================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 27, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 333-36234
LEVI STRAUSS & CO.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 94-0905160
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1155 BATTERY STREET, SAN FRANCISCO, CALIFORNIA 94111
(Address of Principal Executive Offices)
(415) 501-6000
(Registrant's Telephone Number, Including Area Code)
NONE
(Former Name, Former Address, and Former Fiscal Year, if Changed
Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock $.01 par value ------ 37,278,238 shares outstanding on September
29, 2000
<PAGE>
LEVI STRAUSS & CO.
INDEX TO FORM 10-Q
AUGUST 27, 2000
PAGE
NUMBER
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of August 27, 2000 and
November 28, 1999.............................................. 3
Consolidated Statements of Income for the Three and Nine
Months Ended August 27, 2000 and August 29, 1999............... 4
Consolidated Statements of Cash Flows for the Nine Months
Ended August 27, 2000 and August 29, 1999...................... 5
Notes to Consolidated Financial Statements....................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk....... 20
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................. 21
SIGNATURES.................................................................. 22
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
August 27, November 28,
2000 1999
---------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents...................................................... $ 75,446 $ 192,816
Trade receivables, net of allowance for doubtful accounts of $26,841 in 2000
and $30,017 in 1999.................................................... 652,252 759,273
Income taxes receivable........................................................ -- 70,000
Inventories:
Raw materials.............................................................. 120,740 137,082
Work-in-process............................................................ 98,337 100,523
Finished goods............................................................. 427,090 433,882
---------- ----------
Total inventories....................................................... 646,167 671,487
Deferred tax assets............................................................ 258,348 300,972
Other current assets........................................................... 168,799 172,195
---------- ----------
Total current assets............................................... 1,801,012 2,166,743
Property, plant and equipment, net of accumulated depreciation of $509,566 in
2000 and $548,437 in 1999......................................................... 556,226 685,026
Goodwill and other intangibles, net of accumulated amortization of $162,161 in
2000 and $158,052 in 1999......................................................... 267,228 275,318
Non-current deferred tax assets...................................................... 473,014 478,235
Other assets ........................................................................ 74,150 60,195
---------- ----------
Total Assets....................................................... $3,171,630 $3,665,517
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Current maturities of long-term debt and short-term borrowings................. $ 232,159 $ 233,992
Accounts payable............................................................... 211,712 262,389
Accrued liabilities............................................................ 431,149 415,273
Accrued salaries, wages and employee benefits.................................. 199,233 194,130
Restructuring reserves......................................................... 89,741 258,784
Accrued taxes.................................................................. 38,695 2,548
---------- ----------
Total current liabilities.......................................... 1,202,689 1,367,116
Long-term debt, less current maturities.............................................. 1,967,191 2,430,617
Long-term employee related benefits.................................................. 337,000 325,518
Postretirement medical benefits...................................................... 551,380 541,815
Long-term tax liability.............................................................. 202,848 241,542
Other long-term liabilities.......................................................... 24,852 20,696
Minority interest ................................................................... 23,231 26,775
---------- ----------
Total liabilities.................................................. 4,309,191 4,954,079
---------- ----------
Stockholders' Deficit:
Common stock--$.01 par value; authorized 270,000,000 shares; issued and
outstanding: 37,278,238 shares.............................................. 373 373
Additional paid-in capital..................................................... 88,812 88,812
Accumulated deficit............................................................ (1,247,272) (1,395,256)
Accumulated other comprehensive income......................................... 20,526 17,509
---------- ----------
Total stockholders' deficit........................................ (1,137,561) (1,288,562)
---------- ----------
Total Liabilities and Stockholders' Deficit........................ $3,171,630 $3,665,517
========== ==========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended Nine Months Ended
----------------------- ------------------------
August 27, August 29, August 27, August 29,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales........................................................ $1,127,740 $1,226,413 $3,359,221 $3,732,645
Cost of goods sold............................................... 663,418 747,766 1,957,328 2,299,742
---------- ---------- ---------- ----------
Gross profit.................................................. 464,322 478,647 1,401,893 1,432,903
Marketing, general and administrative expenses................... 358,524 338,223 1,048,052 1,164,985
Excess capacity/restructuring charges............................ --- --- --- 405,885
---------- ---------- ---------- ----------
Operating income (loss)....................................... 105,798 140,424 353,841 (137,967)
Interest expense................................................. 59,406 45,742 177,177 132,718
Other (income) expense, net...................................... (11,763) 7,139 (51,003) (29,919)
---------- ---------- ---------- ----------
Income (loss) before taxes.................................... 58,155 87,543 227,667 (240,766)
Income tax expense (benefit)..................................... 20,354 32,391 79,683 (89,083)
---------- ---------- ---------- ----------
Net income (loss)............................................. $ 37,801 $ 55,152 $ 147,984 $ (151,683)
========== ========== ========== ==========
Earnings (loss) per share--basic and diluted...................... $ 1.01 $ 1.48 $ 3.97 $ (4.07)
========== ========== ========== ==========
Weighted-average common shares outstanding....................... 37,278,238 37,278,238 37,278,238 37,278,238
========== ========== ========== ==========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
----------------------------
August 27, August 29,
2000 1999
---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) .......................................................... $ 147,984 $(151,683)
Adjustments to reconcile net cash provided by operating activities:
Depreciation and amortization ............................................ 69,563 86,335
Unrealized foreign exchange gains ........................................ (6,877) (4,516)
Decrease in trade receivables ............................................ 74,746 179,367
Decrease in income taxes receivables ..................................... 70,000 --
Decrease (increase) in inventories ....................................... 10,836 (54,802)
Increase in other current assets ......................................... (5,198) (35,266)
Decrease (increase) in net deferred tax assets ........................... 42,836 (129,090)
Decrease in accounts payable and accrued liabilities ..................... (13,010) (52,476)
Increase (decrease) in accrued salaries, wages and employee benefits...... 9,358 (50,866)
(Decrease) increase in restructuring reserves ............................ (169,043) 59,533
Increase (decrease) in accrued taxes ..................................... 37,815 (16,873)
Increase in long-term employee benefits .................................. 22,529 24,676
(Decrease) increase in other long-term liabilities ....................... (33,921) 1,073
Other, net ............................................................... (58,326) 19,047
--------- ---------
Net cash provided by (used for) operating activities ................... 199,292 (125,541)
--------- ---------
Cash Flows from Investing Activities:
Purchases of property, plant and equipment ............................... (15,799) (39,290)
Proceeds from sale of property, plant and equipment....................... 106,965 49,098
Gains on net investment hedges ........................................... 52,884 37,390
Other, net ............................................................... 152 835
--------- ---------
Net cash provided by investing activities .............................. 144,202 48,033
--------- ---------
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt ................................. 340,500 903,748
Repayments of long-term debt ............................................. (799,238) (772,144)
Net decrease in short-term borrowings .................................... 1,549 2,629
Other, net ............................................................... -- 3
--------- ---------
Net cash (used for) provided by financing activities.................... (457,189) 134,236
--------- ---------
Effect of exchange rate changes on cash .................................... (3,675) 1,208
--------- ---------
Net (decrease) increase in cash and cash equivalents ....................... (117,370) 57,936
Beginning cash and cash equivalents ........................................ 192,816 84,565
--------- ---------
Ending cash and cash equivalents ........................................... $ 75,446 $ 142,501
========= =========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest ................................................................. $ 135,052 $ 110,126
Income taxes ............................................................. 30,641 59,941
Restructuring initiatives ................................................ 169,043 346,352
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
5
<PAGE>
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: PREPARATION OF FINANCIAL STATEMENTS
The unaudited consolidated financial statements of Levi Strauss & Co. and
subsidiaries ("LS&CO." or "Company") are prepared in conformity with generally
accepted accounting principles for interim financial information. In the opinion
of management, all adjustments necessary for a fair presentation of the
financial position and operating results for the periods presented have been
included. These unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements of LS&CO. for the
year ended November 28, 1999 included in the registration statement on Form S-4
under the Securities Act of 1933 filed by LS&CO. with the Securities and
Exchange Commission (the "SEC") on May 4, 2000 as amended by Amendment No. 1
filed by LS&CO. with the SEC on May 17, 2000.
