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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the Quarterly Period Ended May 30, 2004

OR

Commission file number: 333-36234

LEVI STRAUSS & CO.

(Exact Name of Registrant as Specified in Its Charter)

1155 Battery Street, San Francisco, California 94111

(Address of Principal Executive Offices)

(415) 501-6000

(Registrant’s Telephone Number, Including Area Code)

None

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).     Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock $.01 par value—37,278,238 shares outstanding on July 12, 2004

LEVI STRAUSS & CO.

INDEX TO FORM 10-Q

MAY 30, 2004

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

LEVI STRAUSS & CO. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

(Unaudited)

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

LEVI STRAUSS & CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands)

(Unaudited)

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)

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

NOTE 1: PREPARATION OF FINANCIAL STATEMENTS

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 unaudited consolidated financial statements include the accounts of Levi Strauss & Co. and its subsidiaries. All intercompany transactions have been eliminated. Management believes that the disclosures are adequate to make the information presented herein not misleading. Certain prior year amounts have been reclassified to conform to the current presentation. The results of operations for the three months and six months ended May 30, 2004 may not be indicative of the results to be expected for any other interim period or the year ending November 28, 2004.

The Company’s fiscal year consists of 52 or 53 weeks, ending on the last Sunday of November in each year. The 2004 fiscal year consists of 52 weeks ending November 28, 2004. Each quarter of fiscal year 2004 consists of 13 weeks. The 2003 fiscal year consisted of 53 weeks ended November 30, 2003. The first, second and third quarters of fiscal year 2003 consisted of 13 weeks and the fourth quarter of 2003 consisted of 14 weeks.

The unaudited consolidated financial statements for the three and six months ended May 25, 2003 have been restated. All information in the notes to the unaudited consolidated financial statements referring to the three and six months ended May 25, 2003 gives effect to this restatement. Information about the restatement is included in the annual report on Form 10-K filed by LS&CO. with the Securities and Exchange Commission on March 1, 2004.

Exploration of the Sale of the Company’s Dockers^® Business

On May 11, 2004, the Company announced that it is exploring the sale of its worldwide Dockers^® casual clothing business and has retained Citigroup Inc. to assist it with the potential sale. The Company is exploring the sale of the Dockers^® business because it believes that a sale would help the Company reduce substantially its debt, improve its capital structure and focus its resources on growing its Levi’s^® brand and Levi Strauss Signature^™ brand businesses. As previously announced, the Company intends to seek amendments to its senior secured term loan and senior secured revolving credit facility to facilitate any proposed sale of the Dockers^® business. The proposed amendments would, among other things, provide for the lenders’ consent to a sale of the Dockers^® business (which generated approximately 24% of the Company’s revenues in 2003), provided that the application of sale proceeds results in a reduction in the Company’s net debt of at least 30%. If accepted as currently proposed, the amendments would also provide the Company greater flexibility than is currently permitted in applying the proceeds of a sale among the various debt instruments currently outstanding, as well as greater flexibility under several negative covenants in the Company’s senior secured term loan and senior secured revolving credit facility.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes. The Company believes that the following discussion addresses the Company’s critical accounting policies, which are those that are most important to the portrayal of the Company’s financial condition and results and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Changes in such estimates, based on more accurate future information, or different assumptions or conditions, may affect amounts reported in future periods.

The Company summarizes its critical accounting policies below.

Revenue recognition. The Company recognizes revenue on sale of product when the goods are shipped and title passes to the customer provided that: there are no uncertainties regarding customer acceptance; persuasive evidence of an arrangement exists; the sales price is fixed or determinable; and collectibility is probable. Revenue is recognized when the sale is recorded net of an allowance for estimated returns, discounts and retailer promotions and incentives.

The Company recognizes allowances for estimated returns, discounts and retailer promotions and incentives in the period when the sale is recorded. Allowances principally relate to the Company’s U.S. operations and primarily reflect price discounts, non-volume-based incentives and other returns and discounts. The Company estimates non-volume-based allowances by considering customer and product-specific circumstances as well as historical customer claim rates. Actual allowances may differ from estimates due to changes in sales volume based on retailer or consumer demand and changes in customer and product-specific circumstances.

