Registration Statement No. 333-134471

 

LEVI STRAUSS & CO.

 

Offer to Exchange
all outstanding unregistered 8.625% Senior Notes due 2013
(€102,000,000 aggregate principal amount outstanding)

 

for

 

8.625% Senior Notes due 2013
(€102,000,000 aggregate principal amount)
which have been registered under the Securities Act of 1933

 

and

 

all outstanding unregistered 8.875% Senior Notes due 2016
($350,000,000 aggregate principal amount outstanding)

 

for

 

8.875% Senior Notes due 2016
($350,000,000 aggregate principal amount)
which have been registered under the Securities Act of 1933

 

 

The Exchange Offer

 

 

The Exchange Notes

 

 

Resale of Exchange Notes

 

 

 

 

 

See “Risk Factors” beginning on page 10 for a discussion of factors that you should consider before tendering your old notes.

 

 

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

 

The date of this prospectus is June 9, 2006.

 

TABLE OF CONTENTS

 

 

We have filed with the Securities and Exchange Commission (the “SEC” or the “Commission”) a registration statement on Form S-4 under the Securities Act of 1933 (the “Securities Act”) relating to the exchange offer that includes important business and financial information about us that is not included in or delivered with this prospectus. This prospectus does not contain all of the information included in the registration statement. This information is available from us without charge to holders of old notes as specified below. If we have made references in this prospectus to any contracts, agreements or other documents and also filed any of those contracts, agreements or documents as exhibits to the registration statement, you should read the relevant exhibit for a more complete understanding of the document or matter involved.

 

We are required to file periodic reports and other information with the SEC under the Securities Exchange Act of 1934 (the “Exchange Act”).

 

You may read and copy the registration statement, including the attached exhibits, and any report, statements or other information that we file at the SEC’s public reference facilities at 100 F Street, N.E., Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference room. Our SEC filings will also be available to the public from commercial document retrieval services and at the SEC’s Internet site at www.sec.gov.

 

You may request a copy of any of our filings with the SEC, or any of the agreements or other documents that constitute exhibits to those filings, at no cost, by writing or telephoning us at the following address or phone number:

 

Levi Strauss & Co.
1155 Battery Street
San Francisco, California 94111
Attention: Treasurer
Telephone: (415) 501-3869 or (415) 501-6000

 

To obtain timely delivery of any of our filings, agreements or other documents, you must make your request to us no later than five business days before the expiration date of the exchange offer. The exchange offer will expire at 11:59 p.m., New York City time on July 7, 2006 (the “expiration date”). The exchange offer can be extended by us in our sole discretion. See the caption “The Exchange Offer” for more detailed information.

 

You should rely only on the information provided in this prospectus. No person has been authorized to provide you with different information. The information in this prospectus is accurate as of the date on the front cover. You should not assume that the information contained in this prospectus is accurate as of any other date.

 

Any old notes not tendered and accepted in the exchange offer will remain outstanding. To the extent old notes are tendered and accepted in the exchange offer, a holder’s ability to sell untendered old notes could be adversely affected. Following consummation of the exchange offer, the holders of old notes will continue to be subject to the existing restrictions upon transfer thereof and we will have fulfilled one of our obligations under the related registration rights agreements. Holders of old notes who do not tender their notes generally will not have any further registration rights under the registration rights agreements or otherwise.

 

Each broker-dealer that receives exchange notes for its own account pursuant to this exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of such exchange notes. The letter of transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an “underwriter” within the meaning of the Securities Act. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of exchange notes received in exchange for old notes where such old notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. We have agreed that, starting on the expiration date and ending on the close of business 180 days after the expiration date, we will make this prospectus available to any broker-dealer for use in connection with any such resale. See “Plan of Distribution”.

 

Except for the historical information contained in this prospectus, certain matters discussed in this prospectus, including, without limitation, statements under “Summary”, “Business”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors”, contain forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act. 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 “Risk Factors”. All subsequent written and oral forward-looking statements attributable to us are expressly qualified in their entirety by the cautionary statements and the risk factors contained throughout this prospectus.

 

SUMMARY

	•	We derive nearly half of our net revenues and over half of our operating income from our businesses outside the United States.
	•	Our products are sold through more than 55,000 retail locations in over 110 countries, including over 65 company-operated stores in 10 countries.

	•	We have over 5,000 trademark registrations and pending applications in approximately 180 countries.
	•	We have regional headquarters located in San Francisco, Brussels and Singapore, product designers located primarily in Belgium, Hong Kong, Japan, Korea and the United States, and a global sourcing headquarters in Singapore.
	•	Approximately 65% of our employees are located in over 35 countries outside the United States.

	•	The term of the facility has been extended through September 23, 2011.
	•	The maximum availability under the facility has been reduced from $650.0 million to $550.0 million.
	•	The interest rate payable in respect of both base rate loans and LIBOR rate loans has been modified by amending the margin above the base rate or the LIBOR rate (as applicable) which is payable. The margin above the base rate that is payable in respect of base rate loans has changed from a fixed margin of 0.50% to a floating margin based on availability under the facility that will not exceed 0.50%. The margin above LIBOR that is payable in respect of LIBOR rate loans has been reduced from a fixed margin of 2.75% to a floating margin (which will not exceed 2.00%) based on availability under the facility.
	•	We are required to maintain a reserve against availability or deposit cash or certain investment securities in secured accounts with the administrative agent in the amount of $75.0 million at all times. A failure to do so will result in a block on availability under the facility but will not result in a default.
	•	For any period during which availability under the facility is at least $25.0 million, the debt, liens, investments, dispositions, restricted payments and debt prepayment covenants will be either fully or partially suspended. We are currently in a covenant suspension period.
	•	Our debt, liens, investments, dispositions, restricted payments and debt prepayment covenants have been modified to grant us greater flexibility.
	•	We are no longer subject at any time to any financial maintenance covenants.
	•	The facility is no longer secured by the capital stock of any of our foreign subsidiaries.

Registration Rights Agreement		In connection with the issuance of the $350.0 million of old Dollar Notes and €100.0 million of old Euro Notes on March 17, 2006, we entered into registration rights agreements with the initial purchasers with respect to each series of old notes in which we agreed, among other things, to complete an exchange offer. The remaining €2.0 million of old Euro Notes we issued in March 2005 will also be entitled to the benefits of the registration rights agreement we entered into in March 2006 with the initial purchasers of the €100.0 million of old Euro Notes.
		You may exchange your old notes for the applicable exchange notes, which have substantially similar terms to your old notes. The exchange offer satisfies your rights and our obligations under the registration rights agreements. After the exchange offer is over, you will not be entitled to any exchange or registration rights with respect to your old notes.
The Exchange Offer		We are offering to exchange:
		• up to €102.0 million of old Euro Notes for up to €102.0 million of Euro Exchange Notes; and
		• up to $350.0 million aggregate principal amount of old Dollar Notes for up to $350.0 million aggregate principal amount of Dollar Exchange Notes.
		You may exchange old Dollar Notes only in a minimum denomination of $10,000 and integral multiples of $1,000 principal amount thereafter and old Euro Notes only in integral multiples of €50,000 principal amount.
Purpose and Effect		The purpose of the exchange offer is to give you the opportunity to exchange your old notes for exchange notes that have been registered under the Securities Act. We are subject to the informational requirements of the Exchange Act and file reports and other information with the SEC to which each holder of old notes, if any are outstanding after the exchange offer, and exchange notes will have access.
Resale		Except as indicated in this prospectus, we believe that the exchange notes may be offered for resale, resold and otherwise transferred without compliance with the registration and prospectus delivery requirements of the Securities Act provided that:
		• you are acquiring the exchange notes in the ordinary course of your business;
		• you are not participating, do not intend to participate and have no arrangement or understanding with any person to participate in the distribution of the exchange notes;

		• you are not a broker-dealer who purchased the old notes directly from us for resale pursuant to Rule 144A or any other available exemption under the Securities Act; and
		• you are not our “affiliate,” as defined in Rule 405 under the Securities Act.
		Our belief is based on existing interpretations of the Securities Act by the staff of the SEC set forth in several no-action letters to third parties. We do not intend to seek a no-action letter, and there is no assurance that the staff of the SEC would make a similar determination with respect to the exchange notes. If this interpretation is inapplicable, and you transfer any exchange notes without delivering a prospectus meeting the requirements of the Securities Act or without an exemption from such requirements, you may incur liability under the Securities Act. We do not assume, or indemnify holders against, such liability.
		Each broker-dealer that is issued exchange notes for its own account in exchange for old notes that were acquired by the broker-dealer as a result of market-making activities or other trading activities must acknowledge that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of the exchange notes. To the extent described in “Plan of Distribution”, a broker-dealer may use this prospectus for an offer to resell, resale or other retransfer of the exchange notes.

Expiration of the Exchange Offer; Withdrawal of Tender		The exchange offer will expire at 11:59 p.m., New York City time, on July 7, 2006, or a later date and time to which we may extend it. We do not currently intend to extend the expiration of the exchange offer. You may withdraw your tender of old notes pursuant to the exchange offer at any time before expiration of the exchange offer. Any old notes not accepted for exchange for any reason will be returned without expense to you promptly after the expiration or termination of the exchange offer.

Conditions to the Exchange Offer		We will not be required to accept old notes for exchange:
		• if the exchange offer would be unlawful or would violate any interpretation of the SEC staff; or
		• if any legal action has been instituted or threatened that would impair our ability to proceed with the exchange offer.
		The exchange offer is not conditioned on any minimum aggregate principal amount of old notes being tendered. Please read “The Exchange Offer — Conditions” for more information about the conditions to the exchange offer.
Procedures for Tendering Old Notes		We have forwarded to you, along with this prospectus, a letter of transmittal relating to this exchange offer. Because all of the old notes are held in book-entry accounts maintained by the exchange agent at DTC, Euroclear or Clearstream, Luxembourg, a holder need not submit a letter of transmittal. However, all holders who exchange their old notes for exchange notes in accordance with the procedures outlined below will be deemed to have acknowledged receipt of, and

		agreed to be bound by, and to have made all of the representations and warranties contained in the letter of transmittal.

