LEVI STRAUSS & CO - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended August 24, 2003

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 333-36234

LEVI STRAUSS & CO.

(Exact Name of Registrant as Specified in Its Charter)

DELAWARE

94-0905160

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

1155 Battery Street, San Francisco, California 94111

(Address of Principal Executive Offices)

(415) 501-6000

(Registrant’s Telephone Number, Including Area Code)

None

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No x

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 March 1, 2004

LEVI STRAUSS & CO.

INDEX TO FORM 10-Q

AUGUST 24, 2003

EXPLANATORY NOTE

Background. On October 9, 2003, we issued a press release and, on the next day, filed a Form 12b-25 with the Securities and Exchange Commission stating that we would not be able to file our third quarter Form 10-Q on a timely basis, and that we would be restating our quarterly and annual financial statements for 2001. The press release and Form 12b-25 also amended financial information previously included in our fiscal year 2001 financial statements and in press releases issued on September 10, 2003 and September 30, 2003 announcing our results for the third quarter of 2003. On October 10, 2003, we voluntarily furnished on Form 8-K the following sections from the draft Form 10-Q for the quarter ended August 24, 2003: Item 1—“Financial Statements (unaudited);” Item 2—“Management’s Discussion and Analysis of Financial Condition and Results of Operations;” and Item 3—“Quantitative and Qualitative Disclosure about Market Risk.”

New Information. The information included in this Form 10-Q for the period ended August 24, 2003 as filed today describes several developments since we filed our Current Report on Form 8-K on October 10, 2003. These developments are discussed under Item 2—“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments.” They include:

•

our retention of Alvarez & Marsal, Inc. that we announced on December 1, 2003;

•

our appointment of James P. Fogarty as our interim chief financial officer that we announced on December 1, 2003 and other changes in our senior management team;

•

completion by our Audit Committee of a review of an accounting error we announced on October 9, 2003;

•

our receipt of a letter from our independent auditor relating to a material weakness in our internal control; and

•

our decision to suspend indefinitely installation of an enterprise resource planning system.

In addition, this Form 10-Q includes revised financial information. There are three primary reasons for these revisions:

•

First, as contemplated by our Current Report on Form 8-K filed on October 10, 2003, we restated our quarterly and annual financial statements for 2001. We also concluded that it was necessary to restate our financial statements for 2002 and the first two quarters of 2003. These restatements result in changes in our three and nine month results for 2002 and 2003 from those furnished in the Current Report on Form 8-K.

•

Second, in November 2003, we issued revised financial guidance in which we lowered our expectations concerning net sales, gross margins and operating margins for the full-year 2003. In mid-December 2003, we revised our 2004 plan, taking into account these adverse business developments. In January 2004, we concluded that, for purposes of valuing our deferred tax assets, we should use a long-term forecast that takes into account these recent developments but assumes no change from current performance levels, including any revenue growth or any cost reduction or other performance improvement actions we may take as a result of our work with Alvarez & Marsal, Inc. as the impact of these actions are not presently determinable. In short, we assumed flat business projections into the future. Based on this revised forecast, we recorded in the third quarter a substantial increase in the valuation allowance against our deferred tax assets. This reflects our assessment, using the revised January 2004 long-term forecast that reflected the developments and assumptions noted above, of our ability to use our foreign tax credits before they expire and our ability to utilize our alternative minimum tax credits, state and foreign net operating loss carryforwards and other foreign deferred tax assets in the foreseeable future. We were also required to adjust our results for the three and nine months ended

August 24, 2003 to reflect a higher annual effective tax rate resulting from the increase in the valuation allowance on our deferred tax assets.

•

Third, under generally accepted accounting principles, we are required to reflect these new estimates and certain other new developments after the end of the quarter in our third quarter financial statements because our third quarter statements had not been finalized at the time the new information became available.

These and other items result in changes in our unaudited financial statements as of and for the three and nine months ended August 24, 2003 and August 25, 2002 from those included in our Current Report on Form 8-K furnished with the Securities and Exchange Commission on October 10, 2003. The following table sets forth the consolidated statement of operations for the three and nine months ended August 24, 2003 and August 25, 2002 as furnished in our Current Report on Form 8-K and as filed in this Form 10-Q (dollars in thousands):


	As Furnished in Form 8-K on October 10, 2003						As Filed in this Form 10-Q
	Three Months Ended						Three Months Ended
	August 24, 2003			August 25, 2002			August 24, 2003			August 25, 2002
										(Restated)
Net sales	$	1,081,755		$	1,017,744		$	1,083,748		$	1,019,744
Cost of goods sold		677,854			603,249			686,487			600,666

Gross profit		403,901			414,495			397,261			419,078
Marketing, general and administrative expenses		316,261			340,390			214,345			342,574
Other operating (income)		(10,280	)		(6,015	)		(10,280	)		(6,016	)
Restructuring charges, net of reversals		—			(16,565	)		2,610			(15,848	)

Operating income		97,920			96,685			190,586			98,368
Interest expense		62,524			48,476			62,524			48,476
Other (income) expense, net		(9,342	)		20,791			(3,125	)		26,816

Income before taxes		44,738			27,418			131,187			23,076
Income tax expense		22,907			13,709			135,500			16,699

Net income (loss)	$	21,831		$	13,709		$	(4,313	)	$	6,377


	As Furnished in Form 8-K on October 10, 2003						As Filed in this Form 10-Q
	Nine Months Ended						Nine Months Ended
	August 24, 2003			August 25, 2002			August 24, 2003			August 25, 2002
										(Restated)
Net sales	$	2,886,873		$	2,876,546		$	2,892,803		$	2,882,547
Cost of goods sold		1,738,975			1,693,923			1,742,194			1,697,723

Gross profit		1,147,898			1,182,623			1,150,609			1,184,824
Marketing, general and administrative expenses		983,193			958,129			864,505			972,017
Other operating (income)		(27,348	)		(20,640	)		(27,348	)		(20,640	)
Restructuring charges, net of reversals		(9,719	)		124,513			(5,776	)		115,373

Operating income		201,772			120,621			319,228			118,074
Interest expense		185,549			139,009			185,549			139,009
Other expense, net		33,561			20,613			51,673			28,538

Income (loss) before taxes		(17,338	)		(39,001	)		82,006			(49,473	)
Income tax expense (benefit)		(1,303	)		(19,500	)		186,200			(35,801	)

Net loss	$	(16,035	)	$	(19,501	)	$	(104,194	)	$	(13,672	)

Additional information about these developments is contained in Item 2—“Management’s Discussion and Analysis of Financial Condition—Recent Developments.” Note 2 to the Consolidated Financial Statements contains additional information about the restatements.

Other Updated Information. In addition, please see Item 2—“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations” for additional information concerning the impact of these developments on several line items in our results of operations for the three and the nine months ended August 24, 2003 and August 25, 2002; “Liquidity and Capital Resources” for updated information concerning our expected contributions to our pension plans in 2004-2008, our expected net cash payments in 2004 in respect of restructuring activities, our expected net cash payments in 2004-2008 under our postretirement health benefits plans and our expected net cash payments in 2004 for capital expenditures and foreign taxes; “Financial Condition—Credit Ratings” for updated information concerning our credit ratings; “Note 4: Restructuring Reserves” and “Note 12: Subsequent Events—Organizational Changes” for updated information concerning several of our restructuring initiatives; “Note 7: Commitments and Contingencies” and “Part II—Item 1—Legal Proceedings” for updated information about our litigation; and “Statement Regarding Forward-Looking Disclosure” for updated information about our forward-looking statements.

Supplemental Information. We have also provided supplemental information in “Note 1: Preparation of Financial Statements—Estimates;” “Note 4: Restructuring Reserves—Summary;” “Note 5: Income Taxes;” “Note 6: Financing;” and “Note 12: Subsequent Events.”

Items 4 and 6. This Form 10-Q also contains the following sections required to be filed under Form 10-Q but not furnished with the Form 8-K filed on October 10, 2003: Item 4—“Controls and Procedures;” and Item 6—“Exhibits and Reports on Form 8-K,” including the Section 302 and 906 certifications required to be included with this Form 10-Q.

Form 10-K. We filed our Annual Report on Form 10-K for the year ended November 30, 2003 with the Securities and Exchange Commission on March 1, 2004. The Form 10-K contains information about the restatements, the valuation allowance and other matters discussed in this Form 10-Q. We recommend that you read the Form 10-K in conjunction with this Form 10-Q.

* * * *

As noted, we restated our annual and quarterly financial statements for 2001 and 2002 and our quarterly financial statements for the first two quarters of 2003. Except as otherwise clearly stated, all financial information contained in this Quarterly Report on Form 10-Q gives effect to these restatements. All amounts in financial tables herein, unless otherwise indicated, are in thousands.


		Page Number
PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited):
	Consolidated Balance Sheets as of August 24, 2003 and November 24, 2002 (restated)	6
	Consolidated Statements of Operations for the Three and Nine Months Ended August 24, 2003 and August 25, 2002 (restated)	7
	Consolidated Statements of Cash Flows for the Nine Months Ended August 24, 2003 and August 25, 2002 (restated)	8
	Notes to Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	55

Item 4.	Controls and Procedures	57

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	58

Item 6.	Exhibits and Reports on Form 8-K	60

SIGNATURE		63

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

LEVI STRAUSS & CO. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

(Unaudited)


	August 24, 2003			November 24, 2002
				(Restated)
ASSETS
Current Assets:
Cash and cash equivalents	$	50,677		$	96,478
Restricted cash		23,427			—
Trade receivables, net of allowance for doubtful accounts of $24,455 in 2003 and $24,857 in 2002		594,652			658,807
Inventories:
Raw materials		65,301			100,487
Work-in-process		58,204			74,048
Finished goods		675,310			423,857

Total inventories		798,815			598,392

Deferred tax assets, net of valuation allowance of $25,281 in 2003 and $9,626 in 2002		74,010			224,292
Other current assets		120,832			88,611

Total current assets		1,662,413			1,666,580
Property, plant and equipment, net of accumulated depreciation of $490,369 in 2003 and $478,447 in 2002		481,470			489,454
Goodwill, net of accumulated amortization of $151,569 in 2003 and 2002		199,905			199,905
Other intangible assets, net of accumulated amortization of $36,132 in 2003 and $35,911 in 2002		44,932			43,505
Non-current deferred tax assets, net of valuation allowance of $324,269 in 2003 and $57,476 in 2002		633,940			572,585
Other assets		85,162			60,891

Total Assets	$	3,107,822		$	3,032,920


LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
Current maturities of long-term debt and short-term borrowings	$	39,588		$	95,225
Accounts payable		300,377			278,577
Restructuring reserves		9,452			62,165
Accrued liabilities		212,014			225,190
Accrued salaries, wages and employee benefits		206,626			310,445
Accrued taxes		16,700			112,060

Total current liabilities		784,757			1,083,662
Long-term debt, less current maturities		2,327,412			1,751,752
Postretirement medical benefits		551,700			548,930
Pension liability		223,232			228,740
Long-term employee related benefits		169,774			298,678
Long-term tax liabilities		128,142			95,230
Other long-term liabilities		35,001			32,716
Minority interest		21,378			21,541

Total liabilities		4,241,396			4,061,249

Stockholders’ Equity (Deficit):
Common stock—$.01 par value; 270,000,000 shares authorized; 37,278,238 shares issued and outstanding .		373			373
Additional paid-in capital		88,808			88,808
Accumulated deficit		(1,139,695	)		(1,035,501	)
Accumulated other comprehensive loss		(83,060	)		(82,009	)

Stockholders’ (deficit)		(1,133,574	)		(1,028,329	)

Total Liabilities and Stockholders’ Equity (Deficit)	$	3,107,822		$	3,032,920

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

LEVI STRAUSS & CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands)

(Unaudited)


	Three Months Ended						Nine Months Ended
	August 24, 2003			August 25, 2002			August 24, 2003			August 25, 2002
				(Restated)						(Restated)
Net sales	$	1,083,748		$	1,019,744		$	2,892,803		$	2,882,547
Cost of goods sold		686,487			600,666			1,742,194			1,697,723

Gross profit		397,261			419,078			1,150,609			1,184,824
Marketing, general and administrative expenses		214,345			342,574			864,505			972,017
Other operating income		(10,280	)		(6,016	)		(27,348	)		(20,640	)
Restructuring charges, net of reversals		2,610			(15,848	)		(5,776	)		115,373

Operating income		190,586			98,368			319,228			118,074
Interest expense		62,524			48,476			185,549			139,009
Other (income) expense, net		(3,125	)		26,816			51,673			28,538

Income (loss) before taxes		131,187			23,076			82,006			(49,473	)
Income tax expense (benefit)		135,500			16,699			186,200			(35,801	)

Net income (loss)	$	(4,313	)	$	6,377		$	(104,194	)	$	(13,672	)

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

LEVI STRAUSS & CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)


	Nine Months Ended
	August 24, 2003		August 25, 2002
			(Restated)
Cash Flows from Operating Activities:
Net loss	(104,194	)	(13,672	)
Adjustments to reconcile net cash provided by (used for) operating activities:
Depreciation and amortization	46,610		53,550
Asset write-offs associated with 2002 restructuring charge	10,968		19,426
Gain on dispositions of property, plant and equipment	(185	)	(1,171	)
Unrealized foreign exchange (gains) losses	(20,145	)	14,859
Decrease in trade receivables	68,437		65,363
Increase in income taxes receivable	(11,843	)	—
Increase in inventories	(198,879	)	(81,379	)
Increase in other current assets	(15,060	)	(18,528	)
Decrease in other long-term assets	24,590		13,042
Increase in net deferred tax assets	(188,232	)	(26,743	)
Addition to deferred tax valuation allowance	282,448		—
Increase (decrease) in accounts payable and accrued liabilities	34,628		(104,556	)
(Decrease) increase in restructuring reserves	(52,713	)	50,010
(Decrease) increase in accrued salaries, wages and employee benefits	(97,579	)	90,345
(Decrease) increase in accrued taxes	(91,352	)	97,092
(Decrease) in long-term employee benefits	(140,258	)	(4,563	)
Increase (decrease) in long-term tax and other liabilities	34,870		(139,972	)
Other, net	(492	)	6,861

Net cash provided by (used for) operating activities	(418,381	)	19,964

Cash Flows from Investing activities:
Purchases of property, plant and equipment	(50,937	)	(33,771	)
Proceeds from sale of property, plant and equipment	10,105		8,312
Cash (outflow) from net investment hedges	(20,901	)	(11,135	)

Net cash used for investing activities	(61,733	)	(36,594	)

Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt	1,448,660		570,308
Repayments of long-term debt	(955,388	)	(594,238	)
Net increase in short-term borrowings	8,082		1,302
Debt issuance costs	(44,878	)	(3,210	)
Increase in restricted cash	(23,427	)	—

Net cash provided by (used for) financing activities	433,049		(25,838	)

Effect of exchange rate changes on cash	1,264		1,895

Net decrease in cash and cash equivalents	(45,801	)	(40,573	)
Beginning cash and cash equivalents	96,478		102,831

Ending cash and cash equivalents	50,677		62,258

Supplemental Disclosure of cash flow information:
Cash paid during the year for:
Interest	158,837		117,866
Income taxes	166,396		59,572
Restructuring initiatives	41,147		45,938

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

LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1: SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

The unaudited consolidated financial statements of Levi Strauss & Co. and its wholly-owned and majority-owned foreign and domestic subsidiaries (“LS&CO.” or the “Company”) are prepared in conformity with generally accepted accounting principles in the United States (“U.S.”) for interim financial information. In the opinion of management, all adjustments necessary for a fair presentation of the financial position and the results of operations for the periods presented have been included. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of LS&CO. for the year ended November 30, 2003 included in the annual report on Form 10-K filed by LS&CO. with the Securities and Exchange Commission on March 1, 2004.

The consolidated financial statements include the accounts of Levi Strauss & Co. and its subsidiaries. All intercompany transactions have been eliminated. Management believes that, along with the following information, the disclosures are adequate to make the information presented herein not misleading. Certain prior year amounts have been reclassified to conform to the current presentation. The results of operations for the three and nine months ended August 24, 2003 may not be indicative of the results to be expected for the year ending November 30, 2003.

The consolidated financial statements for the years ended November 24, 2002 and November 25, 2001, the interim quarters therein and the quarters ended February 23, 2003 and May 25, 2003 have been restated. All information in the notes to the consolidated financial statements referring to 2002 financial information give effect to the aforementioned restatements. (See Note 2 to the Consolidated Financial Statements).

Restricted Cash

Under the Company’s senior secured credit facility in place as of August 24, 2003 (the “January 2003 senior secured credit facility”), the Company was required to segregate funds in an amount sufficient to repay the Company’s 6.80% notes due November 1, 2003 at maturity (including any interim scheduled interest payments). As of August 24, 2003, this amount was $23.4 million, which included $0.8 million of accrued interest, and is separately identified on the balance sheet as “Restricted cash.”

Estimates

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 consolidated financial statements. Changes in such estimates, based on more accurate future information, may affect amounts reported in future periods.

Employee Incentive Compensation. The Company maintains certain short-term and long-term employee incentive compensation plans. These plans are intended to reward eligible employees for their contributions to the Company’s short-term and long-term success. The amount of compensation earned under the short-term plan is based on a combination of financial results (as measured against pre-established targets) and the performance and salary grade levels of the employees. The amount of compensation earned under the long-term plan in place during 2001-2003 was based on the Company’s cumulative performance against expected shareholder value growth at comparable companies. Provisions for employee incentive compensation are recorded in accrued salaries, wages and employee benefits and long-term employee related benefits. Changes in the liabilities for

LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

these incentive plans correlate with the Company’s financial results and projected future financial performance, and could have a material impact on the consolidated financial statements and on the Company’s future financial performance.

The estimated liability for the Company’s long-term incentive compensation plan is based upon the Company’s performance and various factors including employee forfeitures. The Company recorded a reversal of $129.1 million and $139.3 million for the three and nine months ended August 24, 2003, due to the Company’s performance in 2003, its current plan for 2004 and the impact of a substantial increase in the valuation allowance and other items on computation under its incentive compensation plans. As of August 24, 2003 the short-term and long-term liability balances was $0. As of November 24, 2002, the short-term and long-term liability balances for this plan were $65.0 million and $137.0 million, respectively.

The Company estimates annual employee incentive compensation based upon various factors, including the Company’s forecasted performance measured against pre-established full-year targets. The Company periodically evaluates the adequacy of the recorded liability and makes adjustments as appropriate. The Company recognized a net expense in marketing, general and administrative expense of $2.0 million for both the three and nine months ended August 24, 2003. The net expense for the three and nine months ended August 24, 2003 included estimated accruals of $2.0 million and $7.0 million, respectively. Offsetting the accrual for the nine months ended August 24, 2003 was a reduction of the estimated liability of $5.0 million for the nine months ended August 24, 2003, reflecting the aggregate change in expected payouts. The liability balances for the Company’s annual employee incentive compensation plans were $2.5 million and $51.1 million as of August 24, 2003 and November 24, 2002, respectively.

Taxes. For information about the impact of a change in the long-term forecast the Company uses for valuing its deferred tax assets, see Note 5.

New Accounting Standards

The Financial Accounting Standards Board (“FASB”) issued 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 below under “New Accounting Standards” and “Impairment of Long-Lived Assets”). 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 142 require 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.

