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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

           For the Quarterly Period Ended February 23, 2003

or

Commission file number: 333-36234

LEVI STRAUSS & CO.

(Exact Name of Registrant as Specified in Its Charter)

1155 Battery Street, San Francisco, California 94111

(Address of Principal Executive Offices)

(415) 501-6000

(Registrant’s Telephone Number, Including Area Code)

None

(Former Name, Former Address, and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   x     No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Yes  ¨     No x

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 April 1, 2003

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LEVI STRAUSS & CO.

INDEX TO FORM 10-Q

FEBRUARY 23, 2003

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PART I – FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

LEVI STRAUSS & CO. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

(Unaudited)

The accompanying notes are an integral part of these financial statements.

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LEVI STRAUSS & CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands, Except Share Data)

(Unaudited)

The accompanying notes are an integral part of these financial statements.

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LEVI STRAUSS & CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)

The accompanying notes are an integral part of these financial statements.

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1: PREPARATION OF FINANCIAL STATEMENTS

Basis of Presentation and Principles of Consolidation

The unaudited condensed consolidated financial statements of Levi Strauss & Co. and subsidiaries (“LS&CO.” or “Company”) are prepared in conformity with generally accepted accounting principles for interim financial information. In the opinion of management, all adjustments necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of LS&CO. for the year ended November 24, 2002 included in the annual report on Form 10-K filed by LS&CO. with the Securities and Exchange Commission on February 12, 2003.

The condensed consolidated financial statements include the accounts of LS&CO. and its subsidiaries. All intercompany transactions have been eliminated. Management believes that, along with the following information, the disclosures are adequate to make the information presented herein not misleading. Certain prior year amounts have been reclassified to conform to the current presentation. The results of operations for the three months ended February 23, 2003 may not be indicative of the results to be expected for the year ending November 30, 2003.

Estimates and Critical Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the related notes to the financial statements. Changes in such estimates, based on more accurate future information, may affect amounts reported in future periods. A significant estimate made by the Company is in the area of long-term incentives. The estimated liability for the Company’s long-term incentive plan is based upon various factors including employee forfeitures and the Company’s performance. The Company periodically evaluates the adequacy of the recorded liability and makes adjustments as appropriate. As of February 23, 2003 the Company reduced the estimated liability by approximately $24 million that reflected the aggregate change, since inception, in expected payouts for the outstanding grants.

As of February 23, 2003, the Company identified the critical accounting policies upon which its financial position and results of operations depend as those relating to revenue recognition, inventory valuation, restructuring reserves, income tax assets and liabilities, and derivatives and foreign exchange management activities. The Company has summarized its critical accounting policies below.

The Company recognizes allowances for estimated returns, discounts and retailer promotions and incentives when the sale is recorded. Allowances principally relate to the Company’s U.S. operations and are primarily comprised of volume-based incentives and other returns and discounts. For volume-based retailer incentive programs, reserves for volume allowances are calculated based on a fixed formula applied to sales volumes. The Company estimates non-volume-based allowances using historical customer claim rates, adjusted as necessary for special customer and product-specific circumstances. Actual allowances may differ from estimates due primarily to changes in sales volume based on retailer or consumer demand. Actual allowances have not materially differed from estimates.

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

Historically, the Company entered into cooperative advertising programs with certain customers, but most of these programs were discontinued by the first fiscal quarter of 2002 reflecting the Company’s strategic shift of some advertising dollars to sales incentive programs. The Company recorded payments to customers under cooperative advertising programs as marketing, general and administrative expenses because an identifiable benefit was received in return for the consideration and the Company could reasonably estimate the fair value of the advertising received. Cooperative advertising expense for the three months ended February 23, 2003 was $0.1 million.

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

The Company is exposed to interest rate risk. It is the Company’s policy and practice to use derivative instruments to manage and reduce interest rate exposures using a mix of fixed and variable rate debt. For transactions that do not qualify for hedge accounting or in which management has elected not to designate transactions for hedge accounting, changes in fair value are recorded in earnings.