The consolidated financial statements include the accounts of LS&CO. and
its subsidiaries. All intercompany transactions have been eliminated. Management
believes that, along with the following information, the disclosures are
adequate to make the information presented herein not misleading. Certain prior
year amounts have been reclassified to conform to the current presentation. The
results of operations for the three and nine months ended August 27, 2000 may
not be indicative of the results to be expected for the year ending November 26,
2000.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). In June 1999, the FASB delayed
the effective date of SFAS 133 to fiscal years beginning after June 15, 2000.
The Company will adopt SFAS 133 and its subsequent amendments the first day of
fiscal year 2001. SFAS 133 establishes accounting and reporting standards for
derivative instruments including certain derivative instruments embedded in
other contracts, and for hedging activities. In summary, SFAS 133 requires all
derivatives to be recognized as assets or liabilities at fair value. Fair value
adjustments are made either through earnings or equity, depending upon the
exposure being hedged and the effectiveness of the hedge. The Company has not
yet quantified all effects of adopting SFAS 133 on its financial statements. The
Company tries to take a long-term view and manage its exposures on an economic
basis. The Company uses forecasts to develop exposure positions and engages in
active management of those exposures with the objective of protecting future
cash flows and mitigating risks. Not all of the Company's exposure management
activities will qualify for hedge accounting treatment. The Company would be
required to mark-to-market those exposure management instruments that do not
qualify for hedge accounting treatment and, as a result, it is possible that the
Company will experience increased volatility in its earnings. The Company
currently has an implementation team in place that is determining the method of
implementation and evaluating all effects of adopting SFAS 133 and its
subsequent amendments.
NOTE 2: COMPREHENSIVE INCOME
The following is a summary of the components of total comprehensive income
(loss), net of related income taxes:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------ ------------------------
August 27, August 29, August 27, August 29,
2000 1999 2000 1999
---------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Net income (loss)................................... $37,801 $55,152 $147,984 $(151,683)
Other comprehensive income (loss):
Foreign currency translation adjustments......... 18,668 (5,189) 3,017 28,112
------- ------- -------- ---------
Total comprehensive income (loss).................. $56,469 $49,963 $151,001 $(123,571)
======= ======= ======== =========
</TABLE>
6
<PAGE>
LEVI STRAUSS & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
NOTE 3: EXCESS CAPACITY/RESTRUCTURING RESERVES
NORTH AMERICA PLANT CLOSURES
In view of declining sales, the need to bring manufacturing capacity in
line with sales projections and the need to reduce costs, the Company decided to
close some of its owned and operated production facilities in North America
starting in 1997. The Company announced in 1997 the closure of ten manufacturing
facilities and a finishing center in the U.S., which were closed during 1998 and
displaced approximately 6,400 employees. The table below displays the activity
and liability balances of this reserve.
In 1998, the Company announced the closure of two more finishing centers in
the U.S. that were closed during 1999 and displaced approximately 990 employees.
The table below displays the activity and liability balances of this reserve.
The Company announced in February 1999 plans to close 11 manufacturing
facilities in North America that resulted in an initial charge of $394.1
million. The 11 manufacturing facilities were closed during 1999 and
approximately 5,900 employees were displaced. The table below displays the
activity and liability balances of this reserve.
<TABLE>
<CAPTION>
1997 NORTH AMERICA PLANT CLOSURES
Balance Balance
11/28/99 Reductions 8/27/00
-------- ---------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Severance and employee benefits................. $ 8,790 $ (7,395) $ 1,395
Asset write-offs................................ 10,655 (2,211) 8,444
Other restructuring costs....................... 1,913 (712) 1,201
-------- -------- --------
Total........................................ $ 21,358 $(10,318) $ 11,040
======== ======== ========
<CAPTION>
1998 NORTH AMERICA PLANT CLOSURES
Balance Balance
11/28/99 Reductions 8/27/00
-------- ---------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Severance and employee benefits................. $ 2,683 $ (2,683) $ --
Asset write-offs................................ 9,713 (3,635) 6,078
Other restructuring costs....................... 1,193 (1,193) --
-------- -------- --------
Total........................................ $ 13,589 $ (7,511) $ 6,078
======== ======== ========
<CAPTION>
1999 NORTH AMERICA PLANT CLOSURES
Balance Balance
11/28/99 Reductions 8/27/00
-------- ---------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Severance and employee benefits................. $109,755 $(80,123) $ 29,632
Asset write-offs................................ 37,563 (10,644) 26,919
Other restructuring costs....................... 28,526 (1,998) 26,528
-------- -------- --------
Total........................................ $175,844 $(92,765) $ 83,079
======== ======== ========
</TABLE>
7
<PAGE>
LEVI STRAUSS & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
CORPORATE REORGANIZATION INITIATIVES
Starting in 1998, the Company instituted various overhead reorganization
initiatives to reduce overhead costs and consolidate operations. The
reorganization initiative instituted in 1998 displaced approximately 770
employees. The table below displays the activity and liability balances of this
reserve.