Goodwill and other intangibles are carried at cost, net of accumulated amortization. Goodwill resulted primarily from a 1985 acquisition of LS&CO. by Levi Strauss Associates Inc., a former parent company that was subsequently merged into the Company in 1996.

The Company’s goodwill is allocated to its Americas region. The Company reviewed the balances of goodwill and other intangible assets and determined that it does not have any amounts, such as customer lists,

LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

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 6 to 12 years. Due to the adoption of SFAS 142, the Company had lower amortization of approximately $11.0 million in 2003.

As of August 24, 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 August 24, 2003, the net book value of the Company’s trademarks was $42.9 million, net of accumulated amortization of $34.6 million.

The Company’s remaining identifiable intangible assets as of August 24, 2003, 2003 were not significant. Amortization expense for goodwill and trademarks for fiscal year 2002 was $8.8 million and $1.9 million, respectively. Future amortization expense with respect to the Company’s intangible assets as of August 24, 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 (loss) to amounts adjusted for the exclusion of goodwill and trademark amortization, net of related income tax effect, is as follows:


	Three Months Ended					Nine Months Ended
	August 24, 2003			August 25, 2002		August 24, 2003			August 25, 2002
				(Restated)					(Restated)
	(Dollars in Thousands, except per share amounts)
Net income (loss)	$	(4,313	)	$	6,377	$	(104,194	)	$	(13,672	)
Goodwill and trademark amortization, net of tax		—			1,634		—			4,930

Adjusted net income (loss)	$	(4,313	)	$	8,011	$	(104,194	)	$	(8,742	)

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 August 24, 2003, the Company had approximately $1.9 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.

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

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(Unaudited)

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, for the three and nine months ended August 24, 2003, the Company presented losses of $0.8 million and $15.2 million, respectively, on early extinguishment of its debt in “Other (income) expense, net” in the accompanying 2003 consolidated statements of operations. The losses primarily relate to the repurchase of $327.3 million in principal amount of its 6.80% notes due November 2003 and the write-off of unamortized bank fees associated with refinancing the Company’s 2001 bank credit facility.

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 timing of expense recognition under SFAS 146 for restructuring initiatives in 2003 differs from that which was required under EITF Issue 94-3 and recognized in calendar year 2002 and prior years.

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. These provisions 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.

The FASB issued SFAS 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” dated April 2003. The purpose of SFAS 149 is to amend and clarify financial accounting and reporting for derivative instruments and hedging activities under SFAS 133. SFAS 149 amends SFAS 133 for decisions made: (i) as part of the Derivatives Implementation Group process that require amendment to SFAS 133, (ii) in connection with other FASB projects dealing with financial instruments, and (iii) in connection with the implementation issues raised related to the application of the definition of a derivative. SFAS 149 is effective for contracts entered into or modified after June 30, 2003 and for designated hedging relationships after June 30, 2003. The adoption of SFAS 149 did not have a material effect on the Company’s consolidated financial condition or results of operations.

In December 2003, the FASB issued SFAS 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” This Statement revises employers’ disclosures about pension plans and other

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(Unaudited)

post-retirement benefit plans. It does not change the measurement or recognition of those plans required by SFAS 87, Employers’ Accounting for Pensions, SFAS 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, or SFAS 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions. This Statement requires additional disclosures to those in the original SFAS 132 about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other post-retirement benefit plans. The required information should be provided separately for pension plans and for other post-retirement benefit plans. SFAS 132 is effective for annual financial statements with fiscal years ending after December 15, 2003. The Company will adopt the revised SFAS 132 disclosure requirements in its 2004 Form 10-K.

NOTE 2: RESTATEMENTS OF 2001, 2002 AND FIRST AND SECOND QUARTERS OF 2003

Earlier in 2003, the Company determined that it had reported incorrectly on tax returns for 1998 and 1999 on the disposition of certain fixed assets, primarily a double deduction for losses related to various plant closures. These reporting errors on the Company’s tax returns did not affect its results of operations for fiscal years 1998 through 2000. However, these errors did impact the Company’s results of operations for 2001 because the deferred tax liabilities for these errors were eliminated and taken into income through a 2001 reconciliation project. In preparing its third quarter financial results described in its September 10 and September 30, 2003 press releases, the Company reflected the tax effect of these errors as an adjustment to the full-year effective tax rate for 2003, in effect treating them as a change in accounting estimate that would be recorded in the third and fourth quarters of 2003. Thereafter, the Company determined that the appropriate accounting treatment for these errors is to treat them as an accounting error in 2001, the year in which the deferred tax liabilities associated with these 1998 and 1999 reporting errors were eliminated, and to restate the Company’s fiscal year 2001 financial statements.

As the Company engaged in the reaudit of the 2001 financial statements, the Company identified additional errors and determined that certain other adjustments to the 2001 statements would also affect its financial statements for subsequent periods. The Company also determined that errors were made in these financial statements that were independent of the 2001 restatement items. The Company therefore decided that it would be appropriate to restate its 2002 financial statements, and to restate the financial information the Company previously reported for the first and second quarters of 2003. Unless otherwise specifically noted, the financial information in this Form 10-Q reflects the 2001 restatement, the 2002 restatement and the 2003 first and second quarter adjustments. In addition, the Company restated its financial statements for the first, second and third quarters of 2001 and 2002.

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(Unaudited)

Set forth below are the consolidated statements of operations for the first and second quarters of 2003, in each case as originally reported and as restated.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands)

(Unaudited)


	As Reported for 2003						As Restated for 2003
	First Quarter			Second Quarter			First Quarter			Second Quarter
Net sales	$	875,088		$	930,030		$	877,034		$	932,021
Cost of goods sold		515,641			545,480			516,882			538,825

Gross profit		359,447			384,550			360,152			393,196
Marketing, general and administrative expenses		323,533			343,399			304,770			345,390
Other operating (income)		(7,316	)		(9,752	)		(7,316	)		(9,752	)
Restructuring charges, net of reversals		(4,210	)		(5,509	)		(3,050	)		(5,336	)

Operating income		47,440			56,412			65,748			62,894
Interest expense		59,679			63,346			59,679			63,346
Other expense, net		27,909			14,994			34,615			20,183

Loss before taxes		(40,148	)		(21,928	)		(28,546	)		(20,635	)
Income tax expense (benefit)		(15,658	)		(8,552	)		29,500			21,200

Net loss	$	(24,490	)	$	(13,376	)	$	(58,046	)	$	(41,835	)

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(Unaudited)

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands)

(Unaudited)

Set forth below are the consolidated statements of operations for the first, second and third quarters of 2002 and for the nine months ended August 25, 2002, in each case as originally reported and as restated.


	As Reported for the Nine Months Ended August 25, 2002
	First Quarter			Second Quarter			Third Quarter			For the Nine Months Ended
Net sales	$	935,285		$	923,518		$	1,017,744		$	2,876,546
Cost of goods sold		536,701			553,974			603,249			1,693,923

Gross profit		398,584			369,544			414,495			1,182,623
Marketing, general and administrative expenses		298,935			318,804			340,390			958,129
Other operating (income)		(6,113	)		(8,511	)		(6,015	)		(20,640	)
Restructuring charges, net of reversals		—			141,078			(16,565	)		124,513

Operating income (loss)		105,762			(81,827	)		96,685			120,621
Interest expense		48,023			42,510			48,476			139,009
Other (income) expense, net		(9,677	)		9,499			20,791			20,613

Income (loss) before taxes		67,416			(133,836	)		27,418			(39,001	)
Income tax expense (benefit)		24,944			(58,154	)		13,709			(19,500	)

Net income (loss)	$	42,472		$	(75,682	)	$	13,709		$	(19,501	)


	As Restated
	for the Nine Months Ended August 25, 2002
	First Quarter			Second Quarter			Third Quarter			For the Nine Months Ended
Net sales	$	937,285		$	925,518		$	1,019,744		$	2,882,547
Cost of goods sold		542,000			555,057			600,666			1,697,723

Gross profit		395,285			370,461			419,078			1,184,824
Marketing, general and administrative expenses		307,739			321,704			342,574			972,017
Other operating (income)		(6,113	)		(8,511	)		(6,016	)		(20,640	)
Restructuring charges, net of reversals		563			130,658			(15,848	)		115,373

Operating income (loss)		93,096			(73,390	)		98,368			118,074
Interest expense		48,023			42,510			48,476			139,009
Other (income) expense, net		(9,622	)		11,344			26,816			28,538

Income (loss) before taxes		54,695			(127,244	)		23,076			(49,473	)
Income tax expense (benefit)		39,500			(92,000	)		16,699			(35,801	)

Net income (loss)	$	15,195		$	(35,244	)	$	6,377		$	(13,672	)

The principal restatement adjustments for the second quarter of 2003 consolidated statement of operations were: the adjustment of foreign currency losses from other (income) expense to cost of sales and inventory; the

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reclassification of cost for sales clerks for a foreign subsidiary from sales to management, general and administrative expenses; and the impact of a valuation allowance for deferred tax assets.

The principal restatement adjustments for the first quarter of 2003 consolidated statement of operations were: the reversal of cumulative adjustment for prior periods to reflect the actual liability for occupancy costs and leases on a straight-line basis; the adjustment of foreign currency losses from other (income) expense to cost of sales and inventory; the reclassification of cost for sales clerks for a foreign subsidiary from sales to management, general and administrative expenses; and the impact of the valuation allowance for deferred tax assets.

The principal restatement adjustments for the third quarter of 2002 consolidated statement of operations were: the adjustment of foreign currency transaction gains from other (income) expense to cost of sales and inventory; reclassification of cost for sales clerks for a foreign subsidiary from sales to management, general and administrative expenses; the correction of restructuring errors and correct application of EITF Issue No. 94-3; the adjustment of management, general and administrative expenses to reflect occupancy costs on a straight-line basis; and the adjustment of income tax expense to reflect a valuation allowance relating primarily to foreign net operating losses.

The principal restatement adjustments for the first and second quarters of 2002 consolidated statement of operations were: the adjustment of foreign currency transaction gains from other (income) expense to cost of sales and inventory; reclassification of cost for sales clerks for a foreign subsidiary from sales to management, general and administrative expenses; the correction of restructuring errors and correct application of EITF Issue No. 94-3; the adjustment of management, general and administrative expenses to reflect occupancy costs on a straight-line basis; and the adjustment of income tax expense to reflect a valuation allowance relating primarily to foreign net operating losses.

For additional information concerning the restatement of our 2002 financial statements, see Item 7— “Management’s Discussion and Analysis of our Financial Condition and Results of Operations - Restatements of Financial Information” in our Annual Report on Form 10-K for the year ended November 30, 2003, filed with the Securities and Exchange Commission on March 1, 2004.

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(Unaudited)

NOTE 3: COMPREHENSIVE INCOME (LOSS)

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


	Three Months Ended						Nine Months Ended
	August 24, 2003			August 25, 2002			August 24, 2003			August 25, 2002
				(Restated)						(Restated)
	(Dollars in Thousands)
Net income (loss)	$	(4,313	)	$	6,377		$	(104,194	)	$	(13,672	)

Other comprehensive income (loss):
Reclassification of cash flow hedges to other income, net		—			—			—			(572	)
Net investment hedges		8,165			(10,765	)		(9,935	)		(12,649	)
Foreign currency translations		(5,067	)		19,110			10,396			13,982
Additional minimum pension liability		1,512			—			(1,512	)		—

Total other comprehensive income (loss)		4,610			8,345			(1,051	)		761

Total comprehensive income (loss)	$	297		$	14,722		$	(105,245	)	$	(12,911	)

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


	August 24, 2003			November 24, 2002
				(Restated)
	(Dollars in Thousands)
Net investment hedges	$	18,415		$	28,350
Foreign currency translations		(15,522	)		(25,918	)
Additional minimum pension liability		(85,953	)		(84,441	)

Accumulated other comprehensive loss	$	(83,060	)	$	(82,009	)

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(Unaudited)

NOTE 4: RESTRUCTURING RESERVES

Summary

The following describes the activities associated with the Company’s reorganization initiatives. Severance and employee benefits relate to items such as 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, and other restructuring costs, and foreign exchange differences. The balance of severance, employee benefits and other restructuring costs are included under restructuring reserves on the balance sheet.

The total balance of the reserves at August 24, 2003 was $9.5 million compared to $62.2 million at November 24, 2002. The Company expects to utilize the majority of the reserve balances during fiscal year 2004. The following table summarizes the activities and liability balances associated with the Company’s reorganization initiatives as follows:


	November 24, 2002		Restructuring Charges, Net of Reversals			Asset Write-Offs			MG&A Charges, Net of Reversals		Reductions			August 24, 2003
	(Restated)		(Dollars in Thousands)
Restructuring Reserves	$	62,165	$	(5,776	)	$	(10,968	)	$	5,178	$	(41,147	)	$	9,452

*	MG&A refers to marketing, general and administrative expenses.

**	Asset write-offs are included in restructuring charges, net of reversals.

The Company reversed charges, primarily related to the 2002 U.S. plant closures, of approximately $15 million, principally due to lower than anticipated costs associated with employee benefits, lower than anticipated costs to sell or exit facilities, and updated estimates and assumptions related to certain U.S. suppliers and other exit costs.

2003 North America Plant Closures

During the third quarter of 2003, the Company finalized a plan to close its remaining manufacturing and finishing plants in North America as part of the shift away from owned-and-operated manufacturing that the Company began several years ago.

The Company closed its sewing and finishing operations in San Antonio, Texas in January 2004. The Company’s three Canadian facilities, two sewing plants in Edmonton, Alberta and Stoney Creek, Ontario, and a finishing center in Brantford, Ontario, are expected to close in March 2004. Production from the San Antonio and Canadian facilities will be shifted to third-party contractors located primarily outside the U.S. and Canada. During the third quarter of 2003, the Company recorded initial charges of $11.0 million for asset write-offs associated with the U.S. and Canadian plant closures.

NOTE 5: INCOME TAXES

Deferred tax assets and liabilities. The Company records assets and liabilities that reflect the differences in timing between the financial statements and income tax returns for recognizing certain deduction (income)

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(Unaudited)

items which include foreign tax credits on unremitted non-U.S. earnings; federal, foreign and state net operating losses; postretirement benefits; and employee compensation and benefit plans.

Valuation Allowance. The Company’s valuation allowance has been provided primarily for foreign tax credits, state and foreign net operating loss carryforwards, other foreign deferred tax assets and alternative minimum tax credit carryforwards. Such allowance, totaling $349.5 million at August 24, 2003, has been estimated using year-end balances and activity. Tax expense of $186.2 million has been provided using an effective rate for the full year, in addition to the effect of the increased valuation allowance. Realization of the Company’s deferred tax assets is dependent upon future earnings in specific tax jurisdictions, the timing and amount of which are uncertain. In determining the amount of the valuation allowance, the Company has evaluated all significant available positive and negative evidence, the existence of losses in the recent year and our forecast of future taxable income. The underlying assumptions the Company used in forecasting its future taxable income require significant judgment, and take into account the Company’s recent performance, including continued business deterioration and initial revisions to its 2004 plan, but assume no revenue growth or cost reductions that may be realized as they are not yet determinable.

Long-term tax liabilities. The Company periodically reassesses the likelihood of assessments resulting from audits of federal, state and foreign income tax filings. The Company believes that adequate reserves have been provided for any adjustments that may ultimately result from these examinations. Total long-term tax liabilities were $128.1 million at August 24, 2003, and $95.2 million at November 24, 2002.

Other. During 2002, the Company reached a settlement with the Internal Revenue Service (IRS) on most of the issues in connection with the examination of its income tax returns for the years 1990 through 1995. As a result, the Company made a net payment to the IRS of approximately $110 million in March 2003. In addition to certain open issues relating to earlier years, the Company’s U.S. consolidated income tax returns for the years 1996 through 1999 are presently under audit by the IRS. The Company has taken this, and all other available information, into account in evaluating its total reserves for potential audit assessments.

NOTE 6: FINANCING

Pending completion of a refinancing transaction, the Company obtained on September 17, 2003 a limited waiver of compliance with certain financial covenants under a January 2003 credit facility in place at the time. On September 29, 2003, the Company entered into a new $500.0 million senior secured term loan agreement and a $650.0 million senior secured revolving credit facility that replaced the January 2003 senior secured credit facility and a 2001 domestic receivable securitization arrangement. (See Note 12: “Subsequent Events” for a description of the new loan agreements.) As a result, it was not necessary to reclassify the outstanding debt on the January 2003 senior secured credit facility to current maturities of long-term debt.

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(Unaudited)

NOTE 7: COMMITMENTS AND CONTINGENCIES

Foreign Exchange Contracts

At August 24, 2003, the Company had U.S. dollar spot and forward currency contracts to buy $746.0 million and to sell $310.8 million against various foreign currencies. These contracts were at various exchange rates and expired at various dates through October 2003.

The Company has entered into option contracts to manage its exposure to numerous foreign currencies. At August 24, 2003, the Company had bought U.S. dollar option contracts resulting in a net long position against various foreign currencies of $69.8 million, should the options be exercised. To finance the premium related to bought options, the Company sold U.S. dollar options resulting in a net long position against various currencies of $5.0 million, should the options be exercised. The option contracts are at various strikes and expire at various dates until October 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

Wrongful Termination Litigation. On April 14, 2003, two former employees of the Company’s tax department filed a complaint in the Superior Court of the State of California for San Francisco County in which they allege that they were wrongfully terminated in December 2002. Plaintiffs allege, among other things, that Levi Strauss & Co. engaged in a variety of fraudulent tax-motivated transactions over several years, that the Company manipulated tax reserves to inflate reported income and that the Company fraudulently failed to set appropriate valuation allowances on deferred tax assets. They also allege that, as a result of these and other tax-related transactions, the Company’s financial statements for several years violate generally accepted accounting principles and Securities and Exchange Commission regulations and are fraudulent and misleading, that reported net income for these years was overstated and that these various activities resulted in the Company paying excessive and improper bonuses to management for fiscal year 2002. Plaintiffs in this action further allege that they were instructed by the Company to withhold information concerning these matters from the Company’s auditors and the Internal Revenue Service, that they refused to do so and, because of this refusal, they were wrongfully terminated. Plaintiffs seek a number of remedies, including compensatory and punitive damages, attorneys’ fees, restitution, injunctive relief and any other relief the court may find proper.

The Company is vigorously defending this litigation and filed its formal answer to the lawsuit in California Superior Court on May 23, 2003. In its answer the Company categorically denies all the allegations and spells out the reasons that led to the dismissal of these two employees. The Company also filed a cross complaint against them. The Company does not expect this litigation will have a material impact on its financial condition or results of operations.

In a related administrative proceeding before the U.S. Department of Labor under Section 1107 of the Sarbanes-Oxley Act, the plaintiffs made a claim based on the same allegations made in the wrongful termination suit. The Company defended vigorously this proceeding. On January 23, 2004, the plaintiffs withdrew their complaint just prior to the issuance by the Department of Labor of an initial determination.

