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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED NOVEMBER 26, 2000
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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (paragraph 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of the
Form 10-K or any amendment to this Form 10-K. [x]
The Company is privately held. Nearly all of its common equity is owned by
members of the families of several descendants of the Company's founder, Levi
Strauss. There is no trading in the common equity and therefore an aggregate
market value based on sales or bid and asked prices is not determinable.
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 February 1,
2001
Documents incorporated by reference: None
LEVI STRAUSS & CO.
TABLE OF CONTENTS TO FORM 10-K
FOR FISCAL YEAR ENDING NOVEMBER 26, 2000
PART I
PAGE
Item 1. Business...................................................................................... 3
Item 2. Properties.................................................................................... 12
Item 3. Legal Proceedings............................................................................. 13
Item 4. Submission of Matters to a Vote of Security Holders........................................... 13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................... 14
Item 6. Selected Financial Data....................................................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ......... 17
Item 7A.Quantitative and Qualitative Disclosures About Market Risk...................................... 33
Item 8. Financial Statements and Supplementary Data................................................... 38
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 72
PART III
Item 10. Directors and Executive Officers of the Registrant............................................ 73
Item 11. Executive Compensation........................................................................ 77
Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 81
Item 13. Certain Relationships and Related Transactions................................................ 85
ITEM IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................. 86
SIGNATURES.............................................................................................. 92
Financial Statement Schedules........................................................................... 94
Supplemental Information................................................................................ 95
2
PART I
ITEM 1. BUSINESS
OVERVIEW
We are one of the world's leading branded apparel companies with sales in
more than 80 countries. We design and market jeans and jeans-related pants,
casual and dress pants, shirts, jackets and related accessories for men, women
and children under our Levi's(R), Dockers(R) and Slates(R) brands. Our products
are distributed in the United States primarily through chain retailers and
department stores and abroad primarily through department stores and specialty
retailers. We also maintain a network of approximately 750 franchised or
independently owned stores dedicated to our products outside the United States
and operate a small number of company-owned stores.
LEVI'S(R) BRAND DOCKERS(R) BRAND SLATES(R) BRAND
--------------- ---------------- ---------------
PRODUCTS: Men's, women's and kids'-- Men's, women's and boys'-- Men's and women's-- dress
jeans, jeans-related products, casual pants, shorts, pants, skirts, tops, jackets,
knits and woven tops, outerwear skirts, knit and woven outerwear and accessories
and accessories tops, outerwear and
accessories
GEOGRAPHIC MARKETS: Men's and women's-- global Men's and women's-- global Men's and women's-- U.S.
Kids'-- primarily U.S. Boys'-- U.S. only only
PERCENTAGE OF 2000
NET SALES: 75% 23% 2%
Our business is currently organized into three geographic divisions: the
Americas, consisting of the United States, Canada and Latin America; Europe,
including the Middle East and Africa; and Asia Pacific. Our operations in the
United States are conducted primarily through Levi Strauss & Co., while our
operations outside the United States are conducted primarily through foreign
subsidiaries owned directly or indirectly by Levi Strauss & Co. In 2000, we had
net sales of $4.6 billion, of which the Americas, Europe and Asia Pacific
accounted for 68%, 24% and 8%, respectively. In 1999, we had net sales of $5.1
billion.
OUR BUSINESS STRATEGY
Our primary strategic goals are to continue stabilizing our business and
position it for profitable growth. We believe achievement of these objectives
will help us increase our financial strength and flexibility and meet our goal
of regaining investment grade ratings on our debt securities. To achieve these
goals, we have several key business strategies.
REINVIGORATE OUR BRANDS THROUGH BETTER PRODUCT INNOVATION AND INCREASED CONSUMER
AND CHANNEL RELEVANCE.
We believe that an integrated presentation of new and innovative products
and marketing programs targeted to specific consumer and retail segments is
crucial to generating consumer demand and increasing sales for our products. We
intend to:
o focus on continually updating our core products and creating new
products, such as our Levi's(R) Engineered Jeans(TM), that incorporate
design innovations, new fabrics and new finishes and that draw on our
long heritage of originality in product design and fabrication;
o design and market products that are relevant to our various consumer
segments ranging from teenagers and trend initiators who demand
fashion-forward styles, to urban professionals who desire
sophisticated casual wear, as well as to the broad group of consumers
who want mainstream, quality branded jeanswear and khaki pants for
everyday and business wear;
o take advantage of consumer recognition of our brands and market
opportunities by expanding our product offerings in women's apparel,
tops and licensed merchandise such as outerwear, shoes and belts;
o capitalize on our global brand recognition and marketing capabilities
by adopting successful products and design concepts developed in one
region and introducing them to other geographic markets in which we
operate;
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o target our product offerings to specific distribution channels in
order to reach discrete consumer segments, create differentiation for
our retail customers and between our brands, strengthen our position
in our existing channels and address shifts in retail distribution
channels in both the United States and Europe; and
o develop product-focused marketing programs using both traditional
advertising vehicles such as television, print and point-of-sale
materials and other vehicles such as concert sponsorships, product
placement and Internet sites.
ACHIEVE OPERATIONAL EXCELLENCE.
We are implementing strategies and processes for more effectively
anticipating and fulfilling product demand and replenishing core items. We
intend to:
o improve the coordination of our design, merchandising, forecasting,
sourcing and logistics processes to reduce product lead times, ensure
product availability and improve fill rates;
o improve the linkage of product supply to consumer demand and our
ability to ship product orders in a timely manner;
o focus on working capital control through improved forecasting,
inventory management and product mix; and
o improve our product sourcing and operating efficiencies to further
reduce product costs and control operating expenses.
IMPROVE OUR RELATIONSHIPS WITH OUR CUSTOMERS AND UPGRADE THE PRESENTATION OF OUR
PRODUCT AT RETAIL.
We distribute our products in a wide variety of retail formats around the
world including chain and department stores, franchise stores dedicated to our
brands and specialty retailers. Through better relationships and collaborative
business planning with our customers, we must ensure that the right products are
available and in-stock at retail and are presented in ways that enhance brand
appeal and attract consumers. We intend to:
o engage in more collaborative planning and performance monitoring
processes with our retail customers to achieve better product
presentation, assortment and inventory management;
o improve the presentation of our product at retail through new
retailing formats, better fixturing and visual merchandising, on-floor
merchandising services and other sales-area upgrade programs;
o implement an outlet strategy through new accounts and expanded product
offerings without incurring capital expenditures;
o increase the number of franchised or other retail formats dedicated to
our Dockers(R) brand products outside the United States in order to
present the brand in a focused, image-enhancing environment.
OUR BRANDS AND PRODUCTS
We market a broad line of branded jeanswear, casual wear and dress pants
that appeal to diverse demographic groups in markets around the world. Through a
number of sub-brands and product lines under the Levi's(R), Dockers(R) and
Slates(R) brands, we target specific consumer segments and provide product
differentiation for our retail customers in our selected distribution channels.
We focus on creating new, innovative products relevant to our target consumers,
as well as ensuring that our core, traditional products are updated with new
finishes, fabrications and colors. We strive to leverage our global brand
recognition, product design and marketing capabilities to take products and
design concepts developed in one region and introduce them in other geographic
markets.
4
LEVI'S(R) BRAND
We market jeans and jeans-related products under the Levi's(R) brand around
the world. Since their invention in 1873, Levi's(R) jeans have become one of the
most successful and widely recognized brands in the history of the apparel
industry. In fiscal year 2000, sales of our Levi's(R) brand products represented
approximately 75% of our net sales, and accounted for approximately 67% of net
sales in the Americas, approximately 91% of net sales in Europe and
approximately 95% of net sales in Asia Pacific.
Our Levi's(R) brand features a wide range of product offerings including:
o RED TAB(TM) PRODUCTS. Our Red Tab(TM) product line, identified by our
Tab Device trademark on the back pocket, encompasses a variety of
basic jeans with different silhouettes, fits, fabrics (including denim
and corduroy) and finishes intended to appeal to a wide range of
consumers. Our core line is anchored by the classic 501(R) button-fly
jean, named by Time Magazine as the "Best Fashion of the Century" in
its December 31, 1999 edition. We distribute Red Tab(TM) products
worldwide through many of our distribution channels.
o LEVI'S(R) ENGINEERED JEANS(TM). Developed in Europe, Levi's(R)
Engineered Jeans(TM) represent our reinvention of the blue jean and
the first international jeanswear launch in our history. These jeans
are ergonomically engineered to fit the body's contours and have a
three-dimensional shape that we believe provides innovative design,
unique style, superior comfort and ease of movement. We target
Levi's(R) Engineered Jeans(TM) to 15- to 24-year-olds in Asia, Europe
and the Americas primarily through independent retailers, specialty
stores and Original Levi's Store(R) retail shops.
o SILVERTAB(R) PRODUCTS. Our Silvertab(R) line targets 15- to
19-year-olds and offers a more fashion-forward product range featuring
technologically advanced fabrics, such as microfiber, nylon ripstop
and "oily" canvas and innovative finishes for denim jeans. We
distribute Silvertab(R) products primarily through department stores
and Original Levi's Store(R) retail shops in the Americas.
o OTHER PRODUCTS. Other Levi's(R) brand products include: Levi's(R)
Vintage Clothing for jean "aficionados", a premium line available
through high-end specialty stores and independent retailers in Europe,
Asia and the United States; the Levi's(R) Red(TM) collection, a
European-developed product designed to reflect both our heritage and
modern design concepts; L2(R) brand that targets 15- to 24-year-old
suburban youth who want fashionable products at value pricing that are
distributed through chain stores in the United States and in Asia;
and, in conjunction with Philips Electronics NV, Levi's(R) ICD+(TM)
(Levi's(R) Industrial Clothing Division+(TM)) in Europe features an
innovative line of jackets that integrate wearable electronics with
fashion.