		Holders of old Dollar Notes may hold their notes either directly through DTC or indirectly through Euroclear or Clearstream, Luxembourg who in turn hold via DTC. Similarly, holders of old Euro Notes may hold their notes either directly through Euroclear or Clearstream, Luxembourg or indirectly through DTC who in turn holds via Euroclear and Clearstream, Luxembourg.

		To tender in the exchange offer, a holder must comply with the following procedures, as applicable:

		•  Holders of old notes through DTC:  If you wish to exchange your old notes and either you or your registered holder hold your old notes (either old Dollar Notes or old Euro Notes) in book-entry form directly through DTC, you must submit an instruction and follow the procedures for book-entry transfer as provided under “ — Book-Entry Transfer”.

		•  Holders of old notes through Euroclear or Clearstream, Luxembourg:  If you wish to exchange your old notes and either you or your registered holder hold your old notes (either old Dollar Notes or old Euro Notes) in book-entry form directly through Euroclear or Clearstream, Luxembourg, you should be aware that pursuant to their internal guidelines, Euroclear and Clearstream, Luxembourg will automatically exchange your old notes for exchange notes. If you do not wish to participate in the exchange offer, you must instruct Euroclear or Clearstream, Luxembourg, as the case may be, to “Take No Action”; otherwise your old notes will automatically be tendered in the exchange offer, and you will be deemed to have agreed to be bound by the terms of the letter of transmittal.

		Only a registered holder of record of old notes may tender old notes in the exchange offer. If you are a beneficial owner of old notes that are registered in the name of a broker, dealer, commercial bank, trust company or other nominee, you may request your respective broker, dealer, commercial bank, trust company or other nominee to effect the above transactions for you. Alternatively, if you are a beneficial owner and you wish to act on your own behalf in connection with the exchange offer, you must either make appropriate arrangements to register ownership of the old notes in your name or obtain a properly completed bond power from the registered holder.

		By signing or agreeing to be bound by the letter of transmittal, you will represent to us that, among other things:
		• any exchange notes that you receive will be acquired in the ordinary course of your business;
		• you have no arrangement or understanding with any person to participate in the distribution of the old notes or the exchange notes;
		• you are not our affiliate;
		• if you are not a broker-dealer, you are not engaged in and do not intend to engage in the distribution of the exchange notes; and

		• if you are a broker-dealer that will receive exchange notes for your own account in exchange for old notes that you acquired as a result of market-making activities or other trading activities, you will deliver a prospectus in connection with any resale of such exchange notes.

Effect on Holders of Old Notes		If you are a holder of old notes and you do not tender your old notes in the exchange offer, you will continue to hold your old notes and will be entitled to all the rights and subject to all the limitations applicable to the old notes in the indentures.
		The trading market for old notes could be adversely affected if some but not all of the old notes are tendered and accepted in the exchange offer.
Consequences of Failure to Exchange		All untendered old notes will remain subject to the restrictions on transfer provided for in the old notes and in the indentures. Generally, the old notes that are not exchanged for exchange notes pursuant to the exchange offer will remain restricted securities and may not be offered or sold unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. Other than in connection with the exchange offer, we do not currently anticipate that we will register the old notes under the Securities Act.
Important Federal Income Tax Considerations		The exchange of old notes for exchange notes in the exchange offer will generally not be a taxable exchange for U.S. federal income tax purposes. See the caption “Important U.S. Federal Income Tax Considerations” for a more detailed description of the tax consequences of the exchange.
Use of Proceeds		We will not receive any cash proceeds from the issuance of exchange notes pursuant to the exchange offer.
Exchange Agent		Citibank, N.A. is the exchange agent for the exchange offer. The address and telephone number of the exchange agent are set forth under the caption “The Exchange Offer — Exchange Agent”.

Issuer		Levi Strauss & Co., a Delaware corporation.
Securities Offered		€102.0 million aggregate principal amount of 8.625% Euro Exchange Notes due 2013 and registered under the Securities Act.
		$350.0 million aggregate principal amount of 8.875% Dollar Exchange Notes due 2016 and registered under the Securities Act.
Maturity		For the Euro Exchange Notes: April 1, 2013.
		For the Dollar Exchange Notes: April 1, 2016.
Interest Payment Dates		For the Euro Exchange Notes offered by this prospectus: Semi-annually on April 1 and October 1 of each year, commencing on October 1, 2006.
		For the Dollar Exchange Notes: Semi-annually on April 1 and October 1 of each year, commencing on October 1, 2006.
Ranking		The exchange notes will be senior unsecured unsubordinated obligations of Levi Strauss & Co. and will rank equally with all of Levi Strauss & Co.’s other existing and future senior unsecured and unsubordinated debt. As of February 26, 2006, after giving effect to (i) the issuance of $350.0 million of our Dollar Notes and €100.0 million of our Euro Notes in March 2006 and (ii) our prepayment of our senior secured term loan in March 2006, we would have had approximately $2.3 billion of debt, of which $7.3 million would have been secured, the majority of such secured debt being capital leases. That secured debt will have priority over the exchange notes with respect to the assets securing such debt. Holders of the exchange notes will be creditors of Levi Strauss & Co. and not of our subsidiaries. As a result, all the existing and future liabilities of our subsidiaries, including any claims of trade creditors, will be effectively senior to the exchange notes. As of February 26, 2006, the liabilities of our subsidiaries were approximately $485.0 million. For more information on the ranking of the exchange notes, see “Description of Euro Exchange Notes — Ranking” and “Description of Dollar Exchange Notes — Ranking”.
Optional Redemption		For the Euro Exchange Notes: We may redeem the Euro Notes (including Euro Notes previously issued in 2005), in whole or in part, at any time on or after April 1, 2009, at the redemption prices specified under “Description of Euro Exchange Notes — Optional Redemption”, plus accrued and unpaid interest to the date of redemption, after giving the required notice under the indenture governing the Euro Notes. In addition, at any time and from time to time prior to April 1, 2008, we may also redeem up to 35% of the aggregate principal amount of our Euro Notes (including Euro Notes previously issued in 2005) with the net cash proceeds from certain equity offerings at a redemption price of 108.625% of the principal amount plus accrued and unpaid interest, if any, to the date of redemption.

		For the Dollar Exchange Notes: We may redeem the Dollar Notes, in whole or in part, prior to April 1, 2011, at a price equal to 100% of the principal amount plus accrued and unpaid interest and a “make-whole” premium. Thereafter, we may redeem all or any portion of the Dollar Notes, at any time or from time to time, at the redemption prices specified under “Description of Dollar Exchange Notes — Optional Redemption”, plus accrued and unpaid interest to the date of redemption, after giving the required notice under the indenture governing the Dollar Notes. In addition, at any time and from time to time prior to April 1, 2009, we may also redeem up to 35% of the aggregate principal amount of the Dollar Notes with the net cash proceeds from certain equity offerings at a redemption price of 108.875% of the principal amount plus accrued and unpaid interest, if any, to the date of redemption.
Change in Control		If we experience a change in control, we will be required to make an offer to repurchase the exchange notes at a price equal to 101% of the principal amount plus accrued and unpaid interest, if any, to the date of repurchase. For more detailed information, see “Description of Euro Exchange Notes — Repurchase at the Option of Holders Upon a Change of Control” and “Description of Dollar Exchange Notes — Repurchase at the Option of Holders Upon a Change of Control”.
Restrictive Covenants		The Euro Notes indenture and the Dollar Notes indenture contain covenants that limit our ability and the ability of our restricted subsidiaries (as defined in “Description of Euro Exchange Notes” and “Description of Dollar Exchange Notes”, respectively) to, among other things:
		• 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 restricted subsidiaries;
		• merge or consolidate with any other person; or
		• sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of our assets or the assets of our restricted subsidiaries.
		If a series of exchange notes receives and maintains an investment grade rating by both Standard and Poor’s Ratings Service and Moody’s Investors Service and we and our restricted subsidiaries are and remain in compliance with the indenture governing such series of exchange notes, we and our restricted subsidiaries will not be required to comply with particular covenants contained in the applicable indenture. For more detailed information on covenants contained in the indentures, see “Description of Euro Exchange Notes — Material Covenants” and “Description of Dollar Exchange Notes — Material Covenants.”

Listing; Absence of Established Market for the Exchange Notes		We will apply to list the Euro Exchange Notes on the Luxembourg Stock Exchange in accordance with the rules of the Luxembourg Stock Exchange and have the Euro Exchange Notes traded on the Euro MTF Market. The Euro Exchange Notes offered hereby are expected to be eligible for trading on the Luxembourg Stock Exchange on a fungible basis with the registered outstanding Euro Notes.
		The Dollar Exchange Notes will constitute a new class of securities with currently no established trading market. For more detailed information, see “Plan of Distribution”.

 

Your investment in the exchange notes will involve risks. You should carefully consider the following factors described below and all other information in this prospectus before deciding to exchange your old notes for exchange notes.

 

Risks Relating to Our Substantial Debt

 

We have substantial debt and interest payment requirements that may restrict our future operations and impair our ability to meet our obligations under the exchange notes.

 

As of February 26, 2006, after giving effect to (i) the issuance of $350.0 million of our Dollar Notes and €100.0 million of our Euro Notes in March 2006 and (ii) our prepayment of our senior secured term loan in March 2006, our total debt would have been approximately $2.3 billion and we would have had approximately $220.7 million of additional borrowing capacity under our revolving credit facility, after giving effect to (i) our utilization of credit-related instruments such as documentary and standby letters of credit and (ii) our reserving $77.9 million of availability under our revolving credit facility on March 16, 2006 to satisfy a covenant in our revolving credit facility relating to prepayment of our term loan. For more information on the prepayment of our term loan and our senior secured credit facility, see “Description of Other Indebtedness.” Our substantial debt could have important adverse consequences to you. For example, it could:

 

 

In addition, any future borrowings under our senior secured revolving credit facility will be at variable rates of interest. Our Floating Rate Notes also bear interest at a variable rate. As a result, increases in market interest rates may require a greater portion of our cash flow to be used to pay interest, which could further hinder our operations and affect the trading price of our debt securities. Our ability to satisfy our obligations and to reduce our total debt depends on our future operating performance and on economic, financial, competitive and other factors, many of which are beyond our control.