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(Unaudited)

Class Actions Securities Litigation. On December 12, 2003, a putative bondholder class action styled Orens v. Levi Strauss & Co., et al., Case No. C-03-5605, RMW (HRL), was filed in the United States District Court for the Northern District of California against the Company, its chief executive officer and its former chief financial officer. The action purports to be brought on behalf of purchasers of the Company’s bonds in the period from January 10, 2001 to October 9, 2003, and makes claims under the federal securities laws, including Section 10(b) and 20(a) of the Securities Exchange Act of 1934, relating to the Company’s SEC filings and other public statements. Specifically, the action alleges that certain of the Company’s financial statements and other public statements during this period materially overstated its net income and other financial results and were otherwise false and misleading, and that its public disclosures omitted to state that it lacked adequate internal controls such that the Company was unable to ascertain its true financial condition. Plaintiffs contend that such statements and omissions caused the trading price of the Company’s bonds to be artificially inflated. Plaintiffs seek compensatory damages as well as other relief.

On February 20, 2004, a putative bondholder class action styled General Retirement System of the City of Detroit, et al. v. Levi Strauss & Co., et al., Case No. C-04-00712, JW (EAI), was filed in the United States District Court for the Northern District of California, San Jose Division, against the Company, its chief executive officer, its former chief financial officer, its directors and its underwriters in connection with its April 6, 2001 and June 16, 2003 registered bond offerings. As of February 29, 2004, the Company had not been served with this lawsuit. The action purports to be brought on behalf of purchasers of the Company’s bonds who made purchases pursuant or traceable to our prospectuses dated March 8, 2001 or April 28, 2003, or who purchased the Company’s bonds in the open market from January 10, 2001 to October 9, 2003. The action makes claims under the federal securities laws, including Sections 11 and 15 of the Securities Act of 1933, and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, relating to the Company’s SEC filings and other public statements. Specifically, the action alleges that certain of the Company’s financial statements and other public statements during this period materially overstated our net income and other financial results and were otherwise false and misleading, and that the Company’s public disclosures omitted to state that it made reserve adjustments that plaintiffs allege were improper. Plaintiffs contend that these statements and omissions caused the trading price of the Company’s bonds to be artificially inflated. Plaintiffs seek compensatory damages as well as other relief.

The Company’s in the initial stages of these lawsuits. The Company expects to defend these cases vigorously.

Saipan Class Action Litigation. In April 2000, the Company was named as an additional defendant in a class action suit filed in 1999 in federal district court in Saipan by non-resident garment workers, who currently or formerly worked in Saipan, against several manufacturers operating on the island. (Saipan is a U.S. commonwealth in the Northern Mariana Islands.) The complaint related to working conditions for the operators in Saipan facilities and alleged violation of the Racketeer Influenced and Corrupt Organization Act, the Alien Tort Claims Act and state common and international law. All other defendants settled the lawsuit in September 2002 for $20 million. The Company refused to join the settlement as the Company believed that the allegations about it in the lawsuit were not true.

On January 21, 2003, the court entered judgment in the Company’s favor on the Alien Tort Claims Act claims. On December 18, 2003, the court dismissed all remaining claims against the Company at the request of plaintiffs. As part of the dismissal, the Company agreed only that all parties should bear their own costs and that the Company would not sue plaintiffs or their attorneys for malicious prosecution.

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(Unaudited)

Other Litigation. In the ordinary course of business, the Company has various other pending 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 its financial condition or results of operations.

NOTE 8: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Foreign Exchange Management

The Company manages foreign currency exposures primarily to protect the U.S. dollar value of cash flows. 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. To manage the volatility relating to these exposures, we evaluate them on a global basis to take advantage of the netting opportunities that exist. For the remaining exposures, we enter into various derivative transactions in accordance with our currency risk management policies, aimed at covering the spot risk at inception of the exposure. The Company does not currently manage the timing mismatch derived from forecasted exposures and their corresponding hedges. In 2003, the Company defined as part of its foreign currency risk management policy a hedge ratio limit. The hedge ratio measures the relationship between the notional amount of the hedging instrument and the hedged item. The Company’s foreign exchange policy requires that the hedge ratio be between 50% and 100%. At August 24, 2003, our hedge ratio was 86.5%, while the minimum hedge ratio during the quarter was 76.4%.

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, debt and cash management.

The Company does not apply hedge accounting to its foreign currency derivative transactions, except for certain net investment hedging activities.

The Company manages its net investment position in its subsidiaries in major currencies through a combination of derivative and non-derivative instruments by using swap 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 August 24, 2003, the fair value of qualifying net investment hedges was a $5.5 million net asset with the corresponding unrealized gain recorded in “Accumulated other comprehensive income (loss).” At August 24, 2003, a $2.0 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 August 24, 2003 represented a $0.1 million net liability, 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 August 24, 2003, a $4.5 million unrealized gain related to the translation effects of the Yen-denominated Eurobond was recorded in “Accumulated other comprehensive income (loss).”

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 August 24, 2003.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

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


	Three Months Ended										Nine Months Ended
	August 24, 2003 Other (income) expense, net					August 25, 2002 Other (income) expense, net					August 24, 2003 Other (income) expense, net					August 25, 2002 Other (income) expense, net
	Realized		Unrealized			Realized		Unrealized			Realized		Unrealized			Realized			Unrealized
						(Restated)										(Restated)
	(Dollars in Thousands)										(Dollars in Thousands)
Foreign Exchange Management	$	2,389	$	(10,284	)	$	38,596	$	(18,599	)	$	57,140	$	(7,720	)	$	33,348		$	7,800

Interest Rate Management	$	—	$	—		$	—	$	—		$	—	$	—		$	2,266	⁽¹⁾	$	(2,266	)

(1)	Recorded as an increase to interest expense.

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


	August 24, 2003						November 24, 2002
	Accumulated OCI gain (loss)						Accumulated OCI gain (loss)
	Realized			Unrealized			Realized			Unrealized
							(Restated)
	(Dollars in Thousands)
Foreign Exchange Management
Net Investment Hedges
Derivative Instruments	$	18,862		$	5,543		$	39,818		$	(96	)
Yen Bond		—			4,506			—			5,277
Cumulative income taxes		(6,716	)		(3,780	)		(14,732	)		(1,917	)

Total	$	12,146		$	6,269		$	25,086		$	3,264

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


	August 24, 2003		November 24, 2002
	Fair value asset (liability)		Fair value asset (liability)
			(Restated)
	(Dollars in Thousands)
Foreign Exchange Management	$	10,506	$	(2,851	)

Interest Rate Management	$	—	$	—

LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

NOTE 9: OTHER (INCOME) EXPENSE, NET

The following table summarizes significant components of other (income) expense, net:


	Three Months Ended						Nine Months Ended
	August 24, 2003			August 25, 2002			August 24, 2003			August 25, 2002
				(Restated)						(Restated)
	(Dollars in Thousands)
Foreign exchange management contracts	$	(7,895	)	$	19,997		$	49,420		$	41,148
Interest rate management contracts		—			—			—			(2,266	)
Foreign currency transaction (gains) losses		6,595			17,640			(6,040	)		6,217
Interest income		(1,567	)		(5,589	)		(4,227	)		(6,647	)
Gains on disposal of assets		(384	)		(400	)		(879	)		(1,171	)
Loss on early extinguishment of debt		831			—			15,226			—
Other		(705	)		(4,832	)		(1,827	)		(8,743	)

Total	$	(3,125	)	$	26,816		$	51,673		$	28,538

The Company uses foreign exchange management contracts, such as forward, swap and option contracts, to manage foreign currency exposures. These derivative instruments are recorded at fair value and the changes in fair value are recorded in other (income) expense, net. Foreign currency transactions are transactions denominated in a currency other than the entity’s functional currency. At the date the foreign currency transaction is recognized, each asset, liability, revenue, expense, gain or loss arising from the transaction is measured and recorded in the functional currency of the recording entity using the exchange rate in effect at that date. At each balance sheet date for each entity, recorded balances denominated in a foreign currency are adjusted, or remeasured, to reflect the current exchange rate. The changes in the recorded balances caused by remeasurement at the exchange rate are recorded in other (income) expense, net.

LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

NOTE 10: BUSINESS SEGMENT INFORMATION

The Company manages its business based on geographic regions consisting of the Americas, which includes the U.S., Canada and Latin America; Europe, which includes Europe, the Middle East and Africa; and Asia Pacific. All Other primarily consists of corporate functions and intercompany eliminations.

The presentation below presents operating income (loss) rather than earnings contribution as shown in prior period presentations. Management has determined that this presentation more accurately reflects current management internal analyses and decision-making and provides a more useful comparison to the Consolidated Statements of Operations. Operating income (loss) differs from earnings contribution primarily due to the inclusion in operating income (loss) of licensing income and restructuring charges, net of reversals. The Company now evaluates performance and allocates resources based on regional operating income (loss). The business segment identification itself is the same as for prior periods; it did not change as a result of this change in presentation. Business segment information for the Company is as follows:


	Americas			Europe			Asia Pacific		All Other			Consolidated
	(Dollars in Thousands)
Three Months Ended August 24, 2003:
Net sales	$	748,552		$	243,187		$	92,009	$	—		$	1,083,748
Depreciation and amortization		10,633			4,917			987		—			16,537
Restructuring charges, net of reversals		2,620			(10	)		—		—			2,610
Operating income		109,826			29,150			36,267		15,343			190,586
Interest expense		—			—			—		62,524			62,524
Other expense, net		—			—			—		(3,125	)		(3,125	)
Income before income taxes		—			—			—		131,187			131,187
Three Months Ended August 25, 2002 (Restated):
Net sales	$	683,967		$	254,930		$	80,847	$	—		$	1,019,744
Depreciation and amortization		11,964			4,226			1,122		—			17,312
Restructuring charges, net of reversals		(13,749	)		(2,099	)		—		—			(15,848	)
Operating income		74,361			29,074			8,836		(13,903	)		98,368
Interest expense		—			—			—		48,476			48,476
Other income, net		—			—			—		26,816			26,816
Income before income taxes		—			—			—		23,076			23,076
Nine Months Ended August 24, 2003:
Net sales	$	1,823,328		$	778,718		$	290,757	$	—		$	2,892,803
Depreciation and amortization		30,049			13,471			3,090		—			46,610
Restructuring charges, net of reversals		(5,766	)		(10	)		—		—			(5,776	)
Operating income		101,342			87,301			58,090		72,495			319,228
Interest expense		—			—			—		185,549			185,549
Other expense, net		—			—			—		51,673			51,673
Income before income taxes		—			—			—		82,006			82,006
Nine Months Ended August 25, 2002 (Restated):
Net sales	$	1,882,006		$	756,927		$	243,614	$	—		$	2,882,547
Depreciation and amortization		37,946			12,496			3,108		—			53,550
Restructuring charges, net of reversals		97,002			18,371			—		—			115,373
Operating income		60,198			94,845			33,717		(70,686	)		118,074
Interest expense		—			—			—		139,009			139,009
Other expense, net		—			—			—		28,538			28,538
Loss before income taxes		—			—			—		(49,473	)		(49,473	)

LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

NOTE 11: POSTRETIREMENT BENEFIT PLANS

The Company maintains two plans that provide postretirement benefits, principally health care, to substantially all U.S. retirees and their qualified dependents. These plans have been established with the intention that they will continue indefinitely. However, the Company retains the right to amend, curtail or discontinue any aspect of the plans at any time. Under the Company’s current policies, employees become eligible for these benefits when they reach age 55 with 15 years of credited service. The plans are contributory and contain certain cost-sharing features, such as deductibles and coinsurance. The Company’s policy is to fund postretirement benefits as claims and premiums are paid. On August 1, 2003, the Company amended one of its postretirement benefit plans to change the benefits coverage for certain employees and retired participants. These plan changes are effective for eligible employees and retired participants in fiscal year 2004. Some current and all new employees will not be eligible for medical coverage as a result of the plan changes. The plan amendment also limits the amount that the Company will contribute for medical coverage and prescription drug coverage for retirees. The Company performed an independent valuation of the impact of the plan amendment as of August 1, 2003 resulting in a net curtailment gain of $11.9 million. The Company’s measurement date continues to be the end of its fiscal year. The table below reflects the plan amendment as of August 24, 2003.


	Postretirement Benefits
	August 24, 2003			November 24, 2002
				(Restated)
	(Dollars in Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year	$	761,923		$	561,227
Service cost		5,237			5,918
Interest cost		37,618			40,874
Plan participants’ contributions		2,928			3,152
Plan amendments		(106,412	)		(2,989	)
Actuarial loss		21,754			193,362
Net curtailment gain		—			(12,287	)
Special termination benefits		—			11,868
Benefits paid		(34,668	)		(39,202	)

Benefit obligation at end of period	$	688,380		$	761,923

Change in plan assets:
Fair value of plan assets at beginning of year		—			—
Employer contribution		31,740			36,050
Plan participants’ contributions		2,928			3,152
Benefits paid		(34,668	)		(39,202	)

Fair value of plan assets at end of period		—			—

Funded status		(688,380	)		(761,923	)
Unrecognized actuarial loss		218,605			203,733
Unrecognized prior service cost		(122,843	)		(31,659	)

Net amount recognized	$	(592,618	)	$	(589,849	)

Amounts recognized in the consolidated balance sheets consist of:
Accrued benefit cost short-term	$	(40,918	)	$	(40,919	)
Accrued benefit cost long-term		(551,700	)		(548,930	)

Total accrued benefit cost	$	(592,618	)	$	(589,849	)

Weighted-average assumptions:
Discount rate		6.75	%		7.0	%

LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)


	Postretirement Benefits
	Year-to-date through August 24, 2003			Year-to-date through November 24, 2002
				(Restated)
	(Dollars in Thousands)
Components of net periodic benefit cost:
Service cost	$	5,237		$	5,918
Interest cost		37,618			40,874
Amortization of prior service cost		(3,300	)		(3,522	)
Amortization of loss		6,882			—
Net curtailment gain		(11,928	)		(12,554	)
Termination benefits		—			11,868

Net periodic benefit cost	$	34,509		$	42,584

NOTE 12: SUBSEQUENT EVENTS

New Financing Agreements

Principal Amount; Use of Proceeds. On September 29, 2003, the Company entered into a $500.0 million senior secured term loan agreement and a $650.0 million senior secured revolving credit facility. As of September 29, 2003, unamortized costs associated with the January 2003 senior secured credit facility and the U.S. Receivables Securitization transaction were approximately $24 million. These costs were written-off during the fourth quarter of 2003. The Company used the borrowings under the these agreements to refinance the January 2003 senior secured credit facility and Domestic Receivables Securitization agreement and will also use the borrowings for working capital and general corporate purposes.

Term Loan. The term loan consists of a single borrowing of $500.0 million, divided into two tranches, a $200.0 million tranche subject to a fixed rate of interest and a $300.0 million tranche subject to floating rates of interest. The loan matures on September 29, 2009. Principal payments on the term loan in an amount equal to 0.25% of the initial principal amount must be made quarterly commencing with the last day of the first fiscal quarter of 2004, and the remaining principal amount of the term loan must be repaid at maturity. The Company has limited ability to voluntarily prepay any part of the term loan prior to March 31, 2007. The new term loan also requires mandatory prepayments in specified circumstances, such as if the Company engages in a sale of certain intellectual property assets.

Revolving Credit Facility. The revolving credit facility is an asset-based facility, in which the borrowing availability varies according to the levels of the Company’s U.S. accounts receivable and inventory. Subject to the level of this borrowing base, the Company may make and repay borrowings from time to time until the maturity of the facility. Initial availability was approximately $563 million as of September 29, 2003. The maturity date of the facility is September 29, 2007, at which time all borrowings under the facility must be repaid. The Company may make voluntary prepayments of borrowings at any time and must make mandatory prepayments if certain events occur, such as asset sales. The Company must pay an early termination fee if the facility is terminated prior to September 29, 2005.

Early Maturity if Notes Not Refinanced. The term loan agreement requires the Company to repay the Company’s senior unsecured notes due 2006 and 2008 not later than six months prior to their respective maturity dates, failing which the maturity of the term loan is accelerated to a date three months prior to the scheduled maturity date of the 2006 or the 2008 notes, respectively. As a result, unless the Company has refinanced, repaid

LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

or otherwise provided for the payment of the 2006 notes by May 1, 2006, the term loan will become due on August 1, 2006, and unless the Company has repaid the 2008 notes by July 15, 2007, the term loan will become due on October 15, 2007.

The Company may satisfy this note refinancing requirement under the term loan, in one of two ways. First, the Company may refinance the 2006 and 2008 notes by issuing new debt on terms similar to those of its 12.25% notes due 2012. Second, the Company may repurchase or otherwise set aside funds to repay the 2006 and 2008 notes if the Company meets specified conditions. Those conditions include the Company’s maintaining (after giving effect of the repayment on a pro forma basis) a leverage ratio that does not exceed 4.75 to 1.0 (for the 2006 notes) and 4.5 to 1.0 (for the 2008 notes) and an interest coverage ratio that exceeds 1.85 to 1.0 (for the 2006 notes) and 2.0 to 1.0 (for the 2008 notes). These ratios apply only to the note refinancing requirements; they are not ongoing financial covenants.

The revolving credit facility agreement contains a similar note refinancing requirement with respect to the 2006 notes, except that the consequences of a failure to repay the notes is a breach of covenant, not early maturity. The Company may also satisfy this requirement under the revolving credit facility agreement if the Company reserves cash or has borrowing availability sufficient to repay the 2006 notes and thereafter has $150.0 million of borrowing availability under the revolving credit facility.

Interest Rates. The interest rate for the floating rate tranche of the term loan is 6.875% over the eurodollar rate or 5.875% over the base rate. The interest rate for the fixed rate tranche of the Company’s term loan is 10.0% per annum. The interest rate for the revolving credit facility is, for LIBOR rate loans, 2.75% over the LIBOR rate (as defined in the credit agreement) or, for base rate loans, 0.50% over the Bank of America prime rate.

Guaranties and Security. The Company’s obligations under each of the term loan and the revolving credit facility are guaranteed by the Company’s domestic subsidiaries. The revolving credit facility is secured by a first-priority lien on domestic inventory and accounts receivable, certain domestic equipment, patents and other related intellectual property, 100% of the stock in all domestic subsidiaries, 65% of the stock of certain foreign subsidiaries and other assets. Excluded from the assets securing the revolving credit facility are all of the Company’s most valuable real property interests and all of the capital stock of the Company’s affiliates in Germany and the United Kingdom and any other affiliates that become restricted subsidiaries under the indenture governing the notes due 2006 and the Yen-denominated Eurobond due 2016 (such restricted subsidiaries also are not permitted to be guarantors). The term loan is secured by a lien on trademarks, copyrights and other related intellectual property and by a second-priority lien on the assets securing the revolving credit facility.

Covenants. The term loan and the revolving credit facility each contain customary covenants restricting the Company’s activities as well as those of the Company’s 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 or prepay 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 corporate structure.

LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

Fixed Charge Coverage Ratio. Both the term loan and the revolving credit facility contain a consolidated fixed coverage ratio covenant:

•

The term loan fixed charge coverage ratio is measured as of the end of each fiscal quarter. The ratio is generally defined as the ratio of (i) EBITDA less the sum of (a) capital expenditures and (b) the provision for federal, state and local income taxes for the current period to (ii) interest charges paid in cash for the relevant period. The Company is required to maintain a ratio of least 1.0 to 1.0 as of each measurement date.