Restricted Cash

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

Rent Expense

The Company recorded in the first quarter of 2003 a non-recurring, non-cash charge of approximately $21 million as a catch-up adjustment to recognize rent expense on a straight-line basis over the lease terms and is reflected in “Marketing, general, and administrative expenses.”

New Accounting Standards

The Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. (“SFAS”) 141 “Business Combinations” and SFAS 142 “Goodwill and Other Intangible Assets” in July 2001. SFAS 141 requires that all business combinations be accounted for using the purchase method. SFAS 141 also specifies criteria for recognizing and reporting intangible assets apart from goodwill. SFAS 142 requires that goodwill and indefinite lived intangible assets not be amortized but instead tested for impairment in accordance with the provisions of SFAS 142 at least annually and more frequently upon the occurrence of certain events (see “Impairment of Long-Lived Assets” below). SFAS 142 also requires that all other intangible assets be amortized over their useful lives.

The Company adopted SFAS 141 and SFAS 142 effective November 25, 2002. SFAS 141 and SFAS 142 required the Company to perform the following upon adoption: (i) assess the classification of certain amounts between goodwill and other intangible assets; (ii) reassess the useful lives of intangible assets; (iii) perform a transitional impairment test; and (iv) discontinue the amortization of goodwill and indefinite lived intangible assets.

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

The Company has reviewed the balances of goodwill and other intangible assets and determined that the Company does not have any amounts that are required to be reclassified between goodwill and other intangible assets. The Company has determined that the useful lives of its trademarks are indefinite. The Company has also assessed the useful lives of its remaining identifiable intangible assets and determined that the estimated useful lives range from 5 to 10 years.

The Company has completed the transitional impairment tests and has determined that the Company did not have a transitional impairment of goodwill or indefinite lived intangible assets. Goodwill and indefinite lived intangible assets will be subject to impairment testing during the fourth quarter of each fiscal year, or earlier if circumstances indicate, using a fair value-based approach as required by SFAS 142. Beginning November 25, 2002, the Company discontinued the amortization of goodwill and indefinite lived intangible assets. Prior to November 25, 2002, goodwill and trademarks were amortized over an estimated useful life of 40 years.

As of February 23, 2003 and November 25, 2002, the Company’s goodwill for both periods was $199.9 million, net of accumulated amortization of $151.6 million. As of February 23, 2003 and November 25, 2002, the Company’s trademarks for both periods were $42.8 million, net of accumulated amortization of $34.5 million. The Company’s remaining identifiable intangible assets as of February 23, 2003 were not material. Amortization expense for goodwill and trademarks for 2002 was $8.8 million and $1.9 million, respectively. Future amortization expense with respect to the Company’s intangible assets as of February 23, 2003 is not expected to be material. As of November 25, 2002, the Company’s net book value for goodwill, trademarks, and other identifiable intangibles was $199.9 million, $42.8 million and $0.7 million, respectively.

A reconciliation of previously reported net income and earnings per share to amounts adjusted for the exclusion of goodwill and trademark amortization, net of related income tax effect is as follows:

The Company adopted the provisions of SFAS 143, “Accounting for Asset Retirement Obligations,” effective November 25, 2002. SFAS 143 changes the way companies recognize and measure retirement obligations that are legal obligations and result from the acquisition, construction, development or operation of long-lived tangible assets. The Company’s primary asset retirement obligations relate to certain leasehold improvements in its Americas business for which an asset retirement obligation has been recorded. The adoption of SFAS 143 did not have a material impact on the Company’s consolidated financial condition or results of operations.

The Company adopted the provisions of SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” effective November 25, 2002. This statement supercedes SFAS 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and the accounting and reporting provisions of Accounting Principles Board (“APB”) Opinion No. 30, “Reporting Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.” SFAS 144 requires that the same accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and it broadens the presentation of discontinued operations to include more disposal transactions. At February 23, 2003, the Company had $2.4 million of long-lived assets held for sale. The adoption of SFAS 144 did not have a material impact on the Company’s consolidated financial condition or results of operations.

