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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

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

Yes  þ    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (¶229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K.  x

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

The Company is privately held. Nearly all of its common equity is owned by members of the families of several descendants of the Company’s founder, Levi Strauss. There is no trading in the common equity and therefore an aggregate market value based on sales or bid and asked prices is not determinable.

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

Common Stock $.01 par value—37,278,238 shares outstanding on February 1, 2003

Documents incorporated by reference: None

Table of Contents

LEVI STRAUSS & CO.

TABLE OF CONTENTS TO FORM 10-K

FOR FISCAL YEAR ENDING NOVEMBER 24, 2002

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PART I

Item 1.     BUSINESS

Overview

We are one of the world’s leading branded apparel companies with sales in more than 100 countries. We design and market jeans and jeans-related pants, casual and dress pants, tops, jackets and related accessories for men, women and children under our Levi’s^® and Dockers^® brands. Our products are distributed in the United States primarily through chain retailers and department stores and abroad primarily through department stores and specialty retailers. We also maintain a network of approximately 900 franchised or independently owned stores dedicated to our products outside the United States and operate a small number of company-owned stores. Sales from company-owned stores represented approximately 1% of our total net sales for 2002.

We believe there is no other apparel company with a comparable global presence in either the jeans or casual pants segment of the apparel market. Since our founder, Levi Strauss, invented the blue jean in 1873, Levi’s^® jeans have become one of the most successful and widely recognized brands in the history of the apparel industry. According to a study conducted by NPDFashionworld in December 2001, in the United States, the Levi’s^® brand rated #1 among apparel companies in terms of brand awareness and brand retention (defined as the percent of all past-12-month purchasers who plan to buy the brand in the future). Our Dockers^® brand of casual pants, introduced in 1986, is widely recognized in the United States and a growing number of markets abroad. Sales of our Levi’s^® brand products and sales of our Dockers^® brand products represented approximately 74% and 26%, respectively, of our total net sales for 2002. Jeans, casual and dress pants represented approximately 86% of our total units sold in 2002.

In October 2002, we announced that we will be introducing a new casual clothing brand, the Levi Strauss Signature^™ brand. We created the brand for value-conscious consumers who shop in mass channel retail stores. The Levi Strauss Signature^™ brand will initially feature a range of denim and non-denim pants and shirts as well as denim jackets. We anticipate that the products will be available initially at Wal-Mart Stores, Inc. locations across the United States beginning in July 2003. According to data from Knowledge Networks and NPDFashionworld, the mass channel is the largest and fastest growing retail channel in the United States, reaching approximately 160 million shoppers and selling more than 31% of all jeans sold in 2001. Our entry into the mass channel reflects our strategy of reaching consumers in all segments of the population, wherever they buy their clothing, whether it is through high-end specialty stores, department stores, national chains or mass channel retailers.

We currently organize our business into three geographic divisions: the Americas, consisting of the United States, Canada and Latin America; Europe, including the Middle East and Africa; and Asia Pacific. We conduct our operations in the United States primarily through Levi Strauss & Co. and outside the United States primarily through foreign subsidiaries owned directly or indirectly by Levi Strauss & Co. In 2002, we had approximately 3,300 retail customers operating more than 20,400 locations in the United States and Canada. In 2002, we had net sales of $4.1 billion, of which the Americas, Europe and Asia Pacific accounted for 65%, 26% and 9%, respectively.

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Business Turnaround Update

From 1998 to 2002, we experienced a decrease in net sales from $6.0 billion to $4.1 billion due to both industry-wide and company-specific factors. In response, we have taken these actions:

We believe that through these initiatives we have successfully gained control of our business and are in the process of stabilizing and positioning our company to resume profitable growth. Our actions have enabled us to strengthen the overall financial health of the company. We have:

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Our Business Strategy

Our vision is to market the most appealing and widely-worn casual clothing in the world. We are continuing to execute against the core business strategies underlying our business turnaround. We aim to continue to increase our financial strength and flexibility and resume profitable growth. We are focusing on the following key business strategies:

Innovate and lead from the core.

We believe that an integrated presentation of new and innovative products and marketing programs targeted to specific consumer and retail segments is crucial to generating consumer demand and increasing sales of our products. We continue to focus on:

Achieve operational excellence.

We are implementing processes and initiatives to lower our worldwide sourcing costs, to shorten our time to market, to more effectively and reliably fulfill product demand, and to leverage our global scale. We continue to focus on:

Revitalize retailer relationships and improve our presence at retail.

We distribute our products in a wide variety of retail formats around the world including chain and department stores, franchise stores dedicated to our brands, specialty retailers, and, beginning in July 2003, a mass channel retailer in the United States. We must ensure that the economics for our retail customers are attractive, that the right products are available and in stock at retail, and that our products are presented in ways that enhance brand appeal and attract consumers. We continue to focus on:

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Sell where they shop.

We want to sell products to consumers where they shop. To do this, we must make relevant products accessible through multiple channels of distribution at price points that meet consumer expectations. We continue to focus on:

We believe that our business strategies are directly aligned with industry forces and that we are building the right core capabilities and operating processes to execute these strategies in a manner consistent with our values.

Our Brands and Products

We market a broad range of branded jeanswear, casual wear and dress pants that appeal to diverse demographic groups in markets around the world. Through a number of sub-brands and product lines under the Levi’s^® and Dockers^® brands, and, beginning in July 2003, under the Levi Strauss Signature^™ brand, we target specific consumer segments and provide product differentiation for our retail customers. We focus on creating new, innovative products relevant to our target consumers, as well as ensuring that our core traditional products are updated with new fits, finishes, fabrics and features. For example, our revamped U.S. product line reflects extensive fit testing involving over 14,000 consumers. We strive to leverage our global brand recognition, product design and marketing capabilities by taking products and design concepts developed in one region and introducing them in other geographic markets. We also design and market global products, including, for example, the Levi’s^® Type 1^™ jeans, which we introduced in Asia Pacific in late 2002 and introduced in Europe and the United States in January 2003.

Levi’s^® Brand

Since the invention of jeans by our founder Levi Strauss in 1873, the Levi’s^® brand has become one of the most successful and widely recognized brands in the history of the apparel industry. Levi’s^® brand products are now sold in more than 100 countries around the world. In fiscal 2002, sales of our Levi’s^® brand products represented approximately 74% of our net sales, and accounted for 65% of net sales in the Americas, 91% of net sales in Europe and 96% of net sales in Asia Pacific.

Our Levi’s^® brand features a wide range of product offerings:

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Dockers^® Brand

We market casual clothing, primarily pants and tops, under the Dockers^® brand, in more than 50 countries. We launched the brand in 1986 to address an emerging consumer interest in khaki pants. We believe that the Dockers^® brand, through its product offering and marketing, played a major role in the resurgence of khaki pants and the movement toward casual attire in the U.S. workplace by helping create a standard for business casual clothing. In 2002, sales of Dockers^® brand products represented approximately 26% of our net sales, accounting for approximately 35% of net sales in the Americas, approximately 9% of net sales in Europe and approximately 4% of net sales in Asia Pacific.

Our Dockers^® brand offerings are primarily targeted to men and women ages 25 to 39 and include:

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Levi Strauss Signature^™ Brand

In October 2002, we announced that we will be introducing a new casual clothing brand, the Levi Strauss Signature^™ brand. We created the brand for value-conscious consumers who shop in mass channel retail stores.

Our Go-to-Market Process

We refer to the process from initial product concept to placement of the product on the retailer’s shelf as the “go-to-market process.” This process is the foundation of our operational model and is a key element of our strategy to achieve operational excellence. We work to integrate design, research and development, merchandising, marketing, supply chain and sales functions through disciplined planning, standardized milestones and metrics and clear accountability. Our goal is to translate consumer insight into relevant strategic direction and to deliver the right product at the right time in the most efficient way. We are continually evaluating ways to make this process faster, more disciplined and efficient and to adapt better to reflect our global breadth.

At the beginning of our go-to-market process for every season, our brand merchandisers, designers and research and development teams explore fabric and design concepts driven by consumer preferences, brand direction and market trends to set the creative direction for the season. The product’s strategic direction is then communicated throughout our organization. Our demand planners evaluate volume potential. Our sales teams begin developing product positioning and sell-in strategies. Our supply chain organization analyzes potential sources, manufacturing capacities and costs.

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We then develop and merchandise a line, including recommendations about product features such as fabric, finish, sundries and patterns, make final decisions about products to be included in the line and develop integrated marketing plans. Once the product line is determined, our supply chain organization focuses on production and logistics execution, while our sales team focuses on retail operations, sell-in activities and order management to ensure proper assortment and placement of products at retail. During the final stage of the process, we ship the final product to our customers and launch consumer and retail marketing programs.

Sourcing, Manufacturing and Logistics

Fabric and Raw Materials.    We purchase the fabric and raw materials used in our business, particularly denim and twill, from several suppliers, including Cone Mills, Galey & Lord, including its Swift Denim subsidiary, American Cotton Growers and Burlington Industries, Inc. In addition, we purchase thread, trim, buttons, zippers, snaps and various other product components from numerous suppliers, and we regularly engage in collaborations with fiber, fabric, finishing and components suppliers on developing and commercializing new product innovations. We have rigorous quality, safety and product integrity standards for fabric and other components of our products.

We do not have long-term raw materials or production contracts with any of our principal suppliers, except for Cone Mills, which until March 2003 is the sole worldwide supplier of the denim used for our 501^® jeans, and which supplied approximately 22%, 25% and 26% in 2002, 2001 and 2000, respectively, of the total volume of fabrics we purchased worldwide. Our supply agreement with Cone Mills provides for a rolling five-year term, with the current term ending in 2007, unless either Cone Mills or we elect not to extend the agreement, upon which the agreement will terminate at the end of the then-current term. The contract also aims to ensure our supply for three years following a change of control of Cone Mills. We may terminate the Cone Mills contract at any time upon 30 days notice. On May 13, 2002, we amended the exclusivity and requirements features of our supply agreement with Cone Mills. The amendment provides that, after March 30, 2003, we may purchase these denims from other suppliers and Cone Mills may sell these denims to other customers. The amendment also allows us to purchase these denims for our European business from non-U.S. sources prior to March 30, 2003 if the European Union implements material tariffs against U.S.-produced denim. The amendment does not change any other provision of the supply agreement.