•

The revolving credit agreement fixed charge coverage ratio is measured only if certain availability thresholds are not met. In such case, the ratio is measured as of the end of each month. This ratio is generally defined as the ratio of (i) EBITDA less the sum of (a) capital expenditures and (b) the provision for federal, state and local income taxes for the current period to (ii) the sum of (x) interest charges paid in cash for the relevant period and (y) repayments of scheduled debt during the period. The Company is required to maintain a ratio of least 1.0 to 1.0 when the covenant is required to be tested.

Under the Company’s credit agreements, EBITDA is generally defined as consolidated net income plus (i) consolidated interest charges, (ii) the provision for federal, state, local and foreign income taxes, (iii) depreciation and amortization expense, (iv) other (income) expense and (v) restructuring and restructuring related charges, less cash payments made in respect of the restructuring charges.

Factors that could cause the Company to breach these fixed charge coverage ratio covenants include lower operating income, higher current tax expenses for which we have not adequately reserved, higher cash restructuring costs, higher interest expense due to higher debt or floating interest rates and higher capital spending. There are no other financial covenants in either agreement the Company is required to meet on an ongoing basis.

Events of Default. The term loan and the revolving credit facility each contain customary events of default, including payment failures; failure to comply with covenants; failure to satisfy other obligations under the credit agreements or related documents; defaults in respect of other indebtedness; bankruptcy, insolvency and inability to pay debts when due; 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. The cross-default provisions for the term loan and the revolving credit facility apply if a default occurs on indebtedness in excess of $25.0 million and the applicable grace period in respect of the indebtedness has expired, such that the lenders of, or trustee for, the defaulted indebtedness have the right to accelerate. If an event of default occurs, under either the term loan or the revolving credit facility, the Company’s lenders may terminate their commitments, declare immediately payable the term loan and all borrowings under each of the credit facilities and foreclose on the collateral, including (in the case of the term loan) the Company’s trademarks.

Organizational Changes

On September 10, 2003, the Company announced a reorganization of its U.S. business to further reduce the time it takes from initial product concept to placement of the product on the retailer’s shelf and to reduce costs. In connection with these efforts, the Company displaced approximately 295 salaried employees in various U.S. locations in the fourth quarter of 2003. The Company expects to displace an additional 55 salaried employees in connection with this reorganization in 2004.

LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

In addition, the Company’s European business reached an agreement with its European and appropriate national employee councils to improve competitiveness through a similar program intended to streamline work and reduce the time it takes to get new products to market. The Company had displaced approximately 125 employees as of November 30, 2003 and expects to displace an additional 195 employees during 2004.

Enterprise Resource Planning System Developments

In December 2003, the Company decided to suspend indefinitely installation of an enterprise resource planning system. The Company made this decision in order to reduce costs and prioritize work and resource use. The Company expects to make adjustments in its organization, hardware, software licenses and other contractual arrangements reflecting the indefinite suspension of the program.

As a result of these actions, the Company expects to record, in the first quarter of 2004, asset write-downs of $35 million to $45 million primarily for capitalized hardware and software costs recorded as construction in progress, which is a component of property, plant and equipment.

Postretirement Benefits Plan Developments

In February 2004, the Company amended its postretirement benefit plans for all U.S. field employees to change the benefit coverage. As a result, the Company expects to record a curtailment gain of approximately $5.0 million in the first quarter of 2004. Some current and all new hourly employees will not be eligible for retiree medical as a result of these changes. These plan changes also limit the amount the Company will contribute for medical coverage and prescription drug coverage for hourly retirees. An independent valuation of the impact of the plan amendment will be completed in March 2004.

Long-Term Incentive Compensation Plan Developments

As a result of financial performance and results in 2003, the Company has not made any payments under the Leadership Shares Plan in 2004 in respect of the 2003 plan year. The Company does not expect to make any future payments in respect of any outstanding awards under the plan, although some level of payment is possible if future financial performance substantially exceeds current expectations. In this regard, the eight members of the Company’s board of directors who hold awards granted in 2000 (which includes Philip A. Marineau and Robert D. Haas) have agreed that, in their case, any amounts that may become payable in respect of the 2000 grant will not be paid in full in February 2004 as provided under the plan but will instead vest and be paid in equal installments at the end of 2004, 2005 and 2006 and will be payable only if the Company is in compliance with the financial covenants of its credit agreements. The Company also determined that it will not make any additional awards under the Leadership Shares Plan in 2004 or thereafter.

In February 2004, the Company established a new long-term incentive plan for its management team. The Company has set a target amount for each participant based on job level. The plan includes both performance and retention elements. The Company’s executive officers and most of its directors are eligible to participate in the new plan.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report.

Recent Developments

Form 8-K Filing of October 10, 2003

On October 9, 2003, we issued a press release and, on the next day, filed a Form 12b-25 with the Securities and Exchange Commission stating that we would not be able to file our third quarter Form 10-Q on a timely basis, and that we would be restating our financial statements for 2001. The press release and Form 12b-25 also amended financial information previously included in our fiscal year 2001 financial statements and in press releases issued on September 10, 2003 and September 30, 2003 announcing our results for the third quarter of 2003. On October 10 2003, we voluntarily furnished on Form 8-K the following sections from the draft Form 10-Q for the quarter ended August 24, 2003. Item 1—“Financial Statements (unaudited);” Item 2—“Management’s Discussion and Analysis of Financial Condition and Results of Operations;” and Item 3—“Quantitative and Qualitative Disclosure about Market Risk.” As we discuss below, this Form 10-Q describes several developments since we filed our Current Report on Form 8-K on October 10, 2003, and includes revised financial information for the three and nine months ended August 24, 2003 and August 25, 2002.

Retention of Alvarez & Marsal, Inc.

In December 2003, we retained Alvarez & Marsal, Inc. to work with our board of directors and leadership team in identifying additional actions to accelerate our financial turnaround and help us achieve our objectives. We appointed managing directors of Alvarez & Marsal, Inc. as senior advisor to our chief executive officer and as chief financial officer. Alvarez & Marsal, Inc. is now engaged in an analysis of our business, operations, capital structure, financial condition and short and long-term prospects. We expect Alvarez & Marsal, Inc. to complete their assessment in April 2004. Alvarez & Marsal, Inc. also is assisting us in identifying potential cost reduction, product line rationalization, operational, working capital and revenue growth opportunities.

Restatement of 2002 and First and Second Quarter 2003 Financial Statements

As we engaged in the reaudit of the 2001 financial statements noted above, we identified additional errors and determined that certain other adjustments to the 2001 statements would also affect our financial statements for subsequent periods. We also determined that errors were made in these financial statements that were independent of the 2001 restatement items. We therefore decided that it would be appropriate to restate our 2002 financial statements and to restate the financial information we previously reported for the first and second quarters of 2003. These restatements result in changes in our 2003 and 2002 three and nine month results from those previously furnished in our Current Report on Form 8-K filed on October 10, 2003.

Except as otherwise clearly stated, all financial information contained in this Quarterly Report on Form 10-Q reflects the 2001, 2002 and 2003 first and second quarter restatements. For more information about the restatements, see Note 2: Restatement of 2002 and 2001 Financial Statements; “Financial Statement Impact” and “Accounting and Related Matters” below; and see our Annual Report on Form 10-K for the year ended November 30, 2003, as filed with the SEC on March 1, 2004.

Valuation Allowance

Background. On November 13, 2003, we issued revised financial guidance for the full year 2003, in which we lowered our 2003 expectations concerning net sales, gross margin and operating margin. At that time, we also noted that we were evaluating our 2004 plan in light of current business performance and difficult market conditions. In mid-December 2003, we completed initial revisions to our 2004 plan, taking into account continued business deterioration that caused us to revise our 2003 financial guidance. In January 2004, we

concluded that we should use a revised forecast that takes into account recent performance, including the continued business deterioration but assumes no changes over the forecast period from current performance levels including any revenue growth or any cost reduction or other performance improvement actions we may take as a result of our work with Alvarez & Marsal, Inc., as the impact of any such actions is not presently determinable. In short, we assumed flat business performance into the future. As a result of our review, we recorded a valuation allowance as described below.

Based on our revised long-term forecast described above, we believe that it is more likely than not that we will not be able to fully utilize all of our foreign tax credits, state and foreign net operating losses, other foreign deferred tax assets and alternative minimum tax credits in the foreseeable future. As a result, during the year ended November 30, 2003, we recorded increases in our valuation allowance against certain of our deferred tax assets as follows:

•

a $166.0 million valuation allowance with respect to our future foreign tax credits related to our unremitted non-U.S. earnings;

•

a $49.1 million additional valuation allowance with respect to our foreign net operating loss carryforwards;

•

a $33.6 million additional valuation allowance with respect to our deferred tax assets for alternative minimum tax credits and state net operating loss carryforwards;

•

a $25.9 million valuation allowance with respect to our foreign tax credit carryforwards that must be utilized before the five year carryforward period expires; and

•

a $7.9 million valuation allowance with respect to foreign deferred tax assets.

The total increase in the valuation allowance during the year ended November 30, 2003, was $282.4 million.

The valuation allowance increase and total expense of $186.2 million has been provided for the nine months ended August 24, 2003 using estimates for the annual effective rate.

The recording of a valuation allowance affects tax and other items on both our Consolidated Balance Sheets and Consolidated Statements of Operations. On the balance sheet, the valuation allowance constitutes an adjustment to the deferred tax assets to reduce them to an amount we believe is more likely than not to be realized in the future. On the statement of operations, the valuation allowance results in an increase in income tax expense. These changes, in turn, affected other items in our financial statements as discussed below in “Results of Operations.”

Future Changes in Valuation Allowance. We cannot provide assurance that our future business performance or plans will enable us to conclude that we will be able to fully utilize our remaining foreign tax credits before they expire or utilize our domestic and foreign net operating losses in the foreseeable future. Moreover, if our business or expectations decline further, we may be required to record additional valuation allowances in future periods. On the other hand, improvements in our business performance, or enactment of legislation in Congress that would extend the period for which foreign tax credits may be carried forward and used, may in the future require us to record a reversal of all or a portion of the valuation allowance because that may change our assessment of our ability to use our foreign tax credits and net operating loss carryforwards.

Tax Payment Impact. Our recording the valuation allowance is not due to any payment of additional taxes in the third quarter or from any expectation of increased taxes payable in connection with pending Internal Revenue Service audits of our tax returns. Rather, the valuation allowance results from our determination that, based on our revised long-term forecast discussed above, we do not expect to generate the required level of taxable income in future periods to be able to utilize all of the available tax credits before they expire and net operating loss carryforwards previously reflected in the deferred tax assets item on our balance sheet.

Long-Term Incentive Compensation Plan Developments

Our performance in 2003 and our current plan for 2004 affect computations under our long-term incentive compensation plan. In addition, the change in income tax expense arising from the valuation allowance affects the computation. As a result of these factors, we reversed $129.1 million and $139.3 million in long-term compensation expense for the three months and nine months ended August 24, 2003, respectively.

Financial Statement Impact

The restatements, the long-term compensation expense reversal described above and other business developments and new data since the end of our third quarter result in changes in our unaudited financial statements as of and for the three and nine months ended August 24, 2003 and August 25, 2002 from those furnished in our Current Report on Form 8-K filed with the Securities and Exchange Commission on October 10, 2003. Under generally accepted accounting principles, we are required to reflect these developments and data in our third quarter financial statements, rather than in our fourth quarter financial statements, because our third quarter statements had not been finalized at the time the new information became available. To facilitate review of those changes, the following presents our Consolidated Balance Sheets and Consolidated Statement of Operations as furnished in the Current Report on Form 8-K filed on October 10, 2003 and as contained in this Form 10-Q.

As shown below, as a result of the changes:

•

our marketing, general and administrative expense for the three months ended August 24, 2003 decreased by 32.2% to $214.3 million from $316.3 million reported in our Current Report on Form 8-K filed on October 10, 2003;

•

our operating income for the period increased by 94.6% to $190.6 million from the $97.9 million amount as previously furnished;

•

we recorded a net loss for the three month period of $(4.3) million compared to net income of $21.8 million as previously furnished; and

•

our current and non-current deferred tax assets decreased by 19.0% to $708.0 million from $873.8 million as previously furnished.

For additional information concerning the restatements, see Note 2 to the Consolidated Financial Statements and see Item 7—“Management’s Discussion and Analysis of our Financial Condition and Results of Operations—Restatements of Financial Information” in our Annual Report on Form 10-K for the year ended November 30, 2003, filed with the Securities and Exchange Commission on March 1, 2004.

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

(Unaudited)


	August 24, 2003
	As Furnished in Form 8-K on October 10, 2003			As Filed in this Form 10-Q
ASSETS
Current Assets:
Cash and cash equivalents	$	50,677		$	50,677
Restricted cash		23,427			23,427
Trade receivables, net		601,225			594,652
Inventories:
Raw materials		63,801			65,301
Work-in-process		58,204			58,204
Finished goods		682,586			675,310

Total inventories		804,591			798,815

Deferred tax assets		295,425			74,010
Other current assets		132,545			120,832

Total current assets		1,907,890			1,662,413
Property, plant and equipment, net		491,044			481,470
Goodwill		199,905			199,905
Other intangible assets		43,644			44,932
Non-current deferred tax assets		578,358			633,940
Other assets		86,450			85,162

Total Assets	$	3,307,291		$	3,107,822

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
Current maturities of long-term debt and short-term borrowings	$	39,588		$	39,588
Accounts payable		300,377			300,377
Restructuring reserves		20,325			9,452
Accrued liabilities		212,014			212,014
Accrued salaries, wages and employee benefits		279,266			206,626
Accrued taxes		10,027			16,700

Total current liabilities		861,597			784,757
Long-term debt, less current maturities		2,327,412			2,327,412
Postretirement medical benefits		551,700			551,700
Pension liability		—			223,232
Long-term employee related benefits		436,672			169,774
Long-term tax liabilities		109,821			128,142
Other long-term liabilities		35,001			35,001
Minority interest		21,378			21,378

Total liabilities		4,343,581			4,241,396

Stockholders’ Equity (Deficit):
Common stock—$.01 par value; 270,000,000 shares authorized; 37,278,238 shares issued and outstanding .		373			373
Additional paid-in capital		88,808			88,808
Accumulated deficit		(1,038,357	)		(1,139,695	)
Accumulated other comprehensive (loss)		(87,114	)		(83,060	)

Total stockholders’ deficit		(1,036,290	)		(1,133,573	)

Total Liabilities and Stockholders’ Equity (Deficit)	$	3,307,291		$	3,107,822

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands)

(Unaudited)


	Three Months Ended August 24, 2003
	As Furnished in Form 8-K on October 10, 2003			As Filed in this Form 10-Q
Net sales	$	1,081,755		$	1,083,748
Cost of goods sold		677,854			686,487

Gross profit		403,901			397,261
Marketing, general and administrative expenses		316,261			214,345
Other operating (income)		(10,280	)		(10,280	)
Restructuring charges, net of reversals		—			2,610

Operating income		97,920			190,586
Interest expense		62,524			62,524
Other (income) expense, net		(9,342	)		(3,125	)

Income before taxes		44,738			131,187
Income tax expense		22,907			135,500

Net income (loss)	$	21,831		$	(4,313	)


	Nine Months Ended August 24, 2003
	As Furnished in Form 8-K on October 10, 2003			As Filed in this Form 10-Q
Net sales	$	2,886,874		$	2,892,803
Cost of goods sold		1,738,976			1,742,194

Gross profit		1,147,898			1,150,609
Marketing, general and administrative expenses		983,193			864,505
Other operating (income)		(27,348	)		(27,348	)
Restructuring charges, net of reversals		(9,719	)		(5,776	)

Operating income		201,772			319,228
Interest expense		185,550			185,549
Other (income) expense, net		33,562			51,673

Income (loss) before taxes		(17,340	)		82,006
Income tax expense (benefit)		(1,304	)		186,200

Net loss	$	(16,036	)	$	(104,194	)

Accounting and Related Matters

Accounting Errors; Third Quarter Financial Statements; Restatement of 2001 Financial Statements. As noted above, on October 9, 2003, we issued a press release and, on the next day, filed a Form 12b-25 with the Securities and Exchange Commission stating that we would not be able to file our third quarter Form 10-Q on a timely basis and amending financial information previously included in our fiscal year 2001 financial statements and in press releases issued on September 10, 2003 and September 30, 2003 announcing our results for the third quarter of 2003. We also said that we would be restating our financial statements for 2001.

Restatement of 2001 Financial Statements. Earlier in 2003, we determined that we had reported incorrectly on tax returns for 1998 and 1999 on the disposition of certain fixed assets, primarily a double deduction for losses related to various plant closures. These reporting errors on our tax returns did not affect our results of operations for fiscal years 1998 through 2000. However, these errors did impact our financial statements for 2001 because the deferred tax liabilities for these errors were eliminated and taken into income through a 2001 reconciliation project undertaken while we were still unaware of these errors. In preparing our third quarter financial results described in our September 10 and September 30, 2003 press releases, we reflected the tax effect of these errors as an adjustment to the full-year effective tax rate for 2003, in effect treating them as a change in accounting estimate that would be recorded in the third and fourth quarters of 2003. Thereafter, we determined that the appropriate accounting treatment for these errors is to treat them as an accounting error in 2001, the year in which the deferred tax liabilities associated with these 1998 and 1999 reporting errors were eliminated, and to restate our fiscal year 2001 financial statements.

Audit Committee Review. Our Audit Committee has completed a review concerning these reporting errors on our 1998 and 1999 tax returns, their impact on our fiscal year 2001 financial statements, and the circumstances resulting in the release on September 10 and September 30, 2003 of financial information that contained the errors described above. The Audit Committee retained independent counsel, Simpson Thacher & Bartlett LLP, to assist in the review. An independent accounting firm was retained by Simpson Thacher & Bartlett LLP to consult on specified accounting issues.

The Audit Committee found no evidence of tax or other fraud, or of other wrongdoing by our personnel. The Audit Committee also did not find evidence that information concerning these reporting errors was withheld from senior management or from our independent auditors. The Audit Committee determined that the reporting errors in the 1998 and 1999 tax returns were the result of human errors. The elimination of the deferred tax liabilities associated with these errors in the 2001 reconciliation project, which resulted in these errors having an impact on the results of operations for 2001, was done without knowledge that these errors existed. The incorrect accounting determination reflected in the September 10 and 30 press releases was the result of human error in forming a judgment on the accounting issue for purposes of the third quarter financial statements and inadequate communication among senior members of our financial management and senior members of our independent auditors. We believed when we issued our September 10 and 30 press releases that the accounting treatment for these errors reflected in the releases was appropriate. Upon subsequent review of the accounting issues with senior members of our independent auditors and further consultation internally, we decided that the correct accounting treatment is to restate our financial results for 2001.

Restatement of 2002 and First Two Quarters of 2003 Financial Information. As we engaged in the reaudit of the 2001 financial statements, we determined that certain adjustments to the 2001 statements would affect the financial statements for subsequent periods. We also determined that errors were made in these financial statements that were independent of the 2001 restatement items. We therefore decided that it would be appropriate to restate our 2002 financial statements and to restate the financial information we previously reported for the first and second quarters of 2003. Unless otherwise specifically noted, the financial information in this Form 10-Q reflects the 2001 restatement, the 2002 restatement and the 2003 first and second quarter adjustments.