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

The Company adopted the provisions of SFAS 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,” effective November 25, 2002. SFAS 145 prohibits presentation of gains and losses from extinguishment of debt as extraordinary items unless such items meet the criteria for classification as extraordinary items pursuant to APB Opinion No. 30. As a result, the Company has presented its $8.8 million loss on early extinguishment of its debt in “Other (income) expense, net” in the accompanying 2003 consolidated statement of operations. The loss relates primarily to the Company’s 2001 bank credit facility unamortized bank fees and, to a lesser extent, the repurchase of the 6.80% notes due November 2003.

SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities,” was effective prospectively for qualifying exit or disposal activities initiated after December 31, 2002, and nullifies Emerging Issues Task Force (“EITF”) Issue 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.” The adoption of SFAS 146 did not have a material impact on the Company’s consolidated financial condition or results of operations. However, to the extent the Company has future restructuring initiatives, the timing of expense recognition would differ from that required under EITF Issue 94-3.

The FASB issued Interpretation No. (“FIN”) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and a rescission of FASB Interpretation No. 34,” dated November 2002. FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. FIN 45 also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 31, 2002. The initial recognition and measurement provisions of the interpretation are applicable to guarantees issued or modified after December 31, 2002, and did not have a material effect on the Company’s consolidated financial condition or results of operations.

In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51.” FIN 46 addresses the consolidation by business enterprises of variable interest entities, as defined in the Interpretation. FIN 46 expands existing accounting guidance regarding when a company should include in its financial statements the assets, liabilities and activities of another entity. Many variable interest entities have commonly been referred to as special-purpose entities or off-balance sheet structures. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003. Since the Company does not have any variable interests in variable interest entities, the adoption of FIN 46 did not have any effect on the Company’s consolidated financial condition or results of operations.

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

NOTE 2: COMPREHENSIVE INCOME (LOSS)

The following is a summary of the components of total comprehensive income (loss), net of related income taxes:

The following is a summary of the components of accumulated other comprehensive income (loss) balances:

NOTE 3: RESTRUCTURING RESERVES

The following describes the actions taken associated with the Company’s reorganization initiatives. Severance and employee benefits relate to severance packages, out-placement services and career counseling for employees affected by the plant closures and reorganization initiatives. Reductions consist of payments for severance and employee benefits, other restructuring costs and foreign exchange differences. The balance of severance and employee benefits and other restructuring costs are included under restructuring reserves on the balance sheet.

2002 Reorganization Initiative

In November 2002, the Company announced a reorganization initiative in Europe intended to realign the Company’s resources with its European sales strategy to improve customer service and reduce operating costs. This initiative affects the Company’s operations in several countries and involves moving from a country or regional-based sales organization to a key account structure. The Company recorded an initial charge of $1.6 million reflecting an estimated displacement of 40 employees. As of February 23, 2003, approximately 35 employees have been displaced. The table below displays the activity and liability balance of this reserve.

Europe Reorganization Initiative

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

2002 PLANT CLOSURES

The Company announced in April 2002 the closure of six U.S. manufacturing plants. The decision reflected the Company’s continuing shift from a manufacturing to a marketing and product-driven organization. The Company recorded an initial charge in the second quarter of 2002 of $129.7 million consisting of $22.7 million for asset write-offs, $89.6 million for severance and employee benefits and $17.4 million for other restructuring costs. The Company closed six manufacturing plants in 2002. During the first quarter of 2003, the Company reversed a charge of $0.8 million due to lower than anticipated employee benefit costs. Additionally, the Company reversed $3.2 million for other restructuring costs during the period resulting from lower than anticipated costs to sell the Blue Ridge, Georgia facility and exit the Company’s lease at the Brownsville, Texas location. As of February 23, 2003, approximately 3,295 employees had been displaced at the manufacturing plants and approximately 245 employees had been displaced at the finishing facility. The table below displays the activity and liability balance of this reserve.