DOCKERS(R) BRAND
We market casual clothing, primarily pants and tops, under the Dockers(R)
brand, in more than 40 countries. We launched the brand in 1986 to address an
emerging consumer interest in khaki pants. We believe that the Dockers(R) brand,
through its product offering and marketing, played a major role in the
resurgence of khaki pants and the movement toward casual attire in the workplace
by helping create a standard for business casual clothing. According to a 2000
report by the Society for Human Resource Managers, approximately 80% of U.S.
workplaces today allow casual business wear at least one day a week. In fiscal
year 2000, sales of Dockers(R) brand products represented approximately 23% of
our net sales, accounting for approximately 31% of net sales in the Americas,
approximately 9% of net sales in Europe and approximately 5% of net sales in
Asia Pacific.
Our Dockers(R) brand offerings are primarily targeted to men and women ages
25 to 39 and include:
o DOCKERS(R) BRAND. Dockers(R) brand products are the core line of the
brand. They include a broad range of casual khaki pants and are
complemented by a variety of tops and seasonal pant products in a
range of fits, fabrics, colors and styles. We distribute these
products in the Americas, Europe and Asia through a variety of
channels, including department stores and chain stores.
o DOCKERS(R) PREMIUM. The Dockers(R) Premium pant line provides a range
of cotton pants constructed from premium fabrics with sophisticated
details in a range of finishes, fits, styles and colors. We distribute
these products through department stores in the United States.
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o DOCKERS(R) RECODE(TM). In Spring 2000, we launched the Dockers(R)
Recode(TM) sub-brand exclusively in U.S. department stores in order to
appeal to more fashion-involved consumers who want modern casual
clothes. A slightly more fashion-
forward line of pants and tops, the sub-brand consists of
cotton-blended fabrications in a sophisticated color spectrum. In Fall
2000, we expanded the collection with an offering of sweaters,
outerwear, shoes and belts marketed by our licensees.
o DOCKERS(R) K-1 KHAKIS. The brand's first global product launch,
Dockers(R) K-1 Khakis is a premium khaki pant inspired by the
authentic army khaki and made from the original Cramerton(R) army
cloth. In Fall 2000, we introduced a complete collection with new
colors and fabrics in shirts, sweaters, belts, outerwear and a variety
of pants, all inspired by military and antique workwear themes. We
distribute Dockers(R) K-1 Khakis through specialty and department
stores in Europe, Asia and the Americas, but will discontinue this
line in the United States in 2001 in order to heighten our focus on
other Dockers(R) lines.
o OTHER PRODUCTS. Our other Dockers(R) product lines include Exact(TM) A
Dockers(R) Brand, a collection of more refined casual dress styling
available through chain stores; and Dockers(R) D(TM) products, a new
boys' line distributed in the United States targeted towards boys ages
4 to 14. We work with established licensees to develop and market
complementary products under the Dockers(R) brand, including outerwear
and leather goods, men's and women's footwear, men's sweaters, hosiery
and golf apparel.
SLATES(R) BRAND
We market modern, sophisticated clothes for men and women under the
Slates(R) brand in the United States. Launched in Fall 1996, the Slates(R) brand
became a leading men's dress pant brand at department stores by the end of 1997.
Our Slates(R) brand offerings include:
o MEN'S SLATES(R). The men's Slates(R) brand collection of pants,
shirts, sweaters and outerwear, combines contemporary styles with
modern fabrics and colors. We position the brand between casual pants
and tailored clothing and design and market it to meet the 25- to
34-year-old consumer's desire for a younger and more sophisticated
casual look. This brand is distributed to department stores and
specialty stores.
o WOMEN'S SLATES(R). In Fall 2000, we added a new line of women's
dress-casual clothing to the Slates(R) brand. The "Slates(R) Janet
Howard(R)" line, designed by Janet Howard, targets women ages 24 to 35
with a designer-inspired line of dress pants, skirts, tops, sweaters
and dress jackets. We distribute this line of products to higher-end
department stores to fill a gap between the classic and contemporary
women's apparel categories.
o OTHER PRODUCTS. For men's products, we produce the pants in the
Slates(R) line and work with established licensees to develop and
market complementary products under the Slates(R) brand, including a
broad assortment of knit and woven tops, dress shirts, sweaters,
hosiery and outerwear and, planned for Spring 2001, ties, sportcoats
and suit separates.
SALES, DISTRIBUTION AND CUSTOMERS
We distribute our products on a worldwide basis through selected retail
channels, including chain stores, department stores, specialty stores, dedicated
franchised stores, outlets, Internet sites and mail-order catalogs. Our
distribution strategy focuses on:
o improving the presentation of our products at retail through
introducing new retailing formats, executing new fixturing, visual
merchandising and other sales-area upgrade programs and providing
on-floor merchandising services; and
o strengthening our relationships with our retail customers through more
collaborative planning and performance monitoring processes, providing
sub-brands and products to specific distribution channels in order to
create points of differentiation for our customers and providing them
with products targeted for their core consumers.
6
AMERICAS
In the Americas, we distribute our products through national and regional
chains, department stores, specialty stores and Original Levi's Store(R) and
Dockers(R) Store retail shops. We have approximately 3,000 retail customers
operating more than 16,800 locations in the United States and Canada. Sales of
Levi's(R), Dockers(R) and Slates(R) products to our top five and top 10
customers in the United States accounted for approximately 36% and 48% of our
total net sales in fiscal year 2000, and approximately 54% and 70% of our
Americas net sales in fiscal year 2000, as compared to approximately 34% and 46%
of our total net sales in fiscal year 1999, and approximately 51% and 69% of our
Americas net sales in fiscal year 1999. Our top 10 customers in 2000, on both an
Americas and total company basis, were Designs, Inc., Dillards, Inc., Federated
Department Stores, Inc., Goody's Family Clothing, Inc., J.C. Penney, Kohl's
Corporation, The May Department Stores Company, the Mervyn's unit of Target,
Sears, Roebuck & Co. and Specialty Retailers. J.C. Penney is the only customer
that represented more than 10% of our total net sales, accounting for 12%, 11%
and 12% of our total net sales in fiscal years 2000, 1999 and 1998,
respectively. We also target limited distribution premium products like
Levi's(R) Vintage Clothing to independent, image-conscious specialty stores in
major metropolitan areas who cater to more fashion-forward, trend-influential
consumers.
EUROPE
Our European customers include large department stores, such as Corte
Ingles in Spain, Galeries Lafayette in France and Karstadt Quelle AG in Germany;
dedicated, single-brand Original Levi's Store(R) and Dockers(R) Store retail
shops; mail order accounts; and a substantial number of independent retailers
operating either a single or small group of jeans-focused stores or general
clothing stores. We depend for nearly half our European sales on these
independent retailers, who are under increasing pressure from both vertically
integrated specialty stores and department stores. The more varied and
fragmented nature of European retailing means that we are less dependent on
major customers than we are in the United States. In fiscal year 2000, our top
10 European customers accounted for approximately 10% of our total European net
sales.
ASIA PACIFIC
In Asia Pacific, we generate over half of our sales through the specialty
store channel, which includes multi-brand as well as independently owned
Original Levi's Store(R) retail shops. The rest of our products are sold through
department stores and general merchandise stores. As in Europe, the varied and
fragmented nature of Asian retailing means we are less dependent on individual
customers in the region. Our Asia Pacific business is heavily weighted toward
Japan, which represented approximately 63% of our 2000 net sales in the region.
DEDICATED STORES
We have a network of approximately 750 franchised or other independently
owned stores selling Levi's(R) brand or Dockers(R) brand products under the
"Original Levi's Store(R)", "Levi's(R) Store" and "Dockers(R) Store" names in
Europe, Asia, Canada and Latin America. These dedicated-format stores are
strategically important as vehicles for demonstrating the breadth of our product
line, enhancing brand image and generating sales. These stores also are an
important distribution channel in newer and smaller markets in Eastern Europe,
Asia Pacific and Latin America. We own and operate a small number of stores
dedicated to the Levi's(R) brand, including stores in the United States located
in New York, Chicago, Orange County, San Francisco, San Diego, Boston and
Seattle and in Europe in London, Milan, Paris and Berlin.
We also own in the United States and Japan, and license third parties in
the United States and abroad to operate outlet stores for the disposition of
closeout, irregular and return goods. Sales in fiscal year 2000 through our
outlet channels in the United States represented approximately 8% of our
Americas net sales and approximately 5% of our total net sales. We use the
outlet store channel to support our brands by moving closeout and irregular
goods as quickly as possible through the stores and by reducing the flow of
goods to channels that are not consistent with brand image and distribution
strategies. In order to better meet consumer needs and to participate
effectively in the value distribution channel, we supplement the product
offering to the outlet and related stores in the United States by producing
selected basic products, including jeans, khaki pants and denim shirts,
specifically for those stores.
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INTERNET
We operate web sites devoted to each of the Levi's(R), Dockers(R) and
Slates(R) brands as marketing vehicles to enhance consumer understanding of our
brands. We do not sell products directly to consumers through the Internet. In
the United States, our products are currently sold online through specifically
authorized Internet sites that meet our standards, such as www.macys.com,
operated by Federated, and www.jcpenney.com, operated by J.C. Penney. In Europe,
authorized dealers and mail order accounts who meet our standards relating to
customer service, return policy, site content, trademark use and other matters
may sell our products to consumers through their own Internet sites.
ADVERTISING AND PROMOTION
We make substantial investments in advertising, retail and promotion
activities in support of our brands to increase consumer relevance and to drive
consumer demand. We expensed approximately $402.7 million, or 8.7% of total net
sales, on these activities in fiscal year 2000. We advertise through a broad mix
of media, including television, national publications, billboards and other
outdoor vehicles. We execute both global and region-specific marketing programs
to achieve consistent brand positioning while allowing flexibility to optimize
program execution in local markets. Examples of our global marketing initiatives
include our sponsorships of World AIDS Day and advertising campaigns associated
with the global launch of Levi's(R) Engineered Jeans(TM).
Our marketing strategy focuses on:
o developing clear consumer value propositions that drive product
development and messaging in order to differentiate our brands and
products;
o developing integrated marketing programs that effectively coordinate
product launches and promotions with specific traditional and
non-traditional advertising and retail point of sales activities;
o creating superior quality, product-focused advertising; and
o enhancing presentation of product at retail through innovative retail
initiatives.