 

Restrictions in the indentures governing the exchange notes and our other debt agreements may limit our activities.

 

The indentures governing the exchange notes and the indentures relating to our other senior unsecured notes, and our yen denominated eurobond contain restrictions, including covenants limiting our ability to incur additional debt, grant liens, make acquisitions and other investments, prepay specified debt, consolidate, merge or acquire other businesses, sell assets, pay dividends and other distributions, repurchase stock, make capital expenditures, and enter into transactions with affiliates. Our amended and restated revolving credit facility also imposes many of these restrictions on us in any period during which availability under the facility is less than $25.0 million (see “Description of Indebtedness”). These restrictions may make it difficult for us to successfully execute our business strategy or to compete with companies not similarly restricted. In particular, these restrictions, in combination with

our leveraged condition, could limit our ability to restructure our business or take other actions that require additional funds.

 

If we are unable to service our indebtedness or repay or refinance our indebtedness as it becomes due, we may be forced to sell assets or we may go into default, which could cause other indebtedness to become due and adversely affect the trading value of our debt securities, including the exchange notes.

 

Our 2006 Notes mature on November 1, 2006, our senior secured revolving credit facility matures on September 29, 2007, our Floating Rate Notes mature on April 1, 2012, our 2012 Notes mature on December 15, 2012, our registered outstanding Euro Notes mature on April 1, 2013, our 2015 Notes mature on January 15, 2015 and our yen denominated eurobond matures on November 22, 2016. If we are unable to pay interest on our indebtedness when due, or to repay or refinance the principal amount of our indebtedness when due, we will go into default under the terms of the documents governing such indebtedness, including the indentures governing the exchange notes. If that happens, the holders of the exchange notes and of our other indebtedness could elect to declare the indebtedness due and payable and, in the case of the revolving credit facility, terminate their lending commitments. Prior to or after these defaults, the holders of our indebtedness could exert pressure on us to sell assets or take other actions, including the initiation of bankruptcy proceedings or the commencement of an out-of-court debt restructuring, which may not be in the best interests of the company or holders of our debt securities, including the exchange notes. If we attempt an asset sale, whether on our own initiative or as a result of pressure from holders of our indebtedness, we may not be able to complete a sale on terms acceptable to us. Any default under our indebtedness, or the perception that we may go into default, would also adversely affect the trading value of our debt securities, including the exchange notes.

 

Because the exchange notes are effectively subordinated to all of our secured debt and the liabilities of our subsidiaries, we may not have sufficient assets to pay amounts owed on the exchange notes if a default occurs.

 

The exchange notes are general unsubordinated unsecured obligations that rank equal in right of payment with all of our existing and future unsecured and unsubordinated debt, including our 2006 Notes, 2012 Notes, Floating Rate Notes, registered outstanding Euro Notes issued in March 2005, 2015 Notes and our yen denominated eurobond. The Notes are effectively subordinated to all of our secured debt to the extent of the value of the assets securing that debt. As of February 26, 2006, after giving effect to (i) the issuance of $350.0 million of our Dollar Notes and €100.0 million of our Euro Notes in March 2006 and (ii) our prepayment of our senior secured term loan in March 2006, we would have had approximately $2.3 billion of debt, of which approximately $7.3 million would have been secured, the majority of such secured debt being capital leases. To the extent we enter into additional secured financings in the future, such as another senior secured term loan, the exchange notes will also be effectively subordinated to such secured debt to the extent of the value of the additional assets securing that debt. Failure to comply with the terms of our secured obligations or our inability to pay those lenders at maturity would entitle those lenders immediately to foreclose on our assets which serve as collateral. In the event of any foreclosure on our assets, our secured lenders would be entitled to be repaid in full from the proceeds of the liquidation of those assets before those assets would be available for distribution to other creditors, including the holders of exchange notes.

 

The exchange notes are also structurally subordinated to all obligations of our subsidiaries since holders of exchange notes will be creditors of Levi Strauss & Co. and not of our subsidiaries. As of February 26, 2006, our unaudited consolidated balance sheet includes liabilities of our subsidiaries approximately $485.0 million. The ability of our creditors, including you, to participate in any distribution of assets of any of our subsidiaries upon liquidation or bankruptcy will be subject to the prior claims of that subsidiary’s creditors, including trade creditors, and any prior or equal claim of any equity holder of that subsidiary. In addition, the ability of our creditors, including you, to participate in distributions of assets of our subsidiaries will be limited to the extent that the outstanding shares of capital stock of any of our subsidiaries are either pledged to secure other creditors, such as under our senior secured revolving credit facility, or are not owned by us, such as our Japanese subsidiary. As a result, you may receive less, proportionately, than our secured creditors and the creditors of our subsidiaries.

If our foreign subsidiaries are unable to distribute cash to us when needed, we may be unable to satisfy our obligations under our debt securities, including the exchange notes.

 

We conduct our foreign operations through foreign subsidiaries, which accounted for approximately 45% of our net revenues during 2005 and 2004. As a result, we depend upon funds from our foreign subsidiaries for a portion of the funds necessary to meet our debt service obligations, including payments on the exchange notes. We only receive the cash that remains after our foreign subsidiaries satisfy their obligations. Any agreements our foreign subsidiaries enter into with other parties, as well as applicable laws and regulations limiting the right and ability of non-U.S. subsidiaries and affiliates to pay dividends and remit earnings to affiliated companies, may restrict the ability of our foreign subsidiaries to pay dividends or make other distributions to us. If those subsidiaries are unable to pass on the amount of cash that we need, we will be unable to make payments on our debt obligations, including payments on the exchange notes, which could force us to sell assets or use cash that we were planning on using elsewhere in our business or to default on such obligations, which could hinder our operations and adversely affect the trading price of our debt securities, including the exchange notes.

 

Our ability to obtain new financing and trade credit and the costs associated with a new financing and trade credit may be adversely affected by downgrades or other changes in our credit ratings.

 

The credit ratings assigned to our indebtedness may affect both our ability to obtain new financing and trade credit and the costs of our financing and credit. Although ratings downgrades do not trigger any material obligations or provisions under our financing or other contractual relationships, it is possible that rating agencies may downgrade our credit ratings or change their outlook about us, which could have an adverse impact on us. For example, if our credit ratings are downgraded, it could increase our cost of capital, make our efforts to raise capital or trade credit more difficult and have an adverse impact on our reputation.

 

Risks Relating to the Industry in Which We Compete

 

Our revenues are influenced by general economic cycles.

 

Apparel is a cyclical industry that is dependent upon the overall level of consumer spending. Our customers anticipate and respond to adverse changes in economic conditions and uncertainty by reducing inventories and canceling orders. As a result, any substantial deterioration in general economic conditions, increases in energy costs or interest rates, acts of war, acts of nature or terrorist or political events that diminish consumer spending and confidence in any of the regions in which we compete, could reduce our sales and adversely affect our business and financial condition.

 

Intense competition in the worldwide apparel industry could reduce our sales and prices.

 

We face a variety of competitive challenges from jeanswear and casual apparel marketers, fashion-oriented apparel marketers, athletic and sportswear marketers, vertically integrated specialty stores and retailers of private label products. Some of these competitors have greater financial and marketing resources than we do and may be able to adapt to changes in consumer preferences or retail requirements more quickly, devote greater resources to the marketing and sale of their products or adopt more aggressive pricing policies than we can. As a result, we may not be able to compete successfully with them. Increased competition in the worldwide apparel industry, including from international expansion of vertically integrated specialty stores, from department stores, chain stores and mass channel retailers developing exclusive labels and from well-known and successful non-apparel brands (such as athletic wear and sporting goods marketers) expanding into jeans and casual apparel, could reduce our sales and adversely affect our business and financial condition.

 

The success of our business depends upon our ability to offer innovative and upgraded products at attractive price points.

 

The worldwide apparel industry is characterized by constant product innovation due to changing consumer preferences and by the rapid replication of new products by competitors. As a result, our success depends in large part on our ability to continuously develop, market and deliver innovative and stylish products at a pace, intensity and price competitive with other brands in our segments. In addition, we must create products that appeal to

multiple consumer segments at a range of price points. Failure on our part to regularly and rapidly develop innovative and stylish products and update core products could limit sales growth, adversely affect retail and consumer acceptance of our products, leave us with a substantial amount of unsold inventory which we may be forced to sell at discounted prices and impair the image of our brands.

 

The worldwide apparel industry is subject to ongoing pricing pressure.

 

The apparel market is characterized by low barriers to entry for both suppliers and marketers, global sourcing through suppliers located throughout the world, trade liberalization, continuing movement of product sourcing to lower cost countries, ongoing emergence of new competitors with widely varying strategies and resources, and an increasing focus on apparel in the mass merchant channel of distribution in the United States. These factors contribute to ongoing pricing pressure throughout the supply chain. This pressure has and may continue to:

 

 

Any of these factors could adversely affect our business and financial condition.

 

Increases in the price of raw materials or their reduced availability could increase our cost of goods and decrease our profitability.

 

The principal fabrics used in our business are cotton, blends, synthetics and wools. The prices we pay for our products are dependent in part on the market price for raw materials used to produce them, primarily cotton. The price and availability of cotton may fluctuate substantially, depending on a variety of factors, including demand, crop yields, weather, supply conditions, transportation costs, government regulation, economic climates and other unpredictable factors. Any raw material price increases could increase our cost of goods and decrease our profitability unless we are able to pass higher prices on to our customers. Moreover, any decrease in the availability of cotton could impair our ability to meet our production requirements in a timely manner.

 

Our business is subject to risks associated with sourcing and manufacturing overseas.

 

We import finished garments and raw materials into all of our regions. Substantially all of our import operations are subject to customs requirements and to tariffs and quotas set by governments through mutual agreements or bilateral actions. In addition, the countries in which our products are manufactured or imported may from time to time impose additional quotas, duties, tariffs or other restrictions on our imports or adversely modify existing restrictions. Adverse changes in these import costs and restrictions, or our suppliers’ failure to comply with customs regulations or similar laws, could harm our business.