In 2002, we purchased approximately 75% of our total volume of fabrics from U.S. fabric mills. The U.S. textile industry continues to experience financial difficulty and several mills are operating under bankruptcy protection. We believe that the difficulties in the U.S. textile industry do not present a significant risk to us as we maintain a diverse source base and continually explore opportunities to reduce our reliance on U.S. sources by sourcing fabrics from suppliers located around the world. We have not experienced any significant difficulty in obtaining fabric and other raw materials to meet production needs in the past.

Manufacturing and Finishing.    We obtain our products from a combination of independent manufacturers and company-owned facilities. Since 1997, we have shifted our sourcing base substantially toward outsourcing by closing 37 company-owned production and finishing facilities in North America and Europe, including six plants in the United States and two plants in Europe in 2002. We believe that outsourcing allows us to maintain production flexibility, in terms of both location and nature of production, while avoiding the substantial capital expenditures and costs related to operating a large internal production capability. We continue to own and operate 13 plants located in the United States, Canada, Europe, Asia and South Africa.

In the majority of cases, our purchased fabrics are shipped directly from fabric manufacturers to our own manufacturing plants, or directly to third party contractors for garment construction. In these traditional “Cut-Make-Trim” arrangements, we retain ownership of the fabric throughout the manufacturing and finishing process. We use numerous independent manufacturers, principally in Latin America and Asia, for the production and finishing of our garments. We also use contractors who both produce or purchase fabric, sew and finish the garments. These “package” contractors represent a growing portion of our production and enable us to reduce working capital relating to work-in-process inventories. We typically conduct business with our contractors on an order-by-order basis. We inspect fabrics and finished goods as part of our quality control program to ensure that consumers receive products that meet our high standards.

We require all third party contractors who manufacture or finish products for us to abide by a stringent code of conduct that sets guidelines for employment practices such as wages and benefits, working hours, health and safety, working age and disciplinary practices, and for environmental, ethical and legal matters. We regularly assess manufacturing and finishing facilities to see if they are complying with our code of conduct. Our program includes periodic on-site facility inspections and continuous improvement activities. We also hire independent monitors to supplement our efforts.

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In April 2000, we were named as an additional defendant in a class action suit that was filed by non-resident garment workers, who currently or formerly worked in Saipan (a U.S. commonwealth in the Northern Mariana Islands), against several manufacturers operating on the island. The claims challenge working conditions for the operators in Saipan facilities and allege 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. We have refused to join the settlement as we believe that the allegations about us in the lawsuit are not true and we intend to vigorously defend this case.

Logistics.    We operate dedicated distribution centers in a number of countries and we also outsource distribution activities to third party logistics providers. Distribution center activities include receiving finished goods from our plants and contractors, inspecting those products and shipping them to our customers. In the United States, we are entering into an arrangement with a third party logistics provider to operate warehouse facilities at three major U.S. ports of entry. The objective of this arrangement is to improve product flows into, and the efficiency of, our U.S. distribution centers, and to facilitate product warehousing and shipment to mass channel and other customers. We continually explore opportunities in all of our regions to improve efficiencies in both our in-bound and out-bound logistics activities.

Sales, Distribution and Customers

We distribute our products in a wide variety of retail formats around the world including chain and department stores, franchise stores dedicated to our brands, specialty retailers, and, beginning in July 2003, a mass channel retailer in the United States. Our distribution strategy focuses on ensuring that the economics for our retail customers are attractive, that the right products are available and in stock at retail and that our products are presented in ways that enhance brand appeal and attract consumers. This involves:

Americas

In the Americas, we distribute our products through national and regional chains, department stores, specialty stores and Levi’s^® Store retail shops. We have approximately 3,300 retail customers operating more than 20,400 locations in the United States and Canada. Sales of Levi’s^® and Dockers^® products to our top five and top 10 customers in the United States accounted for approximately 35% and 45% of our total net sales in 2002, and approximately 53% and 69% of our Americas net sales in 2002, as compared to approximately 37% and 47% of our total net sales in 2001, and approximately 55% and 71% of our Americas net sales in 2001. Our top 10 customers in 2002, on both an Americas and total company basis, were (in alphabetical order): Costco Wholesale Corporation, Casual Male Retail Group, Inc. (formerly Designs, Inc.), Dillards, Inc., Federated Department Stores, Inc., Goody’s Family Clothing, Inc., J.C. Penney Company, Inc., Kohl’s Corporation, The May Department Stores Company, the Mervyn’s unit of Target Corporation and Sears, Roebuck & Co. J.C. Penney Company, Inc. is the only customer that represented more than 10% of our total net sales, accounting for approximately 12%, 13% and 12% of our total net sales in 2002, 2001 and 2000, respectively. It is possible that Wal-Mart may become one of our largest customers as a result of purchases of Levi Strauss Signature^™ products. We also target limited distribution premium products like Levi’s^® Vintage Clothing to independent, image-conscious specialty stores in major metropolitan areas who cater to more fashion-forward, trend-initiating consumers.

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We regularly explore entry into new customers and development of new brands and products for both existing and potential customers. For example, during 2002 we entered Pacific Sunwear, a multi-brand specialty store. We also entered a number of image department stores including the Bloomingdales unit of Federated Department Stores, Inc., Neiman Marcus Group Inc., Nordstrom Inc. and Saks Incorporated. In addition, as part of our ongoing effort to build our business, we announced in October 2002 that we will be introducing a new casual clothing brand, the Levi Strauss Signature^™ brand, for consumers who shop at mass channel retail stores. We anticipate that the products will be available initially at Wal-Mart locations across the United States beginning in July 2003.

Europe

Our European customers include large department stores, such as Corte Ingles in Spain, Galeries Lafayette in France and Karstadt/Hertie in Germany; dedicated, single-brand Levi’s^® Store and Dockers^® Store retail shops; mail-order accounts; and a substantial number of independent retailers operating either a single or small group of jeans-focused stores or general clothing stores. During 2002, nearly half our European sales were by these independent retailers, who are under increasing pressure from both vertically integrated specialty stores and department stores. The more varied and fragmented nature of European retailing means that we are less dependent on major customers than we are in the United States. In 2002, our top 10 European customers accounted for approximately 11% of our total European net sales.

Asia Pacific

During 2002, in Asia Pacific we generated over half of our sales through the specialty store channel, which includes multi-brand as well as independently owned Levi’s^® Store retail shops. The rest of our products are sold through department stores and general merchandise stores. As in Europe, the varied and fragmented nature of Asian retailing means we are less dependent on individual customers in the region. Our Asia Pacific business is heavily weighted toward Japan, which represented approximately 53% of our 2002 net sales in the region.

Dedicated Stores

We have a network of approximately 900 franchised or other independently owned stores selling Levi’s^® brand or Dockers^® brand products under the “Original Levi’s^® Store,” “Levi’s^® Store,” “Selvedge” and “Dockers^®” Store names in Europe, Asia, Canada and Latin America. These dedicated-format stores are strategically important as vehicles for demonstrating the breadth of our product line, enhancing brand image and generating sales. These stores also are an important distribution channel in newer and smaller markets in Eastern Europe, Asia Pacific and Latin America. We own and operate a small number of stores dedicated to the Levi’s^® brand, including stores in the United States located in New York, Chicago, Orange County (near Los Angeles), San Francisco, San Diego, Boston and Seattle and in Europe in London, Milan, Paris and Berlin. Sales from company-owned stores represented approximately 1% of our total net sales for 2002.

We also own in the United States and Japan, and license third parties in the United States and abroad to operate, outlet stores for the disposition of closeout, irregular and return goods. Sales through our outlet channels in the United States represented less than 5% of our total net sales in 2002. We use the outlet store channel to support our brands by moving closeout and irregular goods as quickly as possible through the stores and by reducing the flow of goods to channels that are not consistent with our brand image and distribution strategies.

Internet

We operate websites devoted to the Levi’s^® and Dockers^® brands as marketing vehicles to enhance consumer understanding of our brands. We do not sell products directly to consumers through these internet websites. In the United States, our products are currently sold online through specifically authorized third party internet sites that meet our standards, such as www.macys.com, operated by Federated Department Stores, Inc., www.jcpenney.com and www.kohls.com, and visitors can link to authorized on-line retailers through our sites. In Canada and Europe, authorized dealers and mail order accounts who meet our standards relating to customer service, return policy, site content, trademark use and other matters may sell our products to consumers through their own internet sites.

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Advertising and Promotion

We make substantial expenditures on advertising, retail and promotion activities in support of our brands to increase consumer relevance and to drive consumer demand. We expensed approximately $307.1 million, or 7.4% of total net sales, in 2002 on these activities. We advertise through a broad mix of media, including television, national publications, billboards and other outdoor vehicles. We execute region-specific marketing programs that are based on globally consistent brand values. This approach allows us to achieve consistent brand positioning while giving us flexibility to optimize program execution in local markets.

Our marketing strategy focuses on:

We also use less traditional marketing vehicles, including event and music sponsorships, product placement in television shows, music videos and films and alternative marketing techniques, including street-level and nightclub events and similar targeted, small-scale activities. In 2002, our marketing activities have included: “Levi’s^® Girlfriends,” the brand’s first major campaign aimed at women in Europe, conducted in collaboration with MTV and Sony; “Dockers^® Defender of the Week,” an integrated marketing program with Fox Sports; and tie-ins between the Levi’s^® brand in Korea and the World Cup and Korean soccer star Song Chong Gug.

Competition

The worldwide apparel industry is highly competitive and fragmented. In all three of our regional markets we compete with numerous branded manufacturers, retailer private labels, designers and vertically integrated specialty store retailers.