We are increasing our use of less traditional marketing vehicles, including
event and music sponsorships, product placement in television shows, music
videos and films and alternative marketing techniques, including street-level
and nightclub events and similar targeted, small-scale activities. Recent
activities include cosponsoring with Sears the fall tour of the Grammy award
winner Christina Aguilera. The multi-program "Make Them Your Own"(TM) campaign
for the Levi's(R) brand in the United States, launched in summer 2000, features
print and television advertising, interactive online activities and a customized
tractor-trailer featuring games, product displays, video "style-cam", and
karaoke that travels to concert venues and retail locations.
COMPETITION
The worldwide apparel industry is highly competitive and fragmented. We
compete in all of our markets with numerous designers, manufacturers, private
labels and specialty store retailers, both domestic and foreign. The success of
our business depends on our ability to shape and stimulate consumer tastes and
demands by producing innovative, attractive, and competitively priced fashion
products. In fashion-sensitive markets, such as the jeans and casual wear
markets, barriers to entry are sufficiently low so that talented designers and
others can become meaningful competitors soon after establishing a new label. We
believe that the primary factors upon which we compete are:
o anticipating and responding to changing consumer demands in a timely
manner;
o maintaining favorable brand recognition;
o developing innovative, high-quality products in sizes, colors and
styles that appeal to consumers;
o pricing products;
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o providing strong and effective marketing support;
o creating an acceptable value proposition for retail customers;
o ensuring product availability and optimizing supply chain efficiencies
with retailers; and
o obtaining sufficient retail floor space and effective presentation of
products at retail.
We believe our competitive strengths include:
o strong worldwide brand recognition;
o competitive product quality and value;
o long-standing relationships with leading department stores and other
chain stores worldwide;
o our network of franchised and other Original Levi's Store(R) and
Dockers(R) Store retail shops in Europe, Asia, Canada and Latin
America; and
o our commitment to ethical conduct and social responsibility.
We believe that the total unit sales of Levi's(R) brand jeans in the United
States is second only to the combined total unit sales in the United States of
VF Corporation's principal jeans brands, Wrangler, Lee and Rustler. We believe
that the total unit sales of Levi's(R) brand jeans on a pan-European basis and
on a pan-Asia Pacific basis is greater than the total unit sales of jeans of any
single brand in those regions and that there is no single competitor offering
multiple brands with greater total sales of jeans in either of those regions.
AMERICAS
We face intense competition across all of our brands from designer labels,
vertically integrated specialty stores, mass merchandisers, private labels and
fashion labels. We sell both basic and fashion-oriented products under the
Levi's(R), Dockers(R) and Slates(R) brands to retailers in diverse channels
across a wide range of retail price points. As a result, we face a wide range of
competitors, including:
o other jeanswear manufacturers, including VF Corporation, marketer of
the Lee, Wrangler and Rustler brands;
o fashion-oriented designer apparel marketers, including Polo Ralph
Lauren Corporation, Calvin Klein, Nautica Enterprises,
Guess?, Inc. and Tommy Hilfiger Corp.;
o vertically integrated specialty stores, including Gap Inc.,
Abercrombie & Fitch, American Eagle Outfitters Inc., J. Crew
and Eddie Bauer, Inc.;
o lower-volume but high visibility fashion-forward jeanswear brands that
appeal to the teenage market, including the FUBU, JNCO, Lucky, MUDD
and Diesel brands;
o casual wear manufacturers, including Haggar Corp., Liz Claiborne, Inc.
and Savane International Corp.;
o retailer private labels, including J.C. Penney's Arizona brand and
Sears' Canyon River Blues and Canyon River Khakis brands; and
o mass merchandisers, including Wal-Mart Stores, Inc., Target and Kmart.
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EUROPE
While there is no one particular brand with a strong pan-European presence,
strong local brands and retailers exist in certain markets, including Diesel in
Italy and Scandinavia, Pepe in Spain and Lee Cooper in France. Zara, Hennes &
Mauritz AB, Energie and other vertically integrated specialty retailers, and
athletic wear firms such as adidas-Salomon, also offer competitive products and
are an increasing competitive force in the market. Our principal U.S.
competitors, including Gap Inc. and VF Corporation, are expanding their
collective presence in Europe. While these U.S. competitors generally lack the
presence in Europe they enjoy in the United States, we believe they view Europe
as a significant growth opportunity, and we anticipate increased competition
from them going forward.
ASIA PACIFIC
Competitors in the jeanswear market consist of both regional brands, such
as Edwin, our principal competitor in Japan, and U.S. brands, including Guess?,
Lee and Wrangler, which offer basic products available in local markets.
Competitors in both jeanswear and casual apparel also include vertically
integrated specialty stores, such as UNIQLO, Gap Inc., Esprit and Eddie Bauer in
Japan, and Giordano, a more value-focused retailer that operates throughout the
region.
SOURCING, MANUFACTURING AND RAW MATERIALS
Our supply chain strategy focuses on improving the linkage of our product
supply to consumer demand and our ability to ship product orders in a timely
manner. We obtain our products from a combination of company-owned facilities
and independent manufacturers. Over the last three years, we shifted our
sourcing base substantially toward outsourcing by closing 29 company-owned
production and finishing facilities in North America and Europe. We believe that
outsourcing allows us to maintain production flexibility while avoiding the
substantial capital expenditures and costs related to maintaining a large
internal production capability.
Each of our operating regions operates a supply chain network that provides
product management, demand-forecasting, quality assurance, manufacturing and
logistics support to our brands. Within each of our brands, merchandisers and
designers create seasonal product plans that are intended to reflect consumer
preferences, market trends and retail customer requirements. During the
development phase, the merchandisers and designers work closely with the product
managers to ensure completion of manufacturing specifications and costing for
each product in the seasonal plan. They also consult with forecast specialists
and sales representatives to determine the potential unit volume for the fashion
and replenishment products in the plan. Once the brand's seasonal plan is
finalized, product managers focus on sourcing the products in the plan.
We purchase the fabric and raw materials used in our business, particularly
denim and twill, from several suppliers, including Cone Mills, Burlington
Industries, Galey & Lord, including its Swift Denim subsidiary and American
Cotton Growers. In addition, we purchase thread, trim, buttons, zippers, snaps
and various other product components from numerous suppliers. We do not have
long-term raw materials or production contracts with any of our principal
suppliers, except for Cone Mills, which is the sole worldwide supplier of the
denim used for our 501(R) jeans, and which supplied approximately 24%, 22% and
24% in 2000, 1999 and 1998, respectively, of the total volume of fabrics we
purchased worldwide. Our contract with Cone Mills provides for a rolling
five-year term unless either Cone Mills or we elect not to extend the agreement,
upon which the agreement will terminate at the end of the then-current term. The
contract also ensures our supply for three years following a change of control
of Cone Mills. We may terminate the Cone Mills contract at any time upon 30 days
notice. We have not experienced any material difficulty in obtaining fabric and
other raw materials to meet production needs in the past.
Our purchased fabrics are shipped directly from fabric manufacturers to our
owned manufacturing plants, to cutting facilities for cutting and shipment on to
third party contractors or directly to third party contractors for garment
construction. In most cases where we use contractors, we retain ownership of the
fabric throughout the manufacturing process. We use numerous independent
manufacturers, principally in Latin America and Asia, for the production of our
garments. We also use contractors who both produce or purchase fabric and sew
the garments. These package contractors represent a small but growing percentage
of our production and enable us to reduce working capital relating to
work-in-process inventories. We typically conduct business with our contractors
on an order-by-order basis. We inspect fabrics and finished goods as part of our
quality control program.
We require all third party contractors who manufacture or finish products
on our behalf to abide by a stringent code of conduct that sets guidelines for
employment practices such as wages and benefits, working hours, health and
safety, working age
10
and disciplinary practices, and for environmental, ethical and legal matters. We
assess working conditions and contractors' compliance with our standards on a
regular basis and implement continuous improvement plans as needed.
We operate 21 dedicated distribution centers in 18 countries. Distribution
center activities include receiving finished goods from our plants and
contractors, inspecting those products and shipping them to our customers. In
some instances, we outsource distribution activities to third party logistics
providers.
TRADEMARKS
We regard our trademarks as our most valuable assets and believe they have
substantial value in the marketing of our products. Levi's(R), Silvertab(R),
501(R), L2(R), Dockers(R), Slates(R), the Arcuate trademark, the Tab Device and
Two Horse are among our core trademarks. We protect these trademarks by
registering them with the U.S. Patent and Trademark Office and with governmental
agencies in other countries where our products are manufactured and sold. We
work vigorously to enforce and protect our trademark rights by engaging in
regular market reviews, helping local law enforcement authorities detect and
prosecute counterfeiters, issuing cease-and-desist letters against third parties
infringing or denigrating our trademarks and initiating litigation as necessary.
We also work with trade groups and industry participants seeking to strengthen
laws relating to the protection of intellectual property rights in markets
around the world. We grant licenses to other parties to manufacture and sell
products with our trademarks in product categories and in geographic areas in
which we do not operate.
SEASONALITY AND BACKLOG
Our sales do not vary substantially by quarter in any of our three regions,
as the apparel industry has become less seasonal due to more frequent selling
seasons and offerings of both basic and fashion oriented merchandise throughout
the year. In addition, all of our orders are subject to cancellation. For those
reasons, our order backlog may not be indicative of future shipments.
SOCIAL RESPONSIBILITY
We have a long-standing corporate culture characterized by ethical conduct
and social responsibility. Our culture and values are reflected in policies and
initiatives that we believe distinguish us from others in the apparel industry.
We were a pioneer in many social and cultural areas:
o We were the first multinational company to develop a comprehensive
code of conduct intended to ensure that workers making our products
anywhere in the world would do so in safe and healthy working
conditions and be treated with dignity and respect.
o Our commitment to social justice is highlighted by a unique initiative
that addresses racial prejudice and seeks to improve race relations by
supporting community organizations working together to eliminate
racism.
o We were among the first companies to offer employee benefits such as
flexible time-off policies and domestic partner benefits.
o We have been a leader in promoting AIDS awareness and education since
1982.