 

Our operations are also subject to the effects of international trade agreements and regulations such as the North American Free Trade Agreement, the U.S.-Dominican Republic-Central American Free Trade Agreement, the Egypt Qualified Industrial Zone program and the activities and regulations of the World Trade Organization. Although generally these trade agreements have positive effects on trade liberalization, sourcing flexibility and cost of goods by reducing or eliminating the duties and/or quotas assessed on products manufactured in a particular country, trade agreements can also impose requirements that adversely affect our business, such as setting quotas on products that may be imported from a particular country into our key markets such as the United States or the European Union.

 

Our ability to import products in a timely and cost-effective manner may also be affected by conditions at ports or issues that otherwise affect transportation and warehousing providers, such as port and shipping capacity, labor disputes, severe weather or increased homeland security requirements in the United States and other countries. These issues could delay importation of products or require us to locate alternative ports or warehousing providers

to avoid disruption to our customers. These alternatives may not be available on short notice or could result in higher transit costs, which could have an adverse impact on our business and financial condition.

 

Risks Relating to Our Business

 

Our net sales and market share have declined since 1996, we have substantial debt and actions we have taken and may take to turn around our business may not be successful in the long term.

 

Our net sales have declined from a peak of $7.1 billion in 1996 to $4.2 billion in 2005. Our market shares in certain categories and geographies, including the men’s jeans market in the United States and Europe, have also declined in recent years. We currently face intense competition, customer consolidation, shifts by consumers to sales channels and price points where we traditionally have not had a strong presence, reliance on key customers who operate in sales channels facing considerable competitive pressures, and continuing pressure on both wholesale and retail pricing. Our ability to successfully compete is impaired by our substantial debt and interest expense, which reduces our operating flexibility and limits our ability to respond to developments in the worldwide apparel industry as effectively as competitors that do not have comparable financial leverage. In addition, the strategic, operations and management changes we have made in recent years to turn around our business and drive future sales growth may not be successful over the long term.

 

We may be unable to maintain or increase our sales of Levi’s^® and Dockers^® products through our primary distribution channels.

 

In the United States, chain stores and department stores are the primary distribution channels for our Levi’s^® and Dockers^® products. We may be unable to increase sales of our products through these distribution channels for several reasons including the following:

 

 

Our ability to maintain retail floor space, market share and sales in these channels may depend on our ability to offer more premium, innovative, differentiated and exclusive products and to increase retailer profitability on our products, which could have an adverse impact on our margins.

 

In Europe, department stores and independent jeanswear retailers are our primary distribution channels. If some of these customers were to shift their strategies and seek to differentiate the brands they sell and reduce their purchases from us, our sales would decline. In addition, jeans with basic finishes historically have comprised a substantial portion of our sales to these channels. If we are not successful in selling to our customers a greater mix of products with more advanced finishes in order to meet changes in consumer preferences, our European sales could continue to decline. Finally, many of our European customers have experienced challenges competing against vertically integrated specialty stores. Further success by vertically integrated specialty stores may adversely affect the sales of our products in Europe.

 

We depend on a group of key customers for a significant portion of our sales. A significant adverse change in a customer relationship or in a customer’s performance or financial position could harm our business and financial condition.

 

Net sales to our ten largest customers totaled approximately 42% and 40% of total net revenues in 2005 and 2004, respectively. Our largest customer, J.C. Penney Company, Inc., accounted for approximately 8% of net revenues in 2005 and 2004. The retail industry in the United States has experienced substantial consolidation in

recent years as a result of acquisitions by both strategic and financial buyers. For example, Sears Roebuck and Co. (a Levi’s^® brand and Dockers^® brand customer and one of our top ten customers in 2005) and Kmart Corporation (a Levi Strauss Signature^® brand customer) merged in 2005, as did Federated Department Stores, Inc. (a Levi’s^® brand and Dockers^® brand customer) and May Department Stores Co. (a Levi’s^® brand and Dockers^® brand customer and one of our top ten customers in 2005). Consolidation in the retail industry has resulted in store closures, centralized purchasing decisions, increased customer leverage over suppliers, greater exposure for suppliers to credit risk and an increased emphasis by retailers on inventory management and productivity.

 

A decision by a major customer, whether motivated by competitive considerations, strategic shifts, financial requirements or difficulties, economic conditions or otherwise, to decrease its purchases from us, to reduce the floor space, assortments, fixtures or advertising for our products or to change its manner of doing business with us, could adversely affect our business and financial condition. In addition, while we have long-standing customer relationships, we do not have long term contracts with any of our customers. As a result, purchases generally occur on an order-by-order basis, and the relationship, as well as particular orders, can generally be terminated by either party at any time.

 

We must attract younger consumers and more women consumers to our jeans brands.

 

In the United States, our Levi’s^® brand sales are heavily weighted towards male consumers 35 years and older. This is due partly to the aging of our traditional consumer, the “baby boomer” generation, as well as the entry into the market of multiple brands that target younger consumers, including brands offered by vertically integrated specialty stores. We believe that 15-24 year-old consumers represent the highest growth segment of the U.S. men’s jeans market. In addition, we believe that over the last several years, the worldwide women’s jeans market has grown more quickly than the men’s jeans market and is now larger than the men’s jeans market. If we are not successful in attracting younger consumers and more female consumers to our brands, our results of operations and our ability to grow will be adversely affected.

 

Lack of success in revitalizing our Dockers^® business or our European business could harm our financial results.

 

Our Dockers^® business worldwide has suffered sales declines in recent years. In 2005, U.S. Dockers^® net revenues declined by approximately 0.4% compared with 2004, but declined by approximately 20% from 2003 to 2004. Our European business as a whole has also suffered recent sales declines. Our Europe net revenues declined by approximately 8.0% and 5.7%, on a constant currency basis, in 2005 and 2004, respectively. The declines were attributable to a variety of factors, including weak market and retail conditions in Europe generally and poor customer service by us, including low order fulfillment rates.

 

Although we have taken actions to reverse these sales declines, if our actions are not successful, our results of operations and our ability to grow will be adversely affected.

 

Our Levi Strauss Signature^® business could erode our margins and our sales of our Levi’s^® products.

 

Our Levi Strauss Signature^® brand, which includes a broad line of denim jeans and casual apparel products, is available at mass channel retailers across the United States, including Wal-Mart, Target and Kmart, and in mass channel and other retailers in Europe and Asia. Although our research to date indicates that we have not experienced any substantial cannibalization of our Levi’s^® brand, it is possible that sales of Levi Strauss Signature^® products through the mass channel may result in reduced sales of our Levi’s^® and Dockers^® brands. In addition, by offering a less expensive brand in the mass channel that carries the “Levi Strauss” name, it is possible that we may adversely affect the perception and appeal of our Levi’s^® brand by both our current retailers who sell our products and consumers who purchase our products. A decision by a retailer to stop carrying or reduce its support of the Levi’s^® brand or reduced purchases by consumers could result in an overall decrease in our sales.

Increasing the number of our company-operated stores will require us to develop new capabilities and increase our expenditures.

 

We plan to expand the number of our company-operated retail stores dedicated to our Levi’s^® brand. Although we currently operate over 65 retail stores, we are primarily a wholesaler and not a retailer, and an increase in the number of company-operated stores will require us to further develop our retailing skills and capabilities. In addition, it may be difficult for us to identify and obtain retail space in locations and on terms we find acceptable. We will be required to enter into additional leases, increase our rental expenses and make capital expenditures for these stores. These commitments may be costly to terminate, and these investments may be difficult to recapture, if we decide to close a store or change our strategy. We must also appropriately manage greater inventory levels, install and operate effective retail systems, apply effective pricing strategies and integrate our stores into our overall business mix. Finally, we will need to hire and train qualified employees and incur additional costs to operate these stores, which will increase our operating expenses.

 

We rely on outsourced manufacturing of our products. Our inability to secure production sources meeting our quality, cost, working conditions and other requirements, or failures by our contractors to perform, could harm our sales, service levels and reputation.

 

We currently source over 90% of our products from independent contract manufacturers who purchase fabric and other raw materials and may also provide us with design and development services. An increasing proportion of our outsourced supply consists of “package” or “ready to wear” arrangements, in which contractors produce or purchase fabric themselves and then sew, finish and ship the garments. As a result, we depend on independent contract manufacturers to maintain adequate financial resources, to secure a sufficient supply of raw materials and to maintain sufficient development and manufacturing capacity in an environment characterized by continuing cost pressure and demands for product innovation and speed-to-market. In addition, we do not have material long-term contracts with any of our independent manufacturers, and these manufacturers generally may unilaterally terminate their relationship with us at any time.

 

This dependence could subject us to difficulty in obtaining timely delivery of products of acceptable quality. A contractor’s failure to ship products to us in a timely manner or to meet our required quality standards could cause us to miss the delivery date requirements of our customers. The failure to make timely deliveries may cause our customers to cancel orders, refuse to accept deliveries, impose non-compliance charges through invoice deductions or other charge-backs, demand reduced prices or reduce future orders, any of which could harm our sales and margins.

 

We require contractors to meet our standards in terms of working conditions, environmental protection, security and other matters before we are willing to place business with them. As such, we may not be able to obtain the lowest-cost production. In addition, the labor and business practices of apparel manufacturers have received increased attention from the media, non-governmental organizations, consumers and governmental agencies in recent years. Any failure by our independent manufacturers to adhere to labor or other laws or appropriate labor or business practices, and the potential litigation, negative publicity and political pressure relating to any of these events, could harm our business and reputation.

 

Most of the employees in our distribution facilities are covered by collective bargaining agreements, and any material job actions could negatively affect our results of operations.

 

In the United States, most of our distribution employees are covered by various collective bargaining agreements, and outside the United States, most of our production and distribution employees are covered by either industry-sponsored and/or state-sponsored collective bargaining mechanisms. Any work stoppages or other job actions by our distribution employees could harm our business and reputation.

We are a global company with nearly half our revenues coming from our international operations, which exposes us to political and economic risks.