Letter from Independent Auditor. Our independent auditors have been informed of the results of the Audit Committee review, conducted due diligence concerning the scope and methodology of the review, and have accepted the scope, methodology and findings for the purpose of their reviews and audits of our financial statements. After completion of their diligence regarding the Audit Committee review, we received a letter from our independent auditors which reported certain material weaknesses in our internal control systems and made certain recommendations. The letter included the following:

•

our tax returns for the years 1998 and 1999. The letter stated that although our tax department noted the double deduction errors, we incorrectly recorded the effect of such errors as an adjustment to fiscal 2003 third-quarter’s tax rate, thereby treating the correction as a change in estimate rather than a correction of an error to our financial statements for 2001.

•

Our auditors noted that our procedures for evaluating and assessing the accounting impact depend on the various individuals in the process to critically analyze transactions affecting the accounting records for their accounting propriety. In this situation, the auditors said that members of both the tax department and the global controller’s group were aware of the nature of the tax reporting errors, but did not identify the proper accounting treatment. The auditors stated that they consider these oversights to be failures in our controls for preventing or detecting misstatements of accounting information. In relation to this matter, the auditors stated that a material error would have gone undetected in the fiscal year ended November 30, 2003 financial statements.

•

The auditors recommend in the letter that our global controller’s group, the corporate controller and the chief financial officer increase their involvement in the review and disclosure of tax items as they relate to the application of generally accepted accounting principles (GAAP). They also recommended that we appoint individuals in the tax department and controller’s group with sufficient expertise in tax GAAP issues. The auditors noted their understanding that we are currently considering numerous alternatives in both departments that will address those recommendations.

•

The auditors also noted that the conditions are considered in determining the nature, timing, and extent of the audit tests they plan to apply in their audit of the 2003 financial statements, and that their letter does not affect their report dated February 5, 2003 on the November 24, 2002 financial statements.

In response to the errors and the letter from our independent auditor, we have taken actions and are commencing initiatives to address these issues, including:

•

we appointed a chief financial officer with substantial accounting and public company finance experience who has experience working with companies in need of improved accounting processes;

•

we are recruiting individuals with expertise in financial reporting including tax GAAP issues; and

•

our corporate controller’s group and our tax department are focusing on communicating more effectively with an increased concentration on the financial reporting aspects of tax items.

These changes have materially affected, or are reasonably likely to affect, our internal control over financial reporting.

Enterprise Resource Planning System Developments

In December 2003, we decided to suspend indefinitely installation of an enterprise resource planning system. We made this decision in order to reduce costs and prioritize work and resource use. We expect to make adjustments in our organization, hardware, software licenses and other contractual arrangements reflecting the indefinite suspension of the program.

As a result of these actions, we expect to record, in the first quarter of 2004, asset write-downs of $35 million to $45 million primarily for capitalized hardware and software costs recorded as construction in progress, which is a component of property, plant and equipment.

Changes in Executive Officers

President of European Business. On September 1, 2003, Joseph Middleton resigned from his position as Senior Vice President and President, Levi Strauss Europe, Middle East and Africa. Following Mr. Middleton’s departure, R. John Anderson, Senior Vice President and President of our Asia Pacific Division, served as interim president of the European business. On January 27, 2004, we announced that we hired Paul Mason as our new Senior Vice President, Levi Strauss, Europe. Mr. Mason was chief executive officer of Matalan PLC, a discount clothing business and leading U.K. jeans retailer from 2002 to 2003. Prior to that time, he held senior positions

with ASDA Group Limited, a subsidiary of Wal-Mart Stores, Inc., including chief operating officer, retailer director and logistics and human resources director. His appointment became effective February 23, 2004.

Chief Financial Officer. William B. Chiasson resigned from his position as Senior Vice President and Chief Financial Officer effective December 5, 2003. On December 1, 2003, we announced the appointment of James P. Fogarty as our interim chief financial officer. Mr. Fogarty is a managing director with Alvarez & Marsal, Inc. and has been associated with the firm since 1994. During that time he has held a variety of management and advisory roles in several industries, most recently serving as senior vice president and chief financial officer of The Warnaco Group, Inc. until September, 2003. As part of his work with Alvarez & Marsal, Inc., Mr. Fogarty has held management positions with Bridge Information Systems, DDS Partners LLC, AM Cosmetics, Inc. and Color Tile, Inc. In addition, Mr. Fogarty provided restructuring advisory services to Fruehauf Trailer and Homeland Stores, Inc. Mr. Fogarty will remain an employee of Alvarez & Marsal, Inc.

Senior Advisor. On December 1, 2003, we announced the appointment of Antonio Alvarez as our Senior Advisor to the President and Chief Executive Officer. Mr. Alvarez is a co-founding managing director of Alvarez & Marsal, Inc. Mr. Alvarez has served as a restructuring officer, consultant or operating officer of numerous troubled companies, including serving as president and chief executive officer of The Warnaco Group, Inc. from November 2001 until April 2003, and as chief restructuring officer of The Warnaco Group, Inc. from June 2001 to November 2001. Mr. Alvarez is currently a director of American Household, Inc. Mr. Alvarez will remain an employee of Alvarez & Marsal, Inc.

Worldwide Supply Chain. Effective February 29, 2004, Paul Harrington left employment with us as our Senior Vice President, Worldwide Supply Chain. He is being replaced on an interim basis by Mr. Anderson.

Financing Developments and Liquidity

As we announced on September 30, 2003, we entered on September 29, 2003 into a new $500.0 million senior secured term loan agreement and a new $650.0 million senior secured revolving credit facility agreement. The new agreements replaced our January 2003 senior secured credit facility and our U.S. receivables securitization transaction completed in July 2001. More information about our new agreements is contained in “Financial Condition” below.

As of February 29, 2004, our availability under our domestic asset-based revolving credit facility was approximately $455 million and we had no outstanding loans. After taking into account usage of availability for other credit-related instruments such as documentary and standby letters of credit, our unused availability was approximately $269 million. In addition, we had highly liquid short-term investments in the U.S. totaling approximately $97 million, leaving us with total U.S. liquidity (availability and liquid short term investments) of $366.0 million.

Litigation Developments

For information about purported bondholder securities class actions filed against us on December 12, 2003 and on February 20, 2004, and about the dismissal on December 18, 2003, of a class action filed against us relating to garment contract manufacturer practices in Saipan, see Item 1 of Part II below.

Results of Operations

The following table sets forth, for the periods indicated, items in our Consolidated Statements of Operations, expressed as a percentage of net sales (amounts may not total due to rounding).


	Three Months Ended				Nine Months Ended
	August 24, 2003		August 25, 2002		August 24, 2003		August 25, 2002
			(Restated)				(Restated)
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of goods sold	63.3		58.9		60.2		58.9

Gross profit	36.7		41.1		39.8		41.1
Marketing, general and administrative expenses	19.8		33.6		29.9		33.7
Other operating (income)	(0.9	)	(0.6	)	(0.9	)	(0.7	)
Restructuring charges, net of reversals	0.2		(1.6	)	(0.2	)	4.0

Operating income	17.6		9.6		11.0		4.1
Interest expense	5.8		4.8		6.4		4.8
Other (income) expense, net	(0.3	)	2.6		1.8		1.0

Income (loss) before taxes	12.1		2.3		2.8		(1.7	)
Income tax expense (benefit)	12.5		1.6		6.4		(1.2	)

Net income (loss)	(0.4	)%	0.6	%	(3.6	)%	(0.5	)%


	Three Months Ended				Nine Months Ended
	August 24, 2003		August 25, 2002		August 24, 2003		August 25, 2002
			(Restated)				(Restated)
NET SALES SEGMENT DATA:
Geographic
Americas	69.1	%	67.1	%	63.0	%	65.3	%
Europe	22.4	%	25.0	%	26.9	%	26.2	%
Asia Pacific	8.5	%	7.9	%	10.1	%	8.5	%

Consolidated net sales. Net sales for the three months ended August 24, 2003 increased 6.3% to $1,083.7 million, as compared to $1,019.7 million for the same period in 2002. Net sales for the nine months ended August 24, 2003 increased 0.4% to $2,892.8 million, as compared to $2,882.5 million for the same period in 2002. If currency exchange rates were unchanged from the prior year periods, net sales would have increased approximately 2.6% for the three months ended August 24, 2003 and decreased approximately 4.2% for the nine months ended August 24, 2003. The primary factors underlying the increase in constant currency sales for the three months ended August 24, 2003 were the launch of our Levi Strauss Signature^™ brand into 3,000 Wal-Mart Stores, Inc. in the United States and the continuing strength of our Asia Pacific business. This increase was offset by weakness in our European business and lower sales of our Levi’s^® and Dockers^® products in the U.S. The decrease in constant currency sales for the nine months ended August 24, 2003 reflected the weak retail climate and deflationary pressures in most apparel markets in which we operate.

Americas net sales. In the Americas, net sales for the three months ended August 24, 2003 increased 9.4% to $748.6 million, as compared to $684.0 million for the same period in 2002. Net sales for the nine months ended August 24, 2003 decreased 3.1% to $1,823.3 million, as compared to $1,882.0 million for the same period in 2002. If currency exchange rates were unchanged from 2002, net sales would have increased approximately 9.3% for the three months ended August 24, 2003 and decreased approximately 2.7% for the nine months ended August 24, 2003 compared to the same periods in 2002.

The increase in Americas net sales for the three months ended August 24, 2003 was due to the launch in July 2003 of our Levi Strauss Signature^™ brand into Wal-Mart stores in the U.S. Excluding the launch of our new Levi Strauss Signature^™ brand, net sales for the three months ended August 24, 2003 would have declined.

We believe the overall decline in Americas net sales for the nine months ended August 24, 2003 compared to the same period in 2002 can be attributed to a number of factors, including the following:

•

soft market conditions, particularly in men’s apparel, which accounts for a large part of our business;

•

depressed retail sales in department and chain stores where our Levi’s^® and Dockers^® brands are primarily distributed;

•

inventory reductions by retailers in response to poor overall retail sales and in anticipation of the potential impact of the Levi Strauss Signature^™ launch;

•

wholesale price reductions and higher sales allowances that we offered to our retail customers to improve their margins and help both of us remain competitive in an increasingly deflationary apparel environment; and

•

sales of our excess seasonal and other inventory at reduced prices.

We continue to focus on providing innovative products to consumers in every channel of distribution. We have introduced a number of new products during the fall season, including Levi’s^® brand corduroys with new styles, an improved fabric feel and performance, and a wide range of new colors. We extended our popular Dockers^® Go Khaki^® with Stain Defender^™ finish to our women’s khaki lines. We also introduced our Dockers^® Individual Fit^™ waistband technology, featuring an expandable waistband, into a number of our men’s and women’s products.

Europe net sales. In Europe, net sales for the three months ended August 24, 2003 decreased 4.6% to $243.2 million, as compared to $254.9 million for the same period in 2002. Net sales for the nine months ended August 24, 2003 increased 2.9% to $778.7 million, as compared to $756.9 million for the same period in 2002. On a constant currency basis, net sales would have decreased by approximately 17.6% and 13.1% for the three and nine months ended August 24, 2003, respectively, compared to the same periods in 2002.

Net sales in Europe were affected by more severe market conditions than those prevailing in the United States. These market conditions included weak economies, low consumer confidence, price deflation in apparel and a stagnant retail environment. Our core replenishment business in the region suffered, particularly replenishment of 501^® jeans products, in part due to retailers adopting more conservative purchasing patterns to reduce high inventory levels. A less favorable product mix also contributed to our constant currency sales decrease in the third quarter of 2003, reflecting in part lower sales of 501^® jeans and sales of lower priced Levi’s^® 580^™ jeans and tops. Finally, we believe actions we took in Europe to move closeout and slow moving inventory, and unauthorized sales of our products, also adversely affected our sales in the third quarter of 2003.

In an effort to reinvigorate the European business, we are introducing product and marketing initiatives to drive demand. For example, in the casual pant segment we introduced the Dockers^® S-Fit^™ pant, featuring water repellent properties. We introduced the Levi Strauss Signature^™ brand in Europe in early 2004. In addition, in 2004 we will introduce an updated 501^® jean in Europe supported by a substantial marketing campaign, including television and print advertising and point of sale material, in an effort to appeal to a broader consumer group. We are also taking actions to reduce the presence of our products in unauthorized retail channels.

Asia Pacific net sales. In our Asia Pacific region, net sales for the three months ended August 24, 2003 increased 13.8% to $92.0 million, as compared to $80.8 million for the same period in 2002. Net sales for the nine months ended August 24, 2003 increased 19.4% to $290.8 million, as compared to $243.6 million for the same period in 2002. If exchange rates were unchanged from the prior year periods, net sales would have increased approximately 9.7% and 11.1% for the three and nine months ended August 24, 2003, respectively.

Sales growth reflected the impact of our new products, including the super premium priced Red Loop^™ product introduced in August and improved retail presentation. In Japan, which accounted for approximately 55% of our business in the Asia Pacific region for the first nine months of 2003, net sales for the three and nine

months ended August 24, 2003 increased approximately 12% and 21%, respectively, on a constant currency basis compared to the same periods in 2002. The positive results in Japan also reflected the opening of additional independently owned retail stores dedicated to the Levi’s^® brand. Levi’s^® Type 1^™ lines and our Red Tab^™ products, including a revitalized 501^® jean product, performed well in the region.

Gross profit. Gross profit for the three months ended August 24, 2003 was $397.3 million compared with $419.1 million for the same period in 2002. Gross profit for the nine months ended August 24, 2003 was $1,150.6 million compared with $1,184.9 million for the same period in 2002. Gross profit as a percentage of net sales, or gross margin, for the three months ended August 24, 2003 decreased to 36.7% compared to 41.1% for the same period in 2002. Gross margin for the nine months ended August 24, 2003 decreased to 39.8%, compared to 41.1% for the same period in 2002.

Factors that reduced our gross margin included the following:

•

reduced wholesale prices beginning in mid-2003 on our U.S. Levi’s^® and Dockers^® products in order to provide better margins for our retailers;

•

increased sales allowances and incentives in the U.S. primarily to facilitate transitions to new Levi’s^® and Dockers^® products and to clear seasonal and poorly-performing products, including Levi’s^® Type 1^™ jeans;

•

sales in the U.S. of our lower-priced products which generated lower gross margins than our other brands;

•

investments in fit, finish and fabric changes and in innovations in our Levi’s^® and Dockers^® products; and

•

lower sales of our 501^® jeans and other core products in Europe and increased sales of lower margin Levi’s^® Type 1^™ jeans and Levi’s^® 580^™ jeans.

Cost savings from our 2002 plant closures partially offset the impact of these factors.

Gross profit in the three and nine months ended August 25, 2002 was adversely affected by expenses of $3.8 million and $33.9 million, respectively, associated with plant closures in the U.S. and Scotland. Most of these expenses were for workers’ compensation and pension enhancements in the U.S.

Unlike in prior periods, gross profit in the 2003 period does not include postretirement medical benefits related to manufacturing employees, as we have closed most of our manufacturing plants in the U.S. These costs, totaling approximately $10.0 million and $30.0 million for the three and nine months ended August 24, 2003, respectively, are now reflected in marketing, general and administrative expenses. For the three and nine months ended August 25, 2003, the translation impact of stronger foreign currencies had an adverse impact on gross profit.

Taking all of the above factors into account, gross margins for the three and nine months ended August 24, 2003, were lower compared to the same periods last year. We believe that intense price deflation worldwide has compounded the downward pressure on our gross margins. The average out-the-door selling price for jeans and causal pants continues to decline. We took wholesale price reductions earlier this year to remain competitive and have taken additional actions to move inventory and support retailers’ margins. These steps directly affect our gross margin.

Cost of goods sold is primarily comprised of cost of materials, labor and manufacturing overhead, and also includes the cost of inbound freight, internal transfers, and receiving and inspection at manufacturing facilities as these costs vary with product volume. We include substantially all the costs related to receiving and inspection at

distribution centers, warehousing and other activities associated with our distribution network in marketing, general and administrative expenses. Our gross margins may not be comparable to those of other companies in our industry, since some companies may include costs related to their distribution network in cost of goods sold.

Marketing, general and administrative expenses. Marketing, general and administrative expenses for the three months ended August 24, 2003 decreased 37.4% to $214.3 million compared to $342.6 million for the same period in 2002, and for the nine months ended August 24, 2003 decreased 11.1% to $864.5 million compared to $972.0 million for the same period in 2002. For the three and nine months ended August 24, 2003, marketing, general and administrative expenses benefited from the translation impact of stronger foreign currencies. As a percentage of sales, these expenses decreased to 19.8% for the three months ended August 24, 2003 compared to 33.6% for the same period in 2002, and decreased to 29.9% for the nine months ended August 24, 2003 compared to 33.7% for the same period last year.

A number of factors caused the decline in marketing, general and administrative expenses for the three and nine months ended August 24, 2003 compared to the same period in 2002:

•

We had lower long-term and annual incentive compensation expenses. Long-term incentive compensation expenses, including reversals, were approximately $129.1 million and $139.3 million for the three and nine months ended August 24, 2003, respectively. The reversals reflect our performance in 2003, our current expectations for 2004 and the impact of income tax expense and other items under our long-term incentive compensation plan. For the three and nine months ended August 24, 2003, our annual incentive compensation expense was $2.0 million for both periods. For the three and nine months ended August 25, 2002, our net long-term incentive compensation expense was $20.0 million and $60.0 million, and our annual incentive compensation expense was $12.8 million and $30.3 million, respectively.

•

We had a curtailment gain in the third quarter of 2003 of approximately $11.9 million due to an amendment to one of our postretirement medial plans and a displacement of salaried employees in our U.S. business. The amendment affects both employees and retirees, including changing eligibility for the plan and changing our contribution levels for medical and prescription drug coverage.

•

Our amortization expense for the nine months ended August 24, 2003 was approximately $8.0 million lower than in the same period in 2002 due to our adoption in 2003 of SFAS 142, “Goodwill and Other Intangible Assets.”

•

Our advertising expense in the three months ended August 24, 2003 decreased 7.9% to $70.4 million, compared to $76.4 million for the same period in 2002. Advertising expense for the nine months ended August 24, 2003 increased 6.5% to $225.8 million, compared to $212.1 million for the same period in 2002. Advertising expense in the three and nine months ended August 24, 2003 as a percentage of sales was 6.5% and 7.8%, respectively, (7.5% and 8.2%, respectively, of net sales excluding sales of Levi Strauss Signature^™ products), compared to 7.5% and 7.4%, respectively, in the same periods in 2002. The decrease for the three months ended August 24, 2003 was primarily due to the timing of certain advertising campaigns.

These decreases were offset by expenses associated with our launch of the Levi Strauss Signature^™ brand and inclusion in marketing, general and administrative expenses of postretirement health benefit costs relating to retired manufacturing employees as discussed above under “Gross profit.”

Marketing, general and administrative expenses also include distribution costs, such as costs related to receiving and inspection at distribution centers, warehousing, shipping, handling and certain other activities associated with our distribution network. These expenses for the three and nine months ended August 24, 2003 were $55.3 million and $152.6 million, respectively, compared to $45.2 million and $133.0 million for the same periods last year. The increases were primarily due to expenses associated with our entry into the mass channel.