We are active in the communities where we have a presence. We and the Levi
Strauss Foundation jointly contributed $17.2 million during fiscal year 2000 to
community agencies in over 40 countries to support employee volunteerism and
programs in AIDS prevention and care, economic empowerment, youth empowerment
and social justice. In addition, we support more than 75 community involvement
teams worldwide that facilitate employee volunteerism and raise funds for
community projects.
EMPLOYEES
As of November 26, 2000, we employed approximately 17,300 people,
approximately 9,000 of whom were located in the United States. Most of our
production and distribution employees in the United States are covered by
various collective bargaining agreements. Outside the United States, most of our
production and distribution employees are covered by either industry-sponsored
and/or state-sponsored collective bargaining mechanisms. We consider our
relations with our employees to be good and have not recently experienced any
material job actions or labor shortages.
11
ITEM 2. PROPERTIES
We conduct manufacturing, distribution and administrative activities in
owned and leased facilities. We have renewal rights in most of our property
leases. We anticipate that we will be able to extend these leases on terms
satisfactory to us or, if necessary, locate substitute facilities on acceptable
terms. We believe our facilities and equipment are in good condition and are
suitable for our needs. Information about manufacturing, finishing and
distribution facilities and other key operating properties in use as of November
26, 2000 is summarized in the following table:
LOCATION PRIMARY USE LEASED/OWNED
-------- ----------- ------------
UNITED STATES
Little Rock, AR.......................................................... Distribution Owned
Hebron, KY............................................................... Distribution Owned
Canton, MS............................................................... Distribution Owned
Henderson, NV............................................................ Distribution Owned
San Antonio, TX.......................................................... Finishing Owned
San Antonio, TX.......................................................... Manufacturing Owned
San Francisco, CA........................................................ Manufacturing Owned
Blue Ridge, GA........................................................... Manufacturing Owned
Powell, TN............................................................... Manufacturing Owned
Brownsville, TX.......................................................... Manufacturing Owned
El Paso (Kastrin), TX.................................................... Manufacturing Owned
San Benito, TX........................................................... Manufacturing Owned
Westlake, TX............................................................. Data Center Leased
OTHER AMERICAS
Buenos Aires, Argentina.................................................. Distribution Leased
Cotia, Brazil............................................................ Distribution Leased
Rexdale, Canada.......................................................... Distribution Owned
Stoney Creek, Canada..................................................... Manufacturing Owned
Brantford, Canada........................................................ Finishing Leased
Edmonton, Canada......................................................... Manufacturing Leased
Naucalpan, Mexico........................................................ Distribution Leased
EUROPE, MIDDLE EAST AND AFRICA
Schoten, Belgium......................................................... Distribution Leased
Les Ulis, France......................................................... Distribution Leased
Heustenstamm, Germany.................................................... Distribution Owned
Kiskunhalas, Hungary..................................................... Manufacturing, Finishing Owned
and
Distribution
Milan, Italy............................................................. Distribution Leased
Amsterdam, Netherlands................................................... Distribution Leased
Plock, Poland............................................................ Manufacturing and Finishing Leased
Warsaw, Poland........................................................... Distribution Leased
Dundee, Scotland......................................................... Manufacturing Owned
Bellshill, Scotland...................................................... Finishing Owned
Northhampton, U.K........................................................ Distribution Owned
Cape Town, South Africa.................................................. Manufacturing, Finishing Leased
and Distribution
Sabedell, Spain.......................................................... Distribution Leased
Bonmati, Spain........................................................... Manufacturing Owned
Olvega, Spain............................................................ Manufacturing Owned
Helsingborg, Sweden...................................................... Distribution Owned
Corlu, Turkey............................................................ Manufacturing, Finishing Owned
and Distribution
ASIA PACIFIC
Auckland, New Zealand.................................................... Distribution Leased
Adelaide, Australia...................................................... Manufacturing and Owned
Distribution
Bangalore, India......................................................... Distribution Leased
Jawa Barat, Indonesia.................................................... Finishing Leased
Hiratsuka Kanagawa, Japan................................................ Distribution Owned
Makati, Philippines...................................................... Distribution Leased
Makati, Philippines...................................................... Manufacturing Leased
12
Our global headquarters and the headquarters of our Americas business are
both located in leased premises in San Francisco, California. Our Europe and
Asia Pacific headquarters are located in leased premises in Brussels, Belgium
and Singapore. We also lease or own over 110 administrative and sales offices in
44 countries, as well as lease a number of small warehouses in nine countries.
In addition, we have 52 company-operated retail and outlet stores in eight
countries in owned and leased premises, of which 10 stores are outlet stores in
the United States, and 15 stores are located in Poland. We also own or lease
several facilities we formerly operated and have closed.
ITEM 3. LEGAL PROCEEDINGS
We are subject to claims against us, and we make claims against others, in
the ordinary course of our business, including claims arising from the use of
our trademarks and with respect to employment matters. We do not believe that
the resolution of any pending claims will materially adversely affect our
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during our 2000
fiscal fourth quarter.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Our shares of common stock are held by members of the families of
several descendants of our founder, Levi Strauss, and by several former members
of our management. There is no established public trading market for our shares
and none of our shares are convertible into shares of any other class of stock
or other securities.
All shares of our common stock are deposited in a voting trust, a legal
arrangement that transfers the voting power of the shares to a trustee or group
of trustees. The four voting trustees are Peter E. Haas, Sr., Peter E. Haas,
Jr., Robert D. Haas and F. Warren Hellman. The voting trustees have the
exclusive ability to elect and remove directors, amend our by-laws and take
certain other actions which would normally be within the power of stockholders
of a Delaware corporation. Our equity holders who, as a result of the voting
trust, legally hold "voting trust certificates", not stock, retain the right to
direct the trustees on specified mergers and business combinations,
liquidations, sales of substantially all of our assets and specified amendments
to our certificate of incorporation.
The voting trust will last until April 2011, unless the trustees
unanimously decide, or holders of at least two-thirds of the outstanding voting
trust certificates decide, to terminate it earlier. If Robert D. Haas ceases to
be a trustee for any reason, then the question of whether to continue the voting
trust will be decided by the holders. If Peter E. Haas, Sr. ceases to be a
trustee, his successor will be his spouse, Miriam L. Haas. The existing trustees
will select the successors to the other trustees. The agreement among the
stockholders and the trustees creating the voting trust contemplates that, in
selecting successor trustees, the trustees will attempt to select individuals
who share a common vision with the sponsors of the 1996 transaction that gave
rise to the voting trust, represent and reflect the financial and other
interests of the equity holders and bring a balance of perspectives to the
trustee group as a whole. A trustee may be removed if the other three trustees
unanimously vote for removal or if holders of at least two-thirds of the
outstanding voting trust certificates vote for removal.
Our common stock, as noted, and the voting trust certificates, are not
publicly held or traded. All shares and the voting trust certificates are
subject to a stockholders' agreement. The agreement, which expires in April
2016, limits the transfer of shares and certificates to other holders, family
members, specified charities and foundations and to us. The agreement does not
provide for registration rights or other contractual devices for forcing a
public sale of shares, certificates or other access to liquidity. The scheduled
expiration date of the stockholders' agreement is five years later than that of
the voting trust agreement in order to permit an orderly transition from
effective control by the voting trust trustees to direct control by the
stockholders.
We may hold "annual stockholders' meetings" to which all voting trust
certificate holders are invited to attend. These meetings are not a "meeting of
stockholders" in the traditional corporate law sense; under the voting trust
agreement, the trustees, not the voting trust certificate holders, elect the
directors and vote the shares on most other corporate matters. In addition, the
meetings are not official formal meetings, under the voting trust agreement, of
the voting trust certificate holders. Instead, these annual gatherings are
opportunities for the voting trust certificate holders to interact with the
board of directors and management and to learn more about our business.
(b) As of January 1, 2001, there were 164 record holders of voting trust
certificates.
(c) We did not declare or pay any dividends in our two most recent fiscal
years. Our current bank credit facilities prohibit our declaring or paying any
dividends without first obtaining consents from our lenders. In addition in
January 2001, we entered into indentures relating to our 11.625% senior notes
due 2008 that prohibit our paying any dividends unless we meet specific
requirements. For more detailed information about our bank credit facilities and
senior notes, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources" and Notes to
Consolidated Financial Statements.
14
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth our selected financial data. The following
selected statements of income data and cash flow data for fiscal years 2000,
1999, 1998, 1997 and 1996 and the consolidated statement of balance sheet data
of such periods are derived from our financial statements that have been audited
by Arthur Andersen LLP, independent public accountants.
The financial data set forth below should be read in conjunction with, and
is qualified by reference to, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," our consolidated financial statements and
the related notes to those financial statements, included elsewhere in this
report. Certain prior year amounts have been reclassified to conform to the 2000
presentation.