 

We generated approximately 45% of our net revenues outside the United States in 2005 and 2004. A substantial amount of our products came from sources outside of the country of distribution. As a result, we are subject to the risks of doing business abroad, including:

 

 

The functional currency for most of our foreign operations is the applicable local currency. As a result, fluctuations in foreign currency exchange rates affect the results of our operations and the value of our foreign assets, which in turn may adversely affect reported earnings and the comparability of period-to-period results of operations. Our consolidated net revenues in 2005 were $4.2 billion, an increase of 1.7% compared to 2004 but flat on a constant currency basis. In addition, although we engage in hedging activities to manage our foreign currency exposures, our earnings may be subject to volatility since we are required to record in income the changes in the market values of our exposure management instruments that do not qualify for hedge accounting treatment. Changes in currency exchange rates may also affect the relative prices at which we and foreign competitors sell products in the same market. In addition, changes in the value of the relevant currencies may affect the cost of certain items required in our operations.

 

During the past 24 months, we have experienced significant management turnover. The success of our business depends on our ability to attract and retain qualified employees.

 

We need talented and experienced personnel in a number of areas including our core business activities. An inability to retain and attract qualified personnel, especially our key executives, could harm our business. In the past 24 months, we have had several changes in our senior management, including two chief financial officers, a new general counsel and new leaders of our Europe business, our global sourcing organization and our U.S. Dockers^® business. Our European president, who joined us in February 2004, left us at the end of February 2006, and we are conducting a search for his replacement. Turnover among our senior management could have a material adverse effect on our ability to implement our strategies and on our results of operations. Our ability to attract and retain qualified employees is adversely affected by the San Francisco location of our headquarters due to the high cost of living in the San Francisco area.

 

We have substantial liabilities and cash requirements associated with pension, post-retirement health benefit and with our restructuring activities.

 

Our restructuring activities, post-retirement health benefits plans and pension plans result in substantial liabilities on our balance sheet, which as of November 27, 2005 and November 28, 2004 totaled $754.0 million and $814.3 million, respectively. In addition, these plans and activities have and will generate substantial cash requirements for us. For example, for 2005, we made net cash payments of approximately $98 million relating to our restructuring activities, post-retirement health benefits plans and pension plans. For 2006, we expect to make net cash payments of approximately $17 million relating to restructuring activities, approximately $28 million under our post-retirement health benefits plan and approximately $47 million as contributions to our pension plans.

 

These liabilities may impair our liquidity, have an unfavorable impact on our ability to obtain financing and place us at a competitive disadvantage compared to some of our competitors who do not have such liabilities and cash requirements.

Our success depends on the continued protection of our trademarks and other proprietary intellectual property rights.

 

Our trademarks and other intellectual property rights are important to our success and competitive position, and the loss of or inability to enforce trademark and other proprietary intellectual property rights could harm our business. We devote substantial resources to the establishment and protection of our trademark and other proprietary intellectual property rights on a worldwide basis. Our efforts to establish and protect our trademark and other proprietary intellectual property rights may not be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products. Unauthorized imitation of our products or unauthorized use of our trademarks or other proprietary rights may not only erode sales of our products but may also cause significant damage to our brand name and our ability to effectively represent ourselves to our customers, contractors, suppliers, and/or licensees. Moreover, others may seek to assert rights in, or ownership of, our trademarks and other proprietary intellectual property, and we may not be able to successfully resolve those claims. In addition, the laws and enforcement mechanisms of some foreign countries may not allow us to protect our proprietary rights to the same extent as we are able to in the United States and other countries.

 

We intend to expand our trademark licensing programs. Our licensees may not comply with our product quality, manufacturing standards, marketing and other requirements.

 

We license our trademarks to third parties for manufacturing, marketing, distribution and sale of various products and intend to expand our licensing programs. While we enter into comprehensive licensing agreements with our licensees covering product design, product quality, sourcing, manufacturing, marketing and other requirements, our licensees may not comply fully with those agreements. Non-compliance could include marketing products under our brand names that do not meet our quality and other requirements or engaging in manufacturing practices that do not meet our supplier code of conduct. These activities could harm our brand equity, our reputation and our business.

 

Our approach to corporate governance may lead us to take actions that conflict with our creditors’ interests as holders of our debt securities.

 

All of our common stock is owned by a voting trust described under “Principal Stockholders”. Four voting trustees have the exclusive ability to elect and remove directors, amend our by-laws and take other actions which would normally be within the power of stockholders of a Delaware corporation. Although the voting trust agreement gives the holders of two-thirds of the outstanding voting trust certificates the power to remove trustees and terminate the voting trust, three of the trustees, as a group based on their ownership of voting trust certificates, have the ability to block all efforts by the two-thirds of the holders of the voting trust certificates to remove a trustee or terminate the voting trust. In addition, the concentration of voting trust certificate ownership in a small group of holders, including these three trustees, gives this group the voting power to block stockholder action on matters for which the holders of the voting trust certificates are entitled to vote and direct the trustees under the voting trust agreement.

 

Our principal stockholders created the voting trust in part to ensure that we would continue to operate in a socially responsible manner while seeking the greatest long-term benefit for our stockholders, employees and other stakeholders and constituencies. As a result, we cannot assure that the voting trustees will cause us to be operated and managed in a manner that benefits our creditors or that the interests of the voting trustees or our principal equity holders will not diverge from our creditors.

 

We will be required to evaluate our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act. Failure to timely comply with the requirements of Section 404 or any adverse results from such evaluation could result in a loss of investor confidence in our financial reports and have an adverse effect on the trading price of our debt securities.

 

We are not currently an “accelerated filer” as defined in Rule 12b-2 under the Exchange Act under current guidelines. Beginning with our Annual Report for the year ending November 25, 2007, Section 404 of the Sarbanes-Oxley Act of 2002 will require us to include an internal control report with our Annual Report on Form 10-K. That

report must include management’s assessment of the effectiveness of our internal control over financial reporting as of the end of the fiscal year. This report must also include disclosure of any material weaknesses in internal control over financial reporting that we have identified. Additionally, our independent registered public accounting firm will be required to issue reports on management’s assessment of our internal control over financial reporting and their evaluation of the operating effectiveness of our internal control over financial reporting. Our assessment requires us to make subjective judgments and our independent registered public accounting firm may not agree with our assessment.

 

Achieving compliance with Section 404 within the prescribed period may require us to incur significant costs and expend significant time and management resources. We incurred approximately $8 million of third-party expenses in 2005 related to our activities regarding Section 404. We cannot assure you that we will be able to complete the work necessary for our management to issue its management report in a timely manner, or that we will be able to complete any work required for our management to be able to conclude that our internal control over financial reporting is operating effectively. If we are not able to complete the assessment under Section 404 in a timely manner, we and our independent registered public accounting firm would be unable to conclude that our internal control over financial reporting is effective as of November 25, 2007. As a result, investors could lose confidence in our reported financial information, which could have an adverse effect on the trading price of our debt securities. In addition, our independent registered public accounting firm may not agree with our management’s assessment or conclude that our internal control over financial reporting is operating effectively.

 

We must successfully maintain and/or upgrade our information technology systems.

 

We rely on various information technology systems to manage our operations and we regularly evaluate these systems against our current and expected requirements. We are currently implementing modifications and upgrades to our systems, including replacing legacy systems with successor systems, making changes to legacy systems and acquiring new systems with new functionality. For example, we are currently implementing an SAP enterprise resource planning system in Asia, which we also plan to implement in North America and Europe in the coming years. There are inherent costs and risks associated with replacing and changing these systems, including significant capital expenditures and the risk of delays or difficulties in transitioning to new systems or of integrating new systems into our current systems. Any information technology system disruptions, if not anticipated and appropriately mitigated, could have an adverse effect on our business and operations.

 

Earthquakes or other events outside of our control may damage our facilities or the facilities of third parties on which we depend.

 

Our corporate headquarters are located in California near major earthquake faults that have experienced earthquakes in the past. An earthquake or other natural disaster could disrupt our operations. Additionally, the loss of electric power, such as the temporary loss of power caused by power shortages in the grid servicing our headquarters, could disrupt operations or impair critical systems. Any of these disruptions or other events outside of our control could affect our business negatively, harming our operating results. In addition, if any of our other facilities, including our manufacturing, finishing or distribution facilities or our company-operated or franchised stores, or the facilities of our suppliers or customers are affected by earthquakes, power shortages, floods, monsoons, terrorism or other events outside of our control, our business could suffer.

 

Risks Relating to the Offering

 

There is no established trading market for the exchange notes, and any market for the exchange notes may be illiquid.

 

Prior to this offering, there was no market for the Dollar Exchange Notes and the existing market for the Euro Exchange Notes was limited. We cannot assure you that a liquid market will develop for each series of exchange notes, that you will be able to sell your exchange notes at a particular time or that the prices that you will receive when you sell will be favorable. We will apply to list the Euro Exchange Notes on the Luxembourg Stock Exchange and to have the Euro Exchange Notes traded on the Euro MTF Market. We do not intend to apply for listing of the exchange notes on any U.S. securities exchange or for quotation through an automated dealer quotation system. In

addition, the indenture governing the Euro Notes permits the delisting of the Euro Exchange Notes from the Luxembourg Stock Exchange under certain circumstances. See “Description of Euro Exchange Notes — Listing”. The liquidity of the trading market in the exchange notes and the market price quoted for the exchange notes may be adversely affected by changes in the overall market for high yield securities generally or the interest of securities dealers in making a market in the exchange notes and by changes in our financial performance or prospects or in the prospects for companies in the apparel industry generally. As a result, you cannot be sure that an active trading market will develop for the exchange notes.

 

This offer to exchange the exchange notes for the respective series of old notes does not depend upon any minimum amount of such series of old notes being tendered for exchange.

 

Unless you are an affiliate of us within the meaning of Rule 405 under the Securities Act, you may offer for resale, resell or otherwise transfer exchange notes without compliance with the registration and prospectus delivery provisions of the Securities Act, so long as you acquired the exchange notes in the ordinary course of business and have no arrangement or understanding with respect to the distribution of the exchange notes to be acquired in the exchange offer. If you tender your old notes for the purpose of participating in a distribution of the exchange notes, you must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction.