Other operating income. Other operating income includes royalty income we generate through licensing our trademarks to accessory, country and other licensees. Licensing income for the three months ended August

24, 2003 increased 70.9% to $10.3 million compared to $6.0 million for the same period in 2002. Licensing income for the nine months ended August 24, 2003 increased 32.5% to $27.3 million compared to $20.6 million for the same period in 2002. The increases reflect a higher number of licensees, higher sales of licensed accessories such as men’s leather accessories, hosiery, footwear and sleepwear and the introduction of licensed bed and bath products.

Restructuring charges, net of reversals. For the three and nine months ended August 24, 2003, we recorded restructuring charges, net of reversals of $2.6 million and $(5.8) million, respectively, for asset write-offs and reversals associated with previously recorded restructuring charges relating to prior years’ reorganization activities.

For the three and nine months ended August 25, 2002, we recorded restructuring charges, net of reversals of $(15.8) million and $115.4 million. The charges were primarily associated with the closure of manufacturing plants and the reversals were associated with previously recorded restructuring charges relating to prior years’ reorganization activities.

Operating income. Operating income for the three months ended August 24, 2003 was $190.6 million compared to $98.4 million for the same period in 2002. Operating income for the nine months ended August 24, 2003 was $319.2 million compared to $118.1 million for the same period in 2002. Operating income as a percentage of sales, or operating margin, was 17.6% for the three months ended August 24, 2003 compared to 9.6% for the same period last year, and 11.0% for the nine months ended August 24, 2003 compared to 4.1% for the same period last year.

The increase in operating income for the three months ended August 24, 2003 compared to the same period last year was primarily attributable to lower marketing, general and administrative expenses and higher other operating income, partially offset by lower gross margin. The increase in operating income for the nine months ended August 24, 2003 compared to the same period last year was primarily attributable to the reversal of long-term compensation expense. As described above, the lower marketing, general and administrative expenses reflect our business performance in 2003, our current plan for 2004 and the impact of the valuation allowance on computations under our long-term incentive compensation plan.

In addition, for the three months ended August 24, 2003, operating income included restructuring charges, net of reversals of $2.6 million for asset write-offs and reversals associated with previously recorded restructuring charges relating to prior years’ reorganization activities. For the nine months ended August 24, 2003, operating income included restructuring charges, net of reversals of $(5.8) million for reversals associated with previously recorded restructuring charges relating to prior years’ reorganization activities. For the three and nine months ended August 25, 2002, operating income included restructuring charges, net of reversals of $(15.8) million and $115.4 million, respectively, and restructuring-related expenses of $3.8 million and $33.9 million, respectively, primarily associated with the closure of manufacturing plants in 2002.

Interest expense. Interest expense for the three months ended August 24, 2003 increased 29.0% to $62.5 million compared to $48.5 million for the same period in 2002. Interest expense for the nine months ended August 24, 2003 increased 33.5% to $185.6 million compared to $139.0 million for the same period in 2002. The higher interest expense was primarily due to higher average debt balances and higher effective interest rates in 2003. The increase in the higher average debt balances of $434.3 million was due primarily to tax settlement and incentive compensation payments in early 2003 and higher inventories.

The weighted average cost of borrowings for the three months ended August 24, 2003 and August 25, 2002 was 9.92% and 9.11%, respectively. The weighted average cost of borrowings for the nine months ended August 24, 2003 and August 25, 2002 was 9.94% and 9.06%, respectively. The increases in the weighted average interest rates reflect the issuance during the first quarter of 2003 of $575.0 million of senior notes due 2012 at an interest

rate of 12.25%. The weighted average interest rate on average borrowings outstanding excludes interest payable to participants under unfunded deferred compensation plans and other items.

Other (income) expense, net. The following table summarizes significant components of other (income) expense, net:


	Three Months Ended						Nine Months Ended
	August 24, 2003			August 25, 2002			August 24, 2003			August 25, 2002
($000s)				(Restated)						(Restated)
	(Dollars in Thousands)
Foreign exchange management contracts	$	(7,895	)	$	19,997		$	49,420		$	41,148
Interest rate management contracts		—			—			—			(2,266	)
Foreign currency transaction (gains) losses		6,595			17,640			(6,040	)		6,217
Interest income		(1,567	)		(5,589	)		(4,227	)		(6,647	)
Gains on disposal of assets		(384	)		(400	)		(879	)		(1,171	)
Loss on early extinguishment of debt		831			—			15,226			—
Other		(705	)		(4,832	)		(1,827	)		(8,743	)

Total	$	(3,125	)	$	26,816		$	51,673		$	28,538

We use foreign exchange management contracts, such as forward, swap and option contracts, to manage foreign currency exposures. These derivative instruments are recorded at fair value and the changes in fair value are recorded in other (income) expense, net. Foreign currency transactions are transactions denominated in a currency other than the entity’s functional currency. At the date the foreign currency transaction is recognized, each asset, liability, revenue, expense, gain or loss arising from the transaction is measured and recorded in the functional currency of the recording entity using the exchange rate in effect at that date. At each balance sheet date for each entity, recorded balances denominated in a foreign currency are adjusted, or remeasured, to reflect the current exchange rate. The changes in the recorded balances caused by remeasurement at the exchange rate are recorded in other (income) expense, net.

The decrease in interest income for the three and nine months ended August 24, 2003 was primarily related to the receipt in the third quarter of 2002 of interest income on a refund arising from a legal settlement associated with custom duties in Mexico. The net gain on disposal of assets for the three and nine months ended August 24, 2003 relates to the sale of fixed assets associated with our 2002 U.S. plant closures. The loss on early extinguishment of debt for the three and nine months ended August 24, 2003 primarily related to our purchase of $327.3 million in principal amount of our 6.80% notes due November 1, 2003. The loss on early extinguishment of debt for the nine months ended August 24, 2003 also included the write-off of unamortized bank fees associated with the refinancing in January 2003 of our 2001 bank credit facility.

Income tax expense (benefit). Income tax expense was $135.5 million for the three months ended August 24, 2003 compared to $16.7 million for the same period in 2002. Income tax expense was $186.2 million for the nine months ended August 24, 2003 compared to income tax benefit of $35.8 million for the same period in 2002. Income tax expense for the three and nine months ended August 24, 2003 includes a period expense for the valuation allowance of $223.0 million. We recorded a portion of the remaining $59.4 million of the valuation allowance through an adjustment in the annual effective tax rate reflected in the first, second and third quarter tax provision and recorded the balance in the fourth quarter tax provision.

Net income (loss). Net income (loss) for the three months ended August 24, 2003 was $(4.3) million compared to $6.4 million for the same period in 2002. Net loss for the nine months ended August 24, 2003 was $(104.2) million compared to $(13.7) million for the same period in 2002. The impact of the valuation allowance on our income tax expense, together with increased interest expense resulting from higher average debt balances and effective interest rates in 2003, far offset the increase in our operating income, and drove the net loss for the three and nine months ended August 24, 2003 year.

Tax Matters

Internal Revenue Service Examinations. During 2002, we reached a settlement with the IRS on most of the issues in connection with the examination of our income tax returns for the years 1990 through 1995. As a result, we made a net payment of approximately $110.0 million to the IRS in March 2003. Our consolidated U.S. income tax returns for the years 1996 to 1999, and certain open issues relating to earlier years, are presently under examination by the IRS. We expect this examination to be substantially completed during 2004. We cannot provide assurance that we will be able to reach a settlement for 1996 to 1999, and for other open issues, on terms that are acceptable to us. In addition, our income tax returns for other years may also be the subject of future examination by tax authorities. While we believe that we have adequately provided for potential assessments, it is possible that an adverse outcome resulting from any settlement or future examination may lead to a deficiency in our recorded income tax expense and may adversely affect our liquidity.

Valuation Allowance. Our assessment of the realizability of our deferred tax assets reflects estimates of earnings over the foreseeable future. In January 2004, we concluded that we should use a revised forecast that takes into account recent performance, including adverse business developments in October and November 2003, but assumes no changes over the forecast period from current performance levels including any revenue growth or any cost reduction or other performance improvement actions we may take as a result of our work with Alvarez & Marsal, Inc. In short, we assumed flat business performance into the future. As a result of our review, we recorded a valuation allowance as described below.

Our ability to utilize existing foreign tax credit carryforwards and future foreign tax credits on unremitted non-U.S. earnings is dependent on our future taxable income in our U.S. operations. Our ability to utilize alternative minimum tax credits, and foreign and state net operating losses is a function of our expected future operating income in the relevant foreign entities and domestic jurisdictions.

Based on our revised long-term forecast described above, we believe that it is more likely than not that we will not be able to fully utilize all of our foreign tax credits, state and foreign net operating losses and alternative minimum tax credits in the foreseeable future. As a result, during the year ended November 30, 2003, we recorded increases in our valuation allowance against certain of our deferred tax assets as follows:

•

a $166.0 million valuation allowance with respect to our future foreign tax credits related to our unremitted non-U.S. earnings;

•

a $49.1 million additional valuation allowance with respect to our foreign net operating loss carryforwards;

•

a $33.6 million additional valuation allowance with respect to our deferred tax assets for alternative minimum tax credits and state net operating loss carryforwards;

•

a $25.9 million valuation allowance with respect to our foreign tax credit carryforwards that must be utilized before the five-year carryforward period expires; and

•

a $7.9 million valuation allowance with respect to foreign deferred tax assets.

The total increase in the valuation allowance during the year ended November 30, 2003, was $282.4 million.

The valuation allowance increase and total expense of $186.2 million has been provided for the nine months ended August 24, 2003 using estimates for the annual effective rate.

Income tax expense for the three and nine months ended August 24, 2003 includes a period expense for the valuation allowance of $223.0 million. A portion of the remaining $59.4 million of the valuation allowance was recorded through an adjustment in the annual income tax rate reflected in the first, second and third quarter tax provision and recorded in the fourth quarter tax provision.

We cannot provide assurance that our future business performance or plans will enable us to conclude that we will be able to fully utilize our remaining foreign tax credits before they expire or utilize our domestic and

foreign net operating losses in the foreseeable future. Moreover, if our business or expectations decline further, we may be required to record additional valuation allowances in future periods. On the other hand, improvements in our business performance, or enactment of legislation in Congress that would extend the period for which foreign tax credits may be carried forward and used, may in the future require us to record a reversal of all or a portion of the valuation allowance because that may change our assessment of our ability to use our foreign tax credits and net operating loss carryforwards.

Liquidity and Capital Resources

Our principal cash requirements include working capital and payments of interest on our debt. We also expect to have the following additional cash requirements in fiscal year 2004:

•

net cash payments of approximately $140 million resulting from plant closures, organizational changes, indefinite suspension of installation of an enterprise resource planning system and other restructuring activities;

•

net cash payments of approximately $41 million under our postretirement health benefits plans;

•

net cash payments of approximately $20 million as contributions to our pension plans; and

•

net cash payments of approximately $40 for capital expenditures; and

•

net cash payments of approximately $30 million for foreign taxes.

These amounts do not reflect any actions we may take as a result of our work with Alvarez & Marsal, Inc.

We expect our key sources of cash to include earnings from operations and borrowing availability under our senior secured revolving credit facility. We expect working capital improvements, in the form of reduced raw materials and work-in-process inventories, from our shift away from self-manufacturing and cut-make-trim arrangements with contractors to outsourced package sourcing. We believe we will have adequate liquidity in 2004 to operate our business and to meet our cash requirements. We also believe that we will be in compliance with the financial covenants contained in our senior secured term loan and our senior secured revolving credit facility.

Cash and Cash Equivalents as of August 24, 2003

As of August 24, 2003, total cash and cash equivalents was $50.7 million, a $45.8 million decrease from the $96.5 million cash balance reported as of November 24, 2002. The decrease primarily reflected purchases of 6.80% notes due November 2003 that were partially offset by the issuance in the first quarter of 2003 of the 12.25% senior unsecured notes due 2012 and entry into the January 2003 senior secured credit facility.

Debt and Credit Facilities as of August 24, 2003

Debt, net of cash on hand was $2.3 billion as of August 24, 2003. This reflected an increase of $542.4 million since November 24, 2002. The increase in our net debt was due to incentive compensation payments made in the first quarter of 2003, higher inventory levels and payments in settlement of examinations by the Internal Revenue Service of our income tax returns for the years 1990 through 1995. As of August 24, 2003, our January 2003 senior secured credit facility consisted of $365.3 million of term loans and a $375.0 million revolving credit facility, of which $70.0 million of borrowings under the revolving credit facility were outstanding. Total availability under the revolving credit facility was reduced by $145.2 million of letters of credit allocated under the revolving credit facility, yielding a net availability of $159.8 million. Included in the $145.2 million of letters of credit at August 24, 2003 were $120.2 million of stand-by letters of credit with various international banks, of which $64.7 million serve as guarantees by the creditor banks to cover U.S.

workers’ compensation claims. We pay fees on the stand-by letters of credit and borrowings against letters of credit are subject to interest at various rates.

At August 24, 2003, we had unsecured and uncommitted short-term credit lines available totaling $32.8 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.

New Loan Agreements; Liquidity as of February 29, 2004

On September 29, 2003, we entered into a $500.0 million senior secured term loan agreement and a $650.0 million senior secured revolving credit facility that replaced our existing January 2003 senior secured credit facility. These financing agreements are described below under “Financial Condition.” As of February 29, 2004, our availability under our domestic asset-based revolving credit facility was approximately $455 million and we had no outstanding loans. After taking into account usage of availability for other credit-related instruments such as documentary and standby letters of credit, our unused availability was approximately $269 million. In addition, we had highly liquid short-term investments in the U.S. totaling approximately $97 million, leaving us with total U.S. liquidity (availability and liquid short term investments) of approximately $366 million.

Anticipated Restructuring and Benefit Plan Payments

Restructuring Charges. We expect to make net cash payments of approximately $140 million in 2004 in respect of the plant closures, organizational changes, enterprise resource planning system suspension and other restructuring activities described in this Form 10-Q.

Postretirement Health Benefits. We maintain two plans that provide postretirement benefits, principally health care, to qualified U.S. retirees and their qualified dependents. The plans are contributory and contain certain cost-sharing features, such as deductibles and coinsurance. Our policy is to fund postretirement benefits as claims and premiums are paid. We amended these plans in August 2003 and February 2004 to change the benefits coverage for certain employees and retired participants. We expect to make net cash payments of approximately $200 million under these plans in 2004 – 2008, including expected net cash payments of approximately $41 million in 2004. In addition, we expect to record in 2004 a curtailment gain of approximately $17 million and a net credit of $5.0 million. The net credit arises chiefly from the amortization of the unrecognized prior service cost generated as a result of the plan amendment.

Pension Plans. We have numerous noncontributory pension plans covering substantially all of our employees. Our pension plan assets are principally invested in equity securities and fixed income securities. We expect to make pre-tax contributions of approximately $167 million to our pension plans in 2004 – 2008, including expected payments of $20.0 million in 2004. Our plan to make these contributions reflects lower market interest rates in recent years, which have resulted in both an increase in present value of the future pension benefits and a decrease in our return assumptions for pension assets. In addition, our expectations for these future payments reflect our anticipation of adoption by the U.S. Department of Labor of a new mortality table. These expected payments are not in addition to the pension expense recorded for the applicable year and are based on estimates and are subject to change.

Other Cash Obligations and Commitments

We have no material special-purpose entities, off-balance sheet debt obligations or unconditional purchase commitments other than operating lease commitments. We do not have any material long-term raw materials supply agreements. We typically conduct business with our raw material suppliers, garment manufacturing and finishing contractors on an order-by-order basis.

Our total short-term and long-term debt principal payments as of August 24, 2003 and minimum operating lease payments for facilities, office space and equipment as of November 24, 2002 for the next five years and thereafter are as follows:


	Principal Payments as of 08/24/03*		Minimum Operating Lease Payments as of 11/24/02
	(Dollars in Thousands)
Year
2003	$	25,605	$	64,211
2004		149,774		58,375
2005		150,422		55,051
2006		784,945		52,646
2007		—		47,887
Thereafter		1,256,254		189,832

Total	$	2,367,000	$	468,002

*The principal payments included $22.6 million of the outstanding 6.80% notes due November 1, 2003. Under the January 2003 senior secured credit facility, we were required to 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 August 24, 2003, this amount was $23.4 million, which includes $0.8 million of accrued interest, and is separately identified on the balance sheet as “Restricted cash.” The table above does not reflect our new financing agreements entered into on September 29, 2003. These financing agreements are described below under “Financial Condition.”

Cash Used For/Provided By Operating Activities

Cash used for operating activities for the nine months ended August 24, 2003 was $418.4 million, as compared to cash provided by operating activities of $20.0 million for the same period in 2002. The decrease in operating cash flow is attributable primarily to an increase in inventories resulting from the introduction of the Levi Strauss Signature^™ brand and preparation for the fourth quarter sales, which are typically higher than in other quarters. In addition, we made payments in the first quarter of 2003 of approximately $95 million, net of employee deferrals, under our employee incentive compensation plan and $110 million in settlement of examinations by the Internal Revenue Service of our income tax returns for the years 1990 through 1995.

Cash Used For Investing Activities

Cash used for investing activities for the nine months ended August 24, 2003 was $61.7 million compared to cash used for investing activities of $36.6 million during the same period in 2002. Cash used for investing activities for the nine months ended August 24, 2003 resulted primarily from purchases of information systems enhancements and realized losses on net investment hedges. These items were partially offset by proceeds primarily from the sale of assets associated with the U.S. plant closures.

Cash Provided By/Used For Financing Activities

Cash provided by financing activities for the nine months ended August 24, 2003 was $433.0 million, compared to cash used for financing activities of $25.8 million for the same period in 2002. Cash provided by financing activities during the nine months ended August 24, 2003 primarily reflected the issuance of the 12.25% senior unsecured notes due 2012 and the January 2003 senior secured credit facility. These items were partially offset by the maturity and repayment of $350.0 million in principal amount of our 6.80% notes due November 1,

2003, debt issuance costs associated with our first quarter 2003 debt financing transactions, and the retirement of our European receivables securitization financing arrangements and the retirement of an industrial development revenue refunding bond. Under the January 2003 senior secured credit facility, we were required to segregate funds in an amount sufficient to repay the 6.80% notes due November 1, 2003 at maturity (including any interim scheduled interest payments). On November 3, 2003, we repaid the remaining $22.7 million in principal amount plus accrued interest of the 6.80% notes using the segregated funds.

Financial Condition

January 2003 Senior Secured Credit Facility

Our January 2003 senior secured credit facility in place as of August 24, 2003 consisted of a $375.0 million revolving credit facility and a $375.0 million Tranche B term loan facility. As of August 24, 2003, there was $70.0 million outstanding under the January 2003 senior secured credit facility. Total availability as of August 24, 2003 under the January 2003 revolving credit facility was reduced by $145.2 million of letters of credit allocated under the facility, yielding a net availability of $159.8 million. As of August 24, 2003, the principal balance of the Tranche B term loan was $365.3 million. We used the borrowings under the January 2003 senior secured credit facility for working capital and general corporate purposes.

Under the January 2003 senior secured credit facility, the interest rates for the revolving credit facility varied: for Eurodollar Rate Loans and Letters of Credit, from 3.50% to 4.25% over the Eurodollar Rate (as defined in the credit agreement) or, for Base Rate Loans, from 2.50% to 3.25% over the higher of (i) the Citibank base rate or (ii) the Federal Funds rate plus 0.50% (the “Base Rate”), with the exact rate in each case depending upon performance under specified financial criteria. The interest rate for the Tranche B term loan facility was 4.25% over the Eurodollar Rate or 3.25% over the Base Rate.