YEAR ENDED
----------
NOVEMBER 26, NOVEMBER 28, NOVEMBER 29, NOVEMBER 30, NOVEMBER 24,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
STATEMENT OF INCOME DATA:
Net sales........................ $4,645,126 $ 5,139,458 $ 5,958,635 $ 6,861,482 $ 7,136,304
Cost of goods sold............... 2,690,170 3,180,845 3,433,081 3,962,719 4,159,371
---------- ----------- ----------- ----------- -----------
Gross profit..................... 1,954,956 1,958,613 2,525,554 2,898,763 2,976,933
Marketing, general and
administrative expenses........ 1,481,718 1,629,845 1,834,058 2,045,938 2,029,138
Other operating income (32,380) (24,387) (25,310) (26,769) (28,328)
Excess capacity/restructuring (1) (33,144) 497,683 250,658 386,792 --
Global Success Sharing Plan(2) .. -- (343,873) 90,564 114,833 138,963
Special Compensation Charge(3) .. -- -- -- -- 76,983
---------- ----------- ----------- ----------- -----------
Operating income................. 538,762 199,345 375,584 377,969 760,177
Interest expense................. 234,098 182,978 178,035 212,358 145,234
Other (income) expense, net...... (39,016) 7,868 34,849 (18,670) (4,963)
---------- ----------- ----------- ----------- -----------
Income before taxes.............. 343,680 8,499 162,700 184,281 619,906
Income tax expense............... 120,288 3,144 60,198 46,070 154,977
---------- ----------- ----------- ----------- -----------
Net income....................... $ 223,392 $ 5,355 $ 102,502 $ 138,211 $ 464,929
========== =========== ==========- =========== ===========
OTHER FINANCIAL DATA:
EBITDA(4)........................ $ 629,743 $ 319,447 $ 504,357 $ 516,863 $ 889,714
Adjusted EBITDA(5)............... 596,599 473,257 845,579 1,018,488 1,105,660
Capital expenditures............. 27,955 61,062 116,531 121,595 210,466
Ratio of adjusted EBITDA to
interest....................... 2.5x 2.6x 4.7x 4.8x 7.6x
Ratio of earnings to fixed
charges(6)..................... 2.0x 1.0x 1.6x 1.6x 3.8x
STATEMENT OF CASH FLOW
DATA:
Cash flows from operating
activities..................... $ 305,926 $ (173,772) $ 223,769 $ 573,890 $ 494,138
Cash flows from investing
activities..................... 154,223 62,357 (82,707) (76,895) (242,781)
Cash flows from financing
activities..................... (527,062) 224,219 (194,489) (530,302) (1,136,300)
BALANCE SHEET DATA:
Cash and cash equivalents....... $ 117,058 $ 192,816 $ 84,565 $ 144,484 $ 195,852
Working capital.................. 555,062 770,130 637,801 701,535 1,059,940
Total assets..................... 3,205,728 3,670,014 3,867,757 4,012,314 4,167,696
Total debt....................... 2,126,430 2,664,609 2,415,330 2,631,696 3,225,512
Stockholders' deficit(3)......... (1,098,573) (1,288,562) (1,313,747) (1,370,262) (1,481,577)
15
- --------------
(1) We reduced overhead expenses and eliminated excess manufacturing capacity
through extensive restructuring initiatives executed during the past three
years, including closing 29 of our owned and operated production and
finishing facilities in North America and Europe.
(2) Our Global Success Sharing Plan, adopted in 1996, provides for cash
payments to our employees in 2002 if we achieve pre-established financial
targets. We recognized and accrued expenses in 1998, 1997 and 1996 for our
Global Success Sharing Plan. During 1999, we concluded that, based on our
financial performance, the targets under the plan would not be achieved and
that the probability of a payment in 2002 is highly unlikely. As a result,
in 1999 we reversed into income $343.9 million of accrued expenses, less
miscellaneous expenses, previously recorded in connection with the Global
Success Sharing Plan.
(3) The special compensation charge and stockholders' deficit resulted from a
1996 transaction in which our stockholders created new long-term governance
arrangements for us, including the voting trust and stockholders agreement.
In the 1996 transaction, a group of stockholders of our former parent, Levi
Strauss Associates Inc., established a new company, LSAI Holding Corp, to
which they contributed approximately 70% of the outstanding shares of Levi
Strauss Associates Inc. Levi Strauss Associates Inc. was then merged with a
subsidiary of LSAI Holding Corp. In the merger, shares of Levi Strauss
Associates Inc. not contributed to LSAI Holding Corp., including shares
held under several employee benefit and compensation plans, were converted
into the right to receive cash, thereby making Levi Strauss Associates Inc.
a wholly-owned subsidiary of LSAI Holding Corp. Funding for the cash
payments in the merger was provided in part by cash on hand and in part
from proceeds of approximately $3.3 billion of borrowings under bank credit
facilities. The special compensation charge resulted from the impact of the
transaction on various employee plans. In October 1996, Levi Strauss
Associates Inc. and LSAI Holding Corp. were merged into Levi Strauss & Co.
These transactions were accounted for as a reorganization of entities under
common control.
(4) EBITDA equals operating income plus depreciation and amortization expense.
EBITDA is not intended to represent cash flow or any other measure of
performance in accordance with generally accepted accounting principles.
(5) The calculation for adjusted EBITDA is shown below:
YEAR ENDED
----------
NOVEMBER 26, NOVEMBER 28, NOVEMBER 29, NOVEMBER 30, NOVEMBER 24,
2000 1999 1998 1997 1996
---- ----- ---- ---- ----
(DOLLARS IN THOUSANDS)
EBITDA.......................... $629,743 $319,447 $504,357 $ 516,863 $ 889,714
Excess capacity
reduction/restructuring....... (33,144) 497,683 250,658 386,792 --
Global Success Sharing Plan..... -- (343,873) 90,564 114,833 138,963
Special Compensation Charges.... -- -- -- 76,983
-------- -------- -------- ---------- ----------
Adjusted EBITDA................. $596,599 $473,257 $845,579 $1,018,488 $1,105,660
======== ======== ======== ========== ==========
(6) For the purpose of computing the ratio of earnings to fixed charges,
earnings are defined as income from continuing operations before income
taxes, plus fixed charges and less capitalized interest. Fixed charges are
defined as the sum of interest, including capitalized interest, on all
indebtedness, amortization of debt issuance cost and that portion of rental
expense which we believe to be representative of an interest factor.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements, including, in particular,
statements about our plans, strategies and prospects under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business." Among these forward looking statements are statements regarding our
anticipated performance in fiscal year 2001, specifically statements relating to
our net sales, gross profit, advertising expense and capital expenditures.
We have based the forward-looking statements herein on our current
assumptions, expectations and projections about future events. When used in this
report, the words "believe," "anticipate," "intend," "estimate," "expect,"
"project" and similar expressions are intended to identify forward-looking
statements, although not all forward-looking statements contain such words.
These forward-looking statements speak only as of the date of this report, and
we do not undertake any obligation to update or revise publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise. Although we believe that the expectations reflected in
these forward-looking statements are reasonable, we can give no assurance that
these expectations will prove to be correct or that we will achieve savings or
other benefits anticipated in the forward-looking statements. We disclose
important factors, some of which may be beyond our control, that could cause
actual results to differ materially from management's expectations in this
report, including, without limitation:
o risks related to the impact of competitive products;
o changing fashion trends;
o dependence on key distribution channels;
o customers and suppliers;
o our supply chain executional performance;
o ongoing competitive pressures in the apparel industry;
o changing international retail environments;
o changes in the level of consumer spending or preferences in apparel;
o trade restrictions; and
o political or financial conditions in countries where our products are
manufactured.
For more information on these and other factors, see "Factors That May
Affect Future Results." We caution prospective investors not to place undue
reliance on these forward-looking statements. All subsequent written and oral
forward-looking statements attributable to us are expressly qualified in their
entirety by the cautionary statements and the risk factors contained throughout
this report.
17
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 foot due to rounding).
YEAR ENDED
----------
NOVEMBER 26, NOVEMBER 28, NOVEMBER 29,
2000 1999 1998
----- ----- -----
Net sales ............................................ 100.0% 100.0% 100.0%
Cost of goods sold.................................... 57.9 61.9 57.6
----- ----- ----
Gross profit.......................................... 42.1 38.1 42.4
Marketing, general and administrative
expenses........................................... 31.9 31.7 30.8
Other operating income................................ (0.7) (0.5) (0.4)
Excess capacity/restructuring charges................. (0.7) 9.7 4.2
Global Success Sharing Plan........................... -- (6.7) 1.5
----- ----- -----
Operating income...................................... 11.6 3.9 6.3
Interest expense...................................... 5.0 3.6 3.0
Other (income) expense, net........................... (0.8) 0.2 0.6
----- ----- -----
Income before taxes................................... 7.4 0.2 2.7
Income tax expense.................................... 2.6 0.1 1.0
----- ----- -----
Net income............................................ 4.8% 0.1% 1.7%
===== ===== =====
NET SALES SEGMENT DATA:
GEOGRAPHIC
Americas......................................... 67.8% 66.6% 66.1%
Europe........................................... 23.8 26.5 27.7
Asia Pacific..................................... 8.4 7.0 6.2
YEAR ENDED NOVEMBER 26, 2000 AS COMPARED TO YEAR ENDED NOVEMBER 28, 1999
NET SALES. Total net sales in fiscal year 2000 decreased 9.6% to $4.6
billion, as compared to $5.1 billion in fiscal year 1999. This decrease reflects
a combination of factors including volume declines, a higher percentage of
closeout sales related to our efforts to clear inventories of slow moving and
obsolete fashion products earlier in the year, and the impact of the
depreciating Euro. Net sales declined in the Americas and Europe regions, but
increased in the Asia Pacific region, as compared to the same period of 1999. If
currency exchange rates were unchanged from the prior year period, net sales for
fiscal year 2000 would have declined approximately 7%.
Although year over year total net sales continued to decline, the rate of
decline narrowed to 9.6% in fiscal 2000 as compared to 13.7% in fiscal 1999 and
13.2% in fiscal 1998. 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, stronger retail relationships and incremental progress in our shipping
execution contributed to the slowing decline in sales. Our narrowing sales
decline, particularly in a difficult retail environment, reflects ongoing
progress in our business turnaround and efforts to improve performance. We
believe we are positioned both operationally and financially to work toward
stabilizing our business in fiscal year 2001 and hope to achieve relatively flat
net sales on a constant currency basis, compared to fiscal year 2000.
In fiscal years 2000 and 1999, we had one customer that represented
approximately 12% and 11%, respectively, of total net sales. No other customer
accounted for more than 10% of total net sales.
In the Americas, net sales decreased 8.0% to $3.1 billion, as compared to
$3.4 billion in fiscal year 1999, due primarily to a drop in volume. Although,
this decrease was partially attributable to a weak apparel retail market,
including difficult back-to-school and holiday seasons, we experienced increased
consumer interest in our Levi's(R) brand product innovations, such as Levi's(R)
Engineered Jeans, and higher volume in Dockers(R) product lines.
18
In Europe, net sales decreased 18.8% to $1.1 billion, as compared to $1.4
billion in fiscal year 1999. Net sales decreased primarily due to a decline in
volume caused by a continued softening of the European apparel market, certain
execution issues in our supply chain, lower average unit selling prices
resulting from a higher percentage of closeouts sales and the reporting impact
of the depreciating Euro. If exchange rates were unchanged from the prior year
period, the reported net sales decrease would have been approximately 8% in
fiscal year 2000 compared to the prior year period.