In conjunction with the above plan to institute overhead reorganization
initiatives, the Company recorded charges of $11.8 million and $37.1 million
during the second and fourth quarters of 1999, respectively, that were estimated
to displace approximately 930 employees. As of August 27, 2000, approximately
665 employees were displaced. The table below displays the activity and
liability balances of this reserve.
<TABLE>
<CAPTION>
1998 CORPORATE REORGANIZATION INITIATIVES
Balance Balance
11/28/99 Reductions 8/27/00
-------- ---------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Severance and employee benefits................. $ 3,204 $(2,308) $ 896
Asset write-offs................................ 3,044 (1,997) 1,047
Other restructuring costs....................... 6,412 (2,742) 3,670
-------- ------- --------
Total........................................ $ 12,660 $(7,047) $ 5,613
======== ======== ========
<CAPTION>
1999 CORPORATE REORGANIZATION INITIATIVES
Balance Balance
11/28/99 Reductions 8/27/00
-------- ---------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Severance and employee benefits................. $ 43,550 $(31,419) $ 12,131
Other restructuring costs....................... 1,680 (412) 1,268
-------- -------- --------
Total........................................ $ 45,230 $(31,831) $ 13,399
======== ======== ========
</TABLE>
EUROPE REORGANIZATION AND PLANT CLOSURES
In 1998, the Company announced plans to close two manufacturing and two
finishing facilities, and reorganize operations throughout Europe, displacing
approximately 1,650 employees. These plans were prompted by decreased demand for
denim jeans products and a resulting over-capacity in the Company's European
owned and operated plants. The production facilities were closed by the end of
1999 and as of August 27, 2000, approximately 1,635 employees were displaced.
The table below displays the activity and liability balances of this reserve.
In conjunction with the above plans in Europe, the Company announced in
September 1999 plans to close a production facility, and reduce capacity at a
finishing facility in the United Kingdom with an estimated displacement of 960
employees. The production facility closed in December 1999 and as of August 27,
2000, approximately 870 employees were displaced. The table below displays the
activity and liability balances of this reserve.
8
<PAGE>
LEVI STRAUSS & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
1998 EUROPE REORGANIZATION AND PLANT CLOSURES
Balance Balance
11/28/99 Reductions 8/27/00
-------- ---------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Severance and employee benefits................. $ 10,653 $ (7,499) $ 3,154
Asset write-offs................................ 3,396 (2,504) 892
-------- -------- --------
Total........................................ $ 14,049 $(10,003) $ 4,046
======== ======== ========
<CAPTION>
1999 EUROPE REORGANIZATION AND PLANT CLOSURES
Balance Balance
11/28/99 Reductions 8/27/00
-------- ---------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Severance and employee benefits................. $ 38,413 $(29,187) $ 9,226
Asset write-offs................................ 4,474 (4,100) 374
Other restructuring costs....................... 2,012 (1,372) 640
-------- -------- --------
Total........................................ $ 44,899 $(34,659) $ 10,240
======== ======== ========
</TABLE>
Reductions consist of payments for severance and employee benefits and the
other restructuring costs, as well as actual losses on disposals of assets. The
balance of severance and employee benefits and other restructuring costs are
included under restructuring reserves on the balance sheet. The balance of asset
write-offs is categorized as a non-cash reduction to property, plant and
equipment on the balance sheet.
NOTE 4: FINANCING
NOTES EXCHANGE OFFER
In May 2000, the Company filed a registration statement on Form S-4 under
the Securities Act of 1933, as amended (the "Securities Act") with the SEC
relating to an exchange offer of its 6.80% notes due 2003 and 7.00% notes due
2006. The exchange offer gave holders of these notes the opportunity to exchange
these old notes, which were issued on November 6, 1996 under Rule 144A of the
Securities Act, for new notes that are registered under the Securities Act of
1933. The new notes are identical in all material respects to the old notes
except that the new notes are registered.
The exchange offer ended on June 20, 2000. As a result of the exchange
offer, all but $20 thousand of the $350.0 million aggregate principal amount of
6.80% old notes due 2003 were exchanged for the 6.80% exchange notes due 2003;
and all $450.0 million aggregate principal amount of the 7.00% old notes due
2006 were exchanged for the 7.00% exchange notes due 2006.
The Company was not obligated by any agreement including its credit
facility agreements to engage in the exchange offer. The Company initiated the
exchange offer to give holders of these notes the opportunity to exchange the
old notes for registered notes.
9
<PAGE>
LEVI STRAUSS & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
2000 CREDIT FACILITY AGREEMENTS
On January 31, 2000 the Company amended three of its credit facility
agreements and entered into one new agreement to reflect its current financial
position and extend maturity dates. The new financing package consists of four
separate agreements: (1) a new $450.0 million bridge loan to fund working
capital and support letters of credit, foreign exchange contracts and
derivatives, (2) an amended $300.0 million revolving credit facility, extending
the existing bridge facility, (3) an amended $545.0 million 364-day credit
facility, and (4) an amended $584.0 million 5-year credit facility.
Simultaneously with entering into these agreements, the Company terminated a
domestic receivables-backed securitization financing.
All four facilities are secured by domestic receivables, domestic
inventories, certain domestic equipment, trademarks, other intellectual
property, 100% of the stock in domestic subsidiaries, 65% of the stock of
certain foreign subsidiaries and other assets. The maturity date for all credit
facilities is January 31, 2002. Borrowings under the bank credit facilities bear
interest at LIBOR or the agent bank's base rate plus an incremental borrowing
spread. For the bridge facility, the spread is 3.00% over LIBOR or 1.75% over
the base rate. For each of the three amended facilities, the spread is 3.25%
over LIBOR or 2.00% over the base rate.
In addition, if by February 1, 2001 the Company has not completed one or
more private or public capital-raising transactions yielding net proceeds of at
least $300.0 million, which are required to be used to reduce commitments under
the bank credit facilities, the Company will be required to pay its lenders an
additional borrowing spread of 1.00% on outstanding borrowings under the bank
credit facilities, plus a one-time additional fee of 2.00% of total commitments
as of January 31, 2001. The Company's borrowing spread will be increased by
0.25% quarterly until those capital-raising transactions are completed.
The credit agreements contain customary covenants restricting the Company's
activities as well as those of its subsidiaries, including limitations on the
Company's and its subsidiaries' ability to sell assets; engage in mergers; enter
into operating leases or capital leases; enter into transactions involving
related parties, derivatives or letters of credit; enter into intercompany
transactions; incur indebtedness or grant liens or negative pledges on the
Company's assets; make loans or other investments; pay dividends or repurchase
stock or other securities; guaranty third party obligations; make capital
expenditures; and make changes in the Company's corporate structure. The credit
agreements also contain financial covenants that the Company must satisfy on an
ongoing basis, including a maximum leverage ratio, a minimum coverage ratio and
a minimum earnings base calculation. The Company was in compliance with
financial covenants required by the credit facility agreements as of August 27,
2000.