2002 U.S. Plant Closures

2001 Reorganization Initiatives

In November 2001, the Company instituted various reorganization initiatives in the U.S. that included simplifying product lines and realigning the Company’s resources to those product lines. The Company recorded an initial charge of $20.3 million in November 2001. The Company displaced approximately 325 employees as of February 23, 2003. During the first quarter of 2003, the Company reversed $0.2 million for lower than anticipated severance and benefit costs due to attrition. The table below displays the activity and liability balance of this reserve.

Corporate Restructuring Initiatives

SUMMARY

The total balance of the reserves at February 23, 2003 was $39.9 million compared to $65.6 million at November 24, 2002. The majority of the balances are expected to be utilized by the end of 2003. The following table summarizes the activities and liability balances associated with the 2001 – 2002 plant closures and restructuring initiatives:

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

Senior Notes Offering

On December 4, 2002, the Company issued $425.0 million in notes to qualified institutional buyers in reliance on Rule 144A under the Securities Act. These notes are unsecured obligations that rank equally with all of the Company’s other existing and future unsecured and unsubordinated debt. These notes are 10-year notes maturing on December 15, 2012 and bear interest at 12.25% per annum, payable semi-annually in arrears on December 15 and June 15, commencing on June 15, 2003. These notes are callable beginning December 15, 2007. These notes were offered at a discount of $6.0 million to be amortized over the term of the notes using an approximate effective-interest rate method. Costs representing underwriting fees and other expenses of approximately $12.6 million are amortized over the term of the notes. Approximately $125.0 million of the net proceeds from the offering were used to repay remaining indebtedness under the Company’s 2001 bank credit facility as of the close of business on December 3, 2002. The Company intends to use the remaining net proceeds to either (i) refinance (whether through payment at maturity, repurchase or otherwise) a portion of the aggregate principal amount of the 6.80% notes due November 1, 2003, or other outstanding indebtedness, or (ii) for working capital or other general corporate purposes.

On January 22, 2003 and on January 23, 2003, the Company issued an additional $100.0 million of these notes at a premium of $3.0 million and an additional $50.0 million of these notes at a discount of $0.7 million. Both the discount and premium will be amortized over the term of the notes using an approximate effective-interest rate method. The notes issued in these additional offerings were issued under the same indenture as, have the same terms as, and constitute the same issue of, the December 2002 notes. The Company intends to use the proceeds from the notes issued in January 2003 to refinance (whether through payment at maturity, repurchase or otherwise) a portion of the aggregate principal amount of the 6.80% notes due November 1, 2003, or other outstanding indebtedness, or for working capital or other general corporate purposes.

During the first quarter of 2003, the Company purchased approximately $121 million of the 6.80% notes using proceeds from the senior notes offering due 2012. At February 23, 2003, $228.5 million were outstanding on these notes. During the first week of April 2003, the Company purchased an additional $21.8 million of the 6.80% notes using proceeds from the senior notes offering due 2012.

The indenture governing these notes contain covenants that limit the Company’s and its subsidiaries’ ability to incur additional debt; pay dividends or make other restricted payments; consummate specified asset sales; enter into transactions with affiliates; incur liens; impose restrictions on the ability of a subsidiary to pay dividends or make payments to the Company and its subsidiaries; merge or consolidate with any other person; and sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the Company’s assets or its subsidiaries’ assets.

If the Company experiences a change in control as defined in the indenture governing the notes, then the Company will be required under the indenture to make an offer to repurchase the notes at a price equal to 101% of the principal amount plus accrued and unpaid interest, if any, to the date of repurchase. If these notes receive and maintain an investment grade rating by both Standard and Poor’s and Moody’s and the Company and its subsidiaries are and remain in compliance with the indenture, then the Company and its subsidiaries will not be required to comply with specified covenants contained in the indenture.