Inventory valuation. The Company values inventories at the lower of cost or market value. Inventory costs are based on standard costs on a first-in first-out basis, which are updated periodically and supported by actual cost data. The Company includes materials, labor and manufacturing overhead in the cost of inventories. In determining inventory market values, substantial consideration is given to the expected product selling price. The Company considers various factors, including estimated quantities of slow-moving and obsolete inventory, by reviewing on-hand quantities, outstanding purchase obligations and forecasted sales. The Company then estimates expected selling prices based on its historical recovery rates for sale of slow-moving and obsolete inventory and other factors, such as market conditions and current consumer preferences. Estimates may differ from actual results due to the quantity, quality and mix of products in inventory, consumer and retailer preferences and economic conditions.

Restructuring reserves. Upon approval of a restructuring plan by management with the appropriate level of authority, the Company records restructuring reserves for certain costs associated with plant closures and business reorganization activities as they are incurred or when they become probable and estimable. Such costs are recorded as a current liability. Restructuring costs associated with initiatives commenced prior to January 1, 2003 were recorded in compliance with Emerging Issues Task Force No. 94-3 as a current liability and primarily include employee severance, certain employee termination benefits, such as outplacement services and career counseling, and resolution of contractual obligations.

For initiatives commenced after December 31, 2002, the Company recorded restructuring reserves in compliance with Statement of Financial Accounting Standards No. (“SFAS”) 112, “Employers’ Accounting for Postemployment Benefits,” and SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities,” resulting in the recognition of employee severance and related termination benefits for recurring arrangements when they become probable and estimable and on the accrual basis for one-time benefit arrangements. The Company records other costs associated with exit activities as they are incurred. Employee severance and termination benefit costs reflect estimates based on agreements with the relevant union representatives or plans adopted by the Company that are applicable to employees not affiliated with unions. These costs are not associated with nor do they benefit continuing activities. Changing business conditions may affect the assumptions related to the timing and extent of facility closure activities. The Company reviews the status of restructuring activities on a quarterly basis and, if appropriate, records changes based on updated estimates.

Income tax assets and liabilities. In establishing its deferred income tax assets and liabilities, the Company makes judgments and interpretations based on the enacted tax laws and published tax guidance applicable to its operations. The Company records deferred tax assets and liabilities and evaluates the need for valuation allowances to reduce the deferred tax assets to estimated realizable amounts. The Company utilizes forecasts of future taxable income in assessing the adequacy of its valuation allowances. The likelihood of a material change in the Company’s expected realization of these assets is dependent on estimated assessments of future taxable income and ability to use foreign tax credit carryforwards, carrybacks and net operating losses; U.S. and foreign tax settlements; the effectiveness of tax planning strategies in the various relevant jurisdictions; and other factors. The Company is also subject to examination of income tax returns for multiple years by the Internal Revenue Service and other tax authorities. The Company assesses the likelihood of adverse outcomes resulting from these examinations to determine the impact on its deferred taxes and income tax liabilities and the adequacy of its provision for income taxes. Changes in the Company’s valuation of the deferred tax assets or changes in the necessary reserve balances could impact its annual effective income tax rate.

Derivative and foreign exchange management activities. The Company recognizes all derivatives as assets and liabilities at their fair values. The fair values are determined using widely accepted valuation models and reflect assumptions about currency fluctuations based on current market conditions. The fair values of derivative instruments used to manage currency exposures are sensitive to changes in market conditions and to changes in the timing and amounts of forecasted exposures. The Company actively manages foreign currency exposures on an economic basis, using forecasts to develop exposure positions to protect the U.S. dollar value of cash flows.