The success of our business depends, in part, on our ability to:

We believe our competitive strengths include:

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Americas

We face intense competition across all of our brands from vertically integrated specialty stores, mass merchants, retailer private labels, designer labels and other branded labels. We sell both basic and fashion-oriented products under the Levi’s^® and Dockers^® brands to retailers in diverse channels across a wide range of retail price points. As a result, we face a wide range of competitors, including:

Europe

While there is no one single brand with a strong presence across the entire European region, strong local brands and retailers exist in certain markets, including Diesel, G-Star and Miss Sixty. Our most significant competitors are vertically integrated specialty retailers, such as Zara, Hennes & Mauritz AB, Next and Celio. Athletic wear companies such as Adidas-Salomon AG also offer competitive products and are an increasing force in the European market. Companies based in the United States, such as Gap, Inc. and VF Corporation also compete in Europe. The casual apparel market in Europe is fragmented and there is currently no significant pan-European branded competitor of our Dockers^® brand in Europe.

Asia Pacific

Japan continues to be our largest market in Asia Pacific, representing approximately 53% of regional net sales in 2002. Asia Pacific is a fragmented market with no strong pan-regional competitor. Competitors in the jeanswear market consist of regional brands, such as Edwin, Something and Bobson in Japan, and U.S. brands, such as Gap, Inc., VF Corporation and Earl Jeans. We also face competition from vertically integrated specialty stores, such as UNIQLO and Giordano. Athletic wear companies such as Adidas-Salomon and Nike, Inc. compete in tops and casual pants.

Trademarks

Substantially all of our global trademarks are owned by Levi Strauss & Co. We regard our trademarks as our most valuable assets and believe they have substantial value in the marketing of our products. Levi’s^®, Dockers^®, Levi Strauss Signature^™, Silvertab^®, 501^®, Slates^®, the Wings and Anchor Design, the Arcuate Stitching Design, the Tab Device and the Two Horse^® design are among our core trademarks. We protect these trademarks by registering them with the U.S. Patent and Trademark Office and with governmental agencies in other countries, particularly where our products are manufactured and/or sold. We work vigorously to enforce and protect our trademark rights by engaging in regular market reviews, helping local law enforcement authorities detect and prosecute counterfeiters, issuing cease-and-desist letters against third parties infringing or denigrating our trademarks and initiating litigation as necessary. We also work with trade groups and industry participants seeking to strengthen laws relating to the protection of intellectual property rights in markets around the world. We grant licenses to other parties to manufacture and sell products with our trademarks in product categories and in geographic areas in which we do not operate.

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Seasonality and Backlog

Although the fourth quarter is typically our highest sales quarter, our sales do not vary substantially by quarter in any of our three regions, as the apparel industry has become less seasonal due to more frequent selling seasons and offerings of both basic and fashion oriented merchandise throughout the year.

All of our orders are subject to cancellation. As a result, our order backlog may not be indicative of future shipments.

Government Regulation

Our operations are subject to the effects of international trade agreements and regulations such as the North American Free Trade Agreement and the Caribbean Basin Initiative, and the activities and regulations of the World Trade Organization. Generally, these trade agreements benefit our business by reducing or eliminating the duties and/or quotas assessed on products manufactured in a particular country. However, trade agreements can also impose requirements that adversely affect our business, such as limiting the countries from which we can purchase raw materials and setting quotas on products that may be imported from a particular country. We continuously monitor these trade-related matters pending with the U.S. government for potential positive or negative effects of these matters on our business. Imported products are also subject to customs duties which can represent a significant portion of the cost of the merchandise.

In addition, we are subject to regulation by the Federal Trade Commission in the United States relating principally to the labeling and advertising of our products. We are also subject to federal, state, local and foreign laws and regulations affecting our business, including, in the United States, those promulgated under the Occupational Safety and Health Act, the Consumer Product Safety Act, the Flammable Fabrics Act, the Textile Fiber Product Identification Act, the rules and regulations of the Consumer Products Safety Commission and comparable laws abroad. We believe that we are in substantial compliance with these regulations, as well as applicable federal, state, local, and foreign rules and regulations governing the discharge of materials hazardous to the environment. We do not expect any significant capital expenditures for environmental matters in the near future.

Social Responsibility

We have a long-standing corporate culture characterized by ethical conduct and social responsibility. Our culture and our core values are reflected in policies and initiatives that we believe distinguish us from others in the apparel industry. We were a pioneer in many social and cultural areas:

Our strong commitment to workers rights is reflected in our history of public advocacy for responsible trade policies. In 2001, we expressed our support for incorporating workplace standards and workers rights provisions within the context of trade agreements to members of the U.S. Congress, the U.S. Trade Representative and various other government entities.

We are active in the communities where we have a presence. Together with the Levi Strauss Foundation, we contributed $13.7 million during 2002 to community agencies in over 40 countries to support employee volunteerism and programs to advance HIV/AIDS prevention and care, economic development opportunities for women and youth and access to education. In addition, we support approximately 70 community involvement teams worldwide that facilitate employee volunteerism and raise funds for community projects.

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Employees

As of November 24, 2002, we employed approximately 12,400 people, approximately 4,770 of whom were located in the United States. Most of our production and distribution employees in the United States are covered by various collective bargaining agreements. Outside the United States, most of our production and distribution employees are covered by either industry-sponsored and/or state-sponsored collective bargaining mechanisms. We consider our relations with our employees to be good and have not recently experienced any material job actions or labor shortages.

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Item 2.     PROPERTIES

Properties

We conduct manufacturing, distribution and administrative activities in owned and leased facilities. We have renewal rights for most of our property leases. We anticipate that we will be able to extend these leases on terms satisfactory to us or, if necessary, locate substitute facilities on acceptable terms. We believe our facilities and equipment are in good condition and are suitable for our needs. Information about manufacturing, finishing and distribution facilities and other key operating properties in use as of November 24, 2002 is summarized in the following table:

Our global headquarters and the headquarters of our Americas business are both located in leased premises in San Francisco, California. Our Europe and Asia Pacific headquarters are located in leased premises in Brussels, Belgium and Singapore. We also lease or own 94 administrative and sales offices in 35 countries, as well as lease a small number of warehouses in 4 countries.

In addition, we have 53 company-operated retail and outlet stores in leased premises in 10 countries. We have 20 stores in the Americas region, 28 stores in the Europe region and 5 stores in the Asia Pacific region. In 2002, we opened 5 company-operated stores and closed 10 stores. We also own or lease several facilities we formerly operated and have closed.

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Item 3.     LEGAL PROCEEDINGS

In the ordinary course of business, we have pending various 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 position or results of operations.

Item 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of our security holders during our 2002 fiscal fourth quarter.

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PART II

Item 5.     MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

(a)  Our shares of common stock are held by members of the families of several descendants of our founder, Levi Strauss, and by several former members of our management. There is no established public trading market for our shares and none of our shares are convertible into shares of any other class of stock or other securities.

All shares of our common stock are deposited in a voting trust, a legal arrangement that transfers the voting power of the shares to a trustee or group of trustees. The four voting trustees are Peter E. Haas, Sr., Peter E. Haas, Jr., Robert D. Haas and F. Warren Hellman. The voting trustees have the exclusive ability to elect and remove directors, amend our by-laws and take certain other actions which would normally be within the power of stockholders of a Delaware corporation. Our equity holders who, as a result of the voting trust, legally hold “voting trust certificates,” not stock, retain the right to direct the trustees on specified mergers and business combinations, liquidations, sales of substantially all of our assets and specified amendments to our certificate of incorporation.

The voting trust will last until April 2011, unless the trustees unanimously decide, or holders of at least two-thirds of the outstanding voting trust certificates decide, to terminate it earlier. If Robert D. Haas ceases to be a trustee for any reason, then the question of whether to continue the voting trust will be decided by the holders. If Peter E. Haas, Sr. ceases to be a trustee, his successor will be his spouse, Miriam L. Haas. The existing trustees will select the successors to the other trustees. The agreement among the stockholders and the trustees creating the voting trust contemplates that, in selecting successor trustees, the trustees will attempt to select individuals who share a common vision with the sponsors of the 1996 transaction that gave rise to the voting trust, represent and reflect the financial and other interests of the equity holders and bring a balance of perspectives to the trustee group as a whole. A trustee may be removed if the other three trustees unanimously vote for removal or if holders of at least two-thirds of the outstanding voting trust certificates vote for removal.

Our common stock, as noted, and the voting trust certificates, are not publicly held or traded. All shares and the voting trust certificates are subject to a stockholders’ agreement. The agreement, which expires in April 2016, limits the transfer of shares and certificates to other holders, family members, specified charities and foundations and to us. The agreement does not provide for registration rights or other contractual devices for forcing a public sale of shares, certificates or other access to liquidity. The scheduled expiration date of the stockholders’ agreement is five years later than that of the voting trust agreement in order to permit an orderly transition from effective control by the voting trust trustees to direct control by the stockholders.

We may hold “annual stockholders’ meetings” to which all voting trust certificate holders are invited to attend. These meetings are not a “meeting of stockholders” in the traditional corporate law sense; under the voting trust agreement, the trustees, not the voting trust certificate holders, elect the directors and vote the shares on most other corporate matters. In addition, the meetings are not official formal meetings, under the voting trust agreement, of the voting trust certificate holders. Instead, these annual gatherings are opportunities for the voting trust certificate holders to interact with the board of directors and management and to learn more about our business.

(b)  As of January 1, 2003, there were 167 record holders of voting trust certificates.

(c)  We did not declare or pay any dividends in our two most recent fiscal years. Our current bank credit facility prohibits our declaring or paying any dividends without first obtaining consents from our lenders. In addition, in January 2001 and December 2002 we entered into indentures relating to our 11.625% senior notes due 2008 and 12.25% senior notes due 2012, respectively, that limit our paying any dividends. For more detailed information about our bank credit facilities and senior notes, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and Notes to Consolidated Financial Statements.

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Item 6.     SELECTED FINANCIAL DATA

The following table summarizes our selected financial data. The following selected statements of income data and cash flow data for 2002 and the consolidated balance sheet data of such period is derived from our financial statements that have been audited by KPMG LLP. The following selected statements of income data and cash flow data for 2001, 2000, 1999 and 1998 and the consolidated balance sheet data of such periods are derived from our financial statements that have been audited by Arthur Andersen LLP, independent public accountants. For a discussion of the risks relating to Arthur Andersen LLP’s audit of our financial statements, please see “Factors That May Affect Future Results—Risks relating to Arthur Andersen LLP.”