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

Senior Secured Credit Facility

On January 31, 2003, the Company entered into a new $750.0 million senior secured credit facility to replace the 2001 credit facility due August 2003. The senior secured credit facility consists of a $375.0 million revolving credit facility and a $375.0 million Tranche B term loan facility. As of February 23, 2003, there were no outstanding borrowings under the revolving credit facility. Total availability under the revolving credit facility was reduced by $170.1 million of letters of credit allocated under the revolving credit facility, yielding a net availability of $204.9 million. As of February 23, 2003, the principal balance of the Tranche B term loan was $375.0 million. The Company intends to use the borrowings under the senior secured credit facility for working capital or general corporate purposes.

The $375.0 million revolving credit facility matures on March 31, 2006. The Tranche B term loan facility is subject to repayment based on a specified scheduled amortization, with the final payment of all amounts outstanding thereunder due on July 31, 2006. The Company is required to make principal amortization payments on the Tranche B term loan facility at a quarterly rate beginning in May 2003, with the substantial majority of the quarterly payments due from the quarter ending in November 2005. The senior secured credit facility also requires mandatory prepayments in certain events, such as asset sales. The interest rate for the revolving credit facility varies: for Eurodollar Rate Loans, from 3.25% to 4.00% over the Eurodollar Rate (as defined in the credit agreement) or, for Base Rate Loans, from 2.25% to 3.00% over the higher of (i) the Citibank base rate and (ii) the Federal Funds rate plus 0.50% (the “Base Rate”), with the exact rate depending upon performance under specified financial criteria. The interest rate for the Tranche B term loan facility is 4.00% over the Eurodollar Rate or 3.00% over the Base Rate.

The senior secured credit facility also requires that the Company segregate sufficient funds to satisfy all principal and interest payments on the outstanding 6.80% notes due November 2003 and allows for repurchase of these bonds prior to their maturity. As of February 23, 2003, the segregated amount was $244.3 million and is separately identified on the balance sheet as “Restricted Cash.”

The senior secured credit facility is guaranteed by certain of the Company’s material domestic subsidiaries and is secured by domestic inventories, certain domestic equipment, trademarks, other intellectual property, 100% of the stock in certain domestic subsidiaries, 65% of the stock of certain foreign subsidiaries and other assets. Excluded from the assets securing the senior secured credit facility are certain of the Company’s real property interests and all of the capital stock and debt of its affiliates in Germany and the United Kingdom and any other affiliates that become restricted subsidiaries under the indenture governing the Company’s notes due 2003 and 2006.

The senior secured credit facility contains customary covenants restricting the Company’s activities as well as those of its subsidiaries, including limitations on the Company’s and its subsidiaries’ ability to sell assets; engage in mergers; enter into capital leases or certain leases not in the ordinary course of business; enter into transactions involving related parties or derivatives; incur indebtedness or grant liens or negative pledges on the Company’s assets; make loans or other investments; pay dividends or repurchase stock or other securities; guaranty third party obligations; make capital expenditures; and make changes in the Company’s corporate structure. The senior secured credit facility also contains financial covenants that the Company must satisfy on an ongoing basis, including maximum leverage ratios and minimum coverage ratios. As of February 23, 2003, the Company was in compliance with the financial covenants under the senior secured credit facility.

The senior secured credit facility contains customary events of default, including payment failures; failures to satisfy other obligations under the senior secured credit facility; material judgments; pension plan terminations or specified underfunding; substantial voting trust certificate or stock ownership changes; specified changes in the composition of the Company’s board of directors; and invalidity of the guaranty or security agreements. If an event of default occurs, the Company’s lenders could terminate their commitments, declare immediately payable all borrowings under the credit facilities and foreclose on the collateral, including the Company’s trademarks.