 

The trading prices of our debt securities have been volatile, and may be volatile in the future.

 

Other than our Floating Rate Notes and our registered outstanding Euro Notes that are listed on the Luxembourg Stock Exchange, none of our other debt securities are currently listed on any securities exchange or registered for quotation through any automated dealer quotation system. Accordingly, information regarding the trading prices of our debt securities is limited. Based on the information available to us, however, the trading prices of our debt securities have been volatile. For example, since their issue date, we believe that our 2012 Notes have traded, at times, substantially below par. We expect that the trading price of our debt securities, including the exchange notes, will be affected by developments in our business and our financial results, liquidity position and capital structure as well as developments in the apparel industry, domestic and foreign economies and in the market for high yield debt securities. The trading price for the exchange notes may be volatile, and we cannot assure you that the trading price of the exchange notes will not be lower than the issue price.

 

We may be unable to purchase the exchange notes upon a change in control.

 

Upon a change of control event as defined in the indentures governing the exchange notes, we would be required to offer to purchase the exchange notes (including the outstanding Euro Exchange Notes) in cash at a price equal to 101% of their principal amount, plus accrued and unpaid interest, if any. We also would be required to offer to repurchase our 2015 Notes, our 2012 Notes and our Floating Rate Notes on similar terms. A change of control under the terms of the exchange notes is likely to constitute an event of default under our senior secured revolving credit facility. If this occurs, then the lenders under this facility may declare their debt immediately due and payable. Since our senior secured revolving credit facility is secured, the lenders under this agreement could foreclose on certain of our assets, including our U.S. receivables and inventory, and be entitled to be repaid in full from the proceeds of any liquidation of those assets before any holder of the exchange notes. We cannot assure you that we will have the financial resources necessary to repurchase the exchange notes and satisfy our other payment obligations that could be triggered upon a change of control. If we do not have sufficient financial resources to effect a change of control offer for the exchange notes, we would be required to seek additional financing from outside sources to repurchase the exchange notes. We cannot assure you that financing would be available to us at that time on satisfactory terms, or at all. In addition, the terms of the exchange notes may not protect you if we undergo a highly leveraged transaction, reorganization, restructuring, merger or similar transaction that may adversely affect you unless the transaction is included in the definition of a change of control in the indenture.

 

If you do not exchange your old notes, they may be difficult to resell.

 

It may be difficult for you to sell old notes that are not exchanged in the exchange offer, since any old notes not exchanged will remain subject to the restrictions on transfer provided for in Rule 144 under the Securities Act.

These restrictions on transfer of your old notes exist because we issued the old notes pursuant to an exemption from the registration requirements of the Securities Act and applicable state securities laws. Generally, the old notes that are not exchanged for exchange notes pursuant to the exchange offer will remain restricted securities and may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. Other than in connection with this exchange offer, we do not intend to register the old notes under the Securities Act.

 

To the extent any old notes are tendered and accepted in the exchange offer, the trading market, if any, for the applicable series of old notes that remain outstanding after the exchange offer would be adversely affected due to a reduction in market liquidity.

 

Each of the risks described in this section with respect to the exchange notes are equally applicable to the old notes.

 

General

 

In connection with the issuance of $350.0 million old Dollar Notes and €100.0 million of old Euro Notes in March 2006, we entered into two registration rights agreements, one each with the initial purchasers for each series of old notes, which provide for the exchange offer. A copy of each of the registration rights agreements is filed as an exhibit to the registration statement of which this prospectus is a part.

 

Under the registration rights agreements, we agreed to:

 

 

The exchange offer being made hereby, if completed within 210 days after March 17, 2006 will satisfy those requirements under the registration rights agreements. If the exchange offer is not completed within 210 days of March 17, 2006 and a shelf registration statement has not been declared effective, then the interest rates on the old notes will increase by 0.25% per annum during the 90-day period immediately following the expiration of the 180-day period and will increase by 0.25% per annum at the end of each subsequent 90-day period until the exchange offer is completed or a shelf registration statement is declared effective. In no event shall the additional interest exceed 1.00% per annum.

 

Purpose and Effect of the Exchange Offer

 

The exchange offer will give holders of old notes the opportunity to exchange the old notes, including the €2.0 million of unregistered old Euro Notes issued in March 2005, for exchange notes that have been registered under the Securities Act. The Dollar Exchange Notes and the Euro Exchange Notes will be substantially similar in all material respects to the old Dollar Notes and old Euro Notes, respectively. We are subject to the informational requirements of the Exchange Act. To satisfy those requirements, we file reports and other information with the SEC that will be made available to the holders of the old notes, if any are outstanding after the exchange offer, and the exchange notes and the general public.

 

The exchange offer is not being made to, nor will we accept tenders for exchange from, holders of old notes in any jurisdiction in which the exchange offer or the acceptance of it would not be in compliance with the securities or blue sky laws of the jurisdiction.

 

If you participate in the exchange offer, you will receive an exchange note of equal principal amount and with limited exceptions, receive securities that are freely tradable and not subject to restrictions on transfer. See “–Resales of Exchange Notes” for more information relating to your ability to transfer the exchange notes.

 

If you are eligible to participate in this exchange offer and you do not tender your unregistered notes as described in this prospectus, you will not have any further registration rights, except in limited circumstances. Old notes will continue to bear interest at the current rate and will continue to be subject to all of the terms and conditions specified in the indenture, including restrictions on transfer under the Securities Act.

 

Each broker-dealer that receives exchange notes for its own account in exchange for old notes, where the broker-dealer acquired such old notes as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such exchange notes. Please read “Plan of Distribution” for more details regarding the transfer of exchange notes.

 

Terms of the Exchange Offer

 

Upon the terms and subject to the conditions set forth in this prospectus and in the letter of transmittal, we will accept for exchange any old notes properly tendered and not withdrawn before expiration of the exchange offer. The date of acceptance for exchange of the old notes and completion of the exchange offer is the exchange date, which

will be the first business day following the expiration date unless we extend the date as described in this prospectus. The old Dollar Notes may be tendered only in a minimum denomination of $10,000 and integral multiples of $1,000 principal amount thereafter and old Euro Notes may be tendered only in integral multiples of €50,000. The exchange notes will be delivered on the earliest practicable date following the exchange date.

 

The form and terms of the exchange notes will be substantially identical to the form and terms of the respective series of old notes, except the exchange notes:

 

 

The exchange notes will evidence the same debt as the old notes. The exchange notes will be issued under and entitled to the benefits of the same indenture that authorized the issuance of the applicable series of old notes. For a description of the indentures, see the captions “Description of Euro Exchange Notes” and “Description of Dollar Exchange Notes.”

 

The exchange offer is not conditioned upon any minimum aggregate principal amount of old notes being tendered for exchange.

 

As of the date of this prospectus, $350.0 million aggregate principal amount of the old Dollar Notes and €102.0 million aggregate principal amount of the old Euro Notes are outstanding. There will be no fixed record date for determining registered holders of old notes entitled to participate in the exchange offer.

 

We intend to conduct the exchange offer in accordance with the applicable requirements of the Securities Act, the Exchange Act, and the rules and regulations of the SEC. Old notes that are not exchanged in the exchange offer will remain outstanding and continue to accrue interest and will be entitled to the rights and benefits their holders have under the indentures relating to the old notes and the exchange notes.

 

We will be deemed to have accepted for exchange properly tendered old notes when we have given oral or written notice of the acceptance to the exchange agent. The exchange agent will act as agent for the holders of old notes who surrender them in the exchange offer for the purposes of receiving the exchange notes from us and delivering the exchange notes to their holders. The exchange agent will make the exchange as promptly as practicable on or after the date of acceptance for exchange of the old notes. The exchange date will be the first business day following the expiration date unless it is extended as described in this prospectus. We expressly reserve the right to amend or terminate the exchange offer, and not to accept for exchange any old notes not previously accepted for exchange, upon the occurrence of any of the conditions specified below under the caption “— Conditions”.

 

Holders who tender old notes in the exchange offer will not be required to pay brokerage commissions or fees or, subject to the instructions in the letter of transmittal, transfer taxes with respect to the exchange of old notes. We will pay all charges and expenses, other than applicable taxes described below, in connection with the exchange offer. It is important that you read the caption “— Fees and Expenses” for more details regarding fees and expenses incurred in the exchange offer.

 

Expiration of the Exchange Offer; Extensions; Amendments

 

The exchange offer will expire at 11:59 p.m., New York City time, on July 7, 2006. The exchange offer can be extended by us in our sole discretion, in which case the term “expiration date” shall mean the latest date and time to which the exchange offer is extended.

 

In order to extend the exchange offer, we will notify the exchange agent orally, confirmed in writing, or in writing, of any extension. We will notify the registered holders of old notes by public announcement of the extension no later than 11:59 p.m., New York City time, on the business day after the previously scheduled expiration of the exchange offer.

 

Without limiting the manner in which we may choose to make public announcements of any delay in acceptance, extension, termination or amendment of the exchange offer, we will have no obligation to publish,

advertise, or otherwise communicate any public announcement, other than by making a timely release to a financial news service.

 

Conditions

 

Despite any other term of the exchange offer, we will not be required to accept for exchange any old notes and we may terminate or amend the exchange offer as provided in this prospectus before accepting any old notes for exchange if in our reasonable judgment:

 

 

We will not be obligated to accept for exchange the old notes of any holder that has not made to us:

 

 

We expressly reserve the right, at any time or at various times, to extend the period of time during which the exchange offer is open. Consequently, we may delay acceptance of any old notes by giving oral or written notice of an extension to their holders. During an extension, all old notes previously tendered will remain subject to the exchange offer, and we may accept them for exchange. We will return any old notes that we do not accept for exchange for any reason without expense to their tendering holder as promptly as practicable after the expiration or termination of the exchange offer.