The financial data set forth below should be read in conjunction with, and is qualified by reference to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our consolidated financial statements and the related notes to those financial statements, included elsewhere in this report. Certain prior year amounts have been reclassified to conform to the 2002 presentation.

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The calculation for EBITDA before net restructuring charges and related expenses is shown below:

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Item 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

Except for the historical information contained in this report, certain matters discussed in this report, including (without limitation) statements under “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Although we believe that, in making any such statements, our expectations are based on reasonable assumptions, any such statement may be influenced by factors that could cause actual outcomes and results to be materially different from those projected.

These forward-looking statements include statements relating to our anticipated financial performance and business prospects and/or statements preceded by, followed by or that include the words “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project,” “could,” “plans,” “seeks” and similar expressions. These forward-looking statements speak only as of the date stated and we do not undertake any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, even if experience or future events make it clear that any expected results expressed or implied by these forward-looking statements will not be realized. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these expectations may not prove to be correct or we may not achieve the financial results, savings or other benefits anticipated in the forward-looking statements. These forward-looking statements are necessarily estimates reflecting the best judgment of our senior management and involve a number of risks and uncertainties, some of which may be beyond our control, that could cause actual results to differ materially from those suggested by the forward-looking statements, including, without limitation:

For more information on these and other factors, see “Factors That May Affect Future Results.” We caution you to not place undue reliance on these forward-looking statements. All subsequent written and oral forward-looking statements attributable to us are expressly qualified in their entirety by the cautionary statements and factors that may affect future results contained throughout this report.

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Overview

From 1998 to 2002, we experienced a decrease in net sales from $6.0 billion to $4.1 billion due to both industry-wide and company-specific factors. Industry-wide factors included changing customer preferences and weak economies and retail markets. Company-specific factors included brand equity erosion, insufficient product innovation, poor presentation of our product at retail, operational problems in our supply chain and weakness in our key distribution channels.

In response, we have completed several significant strategic, operational and management initiatives, including closing 37 of our owned and operated production and finishing facilities worldwide, shifting the vast majority of our production to independent contract manufacturers, putting in place a new management team, overhauling our product lines and introducing new products, improving our relationships with retailers, broadening our product availability, improving our operational processes and implementing a new operating model based on disciplined and integrated planning and execution.

We believe that through these initiatives we have successfully gained control of our business and are in the process of stabilizing and positioning our company to resume profitable growth. Our actions have enabled us to strengthen the overall financial health of the company. We have:

In October 2002, we announced that we will be introducing a new casual clothing brand, the Levi Strauss Signature^™ brand. We created the brand for value-conscious consumers who shop in mass channel retail stores. The Levi Strauss Signature^™ brand will initially feature a range of denim and non-denim pants and shirts as well as denim jackets. We anticipate that the products will be available initially at Wal-Mart locations across the United States beginning in July 2003.

Results of Operations

The following table summarizes, for the periods indicated, selected items in our consolidated statements of income, expressed as a percentage of net sales (amounts may not total due to rounding).

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Year Ended November 24, 2002 as Compared to Year Ended November 25, 2001

Consolidated Net Sales.    Net sales in 2002 decreased 2.9% to $4,136.6 million, as compared to $4,258.7 million in 2001. If currency exchange rates were unchanged from 2001, net sales would have decreased approximately 3.2% for 2002 compared to 2001. The decrease primarily reflected the impact of the weak retail and economic climates in many of the markets in which we operate. In the first half of 2002 we were in the early stages of introducing many of the products and programs whose marketplace impact we believed would increase over time. In the second half of 2002, net sales stabilized as these products and programs began to take hold.

Despite the continuation of weak economic and retail conditions in most major markets around the world, we anticipate that 2003 constant currency net sales will increase between 2% to 5% compared to 2002. We expect to continue expanding our reach to a broad range of consumers in 2003, including the faster growing women’s market, by offering relevant products at a wide range of price points. We introduced Levi’s^® Type 1^™ jeans, a modern interpretation of the quintessential Levi’s^® jeans, in Asia Pacific in late 2002 and in Europe and the United States in January 2003. In addition, we will be introducing the Levi Strauss Signature^™ brand, which we expect to be available at Wal-Mart locations across the United States beginning in July 2003. We anticipate that the majority of our net sales growth in 2003 will be in the second half of the year as we continue to build our core business with new fabrics, fits and finishes and launch the Levi Strauss Signature^™ brand.

Americas Net Sales.    In the Americas, net sales in 2002 decreased 5.7% to $2,692.1 million, as compared to $2,856.1 million in 2001. If currency exchange rates were unchanged from 2001, net sales would have decreased approximately 4.9% for 2002 compared to 2001. This decrease primarily reflected the challenging U.S. retail and economic climate. The decline was mitigated by a number of factors in the Americas that continued to improve and have a positive impact during the year. These factors include:

We regularly explore entry into new customers and development of new brands and products for both existing and potential customers. For example, we entered Pacific Sunwear, a multi-brand specialty store, and entered a number of image department stores including the Bloomingdales unit of Federated Department Stores, Inc., Nordstrom Inc. and Saks Incorporated.

Europe Net Sales.    In Europe, net sales in 2002 increased 2.5% to $1,093.1 million, as compared to $1,066.3 million in 2001. On a constant currency basis, net sales would have decreased 1.4% for 2002, compared to 2001. Net sales reflected a competitive and challenging marketplace, particularly in the United Kingdom, Italy and Germany where we experienced weak consumer demand, high retail inventories and increasing apparel price deflation. We stabilized our performance in Europe despite the challenging economic environment by taking various actions including:

Asia Pacific Net Sales.    In our Asia Pacific region, net sales in 2002 increased 4.5% to $351.4 million, as compared to $336.2 million in 2001. If exchange rates were unchanged from 2001, net sales would have increased approximately 6.4% for 2002 compared to 2001. Sales growth reflected the positive impact of our product innovation, marketing programs and improved retail distribution in an environment characterized by economic weakness and apparel price deflation across much of the region.

In Japan, which accounted for approximately 53% of our business in Asia during 2002, net sales in 2002 increased approximately 4.0% compared to the prior year period on a constant currency basis. The results in Japan reflected the positive impact of our premium and super premium product lines, entry into the standard or lower priced segment, and the opening of additional independently-owned retail stores dedicated to the Levi’s^® brand.

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Gross Profit.    Gross profit in 2002 was $1,684.8 million compared to $1,797.5 million in 2001. Gross margin decreased in 2002 to 40.7%, as compared to 42.2% in 2001.

Gross margin in 2002 was adversely affected by expenses of $49.5 million associated with plant closures in the United States and Scotland. Most of those expenses were for workers’ compensation and pension enhancements in the United States. Excluding these restructuring related expenses, gross margin for 2002 would have been 41.9% compared to 42.2% for 2001.

Our gross margins benefited from our lower sourcing and fabric costs and the favorable impact of foreign currency movements as well as lower inventory markdown expenses. Negatively affecting our margins were retailer promotions and incentives in the United States, which were recorded as a reduction of net sales, selective wholesale price reductions in the United States and Europe, entry into lower priced segments in all regions, and more expensive finishes, particularly in Europe.

Our largest supplier, Cone Mills Corporation, has been the sole supplier of the denim used worldwide for our 501^® jeans. On May 13, 2002, we amended the exclusivity and requirements features of our supply agreement with Cone Mills. The amendment provides that, after March 30, 2003, we may purchase these denims from other suppliers and Cone Mills may sell these denims to other customers. The amendment also allows us to purchase these denims for our European business from non-U.S. sources prior to March 30, 2003 if the European Union implements significant tariffs against U.S. produced denim. The amendment does not change any other provisions of the supply agreement.

For 2003, we expect gross margins in the range of 40% to 42%. This range reflects cost savings associated with our 2002 plant closures. We plan to use these savings to provide our retail customers with better margins, while also investing in our products. In addition, our expected gross margins for 2003 do not reflect postretirement medical benefits related to manufacturing employees. Because we have closed most of our manufacturing plants, we will reflect these costs in marketing, general and administrative expenses starting in 2003.

Cost of goods sold is primarily comprised of cost of materials, labor and manufacturing overhead. Cost of goods sold 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 in 2002 decreased 1.7% to $1,332.8 million compared to $1,355.9 million in 2001. These expenses as a percentage of sales in 2002 increased to 32.2% compared to 31.8% in 2001. The dollar decrease in marketing, general and administrative expenses in 2002 was primarily due to lower advertising expense and our continuing cost containment efforts, partially offset by higher employee incentive plan accruals. In addition, expenses in 2001 included a reversal of prior period accruals, in the amount of $18.0 million, associated with an employee long-term incentive plan as a result of changes in employee turnover assumptions based on actual experience.

Advertising expense in 2002 decreased 14.0% to $307.1 million, as compared to $357.3 million in 2001. Advertising expense as a percentage of sales in 2002 decreased to 7.4%, as compared to 8.4% in 2001. The decrease in advertising expense reflected lower media costs and our strategic decision to shift some of our U.S. advertising spending into sales incentive programs with retailers. The cost of those programs was recorded as a reduction of net sales. Cooperative advertising expense for 2002 and 2001 was $3.9 million and $21.5 million, respectively.

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 totaled $183.7 million and $182.0 million for 2002 and 2001, respectively.

We expect marketing, general and administrative expenses as a percent of net sales for 2003 to be in the range of 32% to 34%, up slightly from 2002. This reflects increased costs for the sales, marketing and supply chain functions associated with our entry into the mass channel. We also expect advertising and promotion expenses to be higher than 2002, reflecting our ongoing commitment to investing in product and marketing for the Levi’s^® Red Tab^™ jeans business, but we expect expenses to remain at 7% to 8% of net sales. In addition, due to closing most of our manufacturing plants, marketing, general and administrative expenses for 2003 will reflect the inclusion of postretirement medical benefits related to manufacturing employees. In 2002 and prior years, we recorded these expenses in cost of goods sold.

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We expect to record in the first quarter of 2003 a non-cash charge of approximately $20 million relating to a cumulative effect of a change in accounting for rent expense. We believe that the cumulative effect of the non-cash charge is not material to our historical operations in any period or to the trend of reported results of operations. In addition, we will discontinue amortization expense, a non-cash charge, for our goodwill and trademarks due to a new accounting standard effective the first quarter of 2003.