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

6.80% Notes due November 1, 2003

During the first quarter of 2003, the Company purchased approximately $121 million of the 6.80% notes due November 1, 2003 from proceeds from the senior notes offering due 2012. At February 23, 2003, $228.5 million of these notes were outstanding. The 2003 senior secured credit facility requires that the Company segregate funds in an amount sufficient to repay the 6.80% notes due November 1, 2003 at maturity (including any interim scheduled interest payments). As of February 23, 2003, the segregated amount was $244.3 million and is separately identified on the balance sheet as “Restricted Cash.” During the first week of April 2003, the Company purchased an additional $21.8 million of the 6.80% notes using proceeds from the senior notes offering due 2012.

On April 8, 2003, the Company commenced a tender offer to purchase for cash any and all of the outstanding 6.80% notes due November 1, 2003, at a purchase price of $1,024.24 per $1,000.00 principal amount. The debt tender offer is scheduled to expire on May 7, 2003.

Short-Term Credit Lines and Stand-By Letters of Credit

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

At February 23, 2003 and November 24, 2002, the Company had $131.8 million and $213.3 million, respectively, of standby letters of credit with various international banks, of which $51.2 million and $48.5 million, respectively, serve as guarantees by the creditor banks to cover U.S. workers’ compensation claims. In addition, $68.4 million of these standby letters of credit under the 2003 senior secured credit facility support short-term credit lines at February 23, 2003. The Company pays fees on the standby letters of credit. Borrowings against the letters of credit are subject to interest at various rates.

Interest Rates on Borrowings

The Company’s weighted average interest rate on average borrowings outstanding during the three months ended February 23, 2003 and February 24, 2002, including the amortization of capitalized bank fees, interest rate swap cancellations and underwriting fees, was 10.30% and 9.30%, respectively. The weighted average interest rate on average borrowings outstanding excludes interest payable to participants under deferred compensation plans and other miscellaneous items.

Dividends and Restrictions

Under the terms of the Company’s 2003 senior secured credit facility, the Company is prohibited from paying dividends to its stockholders. In addition, the terms of certain of the indentures relating to the Company’s unsecured senior notes limit the Company’s ability to pay dividends. There are no restrictions under the Company’s 2003 senior secured credit facility or its indentures on the transfer of the assets of the Company’s subsidiaries to the Company in the form of loans, advances or cash dividends without the consent of a third party.

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

NOTE 5: FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company has determined the estimated fair value of certain financial instruments using available market information and reasonable valuation methodologies. However, this determination involves application of considerable judgment in interpreting market data, which means that the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange.

The carrying amount and estimated fair value (in each case including accrued interest) of the Company’s financial instrument assets and (liabilities) at February 23, 2003 and November 24, 2002 are as follows:

Quoted market prices or dealer quotes are used to determine the estimated fair value of foreign exchange contracts, option contracts and interest rate swap contracts. Dealer quotes and other valuation methods, such as the discounted value of future cash flows, replacement cost and termination cost have been used to determine the estimated fair value for long-term debt and the remaining financial instruments. The carrying values of cash and cash equivalents, trade receivables, current assets, certain current and non-current maturities of long-term debt, short-term borrowings and taxes approximate fair value.

The fair value estimates presented herein are based on information available to the Company as of February 23, 2003 and November 24, 2002. These amounts have not been updated since those dates and, therefore, the current estimates of fair value at dates subsequent to February 23, 2003 and November 24, 2002 may differ substantially from these amounts. In addition, the aggregation of the fair value calculations presented herein do not represent and should not be construed to represent the underlying value of the Company.

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

NOTE 6: COMMITMENTS AND CONTINGENCIES

FOREIGN EXCHANGE CONTRACTS

At February 23, 2003, the Company had U.S. dollar spot and forward currency contracts to buy $634.4 million and to sell $199.9 million against various foreign currencies. These contracts are at various exchange rates and expire at various dates through August 2003. The Company had no option contracts outstanding at February 23, 2003.