Not all exposure management activities and foreign currency derivative instruments will qualify for hedge accounting treatment. Changes in the fair values of those derivative instruments that do not qualify for hedge accounting are recorded in “Other expense, net” in the Statements of Operations. As a result, net income may be subject to volatility. The derivative instruments that do qualify for hedge accounting currently hedge the Company’s net investment position in its subsidiaries. For these instruments, the Company documents the hedge designation by identifying the hedging instrument, the nature of the risk being hedged and the approach for measuring hedge effectiveness. Changes in fair values of derivative instruments that do qualify for hedge accounting are recorded in the “Accumulated other comprehensive loss” section of Stockholders’ Deficit.

Employee benefits

Pension and Postretirement Benefits. The Company has several non-contributory defined benefit retirement plans covering substantially all employees. The Company also provides certain health care benefits for employees who meet age, participation and

length of service requirements at retirement. In addition, the Company sponsors other retirement plans for its foreign employees in accordance with local government programs and requirements. The Company retains the right to amend, curtail or discontinue any aspect of the plans at any time. Any of these actions (including changes in actuarial assumptions and estimates), either individually or in combination, could have a material impact on the consolidated financial statements and on the Company’s future financial performance.

The Company accounts for its U.S. and certain foreign defined benefit pension plans and its postretirement benefit plans using actuarial models in accordance with SFAS 87, “Employers’ Accounting for Pension Plans,” and SFAS 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” These models use an attribution approach that generally spreads individual events over the estimated service lives of the employees in the plan. The attribution approach assumes that employees render service over their service lives on a relatively smooth basis and as such, presumes that the income statement effects of pension or postretirement benefit plans should follow the same pattern. The Company’s policy is to fund its retirement plans based upon actuarial recommendations and in accordance with applicable laws and income tax regulations, as well as in accordance with its credit agreements.

Net pension income or expense is determined using assumptions as of the beginning of each fiscal year. These assumptions are established at the end of the prior fiscal year and include expected long-term rates of return on plan assets, discount rates, compensation rate increases and medical trend rates. The Company uses a mix of actual historical rates, expected rates and external data to determine the assumptions used in the actuarial models.

The long-term liability balance for the Company’s pension plans was $226.8 million and $250.8 million as of May 30, 2004 and November 30, 2003, respectively. The short-term pension liability was $14.4 million and $4.5 million as of May 30, 2004 and November 30, 2003, respectively, and is recorded in “Accrued salaries, wages and employee benefits.” The long-term liability balance for the Company’s postretirement benefit plans was $514.4 million and $555.0 million as of May 30, 2004 and November 30, 2003, respectively. The short-term liability balance for postretirement benefit plans was $41.4 million as of both May 30, 2004 and November 30, 2003, respectively, and is recorded in “Accrued salaries, wages and employee benefits.”

Employee Incentive Compensation. The Company maintains 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. 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 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 future financial performance. (For more information, see Note 10 to the Consolidated Financial Statements.)

Long-lived Assets Held for Sale

At May 30, 2004 and November 30, 2003, the Company had approximately $5.6 million and $2.2 million, respectively, of long-lived assets held for sale. Such assets are recorded in “Property, plant and equipment.” Long-lived assets held for sale as of May 30, 2004 are primarily comprised of assets associated with a closed manufacturing plant in San Antonio, Texas. (See Note 3 to the Consolidated Financial Statements.)

New Accounting Standards

In December 2003, the FASB issued SFAS 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” This Statement changes the disclosure requirements for pension plans and other 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 required 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. SFAS 132 requires that information 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, and for interim periods beginning after December 15, 2003. The Company has adopted SFAS 132 and provided the interim period disclosure requirements for the period ended May 30, 2004. The adoption of SFAS 132 did not have any impact on the Company’s operating results or financial position.

In December 2003, the Financial Accounting Standards Board published a revision to Financial Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities” (“FIN 46R”) to clarify some of the provisions of FIN 46, and to exempt certain entities from its requirements. Under the new guidance, there are new effective dates for companies that have interests in structures that are commonly referred to as special-purpose entities. The rules are effective in financial statements for periods ending after March 15, 2004. FIN 46R did not have any impact on the Company’s operating results or financial position because the Company does not have any variable interest entities.