In the Asia Pacific region, net sales increased 9.5% to $392.4 million, as
compared to $358.4 million in fiscal year 1999. The increase was primarily
driven by volume growth in most markets and the effects of translation to U.S.
dollar reported results. These results were achieved despite falling stock
markets, political turmoil in the Philippines and slowed consumer spending in
Japan. In Japan, which accounts for nearly 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
period, the reported net sales increase would have been approximately 7% in
fiscal year 2000 compared to the prior year period.
GROSS PROFIT. Gross profit in fiscal year 2000 of $2.0 billion was
relatively flat compared to the previous year. Gross profit as a percentage of
net sales, or gross margin, increased to 42.1% in fiscal year 2000, as compared
to 38.1% in fiscal year 1999. The increase was primarily attributable to a
better product mix, as well as improved sourcing costs and the benefit of cost
reductions resulting from plant closures taken in prior years. Idle capacity
associated with production downtime occurred in 1999 as factory production was
curtailed prior to fully closing some North American and European plants. In
fiscal year 1999 we determined that the sell-off of obsolete goods would
continue in fiscal year 2000 and as a result we marked down inventories
accordingly. This resulted in higher costs of goods sold in fiscal 1999, despite
the recording of a workers' compensation accrual reversal of approximately $21.0
million. We do not anticipate taking any material restructuring charges relating
to additional capacity reductions or reorganization efforts in 2001. We
anticipate that gross margin will continue to be in our target range of 40 to
42% in fiscal year 2001.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. Marketing, general and
administrative expenses for fiscal year 2000 decreased 9.1% to $1.5 billion, as
compared to $1.6 billion for the same period last year. Marketing, general and
administrative expenses as a percentage of sales for fiscal year 2000 and fiscal
year 1999 were each approximately 32%. The dollar decrease in marketing, general
and administrative expenses was primarily due to our continuing cost containment
efforts, lower salaries and related expenses resulting from prior year
restructuring initiatives, lower sales volume-related expenses, lower
advertising expenses, lower information technology expenses associated with
minimal year 2000 compliance costs in 2000 and an $18.0 million pension
curtailment benefit in fiscal year 2000. These decreases were partially offset
by increased costs for employee incentive plans in fiscal year 2000. The
increase in incentive plans during fiscal year 2000 was due to stronger
performance against financial targets. In addition, marketing general and
administrative expenses in fiscal year 1999 included the benefit from a reversal
of employee incentive costs due to weak performance against financial targets.
Advertising expense for fiscal year 2000 decreased 17.8% to $402.7 million,
as compared to $490.2 million in the same period in 1999. Advertising expense as
a percentage of sales in fiscal year 2000 decreased 0.8 percentage points to
8.7%, as compared to 9.5% for the same period in 1999. The decrease in
advertising expense as a percentage of sales for fiscal year 2000, compared to
the prior year period was consistent with our plans to better focus our
marketing support initiatives and to align them more effectively with new
product introductions and retail presentation. In fiscal year 2001, we expect to
maintain advertising spending in a range of 8 to 9%, as a percentage of sales.
OTHER OPERATING INCOME. For fiscal year 2000, licensing income increased
32.8% from the same period in 1999. The increase was primarily due to more focus
on expanding our brand collection with licensed merchandise such as outerwear,
shoes and belts.
EXCESS CAPACITY/RESTRUCTURING CHARGES. For fiscal year 2000, we reversed
charges of $33.1 million primarily due to periodic reevaluation of estimates
related to the restructuring initiatives. In fiscal year 1999, we recorded
charges of $497.7 million that were associated with our corporate overhead
restructuring initiatives and plant closures in North America and Europe.
GLOBAL SUCCESS SHARING PLAN. In fiscal year 2000, we recorded no expense
for Global Success Sharing Plan. In fiscal year 1999, we reversed into income
$343.9 million of previously recorded expenses associated with the Global
Success Sharing Plan. This reversal of the Global Success Sharing Plan liability
was based on our lower estimate of financial performance through the year 2001
and the determination that payment in 2002 under the Global Success Sharing Plan
is highly unlikely.
OPERATING INCOME. For fiscal year 2000, we recorded operating income of
$538.8 million, as compared to $199.3 million in the same period in 1999. This
increase was due to an improved gross margin, lower marketing, general and
administrative expenses and the reversal of restructuring charges in fiscal year
2000. In addition, reported results in fiscal year 1999 were
19
affected by charges related to the restructuring initiatives, net of benefits
for the Global Success Sharing Plan reversal. Excluding the fiscal year 2000
benefit of $33.1 million related to the reversal of restructuring costs, the
fiscal year 1999 charge of $497.7 million related to restructuring costs and the
$343.9 million benefit related to the Global Success Sharing Plan reversal,
operating income for fiscal year 2000 would have increased approximately 43%
compared to the same period in 1999.
INTEREST EXPENSE. Interest expense for fiscal year 2000 increased 27.9% to
$234.1 million, as compared to $183.0 million for the same period in 1999. This
increase was due to higher interest rates associated with new credit facilities,
customer service center equipment financing agreements and higher market
interest rates.
OTHER INCOME/EXPENSE, NET. For fiscal year 2000 we recorded $39.0 million
of other income, net, as compared to an other expense, net of $7.9 million in
the same period in 1999. The increase for fiscal year 2000 was primarily
attributable to a $26.1 million gain from the sale of two office buildings in
San Francisco located next to our corporate headquarters, an increase in
interest income and net gains in 2000 compared to net losses in 1999 on foreign
currency hedging 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. Income tax expense for fiscal year 2000 was $120.3
million compared to $3.1 million for the same period in 1999. The increase for
fiscal year 2000 was primarily due to higher earnings than in 1999. Our
effective tax rate for fiscal year 2000 was 35%, as compared to 37% for the same
period in 1999. The lower tax rate in 2000 was due to a reassessment of
potential tax settlements.
NET INCOME. Net income for fiscal year 2000 increased by $218.0 million
from $5.4 million in the same period in 1999. Net income for fiscal year 2000
included higher operating income, partially offset by higher interest and tax
expense compared to the same period in 1999. In addition, fiscal year 2000
included a gain from the sale of office buildings and the reversal of
restructuring reserves. The lower net income for the 1999 period was due to the
restructuring charge of $497.7 million, partially offset by the reversal of
incentive compensation and Global Success Sharing Plan accruals. Excluding the
items in both fiscal years 2000 and 1999 for the reversal and charge for
restructuring and Global Success Sharing Plan, net income for fiscal year 2000
would have been $201.8 million, as compared to $102.3 million in the same period
in 1999.
YEAR ENDED NOVEMBER 28, 1999 AS COMPARED TO YEAR ENDED NOVEMBER 29, 1998
NET SALES. Total net sales in fiscal year 1999 decreased 13.7% to $5.1
billion, as compared to $6.0 billion in fiscal year 1998. Net sales declined
worldwide and in each of our regions in Levi's(R) brand basic denim products as
the consumer market trended towards more fashion denim, designer and private
label products, as well as non-denim products. Factors contributing to our
fiscal year 1999 net sales decline for each of our regions were difficulties in
matching production with demand and a higher percentage of closeout sales needed
to reduce the buildup of inventories. In the Americas, net sales decreased 13.2%
to $3.4 billion, as compared to $3.9 billion in fiscal year 1998. In Europe, net
sales decreased 17.6% to $1.4 billion, as compared to $1.7 billion in fiscal
year 1998. In the Asia Pacific region, net sales decreased 3.0% to $358.4
million, as compared to $369.4 million in fiscal year 1998. Changes in foreign
exchange rates had a minimal impact on total net sales. In fiscal years 1999 and
1998, we had one customer that represented approximately 11% and 12%,
respectively, of total net sales. No other customer accounted for more than 10%
of total net sales.
GROSS PROFIT. Gross profit as a percentage of net sales, or gross margin,
decreased to 38.1% in fiscal year 1999, as compared to 42.4% in fiscal year
1998. The decrease was primarily attributable to unfavorable product mix and
increased production downtime. Idle capacity associated with production downtime
occurred in 1999 as factory production was curtailed prior to fully closing some
North American and European plants. In fiscal year 1999 we determined that the
sell-off of obsolete goods would continue in fiscal year 2000 and thus
inventories were marked down accordingly resulting in higher costs of goods
sold.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. Marketing, general and
administrative expenses for fiscal year 1999 decreased 11.1% to $1.6 billion, as
compared to $1.8 billion in fiscal year 1998. Marketing, general and
administrative expenses as a percentage of net sales in fiscal year 1999
increased to 31.7%, as compared to 30.8% in fiscal year 1998. The dollar
decrease resulted primarily from reduced selling and distribution costs
associated with lower unit volume shipments, decreases in performance-related
incentives and reductions in administrative and overhead expenses associated
with cost reduction efforts. Advertising expenses in fiscal year 1999 increased
5.0% to $490.2 million, as compared to $466.7 million in fiscal year 1998
primarily due to various initiatives we implemented to revitalize our brand.
Advertising initiatives in fiscal year 1999 included worldwide music sponsorship
programs, a new Pan-European marketing campaign and a renewed focus on U.S.
Dockers(R) brand promotions.
20
OTHER OPERATING INCOME. For fiscal year 1999, licensing income decreased
approximately 3.6% from the same period in 1998. The decrease was primarily due
to less licensing opportunities as a result of a reduced market for our brands.
EXCESS CAPACITY REDUCTION/RESTRUCTURING EXPENSES. For fiscal year 1999, we
incurred charges of $497.7 million, as compared to $250.7 million in fiscal year
1998. These charges were associated with the plant closures in North America and
Europe and with our corporate overhead restructuring initiatives.
GLOBAL SUCCESS SHARING PLAN. In fiscal year 1999, we reversed into income
$343.9 million of previously recorded expenses associated with the Global
Success Sharing Plan, as compared to an expense of $90.6 million recognized in
fiscal year 1998. This reversal of the Global Success Sharing Plan liability was
based on our lower estimate of financial performance through the year 2001 and
the determination that payment in 2002 under the Global Success Sharing Plan is
highly unlikely.