The Company’s market risk is generally related to fluctuations in the currency exchange rates. The Company is exposed to credit loss in the event of nonperformance by the counterparties to the foreign exchange contracts. However, the Company believes these counterparties are creditworthy financial institutions and does not anticipate nonperformance.

OTHER CONTINGENCIES

In the ordinary course of its business, the Company has pending various cases involving contractual matters, employee-related matters, distribution questions, product liability claims, trademark infringement and other matters. The Company does not believe there are any pending legal proceedings that will have a material impact on the Company’s consolidated financial position or results of operations.

The operations and properties of the Company are designed to comply with applicable federal, state and local laws enacted for the protection of the environment, and with permits and approvals issued in connection therewith, except where the failure to comply would not reasonably be expected to have a material adverse effect on the Company’s financial position or business operations. Based on currently available information, the Company does not consider there to be any circumstances existing that would reasonably likely form the basis of an action against the Company and that could have a material adverse effect on the Company’s financial position or business operations.

NOTE 7: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Foreign Exchange Management

The Company manages foreign currency exposures primarily to maximize the U.S. dollar value over the long term. The Company attempts to take a long-term view of managing exposures on an economic basis, using forecasts to develop exposure positions and engaging in active management of those exposures with the objective of protecting future cash flows and mitigating risks. As a result, not all exposure management activities and foreign currency derivative instruments will qualify for hedge accounting treatment. For derivative instruments utilized in these transactions, changes in fair value are recorded in earnings. The Company holds derivative positions only in currencies to which it has exposure. The Company has established a policy for a maximum allowable level of losses that may occur as a result of its currency exposure management activities. The maximum level of loss is based on a percentage of the total forecasted currency exposure being managed.

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

The derivative instruments used to manage sourcing exposures do not qualify for hedge accounting treatment and are recorded at their fair value. Any changes in fair value are included in “Other (income) expense, net.”

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

The Company manages its net investment position in its subsidiaries in major currencies by using forward, swap and option contracts. Some of the contracts hedging these net investments qualify for hedge accounting and the related gains and losses are consequently included in the “Accumulated other comprehensive income (loss)” section of Stockholders’ Deficit. At February 23, 2003, the fair value of qualifying net investment hedges was a $1.3 million net liability with the corresponding unrealized loss recorded in “Accumulated other comprehensive income (loss).” At February 23, 2003, $0.7 million realized loss has been excluded from hedge effectiveness testing. In addition, the Company holds derivatives managing the net investment positions in major currencies that do not qualify for hedge accounting. The fair value of these derivatives at February 23, 2003 represented a $0.2 million net asset, and changes in their fair value are included in “Other (income) expense, net.”

The Company designates a portion of its outstanding yen-denominated eurobond as a net investment hedge. As of February 23, 2003, a $6.0 million unrealized loss related to the translation effects of the yen-denominated eurobond was recorded in “Accumulated other comprehensive income (loss).”

As of February 23, 2003, the Company holds no derivatives hedging forecasted intercompany royalty flows that qualify as cash flow hedges. The Company does enter into contracts managing forecasted intercompany royalty flows that do not qualify as cash flow hedges and are recorded at their fair value. Any changes in fair value are included in “Other (income) expense, net.”

The derivative instruments utilized in transactions managing cash management exposures are currently marked to market at their fair value and any changes in fair value are recorded in “Other (income) expense, net.” The Company offsets relevant daily cash flows by currency among its affiliates. As a result, the Company hedges only its net foreign currency exposures with external parties.

The Company also entered into transactions managing the exposure related to the Euro notes issued on January 18, 2001. These derivative instruments are currently marked to market at their fair value and any changes in fair value are recorded in “Other (income) expense, net.”