CUSTOMER SERVICE CENTER EQUIPMENT FINANCING
In December 1999 the Company entered into a secured financing transaction
consisting of a five-year credit facility secured by owned equipment at Customer
Service Centers located in Nevada, Mississippi and Kentucky. The amount financed
in December 1999 was $89.5 million, comprised of a $59.5 million tranche
("Tranche 1") and a $30.0 million tranche ("Tranche 2"). Borrowings under
Tranche 1 have a fixed interest rate equal to the yield of a four-year Treasury
note plus an incremental borrowing spread. Borrowings under Tranche 2 have a
floating quarterly interest rate equal to the 90 day LIBOR plus an incremental
borrowing spread based on the Company's leverage ratio at that time. Proceeds
from the borrowings were used to reduce the commitment amounts of the
then-existing credit facilities.
10
<PAGE>
LEVI STRAUSS & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
RECEIVABLES SECURITIZATION AGREEMENTS
In February 2000, several of the Company's European subsidiaries entered
into receivable securitization financing agreements with several lenders. The
subsidiaries are currently working with the lenders to establish certain
reporting and other system functions to support the reporting requirements of
the agreement. Once these matters are resolved, those subsidiaries may borrow up
to $125.0 million under these agreements. Any borrowings under the facilities
must be used to reduce the commitment levels under the Company's bank credit
facilities. Borrowings would be collateralized by a security interest in the
receivables of these subsidiaries. The Company and its Japanese subsidiary are
currently negotiating a similar receivables-backed securitization financing
agreement that the Company expects to complete by the end of December 2000.
INTEREST RATE SWAPS AND OPTIONS
The Company is exposed to interest rate risk. It is the Company's policy
and practice to use derivative instruments, primarily interest rate swaps and
options, to manage and reduce interest rate exposures.
At August 27, 2000, the Company had interest rate swap transactions
outstanding with a total notional principal amount of $425.0 million, to convert
floating rate liabilities to fixed rates, and $375.0 million to convert fixed
rate liabilities to floating rates. These swap transactions effectively change
the Company's interest rates on part of its debt to fixed rates that range from
6.25% to 7.00% and floating rates that range from 6.61% to 6.96%, depending on
their maturities, the latest of which is in 2006. The Company has also entered
into interest rate option structures (caps and floors) to reduce or neutralize
the exposure to changes in variable interest rates. The structures represent an
outstanding amount of $425.0 million and cover a series of variable cash flows
through November 2001. Subsequent to the third quarter of 2000, all interest
rate swap transactions outstanding to convert floating rate liabilities to fixed
rates matured on August 29, 2000. In addition, subsequent to the third quarter
of 2000, the Company terminated $300.0 million of its swap transactions that
convert fixed rate liabilities to floating rates.
The Company is exposed to credit loss in the event of nonperformance by the
counterparties to the interest swap transactions. However, the Company believes
these counterparties are creditworthy financial institutions and does not
anticipate nonperformance.
NOTE 5: COMMITMENTS AND CONTINGENCIES
FOREIGN EXCHANGE CONTRACTS
At August 27, 2000, the Company had U.S. dollar forward currency contracts
to sell the aggregate equivalent of $677.2 million and other contracts to buy
the aggregate equivalent of $289.0 million of various foreign currencies. The
Company also had Euro forward currency contracts to buy the aggregate equivalent
of $14.2 million and other contracts to sell the aggregate equivalent of $10.0
million of various foreign currencies. Additionally, the Company had U.S. dollar
option contracts to sell the aggregate equivalent of $2.3 billion and to buy the
aggregate equivalent of $1.5 billion of various foreign currencies. The Company
also had Euro option contracts to sell the foreign currency aggregate equivalent
of $72.2 million and buy the aggregate equivalent of $93.0 million. These
contracts are at various exchange rates and expire at various dates through
August 2001.
Most option transactions, included in the amounts above, are for the
exchange of Euro and U.S. dollar. At August 27, 2000, the Company had bought
U.S. dollar options to buy the equivalent of $1.3 billion against the Euro. To
finance the option premiums related to these options, the Company sold options
having the obligation to buy Euro for an equivalent of $530.0 million U.S.
dollars.
11
<PAGE>
LEVI STRAUSS & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
The Company's market risk is generally related to fluctuations in the
currency exchange rates. The Company is exposed to credit loss in the event of
nonperformance by the counterparties to the foreign exchange contracts. However,
the Company believes these counterparties are creditworthy financial
institutions and does not anticipate nonperformance.
NOTE 6: FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of certain financial instruments has been
determined by the Company using available market information and appropriate
valuation methodologies. However, considerable judgment is required in
interpreting market data. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange.
The carrying amount and estimated fair value (in each case including
accrued interest) of the Company's financial instrument assets and (liabilities)
at August 27, 2000 and November 28, 1999 are as follows:
<TABLE>
<CAPTION>
August 27, 2000 November 28, 1999
------------------------ -----------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
-------- ---------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
DEBT INSTRUMENTS:
Credit facilities.................................. $(1,102,941) $(1,102,941) $(1,424,449) $(1,424,449)
Yen-denominated eurobond placement................. (186,056) (128,440) (189,274) (148,113)
Notes offering..................................... (813,190) (629,500) (798,640) (626,307)
Receivables-backed securitization.................. -- -- (215,836) (215,836)
Industrial development revenue refunding bond...... (10,035) (10,035) (10,030) (10,030)
Customer service center equipment financing........ (88,414) (88,414) -- --
CURRENCY AND INTEREST RATE HEDGES:
Foreign exchange forward contracts................. $ 11,700 $ 10,981 $ 16,972 $ 16,932
Foreign exchange option contracts.................. 5,738 6,369 7,806 2,288
Interest rate swap contracts....................... 291 (3,108) (2,224) (4,839)
Interest rate option contracts..................... (582) (245) -- --
</TABLE>
Quoted market prices or dealer quotes are used to determine the estimated
fair value of foreign exchange contracts, option contracts and interest rate
swap contracts. Dealer quotes and other valuation methods, such as the
discounted value of future cash flows, replacement cost, and termination cost
have been used to determine the estimated fair value for long-term debt and the
remaining financial instruments. The carrying values of cash and cash
equivalents, trade receivables, current assets, current maturities of long-term
debt, short-term borrowings and taxes approximate fair value.