In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was signed into law in the U.S. The Act introduced a prescription drug benefit under Medicare (Medicare Part D) and a federal subsidy to sponsors of retirement health care plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. In May 2004, the FASB issued Staff Position 106-2, providing final guidance on accounting for the Act. The Staff Position 106-2 will be implemented by the Company in the fourth quarter of Fiscal 2004. The Company is currently evaluating the impact of this guidance on the Company’s financial position, results of operations and cash flows.

NOTE 2: INVENTORY

The following is a summary of the components of inventory as of May 30, 2004 and November 11, 2003:

As of May 30, 2004, the Company had total raw materials and work-in-process inventory of approximately $73 million, as compared to total raw materials and work-in-process inventory of approximately $94 million as of November 30, 2003. The $21 million decrease in raw materials and work-in-process inventory results from the Company’s continuing transition from self-manufacturing to outsourced production. As of May 30, 2004, the Company had excess and/or obsolete finished goods inventory with an original cost of approximately $110. Based upon the estimated recoveries of such inventory, the Company had marked down such inventory by approximately $35 million to its estimated recoverable value of $75 million. As of February 29, 2004, the Company had excess and/or obsolete finished goods inventory with an original cost of approximately $140 million. Based upon the estimated recoveries of such inventory, the Company had marked down such inventory by approximately $50 million to its estimated recoverable value of $90 million. During the first quarter of 2004, the Company reduced its estimated allowance for obsolete and slow-moving inventory by approximately $5.3 million due to improvements in its estimation process. These improvements related to the definition of product attributes that are taken into consideration in evaluating the likelihood of recovery rates below cost. The reduction in the estimated allowance is reflected in the results of operations for the six months ended May 30, 2004. For the three months and six months ended May 25, 2003, improvements in the process of estimating potential excess inventory resulted in a reduction of inventory valuation reserves of approximately $6 million and $11 million, respectively.

NOTE 3: 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 plant closures and reorganization initiatives. Reductions consist of payments for severance and employee benefits, other restructuring costs, and foreign exchange differences. Reversals are recorded as a result of changes in the amount of the estimated future cash outflows based upon quarterly review of restructuring activities. The balance of severance and employee benefits and other restructuring costs are included in restructuring reserves on the accompanying balance sheets.

The total balance of the restructuring reserves at May 30, 2004 was $66.4 million compared to $96.4 million at November 30, 2003. The Company expects to utilize the majority of the reserve balances during fiscal year 2004. For the three and six months ended May 30, 2004, the Company recognized restructuring charges, net of reversals, of $25.7 million and $80.0 million, respectively. The restructuring charges include a charge of $42.8 million related to the indefinite suspension of the installation of a worldwide enterprise resource planning system, which was recorded during the first quarter of fiscal 2004. Additionally, the restructuring charges, net of reversals, for the three and six months ended May 30, 2004 include $25.7 million and $37.2 million, respectively, related to other restructuring activities that became probable and estimable or were expensed as incurred.

The following table summarizes the activities and liability balances associated with restructuring initiatives from 2001 through the second quarter of fiscal 2004:

2004 Reorganization Initiatives

In December 2003, the Company retained the management consulting firm Alvarez & Marsal, Inc. to work with the Company’s leadership team to further assist in analyzing the Company’s business strategies, plans and operations. As a result of this review, during the second quarter of fiscal 2004, the Company commenced the following additional reorganization initiatives described in this section.

2004 Spain Plant Closures

        During the three months ended May 30, 2004, the Company commenced the process of closing its two owned and operated manufacturing plants in Spain. The Company is engaged in negotiations with local representatives for the plant employees and expects the plants to cease operations by the end of fiscal 2004. During the three months ended May 30, 2004, the Company recorded severance costs of approximately $10.3 million related to the anticipated displacement of approximately 460 employees associated with this initiative. The amount of the initial charge was determined based upon the estimated minimum severance benefits for this action under local statutory requirements. As negotiations progress, the Company expects to incur additional employee-related restructuring costs for termination benefits and other restructuring costs which will be recorded as they become probable and estimable. As of May 30, 2004, no employees had yet been displaced. In addition, while preliminary analysis indicates that there does not appear to exist an impairment issue relating to the carrying amounts of the related property, plant and equipment, the Company is in the process of obtaining formal appraisals which could result in additional restructuring charges as a result of the decision to close the plants.