The January 2003 senior secured credit facility required that we segregate sufficient funds to satisfy all principal and interest payments on the outstanding 6.80% notes due November 2003 and allow for repurchase of these notes prior to their maturity. As of August 24, 2003, the segregated amount was $23.4 million, which included $0.8 million of accrued interest, and is separately identified on the balance sheet as “Restricted cash.”

Pending completion of a refinancing transaction, we obtained on September 17, 2003 a limited waiver of compliance with certain financial covenants under the January 2003 senior secured credit facility. As discussed below, on September 29, 2003, we entered into a new $500.0 million senior secured term loan agreement and a $650.0 million senior secured revolving credit facility that replaced the January 2003 senior secured credit facility. As a result, it was not necessary to reclassify the outstanding debt on the January 2003 senior secured credit facility to current maturities of long-term debt.

New Financing Agreements

Principal Amount; Use of Proceeds. On September 29, 2003, we entered into a $500.0 million senior secured term loan agreement and a $650.0 million senior secured revolving credit facility. We used the borrowings under these agreements to refinance our January 2003 senior secured credit facility and our 2001 domestic receivables securitization agreement, and will also use the borrowings for working capital and general corporate purposes.

Term Loan. Our term loan consists of a single borrowing of $500.0 million, divided into two tranches, a $200.0 tranche million subject to a fixed rate of interest and a $300.0 million tranche subject to floating rates of interest. The loan matures on September 29, 2009. Principal payments on the term loan in an amount equal to 0.25% of the initial principal amount must be made quarterly commencing with the last day of the first fiscal quarter of 2004, and the remaining principal of the loan must be repaid at maturity. We have limited ability to voluntarily prepay any part of the term loan prior to March 31, 2007. Our term loan also requires mandatory prepayments in specified circumstances, such as if we engage in a sale of certain intellectual property assets.

Revolving Credit Facility. The revolving credit facility is an asset-based facility, in which the borrowing availability varies according to the levels of our accounts receivable and inventory. Subject to the level of this

borrowing base, we may make and repay borrowings from time to time until the maturity of the facility. Initial availability was approximately $563 million as of September 29, 2003. The maturity date of the facility is September 29, 2007, at which time all borrowings under the facility must be repaid. We may make voluntary prepayments of borrowings at any time and must make mandatory prepayments if certain events occur, such as asset sales. We must pay an early termination fee if the facility is terminated prior to September 29, 2005.

Early Maturity or Default if Notes Not Refinanced. The term loan agreement requires us to repay our senior unsecured notes due 2006 and 2008 not later than six months prior to their respective maturity dates, failing which the maturity of the term loan is accelerated to a date three months prior to the scheduled maturity date of the 2006 or the 2008 notes, respectively. As a result, unless we have refinanced, repaid or otherwise provided for the payment of the 2006 notes by May 1, 2006, the term loan will become due on August 1, 2006, and unless we have repaid the 2008 notes by July 15, 2007, the term loan will become due on October 15, 2007.

We may satisfy this note refinancing requirement under the term loan in one of two ways. First, we may refinance the 2006 and 2008 notes by issuing new debt on terms similar to those of our 12.25% notes due 2012. Second, we may repurchase or otherwise set aside funds to repay the 2006 and 2008 notes if we meet specified conditions. Those conditions include our maintaining (after giving effect of the repayment on a pro forma basis) a leverage ratio that does not exceed 4.75 to 1.0 (for the 2006 notes) and 4.5 to 1.0 (for the 2008 notes) and an interest coverage ratio that exceeds 1.85 to 1.0 (for the 2006 notes) and 2.0 to 1.0 (for the 2008 notes). These ratios apply only to the note refinancing requirements; they are not ongoing financial covenants.

The revolving credit facility agreement contains a similar note refinancing requirement with respect to the 2006 notes, except that the consequence of a failure to repay the notes is a breach of covenant, not early maturity. We may also satisfy this requirement under the revolving credit facility if we reserve cash or have borrowing availability sufficient to repay the 2006 notes and thereafter have $150.0 million of borrowing availability under the revolving credit facility.

Interest Rates. The interest rate for the floating rate tranche of our term loan is 6.875% over the eurodollar rate or 5.875% over the base rate. The interest rate for the fixed rate tranche of our term loan is 10.0% per annum. The interest rate for our revolving credit facility is, for LIBOR rate loans, 2.75% over the LIBOR rate (as defined in the credit agreement) or, for base rate loans, 0.50% over the Bank of America prime rate.

Guaranties and Security. Our obligations under each of the term loan and revolving credit facility are guaranteed by our domestic subsidiaries. The revolving credit facility is secured by a first-priority lien on domestic inventory and accounts receivable, certain domestic equipment, patents and other related intellectual property, 100% of the stock in all domestic subsidiaries, 65% of the stock of certain foreign subsidiaries and other assets. Excluded from the assets securing the revolving credit facility are all of our most valuable real property interests and all of the capital stock of our affiliates in Germany and the United Kingdom and any other affiliates that become restricted subsidiaries under the indenture governing our notes due 2006 and our Yen-denominated Eurobond due 2016 (such restricted subsidiaries also are not permitted to be guarantors). The term loan is secured by a lien on trademarks, copyrights and other related intellectual property and by a second-priority lien on the assets securing the revolving credit facility.

Covenants. The term loan and the revolving credit facility each contain customary covenants restricting our activities as well as those of our subsidiaries, including limitations on our, and our 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 or prepay 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.

Fixed Charge Coverage Ratio. Both the term loan and the revolving credit facility contain a consolidated fixed coverage ratio covenant:

•

The term loan fixed charge coverage ratio is measured as of the end of each fiscal quarter. The ratio is generally defined as the ratio of (i) EBITDA less the sum of (a) capital expenditures and (b) the provision for federal, state and local income taxes for the current period to (ii) interest charges paid in cash for the relevant period. We are required to maintain a ratio of least 1.0 to 1.0 as of each measurement date.

•

The revolving credit agreement fixed charge coverage ratio is measured only if certain availability thresholds are not met. In that case, the ratio is measured as of the end of each month. This ratio is generally defined as the ratio of (i) EBITDA less the sum of (a) capital expenditures and (b) the provision for federal, state and local income taxes for the current period to (ii) the sum of (x) interest charges paid in cash for the relevant period and (y) repayments of scheduled debt during the period. We are required to maintain a ratio of least 1.0 to 1.0 when the covenant is required to be tested.

Under our credit agreements, EBITDA is generally defined as consolidated net income plus (i) consolidated interest charges, (ii) the provision for federal, state, local and foreign income taxes, (iii) depreciation and amortization expense, (iv) other (income) expense and (v) restructuring and restructuring related charges, less cash payments made in respect of the restructuring charges.

Factors that could cause us to breach these fixed charge coverage ratio covenants include lower operating income, higher current tax expenses for which we have not adequately reserved, higher cash restructuring costs, higher interest expense due to higher debt or floating interest rates and higher capital spending. There are no other financial covenants in either agreement we are required to meet on an ongoing basis.

Events of Default. The term loan and the revolving credit facility each contain customary events of default, including payment failures; failure to comply with covenants; failure to satisfy other obligations under the credit agreements or related documents; defaults in respect of other indebtedness; bankruptcy, insolvency and inability to pay debts when due; material judgments; pension plan terminations or specified underfunding; substantial voting trust certificate or stock ownership changes; specified changes in the composition of our board of directors; and invalidity of the guaranty or security agreements. The cross-default provisions in each of the term loan and the revolving credit facility apply if a default occurs on other indebtedness in excess of $25.0 million and the applicable grace period in respect of the indebtedness has expired, such that the lenders of, or trustee for, the defaulted indebtedness have the right to accelerate. If an event of default occurs under either the term loan or the revolving credit facility, our lenders may terminate their commitments, declare immediately payable the term loan and all borrowings under each of the credit facilities and foreclose on the collateral, including (in the case of the term loan) our trademarks.

Senior Unsecured Notes Due November 1, 2003

Our 6.80% notes matured on November 1, 2003. During the first half of 2003, we purchased $327.3 million in principal amount of the 6.80% notes using proceeds from our senior notes offering due 2012. Approximately $184 million of these repurchases resulted from a tender offer made by us on April 8, 2003 to purchase for cash any and all of the outstanding 6.80% notes, at a purchase price of $1,024.24 per $1,000.00 principal amount. The debt tender offer expired on May 7, 2003.

At August 24, 2003, $22.6 million of these notes were outstanding. Under the January 2003 senior secured credit facility, we were required to segregate funds in an amount sufficient to repay the 6.80% notes at maturity (including any interim scheduled interest payments). As of August 24, 2003, the segregated amount was $23.4 million, which included $0.8 million of accrued interest, and is separately identified on the balance sheet as “Restricted cash.” On November 3, 2003, we repaid the $22.7 million in principal amount plus accrued interest of the 6.80% notes using the segregated funds.

Senior Unsecured Notes Due 2012

Principal, Interest and Maturity. On December 4, 2002, January 22, 2003 and January 23, 2003, we issued a total of $575.0 million in notes to qualified institutional buyers. These notes are unsecured obligations that rank equally with all of our other existing and future unsecured and unsubordinated debt. They 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. The notes are callable beginning December 15, 2007. These notes were offered at a net discount of $3.7 million, which is amortized to interest expense over the term of the notes using an approximate effective-interest rate method. Costs representing underwriting fees and other expenses of approximately $18.0 million are amortized over the term of the notes to interest expense.

Use of Proceeds. We used approximately $125.0 million of the net proceeds from the notes offering to repay remaining indebtedness under our 2001 bank credit facility and $327.3 million of the net proceeds to purchase the majority of our 6.80% notes due November 1, 2003.

Covenants. The indenture governing these notes contains covenants that limit our 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; and sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of our assets or our subsidiaries’ assets. These covenants are comparable to those contained in the indenture governing our 11.625% notes due 2008.

Asset Sales. The indenture governing these notes provides that our asset sales must be at fair market value and the consideration must consist of at least 75% cash or cash equivalents or the assumption of liabilities. We must use the net proceeds from the asset sale within 360 days after receipt either to repay bank debt, with an equivalent permanent reduction in the available commitment in the case of a repayment under our revolving credit facility, or to invest in additional assets in a business related to our business. To the extent proceeds not so used within the time period exceed $10.0 million, we are required to make an offer to purchase outstanding notes at par plus accrued and unpaid interest, if any, to the date of repurchase. Any purchase or prepayment of these notes requires consent of the lenders under our senior secured term loan and senior secured revolving credit facility.

Change in Control. If we experience a change in control as defined in the indenture governing the notes, then we 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. Any purchase or prepayment of these notes requires consent of the lenders under our senior secured term loan and senior secured revolving credit facility.

Events of Default. The indenture governing these notes contains customary events of default, including failure to pay principal, failure to pay interest after a 30-day grace period, failure to comply with the merger, consolidation and sale of property covenant, failure to comply with other covenants in the indenture for a period of 30 days after notice given to us, failure to satisfy certain judgments in excess of $25.0 million after a 30-day grace period, and certain events involving bankruptcy, insolvency or reorganization. The indenture also contains a cross-acceleration event of default that applies if debt of Levi Strauss & Co. or any restricted subsidiary in excess of $25.0 million is accelerated or is not paid when due at final maturity.

Covenant Suspension. If these notes receive and maintain an investment grade rating by both Standard and Poor’s and Moody’s and we and our subsidiaries are and remain in compliance with the indenture, then we and our subsidiaries will not be required to comply with specified covenants contained in the indenture. These provisions are comparable to those contained in the indenture governing our 11.625% notes due 2008.

European Receivables Financing

On March 14, 2003, we terminated our European receivables securitization agreements and repaid the outstanding equivalent amount of $54.3 million.

Industrial Development Revenue Refunding Bond

On June 3, 2003 we repaid the outstanding amount of $10.0 million on an industrial development revenue refunding bond relating to our Canton, Mississippi customer service center.

Credit Ratings

On September 10, 2003, Standard & Poor’s Ratings Services, or S&P, lowered our ratings including our corporate credit rating to “B” from “BB-” with a stable outlook. On September 22, 2003, S&P assigned a “BB” rating to our new $650.0 million revolving senior secured credit facility and a “BB-” rating to our new $500.0 million senior secured term loan facility. On October 10, 2003, S&P revised its outlook on us to negative from stable and affirmed all its outstanding ratings, including our corporate credit rating of “B.” On November 13, 2003, S&P placed our ratings on CreditWatch with negative implications. On December 9, 2003, S&P lowered our ratings on our long-term corporate credit and senior unsecured debt ratings to “CCC” from “B,” on our new $650.0 million revolving senior secured credit facility to “B” from “BB” and on our new $500.0 million senior secured term loan facility to “B-” from “BB-.” In addition, S&P removed our ratings from “CreditWatch” and said the outlook is “developing.”

On September 12, 2003, Fitch Ratings, or Fitch, affirmed our senior unsecured debt rating at “B.” In addition, Fitch stated that it expected to rate our new $650.0 million asset-based revolving credit facility at “BB” and our new $500.0 million term loan at “BB-.” On November 13, 2003, Fitch lowered our ratings on our senior unsecured debt to “B-” from “B,” our new $650.0 million asset-based revolving credit facility to “BB-” from “BB” and our new $500.0 million term loan to “B+” from “BB-.” On December 2, 2003, Fitch lowered our ratings on our senior unsecured debt to “CCC+” from “B-,” our new $650.0 million asset-based revolving credit facility to “B+” from “BB-” and our new $500.0 million term loan to “B” from “B+.” Fitch’s rating outlook remains negative.

On September 22, 2003, Moody’s Investor Service, or Moody’s, lowered our ratings on our senior unsecured notes to “Ca” from “B3,” our senior implied rating to “Caa1” from “B2,” and our January 2003 senior secured credit facility to “B3” from “B1.” Moody’s also assigned a prospective rating of “(P)Caa1” to our new term loan facility. On November 13, 2003, Moody’s lowered our ratings on our new $500.0 million term loan to “Caa2” from “Caa1” and our senior implied rating to “Caa2” from “Caa1.” Moody’s also changed the ratings outlook to negative from stable.

These credit rating agency actions do not trigger any obligations or other provisions under our financing agreements or our other contractual relationships.

New Accounting Standards

Note 1 to the Consolidated Financial Statements summarizes our adoption of the following new accounting standards:

2002 Fiscal Year

•

SFAS 141 “Business Combinations;”

2003 Fiscal Year

•

SFAS 142 “Goodwill and Other Intangible Assets;”

•

SFAS 143 “Accounting for Asset Retirement Obligations;”

•

SFAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets;”

•

SFAS 145 “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections;”

•

SFAS 146 “Accounting for Costs Associated with Exit or Disposal Activities;”

•

FIN 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others;” and

•

SFAS 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.”

Our adoption of these standards at the dates indicated in Note 1 did not have a material impact on our consolidated financial condition or results of operations.

STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE

This report includes forward-looking statements about:

•

general economic and retail conditions;

•

sales performance and trends;

•

new product introductions;

•

retail conditions and retailer practices;

•

marketing and advertising initiatives;

•

liquidity and compliance with the financial covenants in our credit agreements;

•

sales of our products in unauthorized retail channels;

•

capital expenditures;

•

income tax audit settlements and payments;

•

deferred tax assets and other tax items;

•

retention of Alvarez & Marsal, Inc. and resulting strategies and actions;

•

our long-term incentive compensation plan and payments;

•

restructuring charges and related expenses;

•

employee pension and postretirement health benefit plan contributions;

•

workforce reductions; and

•

other matters.

We have based these forward-looking statements on our current assumptions, expectations and projections about future events. When used in this document, the words “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these words.

These forward-looking statements are subject to risks and uncertainties including, without limitation:

•

changing domestic and international retail environments;

•

ongoing price and other competitive pressures in the apparel industry;

•

the effectiveness of our promotion and incentive programs with retailers;

•

changes in the level of consumer spending or preferences in apparel;

•

dependence on key distribution channels, customers and suppliers;

•

changing fashion trends;

•

risks related to the impact of consumer and customer reactions to new products including our mass channel products;

•

our ability to utilize our tax credits and net operating loss carryforwards;

•

our ability to remain in compliance with our financial covenants;

•

the impact of potential future restructuring activities;

•

ongoing litigation matters and related regulatory developments;

•

unanticipated adverse income tax audit settlements and related payments;

•

our supply chain executional performance;

•

changes in credit ratings;

•

changes in employee compensation and benefit plans;

•

trade restrictions and tariffs;

•

political or financial instability in countries where our products are manufactured; and

•

other risks detailed in our annual report on Form 10-K for the year ended November 30, 2003, registration statements and other filings with the Securities and Exchange Commission.

Our actual results might differ materially from historical performance or current expectations. We do not undertake any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Derivative Financial Instruments

We are exposed to market risk primarily related to foreign exchange, interest rates and, indirectly through fabric prices, the price of cotton. We actively manage foreign currency risks with the objective of reducing fluctuations in actual and anticipated cash flows by entering into a variety of instruments including spot, forwards, options and swaps. We hold derivative positions only in currencies to which we have exposure. We currently do not hold any interest rate derivatives. In addition, we have not historically, and do not currently, manage exposure related to commodities.

We are exposed to credit loss in the event of nonperformance by the counterparties to the foreign exchange contracts. However, we believe these counterparties are creditworthy financial institutions and do not anticipate nonperformance. In addition, we have ISDA master agreements in place with the main counterparties to mitigate the credit risk related to the outstanding derivatives.

The tables below give an overview of the fair values of derivative instruments reported as an asset or liability and the realized and unrealized gains and losses associated with our foreign exchange and interest rate management activities reported in “Other (income) expense, net.” The derivatives expired at various dates through October 2003.


	August 24, 2003 Fair value Asset (liability)		November 24, 2002 Fair value Asset (liability)
			(Restated)
	(Dollars in Thousands)
Foreign Exchange Management	$	10,506	$	(2,851	)

Interest Rate Management	$	—	$	—


	Three Months Ended August 24, 2003					Three Months Ended August 25, 2002					Nine Months Ended August 24, 2003					Nine Months Ended August 25, 2002
	Other (income) expense, net					Other (income) expense, net					Other (income) expense, net					Other (income) expense, net
	Realized		Unrealized			Realized		Unrealized			Realized		Unrealized			Realized			Unrealized
						(Restated)										(Restated)
	(Dollars in Thousands)
Foreign Exchange Management	$	2,389	$	(10,284	)	$	38,596	$	(18,599	)	$	57,140	$	(7,720	)	$	33,348		$	7,800

Interest Rate Management	$	—	$	—		$	—	$	—		$	—	$	—		$	2,266	(1)	$	(2,266	)

(1)	Recorded as an increase to interest expense.

Foreign Exchange Risk

Foreign exchange market risk exposures are primarily related to cash management activities, raw material and finished goods purchases (sourcing), net investment positions, royalty flows from affiliates and debt. To manage the volatility relating to these exposures, we evaluate them on a global basis to take advantage of the netting opportunities that exist. For the remaining exposures, we enter into various derivative transactions in accordance with our currency risk management policies, aimed at covering the spot risk at inception of the exposure. We do not currently manage the timing mismatch derived from forecasted exposures and their corresponding hedges. We do not apply hedge accounting to our foreign currency derivative transactions, except for certain net investment hedging activities. In 2003, we defined as part of our foreign currency risk management policy a hedge ratio limit. The hedge ratio measures the relationship between the notional amount of the hedging instrument and the hedged item. Our foreign exchange policy requires that the hedge ratio be between 50% and 100%. At August 24, 2003, our hedge ratio was 86.5%, while the minimum hedge ratio during the quarter was 76.4%.

At August 24, 2003, we had U.S. dollar spot and forward currency contracts to buy $746.0 million and to sell $310.8 million against various foreign currencies. These contracts were at various exchange rates and expired at various dates through October 2003.

At August 24, 2003, we bought U.S. dollar option contracts resulting in a net long position against various foreign currencies of $69.8 million, should the options be exercised. To finance the premium related to bought options, we sold U.S. dollar options resulting in a net long position against various currencies of $5.0 million, should the options be exercised. The option contracts are at various strikes and expire at various dates until October 2003.

For more information about market risk, see Notes 7 and 8 to the Consolidated Financial Statements.

Item 4. Controls and Procedures

As of the filing date, we updated our evaluation of the effectiveness of the design and operation of our disclosure controls and procedures for purposes of filing reports under the Securities Exchange Act of 1934. This controls evaluation was done under the supervision and with the participation of management, including our chief executive officer and our chief financial officer.

We conducted the evaluation of our disclosure controls and procedures taking into account the matters identified as a material weakness (as defined under standards established by the American Institute of Certified Public Accountants) in a letter we received from our independent auditors, as well as the measures we are taking in response to this letter. The letter from the independent auditors related to the matters described above in “Management’s Discussion and Analysis and Results of Operations—Recent Developments: Accounting and Related Matters—Letter from Independent Auditor.”

The letter included the following:

•

Our auditors stated that, in the course of reviewing our third-quarter financial statements for fiscal 2003, they noted certain amounts had been adjusted to the quarter’s effective tax rate due to errors relating to our tax returns for the years 1998 and 1999. The letter stated that although our tax department noted the double deduction errors, we incorrectly recorded the effect of such errors as an adjustment to fiscal 2003 third-quarter’s tax rate, thereby treating the correction as a change in estimate rather than a correction of an error to our financial statements for 2001.

•

In response to the errors and the letter from our independent auditor, we have taken actions and are commencing initiatives to address these issues, including:

•

we appointed a chief financial officer with substantial accounting and public company finance experience who has experience working with companies in need of improved accounting processes;

•

we are recruiting individuals with expertise in financial reporting including tax GAAP issues; and

•

our corporate controller’s group and our tax department are focused on communicating more effectively with an increased concentration on the financial reporting aspects of tax items.

These changes have materially affected, or are reasonably likely to affect, our internal control over financial reporting.

Based on the controls evaluation, as of the filing date, we have concluded that our disclosure controls and procedures are designed to ensure that material information relating to the company and our consolidated subsidiaries is made known to management to allow timely decisions regarding required disclosure. As noted above, subsequent to the filing date, we continue to evaluate our control environment and we are continuing to consider additional steps to strengthen these controls.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

Wrongful Termination Litigation On April 14, 2003, two former employees of our tax department filed a complaint in the Superior Court of the State of California for San Francisco County in which they allege that they were wrongfully terminated in December 2002. Plaintiffs allege, among other things, that Levi Strauss & Co. engaged in a variety of fraudulent tax-motivated transactions over several years, that we manipulated tax reserves to inflate reported income and that we fraudulently failed to set appropriate valuation allowances on deferred tax assets. They also allege that, as a result of these and other tax-related transactions, our financial statements for several years violate generally accepted accounting principles and Securities and Exchange Commission regulations and are fraudulent and misleading, that reported net income for these years was overstated and that these various activities resulted in our paying excessive and improper bonuses to management for fiscal year 2002. Plaintiffs in this action further allege that they were instructed by us to withhold information concerning these matters from our auditors and the Internal Revenue Service, that they refused to do so and, because of this refusal, they were wrongfully terminated. Plaintiffs seek a number of remedies, including compensatory and punitive damages, attorneys’ fees, restitution, injunctive relief and any other relief of the court may find proper.

We are vigorously defending this litigation and filed our formal answer to the lawsuit in California Superior Court on May 23, 2003. In our answer we categorically deny all the allegations and spell out the reasons that led to the dismissal of these two employees. We also filed a cross complaint against them. We do not expect this litigation will have a material impact on our financial condition or results of operations.

On September 15, 2003, we announced that our Audit Committee had completed its investigation of the tax and related accounting issues raised in the wrongful termination suit. The Audit Committee concluded that our tax and related accounting positions were reasonable and legally defensible and noted that in the course of its investigation it did not discover evidence of tax or other fraud. The Audit Committee also did not find evidence that information was improperly withheld from the IRS with respect to these issues in connection with IRS audits. The Audit Committee investigation was initiated following the filing of the wrongful termination litigation.

The scope of the Audit Committee investigation was to review issues raised in the complaint. The Audit Committee retained independent counsel, Simpson Thacher & Bartlett LLP, to assist it in the investigation. An independent accounting firm was retained by Simpson Thacher & Bartlett to consult on specified accounting issues. The investigation took place over a period of approximately four and one-half months, and involved extensive discussions with employees of the company, various legal and tax advisors, and our independent auditors as well as extensive review of documents.

In addition to the conclusions noted above, the Audit Committee observed that, during the period from 1994 through 2001, we established, maintained and released varying amounts of unspecified tax reserves. These tax reserves were not supported by sufficient contemporaneous documentation that related the reserves to specified tax exposures. In reviewing the matter, the Committee noted that these tax reserves were communicated to and discussed with our outside independent auditors at the time they were created and maintained. We and our Audit Committee are of the view that the handling of the unspecified tax reserves during these periods was not intended to, and did not, materially affect our SEC-filed financial statements. There was also no evidence of tax or other fraud in connection with the establishment of these reserves.

In the course of the Audit Committee investigation, we have communicated with the SEC on an informal basis, and we expect to continue these communications with respect to the results of the investigation and further developments relating to the litigation as appropriate.

In a related administrative proceeding before the U.S. Department of Labor under Section 1107 of the Sarbanes-Oxley Act, the plaintiffs made a claim based on the same allegations made in the wrongful termination suit. We defended vigorously this proceeding. On January 23, 2004, the plaintiffs withdrew their complaint just prior to the issuance by the Department of Labor of an initial determination.

Class Action Securities Litigation On December 12, 2003, a putative bondholder class action styled Orens v. Levi Strauss & Co., et al., Case No. C-03-5605, RMW (HRL), was filed in the United States District Court for the Northern District of California against us, our chief executive officer and our former chief financial officer. The action purports to be brought on behalf of purchasers of our bonds in the period from January 10, 2001 to October 9, 2003, and makes claims under the federal securities laws, including Section 10(b) and 20(a) of the Securities Exchange Act of 1934, relating to our SEC filings and other public statements. Specifically, the action alleges that certain of our financial statements and other public statements during this period materially overstated our net income and other financial results and were otherwise false and misleading, and that our public disclosures omitted to state that we lacked adequate internal controls such that we were unable to ascertain our true financial condition. Plaintiffs contend that such statements and omissions caused the trading price of our bonds to be artificially inflated. Plaintiffs seek compensatory damages as well as other relief.

On February 20, 2004, a putative bondholder class action styled General Retirement System of the City of Detroit, et al. v. Levi Strauss & Co., et al., Case No. C-04-00712, JW (EAI), was filed in the United States District Court for the Northern District of California, San Jose Division, against us, our chief executive officer, our former chief financial officer, our directors and our underwriters in connection with our April 6, 2001 and June 16, 2003 registered bond offerings. As of February 29, 2004, we had not been served with this lawsuit. The action purports to be brought on behalf of purchasers of our bonds who made purchases pursuant or traceable to our prospectuses dated March 8, 2001 or April 28, 2003, or who purchased our bonds in the open market from January 10, 2001 to October 9, 2003. The action makes claims under the federal securities laws, including Sections 11 and 15 of the Securities Act of 1933, and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, relating to our SEC filings and other public statements. Specifically, the action alleges that certain of our financial statements and other public statements during this period materially overstated our net income and other financial results and were otherwise false and misleading, and that our public disclosures omitted to state that we made reserve adjustments that plaintiffs allege were improper. Plaintiffs contend that these statements and omissions caused the trading price of our bonds to be artificially inflated. Plaintiffs seek compensatory damages as well as other relief.

We are in the initial stages of these lawsuits. We expect to defend these cases vigorously.

Saipan Class Action Litigation In April 2000, we were named as an additional defendant in a class action suit filed in 1999 in federal district court in Saipan by non-resident garment workers, who currently or formerly worked in Saipan, against several manufacturers operating on the island. (Saipan is a U.S. commonwealth in the Northern Mariana Islands.) The complaint related to working conditions for the operators in Saipan facilities and alleged violation of the Racketeer Influenced and Corrupt Organization Act, the Alien Tort Claims Act and state common and international law. All other defendants settled the lawsuit in September 2002 for $20.0 million. We refused to join the settlement as we believed that the allegations about us in the lawsuit were not true.

On January 21, 2003, the court entered judgment in our favor on the Alien Tort Claims Act claims. On December 18, 2003, the court dismissed all remaining claims against us at the request of plaintiffs. As part of the dismissal, we agreed only that all parties should bear their own costs and that we would not sue plaintiffs or their attorneys for malicious prosecution.

Other Litigation In the ordinary course of business, we have various other pending cases involving contractual matters, employee-related matters, distribution questions, product liability claims, trademark infringement and other matters. We do not believe there are any pending legal proceedings that will have a material impact on our financial condition or results of operations.

Item 6. Exhibits and Reports on Form 8-K:

(A) Exhibits:


10.1		Amendment to Revised Employee Retired Plan effective June 1, 2003. Previously filed as Exhibit 99.1 to Registrant’s Current Report on Form 8-K dated and filed with the Commission on October 14, 2003.

10.2		Amendment to Long-Term Investment and Savings Plan effective June 1, 2003. Previously filed as Exhibit 99.2 to Registrant’s Current Report on Form 8-K dated and filed with the Commission on October 14, 2003.

10.3		Credit Agreement, dated September 29, 2003, among the Financial Institutions named therein as the Lenders and, Bank of America, N.A. as the Agent, and the Registrant and Levi Strauss Financial Center Corporation as the Borrowers, Fleet Retail Finance Inc. as Sole Syndication Agent, General Electric Capital Corporation, Wells Fargo Foothill, LLC and JP Morgan Chase Bank as Co-Documentation Agents and Banc of America Securities LLC as Sole Lead Arranger and Sole Book Manager. Previously filed as Exhibit 99.3 to Registrant’s Current Report on Form 8-K dated and filed with the Commission on October 14, 2003.

10.4		Pledge and Security Agreement, dated September 29, 2003, between the Registrant, certain Subsidiaries of the Registrant, and Bank of America, N.A. as Agent. Previously filed as Exhibit 99.4 to Registrant’s Current Report on Form 8-K dated and filed with the Commission on October 14, 2003.

10.5		Subsidiary Guaranty, dated September 29, 2003, entered into by certain Subsidiaries of the Registrant, and Bank of America, N.A. as Agent. Previously filed as Exhibit 99.5 to Registrant’s Current Report on Form 8-K dated and filed with the Commission on October 14, 2003.

10.6		Credit Agreement, dated as of September 29, 2003, between the Registrant, Bank of America, N.A. as Administrative Agent, and The Lenders Party thereto and Banc of America Securities LLC as Sole Lead Arranger and Sole Book Manager. Previously filed as Exhibit 99.6 to Registrant’s Current Report on Form 8-K dated and filed with the Commission on October 14, 2003.

10.7		Guaranty, dated as of September 29, 2003, entered into by certain Subsidiaries of the Registrant in favor of Bank of America, N.A., as Administrative Agent. Previously filed as Exhibit 99.7 to Registrant’s Current Report on Form 8-K dated and filed with the Commission on October 14, 2003.

10.8		Intellectual Property Security Agreement, dated as of September 29, 2003, between the Registrant, certain Subsidiaries of the Registrant, and Bank of America, N.A., as Administrative Agent. Previously filed as Exhibit 99.8 to Registrant’s Current Report on Form 8-K dated and filed with the Commission on October 14, 2003.

10.9		Second-Lien Pledge and Security Agreement, dated as of September 29, 2003 between the Registrant, certain Subsidiaries of the Registrant, and Bank of America, N.A. as Administrative Agent. Previously filed as Exhibit 99.9 to Registrant’s Current Report on Form 8-K dated and filed with the Commission on October 14, 2003.

31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.

31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.

32		Section 906 certification. Furnished herewith.

(B) Reports on Form 8-K:

Current Report on Form 8-K dated June 10, 2003 and filed pursuant to Item 9 of the report and containing a copy of the Company’s press release dated June 10, 2003 titled “Levi Strauss & Co. Extends Exchange Offer for Its 12 ¼% Dollar-denominated Notes Due 2012.”

Current Report on Form 8-K dated June 25, 2003 and filed pursuant to Item 5 of the report and containing a copy of an amendment to the Company’s Credit Agreement.

Current Report on Form 8-K dated June 26, 2003 and furnished under Items 9 and 12 of the report and containing a copy of the Company’s press release dated June 26, 2003 titled “Levi Strauss & Co. Announces Second-Quarter 2003 Financial Results.”

Current Report on Form 8-K dated July 2, 2003 and filed under Item 5 of the report and containing a copy of the Company’s press release dated July 2, 2003 titled “Levi Strauss & Co. Names Pat House to Board of Directors.”

Current Report on Form 8-K dated September 10, 2003 and filed under Item 9 of the report and containing a copy of Standard & Poor’s Rating Services’ press release dated September 10, 2003 titled “Levi Strauss & Co. Ratings Lowered; Outlook Stable.”

Current Report on Form 8-K dated September 10, 2003 and filed under Items 9 and 12 of the report and containing a copy of the Company’s press release dated September 10, 2003 titled “Levi Strauss & Co. Reports Third-Quarter Sales Gain; The Company Announces Additional Business Initiatives.”

Current Report on Form 8-K dated September 11, 2003 and filed under Item 9 of the report and containing copies of Moody’s Investors Service’s press release dated September 11, 2003 titled “Moody’s Investors Service Places the Ratings of Levi Strauss & Co. Under Review for Possible Downgrade,” and Fitch Ratings’ press release dated September 12, 2003 titled “Fitch Affirms Levi Strauss At “B” – Rates Proposed ABL/Term Loan “BB/BB-.”

Current Report on Form 8-K dated September 15, 2003 and filed under Item 5 of the report and containing a copy of the Company’s press release dated September 15, 2003 titled “Levi Strauss & Co. Announces Outcome of Audit Committee Investigation in Wrongful Termination Matter.”

Current Report on Form 8-K dated September 17, 2003 and filed under Item 5 of the report and containing a copy of a limited waiver under the Company’s Credit Agreement.

Current Report on Form 8-K dated September 22, 2003 and filed under Item 9 of the report and containing a copy of Moody’s Investors Service’s press release dated September 22, 2003 titled “Moody’s Investors Service Downgrades Levi Strauss & Co.’s Sr. Unsecured Notes to Ca from B3 – Senior Implied to Caa1 from B2 – Assigns (P)Caa1 to Proposed Gtd Secured Term Loan Due 2009.”

Current Report on Form 8-K dated September 25, 2003 and filed under Item 5 of the report and containing a copy of the Company’s press release dated September 25, 2003 titled “Levi Strauss & Co. To Close Its North American Manufacturing & Finishing Plants; Company plans to offer comprehensive transition assistance for employees and community.”

Current Report on Form 8-K dated September 30, 2003 and furnished under Items 9 and 12 of the report and containing a copy of the Company’s press release dated September 30, 2003 titled “Levi Strauss & Co. Announces Third-Quarter 2003 Financial Results.”

Current Report on Form 8-K dated October 9, 2003 and furnished under Item 12 of the report and containing a copy of the Company’s press release dated October 9, 2003 titled “Levi Strauss & Co. Extends Filing of Third Quarter 10-Q.”

Current Report on Form 8-K dated October 9, 2003 and furnished under Item 12 of the report and containing, on a voluntary basis, the following sections from the draft Form 10-Q for the quarter ended August 24, 2003: Item 1—“Financial Statements (unaudited);” Item 2—“Management’s Discussion and

Analysis of Financial Condition and Results of Operations;” and Item 3—“Quantitative and Qualitative Disclosure about Market Risk.”

Current Report on Form 8-K dated October 14, 2003 and filed under Item 7 of the report and containing exhibits filed pursuant to Item 601 of Regulation S-K.

Current Report on Form 8-K dated October 10, 2003 and filed under Item 9 of the report and containing a copy of Standard & Poor’s Rating Services’ press release dated October 10, 2003 titled “Levi Strauss’ Outlook Revised to Negative; Ratings Affirmed.”

Current Report on Form 8-K dated November 13, 2003 and furnished under Items 9 and 12 of the report and containing a copy of the Company’s press release dated November 13, 2003 titled “Levi Strauss & Co. Revises Financial Guidance for Full-Year 2003.”

Current Report on Form 8-K dated November 13, 2003 and filed under Item 7 of the report and containing copies of Moody’s Investors Service’s press release dated November 13, 2003 titled “Moody’s Investors Service Downgrades Levi Strauss & Co.’s Senior Secured Term Loan and Senior Implied Ratings to Caa2; Confirms Sr Unsecured Rating of Ca; Assigns Negative Outlook. Approximately $2.3 billion of debt affected,” Standard & Poor’s Rating Services’ press release dated November 13, 2003 titled “Levi Strauss Ratings Placed on CreditWatch Negative Following Announcement” and Fitch Ratings’ press release dated November 13, 2003 titled “Fitch Downgrades Levi Strauss’ Sr. Debt to ‘B-;’ ABL/Term Loan Lowered to ‘BB-/B+;’ Otlk Remains Neg.”

Current Report on Form 8-K dated December 1, 2003 and filed under Item 5 of the report and containing a copy of the Company’s press release dated December 1, 2003 titled “Levi Strauss & Co. Retains Alvarez & Marsal and Appoints Interim CFO.”

Current Report on Form 8-K dated December 2, 2003 and furnished under Item 9 of the report and containing a copy of Fitch Ratings’ press release dated December 2, 2003 titled “Levi Strauss’ Debt Lowered to ‘CCC+’; ABL/Term Loan Lowered to ‘B+/B’; Otlk Remains Neg.”

Current Report on Form 8-K dated December 9, 2003 and furnished under Item 9 of the report and containing a copy of Standard & Poor’s Rating Services’ press release dated December 9, 2003 titled “Levi Strauss & Co.’s Ratings Lowered to ‘CCC’; Removed From CreditWatch.”

Current Report on Form 8-K dated March 1, 2004 and furnished under Items 9 and 12 of the report and containing a copy of the Company’s press release dated March 1, 2004 titled “Levi Strauss & Co. Announces Fiscal Year 2003 Financial Results.”

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Date: March 8, 2004	LEVI STRAUSS & CO. (Registrant)

	By:	/s/ PHILIP A. MARINEAU

		Philip A. Marineau
		President and Chief Executive Officer