Other operating income.    Royalty income in 2002 increased to $34.5 million as compared to $33.4 million in 2001. The increase reflected an expansion of licensed accessory categories.

Restructuring charges, net of reversals.    In 2002, we recorded charges of $151.7 million associated with plant closures in the United States and Scotland and a restructuring initiative in Europe. These charges were offset by reversals of $27.1 million in 2002, based on updated estimates. In 2001, we reversed charges of $26.6 million primarily due to updated estimates related to prior years’ restructuring initiatives. This reversal was offset by recorded charges of $22.4 million associated with various overhead restructuring initiatives in 2001 that resulted in workforce reductions in the United States and Japan. (See “Restructuring Charges” below.)

Operating income.    Operating income in 2002 was $261.9 million, as compared to $479.3 million in 2001. This decrease was primarily due to lower gross profit and the net restructuring charge of $124.6 million. This decrease was slightly offset by lower marketing, general and administrative expenses.

Interest expense.    Interest expense in 2002 decreased 19.2% to $186.5 million, as compared to $230.8 million in 2001. This lower interest expense was primarily due to lower average debt levels combined with lower market interest rates. In addition, interest expense in 2001 included the write-off of fees totaling $10.8 million related to our prior credit agreement dated January 31, 2000. We replaced that credit agreement with a new credit facility on February 1, 2001. The weighted average cost of borrowings for 2002 and 2001 was 9.14% and 9.47%, respectively, excluding the write-off of fees.

Other (income) expense, net.    Other (income) expense, net in 2002 was a net expense of $25.4 million, as compared to a net expense of $8.8 million for the same period in 2001. This increase in net expense was primarily due to higher net losses from derivative instruments used for foreign currency management activities, including sourcing, that do not qualify for hedge accounting. The increase in net expense was partially offset by a refund for a legal settlement associated with custom duties in Mexico and the related interest income on the refund.

Income tax expense.    At November 24, 2002, we calculated that our effective income tax rate for 2002 was 50% compared to 37% for 2001. The increase in our annual effective income tax rate was primarily due to the combined effects of the computational impact of expenses not deductible for tax purposes and lower earnings for 2002 resulting from the restructuring charges and related expenses. Income tax expense in 2002 was $25.0 million compared to $88.7 million in 2001.

We reached a settlement on most issues with the Internal Revenue Service during 2002 in connection with the examination of our income tax returns for the years 1990 to 1995. We have completed an evaluation of the impact of this settlement on our deferred tax assets as well as accrued taxes and long-term tax liabilities. As a result of this review, we reclassified approximately $90.0 million from long-term liabilities to accrued taxes to reflect the estimated impact of the settlement and our deferred tax assets were increased for Internal Revenue Service audit adjustments for benefits reversing in future years. Our consolidated U.S. income tax returns for 1996 to 1999 are under examination by the Internal Revenue Service. We expect this examination to be completed by early 2004.

Net income.    Net income in 2002 was $25.0 million compared to $151.0 million in 2001. The decrease in 2002 was primarily attributable to lower earnings resulting from the net restructuring charges of $124.6 million and related expenses of $49.5 million, lower net sales and higher net losses from derivative instruments in 2002. The impact of these factors was partially offset by lower interest expense and lower marketing, general and administrative expenses.

Year Ended November 25, 2001 as Compared to Year Ended November 26, 2000

Consolidated Net Sales.    Total net sales in 2001 decreased 8.3% to $4.3 billion, as compared to $4.6 billion in 2000. If currency exchange rates were unchanged from the prior year period, net sales for 2001 would have declined approximately 6.5%. This decrease reflected volume declines primarily due to weak economies and retail markets in the United States and Japan and the impact of a weaker euro and yen.

Although year over year total net sales continued to decline, the rate of decline narrowed to 8.3% in 2001 as compared to 9.6% in 2000 and 13.7% in 1999. We believed that the narrowed sales decline, in view of the then current economic and retail environment, reflected ongoing progress in our business turnaround and efforts to improve performance.

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We anticipated difficult retail and economic conditions to continue into 2002, along with the need for continued executional improvements, including greater focus on core products and innovation to the U.S. product line. As a result, in 2001, we believed our 2002 constant currency net sales would decline in the low single digits and we planned our production and operating expenses accordingly.

Americas Net Sales.    In the Americas, net sales in the United States accounted for approximately 93% of our Americas net sales in 2001. Net sales in the Americas decreased 9.3% to $2.9 billion, as compared to $3.1 billion in 2000, due primarily to a drop in volume. This decrease was primarily attributable to the weak economy and retail apparel market in the United States. We believed retailers were reducing their open-to-buy and overall inventory levels in response to economic uncertainty and our improved ability to deliver products on time. Where we introduced updated and relevant products, such as our Levi’s^® Superlow jeans and Dockers^® Mobile^™ pant, supported by the right advertising and retail programs, our data showed improved sell-through to consumers. Our performance in the United States also reflected our targeted retailer promotions and incentives that drove sales volumes during the fourth quarter of 2001.

Europe Net Sales.    In Europe, net sales decreased 3.5% to $1.07 billion, as compared to $1.1 billion in 2000. The small decrease in net sales was primarily due to the effects of translation to U.S. dollar reported results. If exchange rates were unchanged from the prior year period, net sales would have increased by approximately 0.7% in 2001 compared to the prior year period. In 2001, we believed the constant currency results indicated that our business in Europe was beginning to stabilize as indicated by modest growth in net sales on a constant currency basis for the last three consecutive quarters of 2001 compared to 2000. We believed this reflected the impact of our updated and innovative products, retail presentation programs and improved delivery performance in the region for 2001.

Asia Pacific Net Sales.    In the Asia Pacific region, net sales decreased 14.3% to $336.2 million, as compared to $392.4 million in 2000. If exchange rates were unchanged from the prior year period, the reported net sales decrease would have been approximately 5.0% in 2001 compared to the prior year period. The decrease was primarily driven by the economic uncertainty in Japan and the effects of translation to U.S. dollar reported results. In Japan, which accounted for approximately 55% of our business in Asia in 2001, difficult business conditions resulted in the loss of some key customers due to retail consolidation, closure of retail store locations and bankruptcies. Except for Japan, our net sales in Asia Pacific increased for 2001 compared to 2000.

Gross profit.    Gross profit in 2001 of $1.8 billion was 8.1% lower than the same period in 2000. Gross profit as a percentage of net sales, or gross margin, was essentially unchanged, increasing slightly to 42.2% in 2001, as compared to 42.1% in 2000. The increase in margin was due to lower sourcing and fabric costs and reduced inventory markdowns. We value inventories at the lower of average cost or market value and include materials, labor and manufacturing overhead. In determining inventory values, we give substantial consideration to the expected product selling price. These items were somewhat offset by costs associated with production down-time taken in our plants in response to the weak retail market in 2001, as well as costs due to a product recall in Europe. The Caribbean Basin Initiative trade act was a key reason for the sourcing cost improvements.

Marketing, general and administrative expenses.    Marketing, general and administrative expenses for 2001 decreased 8.5% to $1.4 billion, as compared to $1.5 billion for 2000. Marketing, general and administrative expenses as a percentage of sales for 2001 decreased slightly to 31.8% as compared to 31.9% in 2000. The dollar decrease in marketing, general and administrative expenses was primarily due to our continuing cost containment efforts, including a lower level of incentive plan accruals and advertising expenses, as well as lower volume-related costs. The lower incentive plan accruals included a reversal of $18.0 million associated with forfeitures under an employee long-term incentive plan in 2001. Marketing, general and administrative expenses for 2000 also included a pension curtailment benefit of $18.0 million. In 2001, we continued to look for opportunities to streamline our organization, in line with our core product focus and related initiatives to reduce business complexity.

Advertising expense for 2001 decreased 11.3% to $357.3 million, as compared to $402.7 million in the same period in 2000. Advertising expense as a percentage of sales in 2001 decreased 0.3 percentage points to 8.4%, as compared to 8.7% for the same period in 2000. Advertising expense as a percentage of sales for 2001 was consistent with our 2001 target range of 8% to 9%.

Other operating income.    For 2001, licensing income increased 3.2% to $33.4 million, as compared to $32.4 million for the same period in 2000. This increase was primarily due to an increase in royalties from sales of merchandise, such as outerwear, shoes, belts, headwear and handbags, by licensees of our trademarks.

Restructuring charges, net of reversals.    For 2001, we reversed charges of $26.6 million primarily due to updated estimates related to prior years’ restructuring initiatives. This reversal was offset by recorded charges of $22.4 million associated with various overhead restructuring initiatives in 2001 that resulted in workforce reductions in the United States and Japan. In 2000, we reversed charges of $33.1 million primarily due to updated estimates related to prior years’ restructuring initiatives.

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Operating income.    For 2001, operating income decreased $59.5 million to $479.3 million, as compared to $538.8 million for the same period in 2000. The decrease was primarily due to lower sales, partially offset by lower marketing, general and administrative expenses. In addition, we recorded a net reversal of $4.3 million in restructuring charges in 2001 as compared to a $33.1 million reversal of restructuring charges in 2000.

Interest expense.    Interest expense for 2001 decreased 1.4% to $230.8 million, as compared to $234.1 million for the same period in 2000. This decrease was due to lower average debt levels, partially offset by a write-off of fees related to a credit agreement that was replaced by a new credit facility in February 2001.

Other (income) expense, net.    For 2001, we recorded $8.8 million of other expense, net, as compared to other income, net of $39.0 million for the same period in 2000. The net expense for 2001 was primarily attributable to lower interest income and net losses from foreign currency exposures and the contracts to manage foreign currency exposures. In addition, the income reported in 2000 included a $26.1 million gain from the sale of two office buildings in San Francisco located next to our corporate headquarters.

Income tax expense.    Income tax expense for 2001 was $88.7 million compared to $120.3 million for the same period in 2000. The decrease for 2001 was primarily due to lower earnings than in 2000, partially offset by a higher effective tax rate of 37% in 2001 compared to 35% in 2000. The lower tax rate in 2000 was due to a reevaluation of potential tax assessments.