The fair value estimates presented herein are based on information
available to the Company as of August 27, 2000 and November 28, 1999. Although
the Company is not aware of any factors that would substantially affect the
estimated fair value amounts, such amounts have not been updated since those
dates and, therefore, the current estimates of fair value at dates subsequent to
August 27, 2000 and November 28, 1999 may differ substantially from these
amounts. Additionally, the aggregation of the fair value calculations presented
herein do not represent and should not be construed to represent the underlying
value of the Company.
12
<PAGE>
LEVI STRAUSS & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
NOTE 7: BUSINESS SEGMENT INFORMATION
<TABLE>
<CAPTION>
Asia All
Americas Europe Pacific Other Consolidated
-------- ------ ------- ----- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED AUGUST 27, 2000:
Net sales....................................... $802,637 $235,869 $89,234 $ -- $1,127,740
Earnings contribution........................... 132,524 33,916 10,623 -- 177,063
Interest expense................................ -- -- -- 59,406 59,406
Corporate and other (income) expense, net....... -- -- -- 59,502 59,502
Income before income taxes...................... -- -- -- -- 58,155
THREE MONTHS ENDED AUGUST 29, 1999:
Net sales....................................... $858,785 $289,798 $77,830 $ -- $1,226,413
Earnings contribution........................... 101,334 46,692 2,797 -- 150,823
Interest expense................................ -- -- -- 45,742 45,742
Corporate and other (income) expense, net....... -- -- -- 17,538 17,538
Income before income taxes...................... -- -- -- -- 87,543
<CAPTION>
Asia All
Americas Europe Pacific Other Consolidated
-------- ------ ------- ----- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
NINE MONTHS ENDED AUGUST 27, 2000:
Net sales....................................... $2,255,279 $817,529 $286,413 $ -- $3,359,221
Earnings contribution........................... 304,623 175,689 37,176 -- 517,488
Interest expense................................ -- -- -- 177,177 177,177
Corporate and other (income) expense, net....... -- -- -- 53,142 112,644
Income before income taxes...................... -- -- -- -- 227,667
NINE MONTHS ENDED AUGUST 29, 1999:
Net sales....................................... $2,480,393 $1,004,053 $248,199 $ -- $3,732,645
Earnings contribution........................... 237,746 206,055 24,170 -- 467,971
Excess capacity/restructuring charge............ -- -- -- 405,885 405,885
Interest expense................................ -- -- -- 132,718 132,718
Corporate and other (income) expense, net....... -- -- -- 152,596 170,134
Loss before income taxes........................ -- -- -- -- (240,766)
</TABLE>
13
<PAGE>
LEVI STRAUSS & CO.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected items
in our consolidated statements of operations, expressed as a percentage of net
sales (amounts may not total due to rounding).
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------- --------------------------
August 27, August 29, August 27, August 29,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
MARGIN DATA:
Net sales............................................. 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.................................... 58.8 61.0 58.3 61.6
---------- ---------- ---------- ----------
Gross profit.......................................... 41.2 39.0 41.7 38.4
Marketing, general and administrative expenses........ 31.8 27.6 31.2 31.2
Excess capacity/restructuring charges................. -- -- -- 10.9
---------- ---------- ---------- ----------
Operating income (loss)............................... 9.4 11.4 10.5 (3.7)
Interest expense...................................... 5.3 3.7 5.3 3.6
Other (income) expense, net........................... (1.0) 0.6 (1.5) (0.8)
---------- ---------- ---------- ----------
Income (loss) before taxes............................ 5.2 7.1 6.8 (6.5)
Income tax expense (benefit).......................... 1.8 2.6 2.4 (2.4)
---------- ---------- ---------- ----------
Net income (loss)..................................... 3.4% 4.5% 4.4% (4.1)%
========== ========== ========== ==========
NET SALES SEGMENT DATA:
GEOGRAPHIC
Americas..................................... 71.2% 70.0% 67.1% 66.5%
Europe....................................... 20.9 23.6 24.3 26.9
Asia Pacific................................. 7.9 6.3 8.5 6.6
</TABLE>
NET SALES. Net sales for the three months ended August 27, 2000 decreased
8.0% to $1.1 billion, as compared to $1.2 billion for the same period in 1999.
Net sales for the nine months ended August 27, 2000 decreased 10.0% to $3.4
billion, as compared to $3.7 billion for the same period in 1999. This reflects
a combination of factors including volume declines, lower average selling prices
caused by a higher percentage of closeout sales, related to our efforts to clear
inventories of slow moving and obsolete fashion products, and the impact of the
depreciating Euro. If currency exchange rates where unchanged from the prior
year periods, net sales for the three months ended August 27, 2000 would have
declined approximately 6% compared to the same period in 1999 and net sales for
the nine months ended August 27, 2000 would have declined approximately 8% from
the same period in 1999. Although net sales levels decreased from the prior year
periods, the rate of decrease, particularly for first quality products, shows
signs of slowing as indicated by the lower decrease for the three month period
ended August 27, 2000, compared to the nine month period ended August 27, 2000.
We believe that positive consumer response to our new product lines, stronger
demand for our basic products such as 501(R) jeans in the U.S. and upgraded core
products in Asia, improved product-focused marketing support, and incremental
progress in our shipping execution, contributed to the slowing decline in sales.
In addition, we believe that denim fashion trends around the world, which appear
to reflect consumer interest in more traditional basic jeans styles, also
contributed to the slowing decline of net sales.
In addition to volume decreases for the three and nine months ended August
27, 2000 compared to the same periods in 1999, average unit selling prices
decreased due to the translation effects of the stronger U.S. dollar versus
certain currencies, particularly the Euro, and a higher proportion of closeout
sales. The majority of the closeout sales were in line with our efforts to clear
inventories of slow-moving or obsolete fashion products.
14
<PAGE>
In the Americas, net sales for the three months ended August 27, 2000 of
$802.6 million decreased 6.5% from the same period in 1999. This decrease was
partially attributable to a weak apparel retail market, a difficult
back-to-school season for many of our customers and an inadequate supply of
501(R) jeans resulting from our decision to tightly manage inventories. In
addition to demand for our 501(R) jeans, we also experienced increased consumer
interest in our new products and core basics such as Levi's(R) Engineered Jeans,
Silvertab(R) apparel, 569(R) jeans and Dockers(R) Khakis. Net sales for the nine
months ended August 27, 2000 of $2.3 billion decreased 9.1% from the same period
in 1999 due primarily to a drop in volume and a higher proportion of closeouts.
In Europe, net sales for the three months ended August 27, 2000 decreased
18.6% to $235.9 million, as compared to $289.8 million for the same period in
1999. Net sales for the nine months ended August 27, 2000 decreased 18.6% to
$817.5 million, as compared to $1.0 billion for the same period in 1999. The net
sales decreases were primarily due to a decline in volume caused by a continued
softening of the European apparel market and our supply chain execution issues,
lower average unit selling price resulting from a higher percentage of closeout
sales and the reporting impact of the depreciating Euro. If exchange rates were
unchanged from the prior year periods, the reported net sales decreases would
have been approximately 9% for the three months ended August 27, 2000 and 10%
for the nine months ended August 27, 2000 compared to the same periods in 1999.
In our Asia Pacific region, net sales for the three months ended August 27,
2000 increased 14.7% to $89.2 million, as compared to $77.8 million for the same
period in 1999. Net sales for the nine months ended August 27, 2000 increased
15.4% to $286.4 million, as compared to $248.2 million for the same period in
1999. The increase was primarily driven by volume growth in most markets and the
effects of translation to U.S. dollar reported results. In Japan, which accounts
for just under two-thirds of our business in Asia, we experienced positive
retail and consumer response to our new products and upgraded core basics. If
exchange rates were unchanged from the prior year periods, the reported net
sales increases would have been approximately 11% for the three months ended
August 27, 2000 and 10% for the nine months ended August 27, 2000 compared to
the same periods in 1999.
GROSS PROFIT. Gross profit for the three months ended August 27, 2000
totaled $464.3 million compared with $478.6 million for the same period in 1999.
Gross profit as a percentage of net sales, or gross margin, for the three months
ended August 27, 2000 increased to 41.2%, as compared to 39.0% for the same
period in 1999. Gross profit for the nine months ended August 27, 2000 and the
same period in 1999 totaled $1.4 billion. Gross margin increased for the nine
months ended August 27, 2000 to 41.7%, as compared to 38.4% for the same period
in 1999. The improvement in both periods reflects stronger demand for higher
margin basic products, as well as improved sourcing costs and the benefit of
cost reductions resulting from plant closures taken in prior years.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. Marketing, general and
administrative expenses for the three months ended August 27, 2000 increased
6.0% to $358.5 million, as compared to $338.2 million for the same period in
1999. Marketing, general and administrative expenses as a percentage of sales
for the three months ended August 27, 2000 increased 4.2 percentage points to
31.8% as compared to 27.6% for the same period in 1999. These increases are due
primarily to increased costs for employee incentive plans related to our
improving financial performance against our internal targets. The effects of the
higher incentive costs were partially offset by our continuing cost containment
efforts, lower advertising expenses, lower sales volume-related expenses, and
lower information technology expenses associated with minimal year 2000
compliance costs in 2000. For the three months ended August 27, 2000, marketing,
general and administrative expenses included a reversal of employee benefit
costs of approximately $24.0 million due to changes in the demographic profile
of our workforce. For the three months ended August 27, 2000, expenses also
included an incremental catch-up accrual of approximately $20.0 million for
incentive programs because of improving performance against our internal
incentive program targets. The 1999 figures included a reversal of employee
benefit costs of approximately $21.0 million and a reversal of incentive
compensation accruals of approximately $24.0 million. Excluding these
adjustments for both periods, marketing, general and administrative expenses for
the three months ended August 27, 2000 would have decreased by approximately 6%
compared to the same period in 1999.
15
<PAGE>
Marketing, general and administrative expenses for the nine months ended
August 27, 2000 decreased 10.0% to $1.0 billion, as compared to $1.2 billion for
the same period in 1999. Marketing, general and administrative expenses as a
percentage of sales for the nine months ended August 27, 2000 and August 29,
1999 were each 31.2%. The dollar decrease in marketing, general and
administrative expenses was primarily due to our continuing cost containment
efforts, lower advertising expenses, lower sales volume-related expenses, lower
information technology expenses associated with minimal year 2000 compliance
costs in 2000 and lower salaries and related expenses resulting from prior year
restructuring initiatives. These decreases were partially offset by increased
costs for employee incentive plans. We anticipate that costs for employee
incentive plans will be higher in the fourth quarter of 2000 compared to the
third quarter of 2000 as a result of our improving performance against internal
targets. Current year marketing, general and administrative expenses included a
reversal of employee benefit costs of approximately $24.0 million due to changes
in the demographic profile of our workforce. The 1999 figures included a
reversal of employee benefit costs of approximately $21.0 million and a reversal
of incentive compensation accruals of approximately $24.0 million. Excluding
these adjustments for both periods, marketing, general and administrative
expenses for the nine months ended August 27, 2000 would have decreased
approximately 11% compared to the same period in 1999.
Advertising expense for the three months ended August 27, 2000 decreased
14.7% to $97.3 million, as compared to $114.1 million for the same period in
1999. Advertising expense as a percentage of sales for the three months ended
August 27, 2000 decreased 0.7 percentage points to 8.6%, as compared to 9.3% for
the same period in 1999. Advertising expense for the nine months ended August
27, 2000 decreased 17.6% to $286.3 million, as compared to $347.6 million for
the same period in 1999. Advertising expense as a percentage of sales for the
nine months ended August 27, 2000 decreased 0.8 percentage points to 8.5%, as
compared to 9.3% for the same period in 1999. The decreases in advertising
expense as a percentage of sales for the three and nine month periods of 2000
compared to the same periods in 1999 were consistent with our plans to better
focus our marketing support initiatives and to align them more effectively with
new product introductions and retail presentation. We anticipate advertising
expense to increase as a percentage of sales in the fourth quarter of 2000
compared to the third quarter of 2000 due to new advertising campaigns.
We expect marketing, general and administrative expenses as a percentage of
sales to be higher in the fourth quarter of 2000 compared to the third quarter
of 2000 due to anticipated increased costs for employee incentive plans and
advertising expense.
EXCESS CAPACITY/RESTRUCTURING CHARGES. For the nine months ended August 27,
2000, we recorded no charges, as compared to charges of $405.9 million for the
same period in 1999 that were associated with our plant closures in North
America and corporate overhead restructuring initiatives.
OPERATING INCOME (LOSS). Operating income for the three months ended August
27, 2000 of $105.8 million decreased 24.7% from the same period in 1999.
Excluding certain adjustments in both periods related to benefits and incentive
compensation programs, operating income for the three months ended August 27,
2000 would have increased 7% compared to the same period in 1999. Operating
income for the nine months ended August 27, 2000 of $353.8 million increased
from the same period in 1999 due to an improved gross margin, lower marketing,
general and administrative costs and the impact of restructuring initiatives on
prior year reported results. Excluding the adjustment items and restructuring
initiatives, operating income for the nine months ended August 27, 2000 would
have increased approximately 48% compared to the same period in 1999.
INTEREST EXPENSE. Interest expense for the three months ended August 27,
2000 increased 29.9% to $59.4 million, as compared to $45.7 million for the same
period in 1999. Interest expense for the nine months ended August 27, 2000
increased 33.5% to $177.2 million, as compared to $132.7 million for the same
period in 1999. These increases were due to higher interest rates associated
with the new credit facilities and equipment financing agreements and higher
market interest rates.
16
<PAGE>
OTHER INCOME/EXPENSE, NET. Other income/expense, net for the three months
ended August 27, 2000 reflected income of $11.8 million, as compared to an
expense of $7.1 million for the same period in 1999. Other income, net for the
nine months ended August 27, 2000 increased 70.5% to $51.0 million, as compared
to $29.9 million for the same period in 1999. The increase in other income for
the three months ended August 27, 2000, was primarily due to an increase in
licensee income, lower transaction losses on foreign currency contracts and
higher interest income. Other expense for the same period in 1999 was primarily
due to an increase in net losses on foreign currency contracts. The increase for
the nine-month period was primarily attributable to a $26.1 million gain for the
sale of two office buildings in San Francisco located next to our corporate
headquarters and increases in licensee and interest income, partially offset by
net losses in 2000 compared to net gains in 1999 on foreign currency contracts.
Net currency gains and losses are primarily due to the fluctuations of various
currencies in relation to our foreign currency hedging positions.
INCOME TAX EXPENSE (BENEFIT). Income tax expense for the three months ended
August 27, 2000 decreased 37.2% to $20.4 million as compared to $32.4 million
for the same period in 1999. Income tax expense for the nine months ended August
27, 2000 was $79.7 million as compared to an income tax benefit of $89.1 million
for the same period in 1999. Our effective tax rate for the third quarter and
nine-month period in 2000 was 35% compared to 37% for the same periods in 1999.
The lower tax rate in 2000 was due to a reassessment of potential tax
settlements. The income tax benefit for the same period in 1999 was generated
primarily from the pre-tax loss that resulted from the restructuring charges of
$405.9 million during the period.
NET INCOME (LOSS). Net income for the three months ended August 27, 2000
decreased to $37.8 million from $55.2 million for the same period in 1999. Net
income for the three months ended August 27, 2000 included higher accruals for
incentive costs and interest expense, as compared to the same period in 1999.
Net income for the three months ended August 27, 2000 also included a gain from
the sale of office buildings and the reversal of employee benefit costs. Net
income for the same period in 1999 included the reversal of employee benefit
costs and the reversal of incentive compensation accruals. Excluding the
non-recurring items in both the 2000 and 1999 three month periods, net income
for the three months ended August 27, 2000 would have increased to $35.4
million, as compared to $26.8 million for the same period in 1999. Net income
(loss) for the nine months ended August 27, 2000 increased to $148.0 million
from a loss of $151.7 million for the same period in 1999. Net income for the
nine months ended August 27, 2000 included higher interest expense, compared to
the same period in 1999, and a tax expense, compared to a tax benefit for the
same period in 1999. In addition, the nine month period of 2000 included a gain
from the sale of office buildings and the reversal of employee benefit costs.
The net loss for the 1999 period was due to the restructuring charge of $405.9
million, partially offset by the reversal of employee benefit costs and the
reversal of incentive compensation accruals. Excluding the non-recurring items
in both the 2000 and 1999 nine month periods and the charge for restructuring,
net income for the nine months ended August 27, 2000 would have increased to
$115.6 million, as compared to $75.7 million for the same period in 1999.
RESTRUCTURING AND EXCESS CAPACITY REDUCTION
Since 1997, we have closed 29 of our owned and operated production and
finishing facilities in North America and Europe and instituted restructuring
initiatives in order to reduce costs, eliminate excess capacity and align our
sourcing strategy with changes in the industry and in consumer demand. (SEE NOTE
3 TO THE CONSOLIDATED FINANCIAL STATEMENTS.)
17
<PAGE>
Following is a table that summarizes plant closures and restructuring
charges for the years 1997 - 1999, the resulting cash and non-cash reductions
and their balances as of August 27, 2000.
<TABLE>
<CAPTION>
Balance as of
Initial Cash Non-Cash August 27,
Provision Reductions Reductions 2000
--------- ---------- ---------- --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
1997 North America Plant Closures.................................. $ 386,792 $336,520 $39,232 $ 11,040
1998 North America Plant Closures.................................. 82,073 56,604 19,391 6,078
1999 North America Plant Closures.................................. 394,105 283,117 27,909 83,079
1998 Corporate Restructuring Initiatives........................... 61,062 52,469 2,980 5,613
1999 Corporate Restructuring Initiatives........................... 48,889 35,490 -- 13,399
1998 Europe Restructuring and Plant Closures....................... 107,523 94,343 9,134 4,046
1999 Europe Restructuring and Plant Closures....................... 54,689 40,323 4,126 10,240
---------- -------- -------- --------
Total as of August 27, 2000..................................... $1,135,133 $898,866 $102,772 $133,495
========== ======== ======== ========
</TABLE>
The balance of these reserves as of August 27, 2000 was $133.5 million, of
which $43.8 million was a non-cash item and categorized as a reduction to
property, plant and equipment on the balance sheet, while the remaining balance
of $89.7 million was included in restructuring reserves on the balance sheet and
will be paid in cash. We expect to pay the remaining balance of $89.7 million in
2001.
LIQUIDITY AND CAPITAL RESOURCES
Our principal capital requirements have been to fund working capital and
capital expenditures. We have historically relied on internally generated funds
and bank borrowings to finance our operations. As of August 27, 2000, total cash
and cash equivalents were $75.4 million, a $67.1 million decrease from the
$142.5 million cash balance reported as of August 29, 1999 and a decrease of
$117.4 million from the $192.8 million reported as of November 28, 1999.
Our capital spending in the nine months ended August 27, 2000 was $15.8
million, as compared to $39.3 million for the same period in 1999. As a result
of our sourcing base shift toward outsourcing, plant closures in 1998 and 1999
and the consolidation of office space, we expect to have reduced capital
spending than in the past. We estimate our capital spending for fiscal year 2000
to be approximately $35.0 million, primarily for maintenance and purchase of
equipment at our remaining manufacturing facilities and distribution centers and
for computer systems.
CASH PROVIDED BY/USED FOR OPERATIONS. Cash provided by operating activities
for the nine months ended August 27, 2000 was $199.3 million, as compared to a
use of cash of $125.5 million for the same period in 1999. Inventory decreased
during the nine months ended August 27, 2000 due to our inventory initiatives,
which included tighter inventory control, lead-time reduction and sales of
second quality and closeout inventory. Income taxes receivable decreased during
the nine months ended August 27, 2000 primarily due to income tax refunds of
$66.3 million received in March 2000 associated with a carryback of a net
operating loss reported on our 1999 income tax return. Net deferred tax assets
and restructuring reserves decreased during the nine months ended August 27,
2000 primarily due to spending related to the restructuring initiatives. Accrued
salaries, wages, and employee benefits, and long-term employee benefits
increased during the nine months ended August 27, 2000 primarily due to
increased accruals for employee incentive plans. Accrued taxes increased and
other long-term liabilities decreased during the nine months ended August 27,
2000 due to a tentative settlement with the Internal Revenue Service in
connection with an examination of our income tax returns for the years 1986 -
1989. The change in other, net during the nine months ended August 27, 2000 was
primarily due to the gain attributable to a sale in February 2000 of two office
buildings in San Francisco located adjacent to our corporate headquarters.
18
<PAGE>
CASH PROVIDED BY INVESTING ACTIVITIES. Cash provided by investing
activities during the nine months ended August 27, 2000 increased to $144.2
million, as compared to $48.0 million during the same period in 1999. The
increase in 2000 resulted primarily from proceeds received on increased sales of
property, plant and equipment, higher realized gains on net investment hedges
and lower purchases of property, plant and equipment. The higher proceeds
received on the sale of property, plant and equipment was primarily attributable
to a sale in February 2000 of two office buildings in San Francisco located
adjacent to our corporate headquarters.
CASH PROVIDED BY/USED FOR FINANCING ACTIVITIES. Cash used for financing
activities for the nine months ended August 27, 2000 was $457.2 million, as
compared to a source of cash of $134.2 million for the same period in 1999. The
use of cash in 2000 was due to repayments on existing debt.
YEAR 2000
We experienced no material disruption in customer or supplier
relationships, revenue patterns or customer buying patterns during the nine
months ended August 27, 2000 as a result of the year 2000 problem. There have
been no losses of revenue and we do not believe that any future contingencies
related to year 2000 would have a material impact on our business.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). In June 1999, the FASB delayed
the effective date of SFAS 133 to fiscal years beginning after June 15, 2000. We
will adopt SFAS 133 and its subsequent amendments the first day of fiscal year
2001. SFAS 133 establishes accounting and reporting standards for derivative
instruments including certain derivative instruments embedded in other
contracts, and for hedging activities. In summary, SFAS 133 requires all
derivatives to be recognized as assets or liabilities at fair value. Fair value
adjustments are made either through earnings or equity, depending upon the
exposure being hedged and the effectiveness of the hedge. We have not yet
quantified all effects of adopting SFAS 133 on our financial statements. We try
to take a long-term view and manage our exposures on an economic basis. We use
forecasts to develop exposure positions and engage in active management of those
exposures with the objective of protecting future cash flows and mitigating
risks. Not all our exposure management activities will qualify for hedge
accounting treatment. We would be required to mark-to-market those exposure
management instruments that do not qualify for hedge accounting treatment and,
as a result, it is possible that we will experience increased volatility in our
earnings. We currently have an implementation team in place that is determining
the method of implementation and evaluating all effects of adopting SFAS 133 and
its subsequent amendments.
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
This Form 10-Q includes forward-looking statements about sales performance
and trends, fashion trends, new product development in our three brands, product
mix, inventory position and management, expense levels including overhead,
employee compensation and advertising expense, debt repayment and liquidity,
capital expenditures, customer orders, retail relationships and developments
including sell-through, presentation of product at retail and marketing
collaborations, restructuring reserves, and marketing and advertising
initiatives. We have based these forward-looking statements on our current
assumptions, expectations and projections about future events. When used in this
document, the words "believe," "anticipate," "intend," "estimate, " "expect,"
"appear," "project" and similar expressions are intended to identify
forward-looking statements, although not all forward-looking statements contain
these words.
19
<PAGE>
These forward-looking statements are subject to risks and uncertainties
including, without limitation, risks related to the impact of competitive
products; changing fashion trends; dependence on key distribution channels,
customers and suppliers; our supply chain executional performance; ongoing
competitive pressures in the apparel industry; changing international retail
environments; changes in the level of consumer spending or preferences in
apparel; trade restrictions; political or financial instability in countries
where our products are manufactured; and other risks detailed in our
registration statement on Form S-4 filed with the Securities and Exchange
Commission (the "SEC") on May 4, 2000 as amended by Amendment No. 1 filed on May
17, 2000, and our other filings with the SEC. Our actual results might differ
materially from historical performance or current expectations. We do not
undertake any obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Note 6 to the Consolidated Financial Statements and the Liquidity and
Capital Resources section under Management's Discussion and Analysis of
Financial Condition and Results of Operations.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) EXHIBITS:
10.1 First Amendment to Bridge Credit Agreement and Limited
Waiver, dated July 31, 2000, between the Registrant and
Bank of America, N.A.
10.2 First Amendment to Amended and Restated 1997 364 Day Credit
Agreement and Limited Waiver, dated July 31, 2000, between
the Registrant and Bank of America, N.A.
10.3 First Amendment to Amended and Restated 1999 180 Day Credit
Agreement and Limited Waiver, dated July 31, 2000, between
the Registrant and Bank of America, N.A.
10.4 First Amendment to 1997 Second Amended and Restated
Credit Agreement and Limited Waiver, dated July 31,
2000, between the Registrant and Bank of America, N.A.
27 Financial data schedule
(a) REPORTS ON FORM 8-K:
Current Report on Form 8-K on September 19, 2000 filed, pursuant to
Item 5 of the report, containing a copy of the Company's press release
titled "Levi Strauss & Co. Third-Quarter and Nine-Month Financial
Results Reflect Ongoing Progress in Business Turnaround."
Current Report on Form 8-K on September 29, 2000 filed, pursuant to
Item 5 of the report, containing a copy of the Company's press release
titled "Levi Strauss & Co. to Pursue $350 Million Private Placement of
Senior Notes."
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SIGNATURES
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Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Date: September 29, 2000 Levi Strauss & Co.
------------------
(Registrant)
By: /s/ WILLIAM B. CHIASSON
-----------------------
William B. Chiasson
Senior Vice President and
Chief Financial Officer
22