Interest Rate Management

The Company is exposed to interest rate risk. It is the Company’s policy and practice to use derivative instruments to manage and reduce interest rate exposures using a mix of fixed and variable rate debt. The Company currently has no derivative instruments managing interest rate risk outstanding as of February 23, 2003.

The table below gives an overview of the realized and unrealized gains and losses associated with our foreign exchange and interest rate management activities reported in “Other (income) expense, net.”

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

The table below gives an overview of the realized and unrealized gains and losses associated with our foreign exchange management activities that are reported in “Accumulated other comprehensive income (loss)” (“Accumulated OCI”) balances. Accumulated OCI is a section of Stockholders’ Deficit.

The table below gives an overview of the fair values of derivative instruments associated with our foreign exchange management activities that are reported as an asset or (liability).

NOTE 8: GUARANTEES

In the ordinary course of business, the Company enters into agreements containing indemnification provisions pursuant to which the Company agrees to indemnify the other party for specified claims and losses. For example, the Company’s trademark license agreements, real estate leases, consulting agreements, logistics outsourcing agreements, securities purchase agreements and credit agreements typically contain such provisions. This type of indemnification provision obligates the Company to pay certain amounts associated with claims brought against the other party as the result of trademark infringement, negligence or willful misconduct of Company employees, breach of contract by the Company including inaccuracy of representations and warranties, specified lawsuits in which the Company and the other party are co-defendants, product claims and other matters. These amounts are generally not readily quantifiable: the maximum possible liability or amount of potential payments that could arise out of an indemnification claim depends entirely on the specific facts and circumstances associated with the claim. The Company has insurance coverage that minimizes the potential exposure to certain of such claims. The Company also believes that the likelihood of significant payment obligations to third parties is remote and that any such amounts would be immaterial.

The Company is party to agreements containing guarantee provisions related to profit levels of certain European franchise retail stores over a five-year period ending in November 2005. Under the agreements, the Company must make a payment to the franchisee if the aggregate income before taxes in any year for the particular retail stores, as defined in the agreement, is less than approximately $0.5 million. The maximum potential payment under the agreement for each fiscal year through November 2005 is based on the maximum annual fixed costs of the store’s operations and is estimated to be approximately $3 million. Amounts paid to date related to this agreement are immaterial.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

NOTE 9: DEFERRED COMPENSATION PLAN

On January 1, 2003, the Company adopted a nonqualified deferred compensation plan (“Plan”) for executives and outside directors. As of February 23, 2003, the Plan liabilities totaled $23.1 million, a portion of which is funded by an irrevocable grantor’s trust (“Rabbi Trust”) established on January 1, 2003. The Plan obligations are payable in cash upon retirement, termination of employment and/or certain other times in a lump-sum distribution or in installments, as elected by the participant in accordance with the Plan.

The obligations of the Company under the Rabbi Trust consist of the Company’s unsecured contractual commitment to deliver, at a future date, any of the following: (i) deferred compensation credited to an account under the Rabbi Trust, (ii) additional amounts, if any, that the Company may, from time to time, credit to the Rabbi Trust, and (iii) notional earnings on the foregoing amounts. In the event that the fair market value of the Rabbi Trust assets as of any valuation date before a change of control is less than 90% of the Rabbi Trust funding requirements on such date, the Company must make an additional contribution to the Rabbi Trust in an amount sufficient to bring the fair market value of the assets in the Rabbi Trust up to 90% of the trust funding requirement. The Rabbi Trust assets are subject to the claims of the Company’s creditors in the event of the Company’s insolvency. The assets of the Rabbi Trust and the Company’s liability to the Plan participants are reflected in “Other long-term assets” and “Long-term employee related benefits,” respectively, on the Company’s consolidated balance sheet. The securities that comprise the assets of the Rabbi Trust are designated as trading securities under SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities.” Changes in the fair value of the securities are recorded in “Other (income) expense, net.” Changes in the liabilities are included in “Marketing, general and administrative expenses.”

NOTE 10: BUSINESS SEGMENT INFORMATION