2004 U.S. Organizational Changes

During the three months ended May 30, 2004, the Company reduced resources associated with the Company’s corporate support functions by eliminating staff, not filling certain open positions and outsourcing most of the transaction activities in the U.S. human resources function. This initiative will result in the displacement of approximately 175 employees. During the three months ended May 30, 2004, the Company recorded a charge for severance and lease termination costs of approximately $12.5 million related to this initiative. As of May 30, 2004, approximately 60 individuals had been displaced. The Company will continue to identify actions intended to further reduce costs, and will record additional employee-related restructuring costs for termination benefits and other restructuring costs, as appropriate, when they become probable and estimable.

2004 Europe Organizational Changes

During the three months ended May 30, 2004, the Company commenced additional reorganization actions which resulted in the displacement of three employees in its European operations. As of May 30, 2004, the Company recorded a charge for severance costs and related benefits of approximately $0.9 million related to this initiative. The Company will continue to identify actions intended to further reduce costs, and will record additional employee-related restructuring costs for termination benefits and other restructuring costs, as appropriate, when they become probable and estimable.

The table below displays the restructuring activity for the six months ended May 30, 2004, and the balance of the restructuring reserves as of May 30, 2004, for the 2004 reorganization initiatives discussed above.

2004 Indefinite Suspension of Enterprise Resource Planning System Installation

In December 2003, the Company indefinitely suspended the installation of a worldwide enterprise resource planning system in order to reduce costs and prioritize work and resource use, and as a result the Company recorded a charge of approximately $42.8 million during the first quarter of fiscal 2004 related to this initiative. The charge was comprised of approximately $2.7 million related to the displacement of approximately 40 employees, $6.6 million for other restructuring costs primarily related to non-cancelable project contractual commitments and $33.4 million to write-off capitalized costs related to the project. As of May 30, 2004, approximately 40 employees had been displaced.

During the remainder of fiscal year 2004, the Company expects to incur no additional restructuring costs in connection with this action.

The table below displays the restructuring activity and liability balance of the reserve for the 2004 ERP installation indefinite suspension.

2003 U.S. 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. During the fourth quarter of fiscal 2003, the Company recorded an initial charge of $22.4 million in connection with this initiative, reflecting the displacement of approximately 350 salaried employees in various U.S. locations. As a result of these initiatives, the Company recorded charges during the three and six months ended May 30, 2004 of $0.7 million and $8.2 million, respectively, for additional severance and benefits related to the displacement of approximately 185 employees, and $0.3 million and $0.9 million, respectively, for other restructuring costs. As of May 30, 2004, approximately 535 employees had been displaced, and the remainder will be displaced during 2004.

During the remainder of fiscal year 2004, the Company expects to incur additional employee-related restructuring costs related to this initiative of approximately $2.5 million for termination benefits and other restructuring costs, which will be recorded as they become estimable and probable.

The table below displays the activity and liability balance of the reserve for the 2003 U.S. organizational changes.

2003 North America Plant Closures

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, closed in March 2004. Production from the San Antonio and Canadian facilities has been shifted to third-party contractors located primarily outside the U.S. and Canada. During the third quarter of 2003, the Company recorded a charge of $11.0 million for asset write-offs associated with the U.S. and Canadian plant closures. During the fourth quarter of 2003, the Company recorded a charge of $42.1 million consisting of $41.3 million for severance and employee benefits and $0.8 million for other restructuring costs. The Company recorded additional charges during the three and six months ended May 30, 2004 of $4.1 million and $7.4 million, respectively, net of reversals, for additional severance and employee benefits, facility closure costs and asset write-offs related to these initiatives. As of May 30, 2004, a total of approximately 2,000 employees had been displaced in connection with these plant closures.