Net income.    Net income for 2001 decreased by $72.4 million to $151.0 million from $223.4 million for the same period in 2000. The decrease was primarily due to lower sales, the impact of our foreign currency management activities and a lower net reversal in restructuring charges in 2001. Included in 2000 was a pre-tax gain of $26.1 million from the sale of office buildings. The decrease was partially offset by a higher gross margin and lower marketing, general and administrative expenses.

Restructuring Charges

Since late 1997 we have implemented extensive restructuring activities to reduce overhead expenses and eliminate excess manufacturing capacity, as well as closing 37 manufacturing facilities worldwide between 1997 and 2002, including closing in 2002 two manufacturing plants in Scotland and six manufacturing plants in the United States. The U.S. closures reflected our continuing shift from a manufacturing to a marketing and product-driven organization. We closed the plants in Scotland in order to reduce average production costs in Europe. We believe these actions will improve our competitiveness and enable us to invest more resources in product, marketing and retail initiatives. These actions also increase the variable nature of our cost structure, which we believe will help us maintain strong gross margins in a highly competitive and price deflationary environment. We do not anticipate closing any more manufacturing or finishing facilities in the near future, although we cannot assure that we will not take further restructuring initiatives in the future.

The following is a summary of the actions taken and related charges associated with these restructuring activities. Restructuring charges include certain costs associated with plant closures and business reorganization activities and are recorded upon approval of, and commitment to, a restructuring plan by executive management. These costs primarily include employee severance, certain employee termination benefits and contractual obligations. Our restructuring charges also include property, plant and equipment write-offs. These costs are not associated with, nor do they benefit, continuing activities. We review and evaluate these activities periodically.

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The following table summarizes the plant closures and restructuring charges and the resulting cash and non-cash reductions. Non-cash reductions include reversals and asset write-offs.

The total balance of the reserves at November 24, 2002 was $65.6 million, of which $52.4 million represented reserves for severance and employee benefits. We expect to utilize the majority of the remaining reserve balances during 2003.

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Liquidity and Capital Resources

Our principal capital requirements have been to fund working capital and capital expenditures. As of November 24, 2002, our total cash and cash equivalents were $96.5 million, compared with the $102.8 million cash balance reported as of November 25, 2001.

We recently completed the following financing transactions:

During 2003, we expect to have between $200 million and $300 million of the following primary cash requirements:

We anticipate that we will meet these obligations primarily through these financings and from cash provided by operations. We will obtain additional liquidity through our revolving 2003 bank credit facility, which will also be used to support letters of credit, and through cash on hand. We anticipate that net debt (gross debt less cash on hand) at the end of 2003 will approximate year end 2002 levels.

Total debt, other cash obligations and commitments.    As of November 24, 2002, our total debt was $1.847 billion, compared with $1.958 billion as of November 25, 2001. As of January 31, 2003, our total debt was approximately $2.578 billion.

As of November 24, 2002, our 2001 credit facility consisted of $110.1 million of term loans and a $615.7 million revolving credit facility, of which $5.0 million of borrowings under the revolving credit facility was outstanding. Total availability under the revolving credit facility was reduced by $239.8 million of letters of credit allocated under the revolving credit facility, yielding a net availability of $370.9 million. Included in the $239.8 million of letters of credit at November 24, 2002 are $213.3 million of standby letters of credit with various international banks, of which $48.5 million serve as guarantees by the creditor banks to cover U.S. workers’ compensation claims. We pay fees on the standby letters of credit and borrowings against letters of credit are subject to interest at various rates.

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At November 24, 2002, we had unsecured and uncommitted short-term credit lines available totaling $13.4 million at various rates. These credit arrangements may be canceled by the bank lenders upon notice and generally have no compensating balance requirements or commitment fees.

We have other current cash obligations for various liabilities categorized on the balance sheet as accounts payable, accrued liabilities, accrued salaries, wages and employee benefits and accrued taxes for our normal business operations. During 2002, we reclassified from long-term employee benefits to accrued salaries, wages and employee benefits, expected liabilities in 2003 of approximately $65 million under our long-term incentive compensation plan.

During 2002, we reached a settlement with the Internal Revenue Service on most of the issues in connection with the examination of our income tax returns for the years 1990 through 1995. As a result, during 2002 we reclassified approximately $90.0 million from long-term tax liabilities into accrued taxes. We anticipate paying the Internal Revenue Service an amount of approximately $115 million during the second quarter of 2003. After taking into account potential refunds from prior years’ overpayments and the tax effects of the interest deduction from this payment, we expect the net cash payment to be approximately $90 million.

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. Based on the fair value of plan assets and interest rates estimated as of November 24, 2002, we recorded a charge of $86.0 million, net of tax of $49.9 million to stockholders’ deficit. This charge reflects the after tax additional minimum pension liability due to pension obligations exceeding assets. As a result of the projected deficit, we expect to make additional pre-tax contributions to the pension plans during the next four fiscal years, including a cash contribution of approximately $25 million in 2003.

We currently expect our debt levels less cash on hand at the end of 2003 to be approximately equal to our 2002 year-end debt level of approximately $1.85 billion. We expect peak borrowings, net of cash on hand, during 2003 to be approximately $200 to $300 million higher than this amount, reflecting seasonal working capital requirements and growth associated with our expected entry into the mass channel in the United States in the third quarter.

We have no off-balance sheet debt obligations or material unconditional purchase commitments. Our total short-term and long-term debt principal payments, 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:

Cash provided by operating activities.    Cash provided by operating activities in 2002 was $191.7 million, as compared to $141.9 million in the same period in 2001. Trade receivables increased during 2002 primarily due to higher net sales in November 2002 compared to November 2001. Inventory decreased during 2002. We achieved the inventory reduction through retailer promotional and incentive programs and better inventory management. For the first half of 2003, we anticipate inventory to be higher than at year end 2002 as we prepare for the launch of the Levi Strauss Signature^™ brand beginning in July 2003. Net deferred tax assets increased during 2002 primarily due to timing of unrealized foreign exchange gains/losses and the additional minimum pension liability.

        Restructuring reserves increased during 2002 primarily due to restructuring charges associated with the United States plant closures. Accrued salaries, wages, and employee benefits increased during 2002 primarily due to higher employee incentive costs than in 2001. Accounts payable and accrued liabilities decreased during 2002 primarily due to lower contractor and advertising accruals. Accrued taxes increased and long-term tax liabilities decreased during 2002 primarily due to a reclassification of approximately $90.0 million in anticipation of a payment to the Internal Revenue Service in connection with an examination of our income tax returns for the years 1990 to 1995. Long-term employee benefits increased primarily due to an increase in our pension liability for anticipated contributions over the next four years.

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Cash provided by operating activities in 2001 was $141.9 million, as compared to $305.9 million in the same period in 2000. Trade receivables decreased during 2001 primarily due to lower net sales. Inventory decreased during 2001, primarily in the fourth quarter. We achieved the inventory reduction through reduced production levels and increased retailer promotional and incentive activities in the United States.

Other current assets decreased during 2001 primarily due to reimbursements of income and payroll taxes for overpayments made in 2000. Other long-term assets increased during 2001 primarily due to the capitalization of underwriting and other fees for the senior notes due 2008 issued in January 2001 and fees associated with the credit facility we entered into on February 1, 2001. Net deferred tax assets decreased during 2001 primarily due to inventory adjustments and tax on unremitted foreign earnings.

Restructuring reserves decreased during 2001 primarily due to spending and accrual reversals related to prior years’ restructuring initiatives, partially offset by 2001 restructuring charges. Accrued salaries, wages, and employee benefits decreased during 2001 primarily due to the payment of annual employee incentives, partially offset by employee incentive accruals. Long-term employee benefits increased primarily due to increased accruals for long-term incentive plans. Accounts payable and accrued liabilities decreased during 2001 primarily due to lower accruals for contractors and raw material purchases resulting from lower production needs. Accrued taxes decreased during 2001 primarily due to a payment of approximately $40 million in the first quarter of 2001 to the Internal Revenue Service in connection with an examination of our income tax returns for the years 1986 to 1989.

Cash used for investing activities.    Cash used for investing activities during 2002 was $59.4 million as compared to $17.2 million during 2001. Cash used for investing activities for 2002 resulted primarily from purchases of property, plant and equipment and realized losses on net investment hedges, partially offset by proceeds received on sales of property, plant and equipment. The purchases primarily related to sales office capital improvements and systems upgrades. We expect capital spending of approximately $70 million in 2003, primarily for system enhancements. The proceeds received on the sale of property, plant and equipment arose mainly from the sale during the first quarter of 2002 of an idle distribution center located in Nevada.

Cash used for investing activities during 2001 was $17.2 million, as compared to cash provided by investing activities of $154.2 million during the same period in 2000. Cash used for investing activities during the year resulted primarily from purchases of property, plant and equipment. In 2000, cash provided by investing activities was primarily attributable to proceeds received from the sale of office buildings and realized gains on net investment hedges. Our capital expenditures for 2001 were $22.5 million, as compared to $28.0 million for 2000.

Cash used for financing activities.    Cash used for financing activities for 2002 was $140.3 million as compared with $139.9 million in 2001 and $527.1 million in 2000. We used cash in 2002 primarily for repayment of existing debt. In fiscal 2001, cash used for financing activities was primarily for repayment of existing debt offset by the senior notes issued in January 2001 and the U.S. receivables securitization transaction completed in July 2001. In 2000, cash used for financing activities was for repayment of existing debt.

Financial Condition

2003 Bank Credit Facility.    On January 31, 2003, we entered into a $750.0 million senior secured credit facility to replace our then existing 2001 credit facility.

The following is a summary description of the material terms of the new bank credit facility.

Our new bank credit facility consists of a $375.0 million revolving credit facility and a $375.0 million Tranche B term loan facility. We will use the borrowings under our new bank credit facility for working capital or general corporate purposes. The revolving credit facility will expire on March 31, 2006.