 

We expressly reserve the right to amend or terminate the exchange offer and to reject for exchange any old notes not previously accepted for exchange, upon the occurrence of any of the conditions of the exchange offer specified above. By public announcement we will give oral or written notice of any extension, amendment, non-acceptance or termination to the holders of the old notes as promptly as practicable. If we amend the exchange offer in a manner that we consider material, we will disclose the amendment by means of a prospectus supplement.

 

These conditions are solely for our benefit and we may assert them regardless of the circumstances that may give rise to them or waive them in whole or in part at any time or at various times in our sole discretion. If we fail at any time to exercise any of the foregoing rights, this failure will not constitute a waiver of that right. Each of these rights will be deemed an ongoing right that we may assert at any time or at various times.

 

We will not accept for exchange any old notes tendered, and will not issue exchange notes in exchange for any old notes, if at that time a stop order is threatened or in effect with respect to the registration statement of which this prospectus constitutes a part or the qualification of the indenture under the Trust Indenture Act of 1939.

 

Procedures for Tendering

 

We have forwarded to you, along with this prospectus, a letter of transmittal relating to this exchange offer. Because all of the old notes are held in book-entry accounts maintained by the exchange agent at DTC, Euroclear or Clearstream, Luxembourg, a holder need not submit a letter of transmittal. However, all holders who exchange their old notes for exchange notes in accordance with the procedures outlined below will be deemed to have acknowledged receipt of, and agreed to be bound by, and to have made all of the representations and warranties contained in the letter of transmittal.

 

Holders of old Dollar Notes may hold their notes either directly through DTC or indirectly through Euroclear or Clearstream, Luxembourg who in turn hold via DTC. Similarly, holders of old Euro Notes may hold their notes either directly through Euroclear or Clearstream, Luxembourg or indirectly through DTC who in turn holds via Euroclear and Clearstream, Luxembourg.

 

To tender in the exchange offer, a holder must comply with the following procedures, as applicable:

 

 

 

Only a registered holder of record of old notes may tender old notes in the exchange offer. If you are a beneficial owner of old notes that are registered in the name of a broker, dealer, commercial bank, trust company or other nominee, you may request your respective broker, dealer, commercial bank, trust company or other nominee to effect the above transactions for you. Alternatively, if you are a beneficial owner and you wish to act on your own behalf in connection with the exchange offer, you must either make appropriate arrangements to register ownership of the old notes in your name or obtain a properly completed bond power from the registered holder.

 

The tender by a holder that is not withdrawn before expiration of the exchange offer will constitute an agreement between that holder and us in accordance with the terms and subject to the conditions set forth in this prospectus and in the letter of transmittal. If a holder tenders less than all of the old notes held by this holder, this tendering holder should so indicate. The amount of old notes delivered to the exchange agent will be deemed to have been tendered unless otherwise indicated.

 

The method of delivery of old notes, the letter of transmittal and all other required documents or transmission of an agent’s message, as described under “— Book Entry Transfer,” to the exchange agent is at the election and risk of the holder. Rather than mail these items, we recommend that holders use an overnight or hand delivery service. In all cases, holders should allow sufficient time to assure delivery to the exchange agent before expiration of the exchange offer. Holders should not send the letter of transmittal or old notes to us. Delivery of documents to DTC, Euroclear or Clearstream, Luxembourg in accordance with their respective procedures will not constitute delivery to the exchange agent.

 

The transfer of registered ownership may take considerable time and may not be completed prior to the expiration date. If the applicable letter of transmittal is signed by the record holder(s) of the old notes tendered, the signature must correspond with the name(s) written on the face of the old note without alteration, enlargement or any change whatsoever. If a letter of transmittal is signed by a participant in DTC or Euroclear or Clearstream, Luxembourg, as applicable, the signature must correspond with the name as it appears on the security position listing as the holder of the old notes.

 

A signature on a letter of transmittal or a notice of withdrawal must be guaranteed by a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank

or trust company having an office or correspondent in the United States or “an eligible guarantor institution” within the meaning of Rule 17Ad-15 under the Exchange Act, unless the old notes tendered pursuant thereto are tendered:

 

 

If a letter of transmittal is signed by a person other than the registered holder of any old notes, the old notes must be endorsed or accompanied by a properly completed bond power. The bond power must be signed by the registered holder as the registered holder’s name appears on the old notes and an eligible institution must guarantee the signature on the bond power.

 

If a letter of transmittal or any old notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, these persons should so indicate when signing. Unless we waive this requirement, they should also submit evidence satisfactory to us of their authority to deliver the letter of transmittal.

 

We will determine in our sole discretion all questions as to the validity, form, eligibility, including time of receipt, acceptance and withdrawal of tendered old notes. Our determination will be final and binding. We reserve the absolute right to reject any old notes not properly tendered or any old notes the acceptance of which would, in the opinion of our counsel, be unlawful. We also reserve the right to waive any defects, irregularities or conditions of tender as to particular old notes. Our interpretation of the terms and conditions of the exchange offer, including the instructions in the letter of transmittal, will be final and binding on all parties.

 

Unless waived, any defects or irregularities in connection with tenders of old notes must be cured within the time that we determine. Although we intend to notify holders of defects or irregularities with respect to tenders of old notes, neither we, the exchange agent nor any other person will incur any liability for failure to give notification. Tenders of old notes will not be deemed made until those defects or irregularities have been cured or waived.

 

Any old notes received by the exchange agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned by the exchange agent without cost to the tendering holder, unless otherwise provided in the letter of transmittal, as soon as practicable following the expiration date.

 

In addition, we reserve the right in our sole discretion to (a) purchase or make offers for any old notes that remain outstanding subsequent to the expiration date, and (b) to the extent permitted by applicable law, purchase old notes in the open market, in privately negotiated transactions or otherwise. The terms of any such purchases or offers may differ from the terms of the exchange offer.

 

Book-entry Transfer

 

The exchange agent has established an account with respect to the old notes at DTC for the purpose of facilitating the exchange offer. Any financial institution that is a participant in DTC’s system may make book-entry delivery of old notes by causing DTC to transfer such old notes into the exchange agent’s DTC account in accordance with DTC’s Automated Tender Offer Program procedures for such transfer. Pursuant to their internal guidelines, Euroclear and Clearstream, Luxembourg will automatically exchange old notes for exchange notes on behalf of the holders of the old notes. If they do not wish to participate in the exchange offer, the registered holder of old notes on the records of Euroclear or Clearstream, Luxembourg must instruct Euroclear or Clearstream, Luxembourg, as the case may be, to “Take No Action”; otherwise such old notes will be tendered in the exchange offer, and the holder of such notes will be deemed to have agreed to be bound by the terms of the letter of transmittal. The exchange for old notes so tendered will only be made after a timely confirmation of a book-entry transfer of old notes into the exchange agent’s account, and timely receipt by the exchange agent of an agent’s message.

 

The term “agent’s message” means a message transmitted by DTC, Euroclear or Clearstream as the case may be, and received by the exchange agent and forming part of the confirmation of a book-entry transfer, which states that DTC has received an express or deemed acknowledgment from a participant tendering old notes and that the participant has received and agrees to be bound by the terms of the letter of transmittal, and that we may enforce that

agreement against the participant. Delivery of an agent’s message will also constitute an acknowledgement from the tendering participant that the representations contained in the appropriate letter of transmittal and described below are true and correct.

 

Resale of Exchange Notes:

 

By signing the letter of transmittal, or causing DTC, Euroclear or Clearstream, Luxembourg, as applicable, to transmit an agent’s message to the exchange agent, each tendering holder of old notes will represent to us that, among other things:

 

 

Withdrawal of Tenders

 

Except as otherwise provided in this prospectus, holders of old notes may withdraw their tenders at any time before expiration of the exchange offer.

 

For a withdrawal to be effective:

 

 

Any notice of withdrawal must:

 

 

If old notes have been tendered pursuant to the procedure for book-entry transfer described above, any notice of withdrawal must specify the name and number of the account at DTC or Euroclear or Clearstream, Luxembourg, as applicable, to be credited with the withdrawn old notes and otherwise comply with the procedures of the facility.

 

We will determine all questions as to the validity, form and eligibility, including time of receipt, of notices of withdrawal, and our determination shall be final and binding on all parties. We will deem any old notes so withdrawn not to have been validly tendered for exchange for purposes of the exchange offer. We will return any old notes that have been tendered for exchange but that are not exchanged for any reason to their holder without cost to the holder as soon as practicable after withdrawal, rejection of tender or termination of the exchange offer. You may

retender properly withdrawn old notes by following one of the procedures described under the caption “— Procedures for Tendering” above at any time on or before expiration of the exchange offer.

 

Exchange Agent

 

Citibank, N.A., London branch has been appointed as exchange agent for the exchange offer. You should direct questions and requests for assistance, requests for additional copies of this prospectus or of the letter of transmittal and requests for the notice of withdrawal to the exchange agent addressed as follows:

 

For All Deliveries:

 

Citibank, N.A.

21^st Floor

Citigroup Centre, Canada Square,

London E14 5LB, United Kingdom

Attention: Exchange Team

 

By Facsimile Transmission (for Eligible Institutions Only): +44-20-7508-3867

 

 

To Confirm by Telephone or for Information Call: +44-20-7508-3866

 

 

Delivery of the letter of transmittal to an address other than as shown above or transmission via facsimile other than as set forth above does not constitute a valid delivery of the letter of transmittal.

 

Fees and Expenses

 

We will bear the expenses of soliciting tenders. The principal solicitation is being made by mail; however, we may make additional solicitations by facsimile, telephone or in person by our officers and regular employees and those of our affiliates.

 

We have not retained any dealer-manager in connection with the exchange offer and will not make any payments to broker-dealers or others soliciting acceptances of the exchange offer. We will, however, pay the exchange agent reasonable and customary fees for its services and reimburse it for its related reasonable out-of-pocket expenses.

 

We will pay the cash expenses to be incurred in connection with the exchange offer, including the following:

 

 

Transfer Taxes

 

We will pay all transfer taxes, if any, applicable to the exchange of old notes under the exchange offer. The tendering holder, however, will be required to pay any transfer taxes, whether imposed on the registered holder or any other person, if:

 

 

 

If satisfactory evidence of payment of transfer taxes is not submitted with the letter of transmittal, the amount of any transfer taxes will be billed to the tendering holder.