During the remainder of fiscal year 2004, the Company expects to incur additional employee-related restructuring costs of approximately $1.1 million for termination benefits, and $4.8 million relating to the closures and other restructuring costs, such as contract termination costs, which will be recorded as they become estimable and probable, or in the case of contract termination costs, when the related contracts are terminated.

The table below displays the restructuring activity and liability balance of the reserve for the 2003 North American plant closures.

2003 Europe Organizational Changes

During the fourth quarter of 2003, the Company announced reorganization actions to consolidate and streamline operations in its European headquarters in Belgium and in various field offices. As a result the Company recorded a charge of $28.9 million consisting of $28.1 million for severance and employee benefits and $0.8 million for other restructuring costs. The charge reflected the estimated

displacement of approximately 310 employees. The Company recorded charges during the three and six months ended May 30, 2004 of $1.0 million and $1.8 million, respectively, for additional severance and employee benefits and legal fees associated with severance negotiations, and reversals of $1.2 million and $1.6 million, respectively, associated with lower than anticipated severance and employee benefits. As of May 30, 2004, approximately 273 employees had been displaced and the remainder are to be displaced in 2004.

The table below displays the activity and liability balance of the reserve for this European initiative.

2002 Europe Reorganization Initiatives

In November 2002, the Company initiated the first of a series of reorganization initiatives affecting several countries to realign its resources with its European sales strategy to improve customer service, reduce operating costs and streamline product distribution activities. These actions included the closures of the Belgium, France and Holland distribution centers during the first half of 2004. During 2002, the Company recorded an initial charge of $1.6 million reflecting the estimated displacement of 40 employees. During 2003, the Company recorded in selling, general and administrative expenses charges of $6.1 million reflecting the estimated displacement of 89 employees. As of May 30, 2004, all of the employees had been displaced.

For the three and six months ended May 30, 2004 the Company recorded charges of $0.2 million and $0.4 million, respectively, for additional severance and benefits and other restructuring costs, such as lease termination costs.

During the remainder of fiscal year 2004, the Company expects to incur additional other restructuring costs, such as contract termination costs, of approximately $1.0 million related to this initiative, which will be recorded as they become estimable and probable, or in the case of contract termination costs, when the related contracts are terminated.

The table below displays the activity and liability balance of the reserve for this European initiative.

2002 U.S. Plant Closures

The Company announced in April 2002 the closure of six U.S. manufacturing plants. The Company recorded an initial charge in the second quarter of 2002 of $120.0 million consisting of $16.3 million for asset write-offs, $86.0 million for severance and employee benefits and $17.7 million for other restructuring costs. The Company closed the six manufacturing plants in 2002, displacing 3,540 employees. For the three and six months ended May 30, 2004, the Company reversed $3.1 million of employee benefit costs due to less than anticipated claims volume.

The table below displays the activity and liability balance of this reserve.

2001 Corporate Reorganization Initiatives

In November 2001, the Company instituted various reorganization initiatives in the U.S. that included simplifying product lines and realigning its resources to those product lines. The Company recorded an initial charge of $20.3 million in November 2001. In connection with these initiatives, approximately 325 employees were displaced.

The table below displays the activity and liability balance of this reserve.

NOTE 4: INCOME TAXES

Effective Tax Rate for Six Months Ended May 30, 2004. The effective tax rate for the six months ended May 30, 2004 was (42.1%), and differs from the Company’s estimated annual effective tax rate of (215.1%) described below, due primarily to losses in certain foreign jurisdictions for which no tax benefit can be recognized. In accordance with FASB Interpretation No. 18, the Company adjusts its annual estimated effective tax rate of (215.1%) to exclude the impact of these foreign losses. The adjusted estimated annual effective tax rate is then applied to the year-to-date pre-tax operating results, exclusive of the results in these foreign jurisdictions, to compute tax expense for the six-month period ended May 30, 2004. This calculation results in a (42.1%) effective rate for the six months ended May 30, 2004. Tax expense of $2.6 million was recorded in the three month period ended May 30, 2004 to bring the year-to-date accrual for income taxes to the (42.1%) effective tax rate.