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Our Tranche B term loan facility is subject to repayment based on a specified scheduled amortization, with the final payment of all amounts outstanding due on July 31, 2006. We are required to make principal amortization payments on the Tranche B term loan facility at a quarterly rate beginning in May 2003, with the substantial majority of the quarterly payments being due from the quarter ending in November 2005. Our bank credit facility also requires mandatory prepayments in certain events, such as if there are asset sales. The interest rate for our revolving credit facility varies, for eurodollar rate loans, from 3.25% to 4.00% over the eurodollar rate (as defined in the credit agreement) or, for base rate loans, from 2.25% to 3.00% over the higher of the Citibank base rate and the Federal Funds rate plus 0.50%, with the exact rate depending upon our performance under specified financial criteria. The interest rate for our Tranche B term loan facility is 4.00% over the eurodollar rate or 3.00% over the base rate. The bank credit facility also requires that we set aside sufficient funds to satisfy all principal and interest payments on the outstanding 6.80% notes due November 2003. We will use any remaining proceeds to refinance other outstanding indebtedness or for working capital or other general corporate purposes.

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

The bank credit facility contains 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 indebtedness or grant liens or negative pledges on our assets; make loans or other investments; pay dividends or repurchase stock or other securities; guaranty third party obligations; make capital expenditures; and make changes in our corporate structure. The credit agreement also contains financial covenants that we must satisfy on an ongoing basis, including maximum leverage ratios and minimum coverage ratios.

The credit agreement contains customary events of default, including payment failures; failures to satisfy other obligations under the credit agreements; 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. If an event of default occurs, our lenders could terminate their commitments, declare immediately payable all borrowings under the credit facilities and foreclose on the collateral, including our trademarks.

2001 Bank Credit Facility.    On February 1, 2001, we entered into a $1.05 billion senior secured credit facility to replace our then existing 2000 bank credit facility on more favorable terms. The facility was amended on July 11, 2001 to permit us to enter into the domestic receivables securitization transaction, on January 29, 2002 to amend several of the financial covenants in conjunction with our anticipated plant closures, on July 26, 2002 to permit us to adopt a deferred compensation plan to be effective in 2003, and on November 25, 2002 to permit us to use a portion of the net proceeds from notes issuances to refinance a portion of our $350.0 million 6.80% notes due November 1, 2003 and also to provide that, for purposes of determining compliance with the leverage ratio financial covenant under the bank credit facility, the amount of debt taken into account for purposes of that computation will be reduced by an amount of any net proceeds from the notes issuances segregated in separate designated bank or investment accounts.

The 2001 bank credit facility originally consisted of a $700.0 million revolving credit facility and $350.0 million of term loans. The $350.0 million of term loans includes two tranches, Tranche A for $100.0 million and Tranche B for $250.0 million. As of November 24, 2002, our credit facility consisted of $110.1 million of term loans and a $615.7 million revolving credit facility, of which $5.0 million of borrowings under the revolving credit facility was outstanding. Total availability under the revolving credit facility was reduced by $239.8 million of letters of credit allocated under the revolving credit facility, yielding a net availability of $370.9 million. Included in the $239.8 million of letters of credit at November 24, 2002 are $213.3 million of standby letters of credit with various international banks, of which $48.5 million serve as guarantees by the creditor banks to cover U.S. workers’ compensation claims.

On January 31, 2003, we entered into a new bank credit facility to replace the 2001 bank credit facility that was due to mature on August 29, 2003.

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Senior Unsecured Notes Due 2003 and 2006. In 1996, we issued $800.0 million in notes to qualified institutional buyers in reliance on Rule 144A under the Securities Act. We issued the notes in two series: $350.0 million seven-year notes maturing in November 2003 and $450.0 million ten-year notes maturing in November 2006. The seven-year notes bear interest at a rate of 6.80%. The ten-year notes bear interest at a rate of 7.00%. These notes are unsecured and rank equally with all of our other existing and future unsecured and unsubordinated debt. The indenture governing these notes contains customary events of default and restricts our ability and the ability of our subsidiaries and future subsidiaries, to:

In May 2000, we filed a registration statement on Form S-4 under the Securities Act with the SEC relating to an exchange offer for the notes. The exchange offer gave holders of these notes the opportunity to exchange the notes for new notes that are registered under the Securities Act. The new notes are identical in all material respects to the old notes except that the new notes are registered.

The exchange offer ended on June 20, 2000. As a result of the exchange offer, all but $20,000 of the $350.0 million aggregate principal amount of 6.80% old notes due 2003 were exchanged for the 6.80% new notes due 2003, and all $450.0 million aggregate principal amount of the 7.00% old notes due 2006 were exchanged for the 7.00% new notes due 2006.

We were not obligated by any agreement including the 2001 bank credit facility agreements to engage in the exchange offer. We initiated the exchange offer to give holders of these notes the opportunity to exchange the old notes for registered notes.

Our 6.80% notes due 2003 mature on November 1, 2003, at which time we will be required to repay or refinance these notes. On December 4, 2002, we used a portion of the net proceeds from the issuance of the 12.25% notes due December 2012 to repurchase $72.8 million of the 6.80% notes due November 1, 2003. We intend to use a portion of the remaining net proceeds from the December 2002 notes issuance, plus the $47.3 million net proceeds from the January 2003 issuance of an additional $50.0 million of these notes and the $99.8 million net proceeds from the January 2003 issuance of an additional $100.0 million of these notes, to refinance (whether through payment at maturity, repurchase or otherwise) all of the remaining aggregate principal amount of our 6.80% notes due November 1, 2003. On January 22, 2003, we purchased approximately $27.0 million of the 6.80% notes due November 1, 2003.

Senior Unsecured Notes Due 2008.    On January 18, 2001, we issued two series of notes payable for an aggregate of $497.5 million to qualified institutional buyers in reliance on Rule 144A under the Securities Act and outside the United States in accordance with Regulation S under the Securities Act. These notes are unsecured obligations, rank equally with all of our other existing and future unsecured and unsubordinated debt, and may be redeemed at any time after January 15, 2005. The issuance was divided into two series: U.S. $380.0 million notes and 125.0 million euro notes. Both series of notes are seven-year notes maturing on January 15, 2008 and bear interest at 11.625% per annum, payable semi-annually in January and July of each year. These notes are callable beginning January 15, 2005. These notes were offered at a discount of $5.2 million to be amortized over the term of the notes. Costs representing underwriting fees and other expenses of $14.4 million on the original issue are amortized, using an approximate effective-interest rate method, over the term of the notes. We used net proceeds from the offering to repay a portion of the indebtedness outstanding under our then effective credit facility.

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

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In March 2001, we filed a registration statement on Form S-4 under the Securities Act with the SEC relating to an exchange offer for these notes. The exchange offer gave holders the opportunity to exchange the notes for new notes that are registered under the Securities Act. The new notes are identical in all material respects to the old notes except that the new notes are registered under the Securities Act. The indenture governing these notes contains the same covenants as for the original issuance under Rule 144A of the Securities Act.

The exchange offer ended on April 6, 2001. As a result of the exchange offer, all but $200 thousand of the $380.0 million aggregate principal amount of old dollar notes were exchanged for new dollar notes, and all but €595 thousand of the €125.0 million aggregate principal amount of old euro notes were exchanged for new euro notes.

Senior Unsecured Notes Due 2012.    On December 4, 2002, we issued $425.0 million in notes to qualified institutional buyers in reliance on Rule 144A under the Securities Act. These notes are unsecured obligations that rank equally with all of our other existing and future unsecured and unsubordinated debt. These notes are 10-year notes maturing on December 15, 2012 and bear interest at 12.25% per annum, payable semi-annually in arrears on December 15 and June 15, commencing on June 15, 2003. These notes are callable beginning December 15, 2007. We issued these notes at a discount of $6.0 million to be amortized over the term of the notes using an approximate effective-interest rate method. We will amortize costs representing underwriting fees and other expenses of approximately $12.6 million over the term of notes. We used approximately $125.0 million of the net proceeds from the offering to repay remaining indebtedness under our 2001 bank credit facility as of the close of business on December 3, 2002. We used a portion of the net proceeds to repurchase $72.8 million of the 6.80% notes due November 1, 2003.

On January 22, 2003 and on January 23, 2003, we issued an additional $100 million of these notes at a premium of $3.0 million and an additional $50.0 million of these notes at a discount of $0.7 million. We will amortize both the discount and premium over the term of the notes using an approximate effective-interest rate method. The notes issued in these additional offerings were issued under the same indenture as, have the same terms as, and constitute the same issue of, the December 2002 notes. We intend to use a portion of the remaining net proceeds from the December 2002 notes issuance, plus the $47.3 million net proceeds from the issuance of an additional $50 million of these notes and the $99.8 million net proceeds from the issuance of an additional $100 million of these notes to refinance (whether through payment at maturity, repurchase or otherwise) all of the remaining aggregate principal amount of our 6.80% notes due November 1, 2003. We will use any remaining proceeds to refinance other outstanding indebtedness or for working capital or other general corporate purposes. On January 22, 2003, we purchased approximately $27.0 million of the 6.80% notes due November 1, 2003.

Credit Ratings.    On August 14, 2002, Moody’s Investors Service downgraded our 2001 bank credit facility from “Ba3” to “B1” and our notes due 2003, 2006 and 2008 from “B2” to “Caa1.” According to a press release announcing the downgrade, Moody’s based this decision on its concerns relating to our level of cash generation, our ability to refinance debt, including our 2001 bank credit facility maturing in August 2003 and our notes maturing in November 2003, and our ability to pay costs associated with plant closures we undertook in 2002. On November 25, 2002, Moody’s upgraded our outlook from negative to stable and announced it would upgrade its ratings for our notes due 2003, 2006 and 2008 to “B3” upon completion of the issuance of the $425.0 million senior notes payable on December 4, 2002. On January 7, 2003, Moody’s upgraded our senior unsecured debt ratings to “B3” from “Caa1.” The “B2” senior implied rating and the “B1” rating on our 2001 bank credit facility were confirmed.

On November 12, 2002, Standard and Poor’s Ratings Service downgraded our long-term corporate credit rating from “BB” to “BB-” and our 2001 bank credit facility from “BB+” to “BB,” while reaffirming our senior unsecured debt rating as “BB-” and upgraded our outlook from negative to stable. According to a press release announcing its action, Standard and Poor’s based this decision on its expectation that our credit measures will not improve significantly in the near term. Standard and Poor’s expressed concerns relating to our entry into the mass channel, including significant execution risk associated with logistics, production and delivery response to serve the mass channel, the potential effect on our brand franchise, and the potential reaction of our existing retailers. Standard and Poor’s also noted that the ratings reflected our leveraged financial profile, the highly competitive nature of our industry, and the inherent fashion risk in our industry.

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Yen-denominated Eurobond Placement

In November 1996, we issued a ¥20 billion principal amount eurobond (equivalent to approximately $180.0 million at the time of issuance) due November 22, 2016, with interest payable at 4.25% per annum. The bond is redeemable at our option at a make-whole redemption price, based on market rates at the time of redemption, commencing in November 2006 and on any subsequent semi-annual interest payment date. We treat the bond as a hedge of our net investment in our Japanese subsidiary.

The bond includes customary events of default and covenants limiting our activities similar to the events of default and covenants contained in the indenture governing our senior unsecured notes due in 2003 and 2006.

European Receivables Financing

In February 2000, several of our European subsidiaries, including Levi Strauss Germany GmbH, Levi Strauss (U.K.) Limited, Levi Strauss Continental S.A., Levi Strauss Italia s.r.l., and Levi Strauss De Espana, S.A., each entered into a receivables-backed securitization financing agreement with ABN AMRO BV and other lenders to borrow up to $125.0 million. Borrowings under the facilities were used to reduce the commitment levels under our 2001 bank credit facility. Interest rates under this agreement are variable based on commercial paper market conditions, and the debt ratings of the underlying conduit. Borrowings are collateralized by a security interest in the receivables of these subsidiaries.

As of November 24, 2002, an equivalent of $51.2 million was outstanding under these facilities. We have borrowed the following amounts under these facilities:

The securitization agreements contain covenants governing the activities of the subsidiaries and the quality of the receivables that may be used to support the borrowings, including, among other things, a requirement that our subsidiaries service the receivables securing their borrowings.

We provide a limited guaranty to support borrowings under the agreements. We guaranty performance by the subsidiaries of their servicing obligations. We also guaranty the collectibility of the receivables in an amount not to exceed 10% of the outstanding amount as of the termination date under the securitization agreements.

The securitization agreements contain customary termination events for these arrangements, including the subsidiaries’ failure to make payments or otherwise comply with their obligations under the securitization agreements, bankruptcy events, material adverse changes in financial position or receivables collection procedures, cross default to other indebtedness, failure of the portfolio to meet certain performance standards or a change in control.

The facilities, which have an annual renewable option upon agreement of all parties, mature on February 28, 2003. We will not renew these facilities.

Customer Service Center Equipment Financing

In December 1999, we borrowed $89.5 million from a group of lenders under a five-year credit facility secured by most of the equipment located at our customer service centers in Nevada, Mississippi and Kentucky. These customer service centers are our principal product distribution facilities in the United States. The equipment in the customer service centers securing this facility is not part of the collateral securing our 2003 bank credit facility. As of November 24, 2002, there was approximately $71.8 million principal amount outstanding under this facility. Approximately $19.7 million in excess collateral equipment value remains available to secure additional third party funding. Borrowings of $44.8 million under the first tranche bear interest at a fixed rate equal to the yield on four-year U.S. Treasury notes at the time of funding plus an incremental borrowing spread. Borrowings of $27.0 million under the second tranche bear interest at a floating quarterly rate equal to the 90-day London Interbank Offered Rate plus an incremental borrowing spread based on our leverage ratio at the time of the interest payment. The borrowings amortize over five years, with 50% and 80% of the principal amount of the first tranche and second tranche, respectively, due at maturity.

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The credit facility is structured as a lease intended as security. This means that we retain ownership of the equipment, the lenders have a security interest in the equipment and the transaction is considered a secured financing, and not a lease, for tax, accounting, bankruptcy, financial reporting and commercial law purposes.

The transaction documents include customary covenants governing our activities, including, among other things, limitations on our ability to sell, lease, relocate or grant liens in the equipment held in these customer service centers.

In some circumstances, we are permitted to sell or, with the lenders’ approval, obtain a release of the lenders’ security interest in, the equipment in the customer service centers upon repayment of a portion of the debt attributable to that equipment. We can also enter into agreements with third party “outsource” providers to operate one or more of the customer service centers.

The transaction documents include customary events of default. If we default, the lenders could accelerate the maturity date of our loans, enter these customer service centers and take possession of our equipment held there.

Domestic Receivables Securitization

On July 31, 2001, we completed a receivables securitization transaction involving receivables generated from sales of products to our domestic customers. The transaction involved the issuance by Levi Strauss Receivables Funding, LLC, our indirect subsidiary, of $110.0 million of secured term notes. The notes, which are secured by trade receivables originated by Levi Strauss & Co., bear interest at a rate equal to the one-month London Interbank Offered Rate plus 0.32% per annum, and have a stated maturity date of November 2005. Net proceeds of the offering were used to repay a portion of the outstanding debt under our 2001 bank credit facility. The purpose of the transaction was to lower our interest expense and diversify funding sources. The notes were issued in a private placement transaction in accordance with Rule 144A under the Securities Act.

Under the securitization arrangement, collections on receivables remaining after payment of interest and fees relating to the notes are used to purchase new receivables from Levi Strauss & Co. The securitization agreements provide that, in specified cases, the collections will not be released but will instead be deposited and used to pay the principal amount of the notes. Those circumstances include, among other things, failure to maintain the required level of overcollaterization due to deterioration in the credit quality, or overconcentration or dilution in respect of, the receivables, failure to pay interest or other amounts which is not cured, breaches of covenants, representations and warranties or events of bankruptcy relating to us and certain of our subsidiaries. Non-release of collections in these limited circumstances could have an adverse effect on our liquidity.

On April 25, 2002, we obtained an amendment to the domestic receivables securitization agreements. Before the amendment, the manner in which sales incentives were treated in the calculation of net eligible U.S. trade receivables decreased net eligible receivables as well as substantially increased the targeted amount. The amendment revises the way sales incentives are treated in calculating the amount of net eligible receivables.

Industrial Development Revenue Refunding Bond

In 1995, the City of Canton, Mississippi issued an industrial development revenue refunding bond with a principal amount of $10.0 million, and the proceeds were loaned to us to help finance the cost of acquiring a customer service center in Canton. Interest payments are due monthly at a variable rate based upon the J.J. Kenny Index, reset weekly at a maximum rate of 13.00%, and the principal amount is due June 1, 2003. The bond is secured by a letter of credit that expires on June 15, 2003, which we have the opportunity to extend or renew. We do not anticipate renewing this financing.

Foreign Currency Translation

The functional currency for most of our foreign operations is the applicable local currency. For those operations, assets and liabilities are translated into U.S. dollars using period-end exchange rates and income and expense accounts are translated at average monthly exchange rates. The U.S. dollar is the functional currency for foreign operations in countries with highly inflationary economies and certain other subsidiaries. The translation adjustments for these entities are included in “Other (income) expense, net.”

Effects of Inflation

We believe that inflation in the regions where most of our sales occur has not had a significant effect on our net sales or profitability.

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Critical Accounting Policies

Our critical accounting policies upon which our financial position and results of operations depend are those relating to revenue recognition, inventory valuation, restructuring reserves, income tax assets and liabilities, and derivatives and foreign exchange management activities. We summarize our most critical accounting policies below.

Revenue recognition.    We recognize revenue 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 net of an allowance for estimated returns, discounts and retailer promotions and incentives when the sale is recorded.

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

We entered into cooperative advertising programs with certain customers. The majority of cooperative advertising programs were discontinued in the first quarter of fiscal 2002. We recorded payments to customers under cooperative advertising programs as marketing, general and administrative expenses because an identifiable benefit was received in return for the consideration and we could reasonably estimate the fair value of the advertising received. Cooperative advertising expense for 2002, 2001 and 2000 was $3.9 million, $21.5 million and $25.0 million, respectively.

Inventory valuation.    We value inventories at the lower of cost or market value. Inventory costs are based on standard costs, which are updated periodically and supported by actual cost data. We include materials, labor and manufacturing overhead in the cost of inventories. In determining inventory market values, we give substantial consideration to the expected product selling price based on historical recovery rates. In determining our expected selling prices, we consider various factors including estimated quantities of slow-moving inventory by reviewing on-hand quantities, outstanding purchase obligations and forecasted sales. We then estimate expected selling prices based on our historical recovery rates for sale of slow-moving inventory through various channels and other factors, such as market conditions and current consumer preferences. Our estimates may differ from actual results due to the quantity and 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, we record restructuring reserves for certain costs associated with plant closures and business reorganization activities. Such costs are recorded as a current liability and primarily include employee severance, certain employee termination benefits, including out-placement services and career counseling, and contractual obligations. The principal components of the reserves relate to employee severance and termination benefits, which we estimate based on agreements with the relevant union representatives or plans adopted by us that are applicable to employees not affiliated with unions. These costs are not associated with nor do they benefit continuing activities. Inherent in the estimation of these costs are assessments related to the most likely expected outcome of the significant actions to accomplish the restructuring. Changing business conditions may affect the assumptions related to the timing and extent of facility closure activities. We review the status of restructuring activities on a quarterly basis and, if appropriate, record changes based on updated estimates.

Income tax assets and liabilities.    In establishing our deferred income tax assets and liabilities, we make judgments and interpretations based on the enacted tax laws and published tax guidance that are applicable to our operations. We record deferred tax assets and liabilities and evaluate the need for valuation allowances to reduce the deferred tax assets to realizable amounts. The likelihood of a material change in our expected realization of these assets is dependent on future taxable income, our ability to use foreign tax credit carryforwards and carrybacks, final U.S. and foreign tax settlements, and the effectiveness of our tax planning strategies in the various relevant jurisdictions. We are also subject to examination of our income tax returns for multiple years by the Internal Revenue Service and other tax authorities. We periodically assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. Changes to our income tax provision or in the valuation of the deferred tax assets and liabilities may affect our annual effective income tax rate.