OPERATING INCOME. Operating income for fiscal year 1999 decreased 46.9% to
$199.3 million, as compared to $375.6 million in fiscal year 1998. The decrease
from fiscal year 1998 was a result of lower sales and gross profit, partially
offset by lower marketing general and administrative costs. Operating income for
fiscal years 1999 and 1998 was adversely impacted by the North American and
European plant closures and restructuring initiatives totaling $497.7 million in
fiscal year 1999 and $250.7 million in fiscal year 1998. Offsetting this
decrease in fiscal year 1999 was the reversal of the Global Success Sharing Plan
liability totaling $343.9 million, as compared to a charge of $90.6 million in
fiscal year 1998. Excluding the charges for the plant closures and restructuring
initiatives and the reversal and charge for the Global Success Sharing Plan in
fiscal years 1999 and 1998, operating income for fiscal year 1999 would have
decreased to $353.2 million, as compared to $716.8 million in fiscal year 1998.
INTEREST EXPENSE. Interest expense in fiscal year 1999 increased 2.8% to
$183.0 million, as compared to $178.0 million in fiscal year 1998. This increase
was due to higher average debt outstanding throughout most of fiscal year 1999.
The increase in outstanding debt was primarily due to the cash outflows
associated with plant closures and restructuring initiatives.
OTHER EXPENSE, NET. Other expense, net in fiscal year 1999 decreased to
$7.9 million compared to $34.9 million in fiscal year 1998. This decrease was
primarily attributable to net gains on foreign currency contracts in fiscal year
1999, as compared to net losses in fiscal year 1998. Net currency gains and
losses are primarily due to currency fluctuations in relation to our foreign
currency hedging positions.
INCOME TAX EXPENSE. Income tax expense for fiscal year 1999 decreased 94.8%
to $3.1 million, as compared to $60.2 million in fiscal year 1998. The decrease
in income tax expense is consistent with the decrease in income before taxes as
the effective tax rate was 37.0% for both fiscal years.
NET INCOME. Net income for fiscal year 1999 decreased 94.8% to $5.4
million, as compared to $102.5 million in fiscal year 1998. Net income for
fiscal years 1999 and 1998 was adversely impacted by the pre-tax North American
and European plant closures and restructuring initiatives totaling $497.7
million in fiscal year 1999 and $250.7 million in fiscal year 1998. Offsetting
this decrease in fiscal year 1999 was the pre-tax reversal of the Global Success
Sharing Plan liability totaling $343.9 million, as compared to a pre-tax charge
of $90.6 million in fiscal year 1998. Excluding the charges for the plant
closures and restructuring initiatives and the reversal and charge for the
Global Success Sharing Plan in fiscal years 1999 and 1998, net income for fiscal
year 1999 would have decreased by $215.2 million to $102.3 million, as compared
to $317.5 million in fiscal year 1998. The principal causes of this decrease
were lower net sales and lower gross margin, which were partially offset by
lower marketing, general and administrative expenses.
RESTRUCTURING AND EXCESS CAPACITY REDUCTION
The following is a summary of the actions taken and related charges
associated with our excess capacity reductions and other restructuring
activities:
o During September 1999, we announced plans to close one manufacturing
facility and further reduce overhead costs by consolidating operations
in Europe, with an estimated displacement of 960 employees. We
recorded an initial charge to set up a reserve of $54.7 million. The
manufacturing facility was closed in December 1999. In fiscal year
2000, $2.2 million of the remaining reserve balance was reversed due
to the periodic reevaluation resulting from updated estimates and
assumptions. As a result of this reevaluation, a total of 945
employees are estimated to be displaced. As of November 26, 2000, the
balance of this reserve was $6.3 million, and approximately 910
employees had been displaced.
21
o In February 1999, we announced the closure of 11 manufacturing
facilities in North America. Those facilities were closed by the end
of 1999, resulting in the displacement of approximately 5,900
employees. We recorded an initial charge to set up a reserve of $394.1
million in 1999. In fiscal year 2000, $13.3 million of the remaining
reserve balance was reversed due to the periodic reevaluation
resulting from updated estimates and assumptions. Of this reversal,
$7.1 million was primarily associated with employee benefits and was
based upon historical trends and future projections of medical and
other employee benefits. Of this reversal, $6.1 million was primarily
associated with plant closure costs and was based upon historical
trends from previous plant closures. As of November 26, 2000, the
balance in this reserve was $54.6 million.
o In fiscal year 1999, we recorded an initial charge to set up a reserve
of $48.9 million for corporate overhead reorganization initiatives
with an estimated displacement of 930 employees upon completion of the
reorganization. In fiscal year 2000, $9.0 million of the remaining
reserve balance was reversed due to the periodic reevaluation
resulting from updated estimates and assumptions. As a result of this
reevaluation, a total of 730 employees are estimated to be displaced.
As of November 26, 2000, the balance of this reserve was $2.8 million,
and approximately 670 employees had been displaced.
o In fiscal year 1998, we recorded an initial charge to set up a reserve
of $61.1 million for corporate overhead reorganization initiatives and
$82.1 million for the closure of two North American finishing
facilities. The two North America finishing facilities were closed
during 1999. Approximately 770 and 990 employees were displaced in
connection with the reorganization and facility closures,
respectively. In fiscal year 2000, $3.7 million of the remaining
reserve balance for the corporate overhead reorganization initiatives
was reversed due to the periodic reevaluation resulting from updated
estimates and assumptions. Of this reversal, $1.8 million was
primarily associated with employee benefits and was based upon
historical trends and future projections of medical and other employee
benefits. Of this reversal, $1.9 million was primarily associated with
higher sub-lease income than initially projected. In fiscal year 2000,
a small amount of the remaining reserve balance for the North America
finishing facilities was reversed due to the periodic reevaluation
resulting from updated estimates and assumptions. This reversal was
primarily associated with employee benefits and was based upon
historical trends and future projections of medical and other employee
benefits. As of November 26, 2000, the balances of these reserves were
$1.9 million and $2.1 million, respectively.
o In fiscal year 1998, we recorded an initial restructuring charge to
set up a reserve of $107.5 million for reorganization initiatives and
the closure of two manufacturing and two finishing facilities in
Europe with an estimated displacement of 1,650 employees. The two
manufacturing and two finishing facilities were closed in 1999. As of
November 26, 2000, the balance of this reserve was $1.5 million and
approximately 1,645 employees had been displaced.
o In November 1997, we announced the closure of one finishing and 10
manufacturing facilities in North America. Those facilities were
closed by the end of 1998, resulting in the displacement of
approximately 6,400 employees. We recorded an initial charge to set up
a reserve of $386.8 million. In fiscal year 2000, $5.0 million of the
reserve balance was reversed due to the periodic reevaluation
resulting from updated estimates and assumptions. This reversal was
primarily associated with employee benefits that expired during 2000.
As of November 26, 2000, the balance of this reserve was $2.4 million.
The following table summarizes the plant closures and restructuring charges
and the resulting reductions:
BALANCE AS
INITIAL OF
INITIAL ASSET CASH NOVEMBER 26,
PROVISION WRITE-OFFS REDUCTIONS REVERSALS 2000
--------- ---------- ---------- --------- ------------
(DOLLARS IN THOUSANDS)
1997 North American Plant Closures.................................... $ 386,792 $ 42,689 $336,669 $ 4,987 $ 2,447
1998 North American Plant Closures.................................... 82,073 23,399 56,604 13 2,057
1999 North American Plant Closures.................................... 394,105 33,430 292,777 13,281 54,617
1998 Corporate Restructuring Initiatives.............................. 61,062 2,985 52,469 3,735 1,873
1999 Corporate Restructuring Initiatives.............................. 48,889 -- 37,164 8,963 2,762
1998 European Restructuring and Plant Closures........................ 107,523 10,026 95,989 -- 1,508
1999 European Restructuring and Plant Closures........................ 54,689 4,500 41,693 2,165 6,331
---------- -------- -------- ------- -------
Total as of November 26, 2000.................................... $1,135,133 $117,029 $913,365 $33,144 $71,595
========== ======== ======== ======= =======
The majority of the initiatives are expected to be completed by the end of
2001.
22
LIQUIDITY AND CAPITAL RESOURCES
Our principal capital requirements have been to fund working capital and
capital expenditures. One of our business strategies is to focus on working
capital control through improved forecasting, inventory management and product
mix. We are also focusing on controlling operating expenses and using cash
generated from operations to further reduce debt. As of November 26, 2000, total
cash and cash equivalents were $117.1 million, a $75.8 million decrease from the
$192.8 million cash balance reported as of November 28, 1999.
CASH PROVIDED BY/USED FOR OPERATIONS. Cash provided by operating activities
in fiscal year 2000 was $305.9 million, as compared to a use of cash of $173.8
million in the same period in 1999. Although inventory increased, the
composition of our inventory in fiscal year 2000 was more current and relevant
to the marketplace compared to the composition of inventory in the prior year
period. This reflected our efforts to clear out old merchandise from fiscal year
1999. Inventory decreased on the balance sheet due to the translation effects of
foreign currency rates to the U.S. dollar.
Income taxes receivable decreased during fiscal year 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.
Restructuring reserves and the related net deferred tax assets decreased during
fiscal year 2000 primarily due to spending and accrual reversals related to the
restructuring initiatives. Accrued salaries, wages and employee benefits, and
long-term employee benefits increased during fiscal year 2000 primarily due to
increased accruals for employee incentive plans. Accrued taxes increased and
other long-term liabilities decreased during fiscal year 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 to 1989. The change in other, net
during fiscal year 2000 was primarily due to the gain attributable to a sale of
two office buildings in San Francisco located adjacent to our corporate
headquarters.
Cash used by operating activities in fiscal year 1999 was $173.8 million,
as compared to cash provided by operating activities of $223.8 million in fiscal
year 1998. This change was primarily due to increased spending associated with
plant closures and restructuring initiatives and lower sales in fiscal year
1999. The decrease in long-term employee related benefits during fiscal year
1999 primarily reflected the reversal of the prior year's accruals for the
Global Success Sharing Plan and reductions in deferred compensation. Inventory
decreased during fiscal year 1999 primarily due to reduced production levels.
The increase in income tax receivable for fiscal year 1999 reflected an expected
income tax refund based upon a carryback of a net operating loss to be reported
on our income tax return.
CASH PROVIDED BY/USED FOR INVESTING ACTIVITIES. Cash provided by investing
activities during fiscal year 2000 increased to $154.2 million, as compared to
$62.4 million during the same period in 1999. The increase in fiscal year 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 of
two office buildings in San Francisco located adjacent to our corporate
headquarters.
Our capital spending for fiscal year 2000 was $28.0 million, as compared to
$61.1 million for fiscal year 1999 and $116.5 million in fiscal year 1998. We
expect capital spending of approximately $50.0 million in fiscal year 2001,
primarily for maintenance and purchase of equipment at our remaining
manufacturing facilities and distribution centers, and for computer related
equipment throughout the world. As expected, we have dramatically reduced
capital spending following our 1998 and 1999 plant closures.
Cash provided by investing activities in fiscal year 1999 was $62.4
million, as compared to net cash used by investing activities of $82.7 million
in fiscal year 1998. This change was primarily due to an increase in proceeds
from the sale of property, plant and equipment mainly associated with the plant
closures, and lower purchases of property, plant and equipment in fiscal year
1999. In addition, in fiscal year 1999 we had net realized gains on hedging of
our net investments, as compared to net losses in fiscal year 1998.
CASH PROVIDED BY/USED FOR FINANCING ACTIVITIES. Cash used for financing
activities for fiscal year 2000 was $527.1 million, as compared to a source of
cash of $224.2 million in the same period in 1999. Cash was used in fiscal year
2000 for repayment of existing debt.
Cash provided by financing activities in fiscal year 1999 was $224.2
million, as compared to net cash used for financing activities of $194.5 million
in fiscal year 1998. This change was primarily due to an increase in debt
financing in fiscal year 1999.
23
FINANCIAL CONDITION
CREDIT AGREEMENTS. On January 31, 2000, we amended each of our three
existing credit agreements, and we entered into one new $450.0 million bridge
credit agreement (the "2000 Credit Facility"). The financing package consists of
four separate agreements: (1) a new $450.0 million bridge facility 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, we terminated a domestic
receivables-backed securitization financing.
In addition, in December 1999, we entered into a five-year $89.5 million
credit facility secured by most of the equipment located at our distribution
centers in Nevada, Mississippi and Kentucky. The transaction documents include
customary covenants governing our activities, including, among other things,
limitations on our ability to sell, lease, relocate or grant liens on the
equipment held in these customer service centers.
In February 2000, several of our European subsidiaries entered into
receivables securitization financing agreements with several lenders under which
those subsidiaries may borrow up to $125.0 million, subject to specified
operational conditions. The securitization agreements contain customary
termination events for these arrangements, including the subsidiaries' failure
to make payments or otherwise comply with their obligations under the
securitization agreements, bankruptcy events, material adverse changes in
financial position or receivables collection procedures, cross default to other
indebtedness, failure of the portfolio to meet certain performance standards or
a change in control.
On February 1, 2001, we entered into a new $1.05 billion senior secured
credit facility to replace the 2000 Credit Facility on more favorable terms. The
new credit facility consists of a $700 million revolving credit facility and
$350 million of term loans. This new facility reduces our borrowing costs and
extends the maturity of our principal bank credit facility to August 2003.
The new facility is secured in substantially the same manner as the 2000
Credit Facility. Collateral includes: 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. Borrowings under the bank credit
facilities bears interest at LIBOR or the agent bank's base rate plus an
incremental borrowing spread.
The new facility contains customary covenants restricting our activities as
well as those of our subsidiaries, including limitations on us and our
subsidiaries' ability to sell assets; engage in mergers; enter into operating
leases or capital leases; enter into transactions involving related parties,
derivatives or letters of credit; enter into intercompany transactions; incur
indebtedness or grant liens or negative pledges on our assets; make loans or
other investments; pay dividends or repurchase stock or other securities;
guaranty third party obligations; make capital expenditures; and make changes in
our corporate structure. The credit agreements will also contain financial
covenants that we must satisfy on an ongoing basis, including maximum leverage
ratios and minimum coverage ratios.
Also in January 2001, we issued two series of notes payable, U.S. $380.0
million Dollar Notes and 125.0 million Euro Notes, totaling the equivalent of
$497.5 million to qualified institutional investors. The notes are unsecured
obligations and may be redeemed at any time after January 15, 2004. The notes
are seven-year notes maturing on January 15, 2008. Net proceeds from the
offering were used to repay a portion of the indebtedness outstanding under the
2000 Credit Facility.
The indentures governing the notes contains covenants that limit us and our
subsidiaries' ability to incur additional debt; pay dividends or make other
restricted payments; consummate specified asset sales; enter into transactions
with affiliates; incur liens, impose restrictions on the ability of a subsidiary
to pay dividends or make payments to us and our subsidiaries; merge or
consolidate with any other person; sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of our assets or the assets of our
subsidiaries. If the notes receive and maintain an investment grade rating by
both Standard and Poor's Ratings Service and Moody's Investors Service and we
and our subsidiaries are and remain in compliance with the indentures, then we
and our subsidiaries will not be required to comply with specified covenants
contained in the indenture. (FOR MORE INFORMATION ABOUT OUR CREDIT ARRANGEMENTS,
SEE NOTES 6 AND 18 TO THE CONSOLIDATED FINANCIAL STATEMENTS.)
FOREIGN CURRENCY TRANSLATION
The functional currency for most of our foreign operations is the
applicable local currency. For those operations, assets and liabilities are
translated into U.S. dollars using period-end exchange rates and income and
expense accounts are translated at average monthly exchange rates. The U.S.
dollar is the functional currency for foreign operations in countries with
highly
24
inflationary economies and certain other subsidiaries. The translation
adjustments for these entities are included in other (income) expense, net.
YEAR 2000
We experienced no material disruption in customer or supplier
relationships, revenue patterns or customer buying patterns 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.
EFFECTS OF INFLATION
We believe that the relatively moderate rates of inflation which have been
experienced in the regions where most of our sales occur have not had a
significant effect on our net sales or profitability.
EURO CONVERSION
On January 1, 1999, eleven European Union member states (Germany, France,
the Netherlands, Austria, Italy, Spain, Finland, Ireland, Belgium, Portugal and
Luxembourg) adopted the euro as their common national currency. On January 1,
2001, Greece adopted the euro as its common national currency. Until January 1,
2002, either the euro or a participating country's national currency will be
accepted as legal tender. Beginning on January 1, 2002, euro-denominated bills
and coins will be issued, and by July 1, 2002, only the euro will be accepted as
legal tender.
We have a multi-functional euro project team responsible for ensuring our
ability to operate effectively during the euro transition phase and through
final euro conversion. Our total program costs are not expected to be material.
We have developed marketing and pricing strategies for implementation throughout
the more open European market.
We are currently able to make and receive payments in euros and will
convert financial and information technology systems to be able to use euros as
the base currency in relevant markets prior to January 1, 2002.
Based on the analysis and actions taken to date, we do not expect the euro
conversion to materially affect our consolidated financial position, results of
operations or cash flow.
NEW ACCOUNTING STANDARDS
In September 2000, the Financial Accounting Standards Board ("FASB") issued
SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which replaces SFAS 125, "Accounting for
Transfers and Services of Financial Assets and Extinguishments of Liabilities."
This standard revises the methods for accounting for securitizations and other
transfers of financial assets and collateral as outlined in SFAS 125, and
requires certain additional disclosures. For transfers and servicing of
financial assets and extinguishments of liabilities, this standard will be
effective for our May 27, 2001 quarterly financial statements. However, for
disclosures regarding securitizations and collateral, as well as recognition and
reclassification of collateral, this standard will be effective for our November
25, 2001 annual financial statements. We are currently evaluating the impact of
the adoption of this standard; however, we do not expect the adoption of this
standard to have a material effect on our financial position or results of
operations.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." In June 1999, the FASB delayed the
effective date of SFAS 133 to fiscal years beginning after June 15, 2000. We
adopted SFAS 133 and 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.
FOREIGN EXCHANGE HEDGING
The primary purpose of our foreign exchange hedging activities is to
maximize our U.S. dollar value over the long term. We manage our foreign
currency exposures in a way that makes it unlikely that we will obtain hedge
accounting treatment for all of our exposure management activities upon the
adoption of SFAS 133. We attempt to take a long-term view of managing exposures
on an economic basis, using forecasts to develop exposure positions and engage
in active management of those
25
exposures with the objective of protecting future cash flows and mitigating
risks. We do not hold any derivative instruments for trading purposes.
As a result, not all exposure management activities and foreign currency
derivative instruments will qualify for hedge accounting treatment under SFAS
133. Derivative instruments utilized in these transactions will be valued at
fair value and changes in fair value will be consequently classified into
earnings. Therefore, it is possible that we will experience increased volatility
in earnings.
We use a variety of derivative instruments, including forward, swap and
option contracts, to hedge foreign currency exposures related to sourcing, net
investment positions, royalties and cash management.
The derivative instruments used to hedge sourcing exposure are currently
recorded at their fair value and any changes in fair value are included in
earnings. Under SFAS 133, a majority of these contracts would not qualify for
hedge accounting treatment. We have therefore chosen to continue to mark to
market all sourcing related hedge transactions at their fair value and any
changes in fair value will be recorded in earnings. At November 26, 2000, the
fair value of these derivative instruments hedging sourcing exposure represented
a net asset of $13.7 million, which is recorded on the balance sheet.
We hedge our net investment position in major currencies by using forward,
swap and option contracts. The contracts hedging these net investments are
currently in compliance with SFAS 52, "Foreign Currency Translation," and are
considered net investment hedges. As a result, the related gains and losses are
categorized as cumulative translation adjustment in the other comprehensive
income section of stockholders' deficit. This will continue to be the
methodology going forward for the contracts that qualify for hedge accounting
treatment under SFAS 133.