Estimated Annual Effective Tax Rate. As indicated above, the Company is projecting an annual 2004 effective tax rate of (215.1%). Income taxes are provided on an interim basis based upon this projection. For the fiscal year ended November 30, 2003, the effective tax rate was (1, 016.3%). The estimated annual effective tax rate of (215.1%) is based on current full-year forecasts of income or losses, as adjusted by the following:

The estimated annual effective tax rate for 2004 differs from the U.S. federal statutory income tax rate of 35% as follows:

The “state income taxes, net of U.S. federal impact” item above reflects the state tax benefit generated by domestic tax losses in the U.S., net of the related U.S. federal impact. As not all state losses meet the more likely than not standard for realization, the Company reverses a portion of this benefit from the estimated annual effective tax rate through an increase in the valuation allowance, which is discussed in more detail below. The rate of 33.7% reflects the state income tax expense or benefit as a percentage of consolidated earnings before taxes.

The “impact of foreign operations” item above reflects additional benefit generated by foreign losses incurred in jurisdictions with rates in excess of the U.S. federal statutory rate. As not all federal losses meet the more likely than not standard for realization, the Company reverses a portion of this benefit from the estimated annual effective tax rate through an increase in the valuation allowance, which is discussed in more detail below. This item also reflects the Company’s expectation that foreign income taxes will be deducted rather than claimed as a credit in the U.S. federal income tax return.

The “interest and taxes accrued for federal, state, and international issues” item above reflects the accrual for current year interest on outstanding tax reserves and any changes during the year to these accruals.

The “increase in valuation allowance” relates primarily to projected additional current year losses in foreign and state jurisdictions in which the Company has previously decided it is unlikely to utilize its existing operating loss carry forwards. The current year losses arise in part due to projections of increased restructuring expenses (see Note 3 to the Consolidated Financial Statements). The Company continues to believe it is more likely than not its U.S. federal net operating loss carryover will be utilized before it expires. Projected repatriations of significant unremitted foreign earnings support utilization of the U.S. federal net operating loss carry forwards.

The Company’s total valuation allowance relates primarily to deferred tax assets for foreign tax credits, state and foreign net operating loss carry forwards and other foreign deferred tax assets. 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. Accordingly, the Company evaluates all significant available positive and negative evidence, including the existence of losses in recent years and our forecast of future taxable income, in assessing the need for a valuation allowance.

The “nondeductible expenses” relate primarily to items that are deductible for determining book income but that will not be deductible in determining U.S. federal and state taxable income.

Examination of Tax Returns. The Company has income tax returns under examination by various regulatory tax authorities. The Company continuously reviews issues raised in connection with these on-going examinations to evaluate the adequacy of its reserves. During the period ended May 30, 2004, the Company received unfavorable advice from the National Office of the Internal Revenue Service with regard to certain tax positions taken by the Company on prior returns. On June 14, 2004, the Company also received a Revenue Agent’s Report (“RAR”) relating to the IRS’s examination of the FY 90-94 U.S. federal income tax returns of the Company. While the Company agrees with the majority of the adjustments proposed by the tax authorities in the RAR, a number of unagreed technical issues will be protested and moved to the Appeals Division of the Internal Revenue Service to be resolved at that level.

The Company believes that its accrued tax liabilities are adequate to cover its domestic and foreign tax loss contingencies.

Reclassifications. During the second quarter of fiscal 2004, the Company reclassified approximately $35 million from long term tax liabilities to accrued taxes to reflect the expected payments during the next 12 months of tax and interest related to the resolution of tax issues with various tax authorities. In addition, for the six months ended May 25, 2003, the Company has reclassified in its statement of cash flows prior year interim changes in deferred tax assets to changes in current tax liabilities, to reflect the current year presentation. There was no change in the reported cash used in operating activities for the six months ended May 25, 2003 as a result of such reclassification.

NOTE 5: DEBT AND LINES OF CREDIT

Debt and lines of credit at May 30, 2004 and November 30, 2003 are summarized below: