratios for the Company at
$189 per Share.
The range and average for market capitalization as a multiple of each of the
indicated statistics for the comparable companies (other than Reebok) were as
follows: (a) latest twelve months' earnings--12.9x to 29.0x, with an average of
19.8x; (b) estimated calendar 1995 earnings (median estimates computed by
I/B/E/S)--12.7x to 20.2x, with an average of 17.8x; (c) I/B/E/S estimated
calendar 1996 earnings--11.2x to 17.5x, with an average of 14.5x; (d) latest
twelve months' book value--1.2x to 4.6x, with an average of 2.6x and (e) latest
twelve months' cash flow--6.5x to 16.4x, with an average of 11.4x. At $189 per
Share, the comparable ratios for LSAI are: (a) 15.9x latest twelve months'
earnings; (b) 15.9x estimated calendar 1995 earnings; (c) 15.0x estimated 1996
earnings; (d) 4.4x latest twelve months' book value; and (e) 13.7x latest
twelve months' cash flow.
The range and average for "aggregate value" (equivalent to market
capitalization plus net debt) as a multiple of each of the indicated statistics
for the comparable companies (other than Reebok) were as follows: (a) estimated
1996 revenues--0.7x to 1.3x, with an average of 1.1x; (b) latest twelve months'
EBITDA-- 6.2x to 9.8x, with an average of 8.2x; (c) Morgan Stanley Research
(Value Line, in the case of Fruit of the Loom) estimated calendar 1996 EBITDA--
5.6x to 7.3x, with an average of 6.4x; (d) latest twelve months' EBIT--8.1x to
13.4x, with an average of 11.0x; and (e) Morgan Stanley Research (Value Line,
in the case of Fruit of the Loom) estimated calendar 1996 EBIT--7.2x to 9.9x,
with an average of 9.1x. At $189 per Share, the comparable ratios for LSAI are:
(a) 1.2x estimated 1996 sales; (b) 8.2x latest twelve months' EBITDA; (c) 8.1x
estimated 1996 EBITDA; (d) 9.1x latest twelve months' EBIT; and (e) 9.0x
estimated 1996 EBIT.
The I/B/E/S estimates described in the preceding two paragraphs were adjusted
by Morgan Stanley to a November year end. Due to Morgan Stanley's belief that
unusual short term circumstances relating to Reebok's management and operations
have severely affected multiples for Reebok, Reebok was excluded from the
averages computed by Morgan Stanley.
3
<PAGE>
The summary set forth above does not purport to be a complete description of
Morgan Stanley's opinion or the analyses performed and factors considered by
Morgan Stanley in connection therewith. Morgan Stanley believes that its
analyses must be considered as a whole and that selecting portions of its
analyses and other factors considered by it, without considering all factors
and analyses, could create a misleading view of the processes underlying its
opinion. Morgan Stanley did not quantify the effect of each factor upon its
opinion, although Morgan Stanley stated that, in its opinion in the current
market environment, profitable companies like the Company are valued primarily
on the basis of projected earnings. Morgan Stanley made numerous assumptions
with respect to industry performance, general business and economic conditions
and other matters, many of which are beyond the Company's and Morgan Stanley's
control. Any estimates contained in Morgan Stanley's analyses are not
necessarily indicative of actual values, which may be significantly more or
less favorable than as set forth therein. Estimates of the financial value of
companies do not purport to be appraisals or necessarily reflect the prices at
which companies actually may be sold. Because such estimates inherently are
subject to uncertainty, neither Morgan Stanley nor any other person assumes
responsibility for their accuracy. In rendering its opinion relating to the
November 30 Valuation, Morgan Stanley expressed no view and does not now
express a view, as to the fairness of the Merger Consideration.
The Company has selected Morgan Stanley to perform valuations of the Shares,
such as the November 30 Valuation, because Morgan Stanley is a nationally
recognized investment banking firm with substantial experience in valuing the
securities of public and private entities.
FINANCING OF THE MERGER
As described in the Information Statement, Holdings expects to obtain a
portion of the funds required to pay the Merger Consideration through a credit
agreement with one or more banks or other lending institutions. Holdings
expects that the borrowing facility will take the form of a five-year revolving
credit facility to which Holdings, the Company, and LS&CO. will be parties.
Borrowings under the facility are expected to bear interest, at the borrowers'
option, at one or more of the following rates: (1) the higher of (a) the
publicly announced "Reference Rate" by the lead bank under the facility or (b)
the "Federal Funds" rate plus 0.50%; (2) the LIBOR (London Interbank Offered
Rate) 1, 2, 3, 6, or 9 month rates for offshore dollar and Eurocurrency
deposits, plus margins ranging up to 50 basis points (0.50%) (depending upon a
defined earnings-to-interest expense ratio and/or the commercial paper rating
of the borrowers); or (3) rates determined by a competitive auction process in
which various lending institutions under the bank facility may "bid" by
offering a rate. Amounts owed under the bank facility are expected to be repaid
with cash generated from operations.
* * * *
It is presently expected that the Merger will be consummated on schedule, by
mid-April, 1996.
Very truly yours,
Levi Strauss Associates Inc.
4