 

Accounting Treatment

 

As the terms of the exchange notes and the old notes are identical in all material respects, we will record the exchange notes in our accounting records at the same carrying value as the old notes, which is the aggregate principal amount, as reflected in our accounting records on the date of exchange. Accordingly, we will not recognize any gain or loss for accounting purposes in connection with the exchange offer. Costs of the exchange offer will be deferred and amortized to interest expense over the term of the notes.

 

Other

 

Participation in the exchange offer is voluntary, and you should carefully consider whether to accept. We urge you to consult your financial and tax advisors in making your own decision on what action to take.

 

We may in the future seek to acquire untendered old notes in open market or privately negotiated transactions, through subsequent exchange offers or otherwise. However, we have no present plans to acquire any old notes that are not tendered in the exchange offer or to file a registration statement to permit resales of any untendered old notes.

 

We will not receive any cash proceeds from the issuance of the exchange notes under the exchange offer. In consideration for issuing the exchange notes as contemplated by this prospectus, we will receive the old notes in like principal amount, the terms of which are identical in all material respects to the exchange notes. The old notes surrendered in exchange for the exchange notes will be retired and canceled and cannot be reissued. Accordingly, the issuance of the exchange notes will not result in any increase in our indebtedness or capital stock.

 

The following table sets forth our cash and cash equivalents and capitalization as of February 26, 2006 and as adjusted to give effect to (i) the issuance of $350.0 million of our Dollar Notes and €100.0 million of our Euro Notes in March 2006 and (ii) our prepayment of our senior secured term loan in March 2006. The table does not give effect to the impact of the May 2006 amendment to our revolving credit facility (including amendment fees payable to the lenders or the write-off of any unamortized debt issuance costs) or interest expense accrued under the facility since February 26, 2006, none of which is material. This table should be read in conjunction with our audited and unaudited consolidated financial statements and the related notes to those consolidated financial statements included elsewhere in this prospectus.

 

 

 

 

The following table sets forth our selected historical consolidated financial data. The summary statements of operations data and cash flow data for fiscal years 2001 and 2002 and the consolidated balance sheet data as of November 25, 2001, November 24, 2002, and November 30, 2003 are derived from our consolidated financial statements that have been audited by KPMG LLP, an independent registered public accounting firm, but are not included in this prospectus. The summary statements of operations data and cash flow data for fiscal years 2003, 2004 and 2005 and the consolidated balance sheet data as of November 28, 2004 and November 27, 2005 are derived from our consolidated financial statements that have been audited by KPMG LLP, an independent registered public accounting firm, and are included in this prospectus. The data for the three months ended February 26, 2006 and February 27, 2005 have been derived from our unaudited consolidated financial statements which, in our opinion, contain all adjustments necessary for a fair presentation of the financial position and the results of operations for these periods, and are included in this prospectus. The results of operations for the three months ended February 26, 2006 may not be indicative of our results to be expected for any other interim period or the year ending November 26, 2006.

 

The financial data set forth below should be read in conjunction with, and are qualified by reference to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, our audited and unaudited consolidated financial statements and the related notes to those financial statements, included elsewhere in this prospectus. Certain prior year amounts have been reclassified to conform to the 2006 presentation.

 

 

 

 

Overview

 

Our Company

 

We are one of the world’s leading branded apparel companies. 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^®, Dockers^® and Levi Strauss Signature^® brands. We also license our trademarks in various countries throughout the world for accessories, pants, tops, footwear, home and other products.

 

We derive approximately 47% of our net revenues from operations outside the United States. Our products are available at over 55,000 retail locations worldwide. We market Levi’s^® brand products in over 110 countries, Dockers^® brand products in over 50 countries and Levi Strauss Signature^® brand products in the United States and eleven other countries.

 

We distribute our Levi’s^® and Dockers^® products primarily through chain retailers and department stores in the United States and primarily through department stores, specialty retailers and franchised stores abroad. We also distribute our products through company-operated stores located in the United States, Europe and Asia. We distribute our Levi Strauss Signature^® products primarily through mass channel retailers in the United States and abroad.

 

Trends Affecting our Business

 

We believe the key marketplace factors affecting us include the following:

 

 

These factors contribute to a market environment of intense competition and continuing cost and pricing pressure throughout the value chain from supplier to consumer.

 

Our Business Transformation

 

We began several years ago executing an integrated set of strategic, operational and organizational initiatives designed to transform our business and address trends and dynamics in the global apparel marketplace. These actions include the following:

 

 

 

As a result of these and other initiatives, we have substantially improved our financial condition and profitability. Our net revenues in 2005 increased as compared to 2004, ending an eight-year decline. Our operating margin improved from 8.7% in 2004 to 14.0% in 2005 and our operating income improved from $361.1 million in 2004 to $589.3 million in 2005. Our organizational streamlining and cost reductions enabled us to increase our investment in advertising and promotion activities in 2005 as part of our continuing effort to build our brands and strengthen our retail relationships. We also had lower restructuring expenses and we reached agreements with the Internal Revenue Service to close our open 1986 — 1999 tax years.

 

We also have improved our financial condition by executing a series of actions, including our senior note financings in December 2004 and early 2005, that extended our senior note maturities on more favorable terms. In March 2006, we prepaid the remaining balance of our senior secured term loan, consisting of principal of approximately $488.8 million as of February 26, 2006, with the net proceeds from the old Euro Notes and the old Dollar Notes we issued in March 2006, as well as cash on hand. In May 2006, we amended our senior secured revolving credit facility on more favorable terms. For more information relating to the prepayment of our term loan and our revolving credit facility, see “Description of Other Indebtedness.”

 

Changes in Presentation of Financial Information

 

Licensing Revenue.  In 2006, we made changes to the classification of revenue generated by our licensing arrangements in our consolidated statements of operations. Commencing with our consolidated statements of income included in our Form 10-Q for the first quarter of 2006, royalties earned from the use of our trademarks in connection with the manufacturing, advertising, distribution and sale of products by third-party licensees have been classified as “Licensing revenue”. In prior periods such amounts were previously included in “Other operating income”. We now include revenues from licensing arrangements as part of our consolidated net revenues because of the increased contribution of licensing arrangements to our operating income, and we have identified the potential expansion of our licensing business as one of our key business strategies. For more information about this change in presentation, see Note 1 to our unaudited consolidated financial statements for the three months ended February 26, 2006 included herein.

 

Segment Reporting.  In 2006, we changed our measure of segment operating income to include depreciation expense for the assets managed by our business segments. This depreciation expense was previously included as a component of our “Corporate expense” in our disclosure of business segment information. For more information about this change in presentation, see Note 18 to our audited consolidated financial statements for the year ended November 27, 2005 included herein.

 

Our audited consolidated financial statements for fiscal years 2005, 2004 and 2003, included herein, have been reclassified to conform to the changes in presentation noted above.

 

Our First Quarter 2006 Results

 

Key financial results for the three months ended February 26, 2006 were as follows:

 

 

 

For the remainder of 2006, we continue to be cautious about our sales outlook in the face of:

 

 

We remain focused on our key priorities of delivering solid and sustainable profitability and strong operating cash flows.

 

Our 2005 Results

 

Key financial results for 2005 were as follows:

 

 

Results of Operations

 

Three Months Ended February 26, 2006 as Compared to Three Months Ended February 27, 2005

 

The following table summarizes, for the years indicated, items in our consolidated statements of income, the changes in these items from period to period and these items expressed as a percentage of net revenues.

 

 

Consolidated net revenues

 

The following table shows our net revenues for our North America, Europe and Asia Pacific businesses and the changes in these results for the three months ended February 26, 2006 as compared to the same period in 2005:

 

North America net revenues

 

The following table presents our net revenues in our North America region broken out for our U.S. brands and for Canada and Mexico, including changes in these results for the three months ended February 26, 2006 as compared to the same period in 2005:

 

 

U.S. Levi’s^® Brand.  The following table shows net sales and licensing revenue for our U.S. Levi’s^® brand, including the changes in these results for the three months ended February 26, 2006 as compared to the same period in 2005:

 

 

Total net revenues in our U.S. Levi’s^® brand decreased by $6.6 million or 2.3% for the three months ended February 26, 2006 as compared to the same period in 2005. This decrease was primarily driven by:

 

 

Partially offsetting these decreases were continued strong demand for our boy’s products and our women’s special sizes products, an increase in net sales from our company-operated Levi’s^® retail and outlet stores and an increase in licensing revenue as a result of license renewals with higher guaranteed minimum royalty amounts.

 

Net sales generated by our company-operated Levi’s^® retail and outlet stores increased by approximately $1.7 million, or 12.3% for the three months ended February 26, 2006 as compared to the same period in 2005, driven primarily by new stores we opened in late 2005. We opened one new store during the 2006 period, and now operate 26 stores (including our online store, www.levisstore.com) in the United States.

U.S. Dockers^® Brand.  The following table shows net sales and licensing revenue for our U.S. Dockers^® brand, including changes in these results for the three months ended February 26, 2006 as compared to the same period in 2005:

 

 

Total net revenues in our U.S. Dockers^® brand increased $7.2 million or 4.8% for the three months ended February 26, 2006 as compared to the same period in 2005. The increase for the three months ended February 26, 2006 was primarily driven by the following:

 

 

Our men’s premium pants segment continued to be a strong performer during the period, led by our Never Iron^tm Cotton Khaki pant.

 

Partially offsetting these factors was a decrease in net sales for our men’s classic pants business, primarily as a result of retail door closures.

 

U.S. Levi Strauss Signature^® Brand.  The following table presents our net sales and licensing revenue in our U.S. Levi Strauss Signature^® brand, including the changes in these results for the three months ended February 26, 2006 as compared to the same period in 2005:

 

 

Total net revenues in our U.S. Levi Strauss Signature^® brand decreased by $17.7 million, or 20.2%, for the first three months ended February 26, 2006 as compared to the same period in 2005. The decrease for the three months ended February 26, 2006 was primarily driven by the following:

 

 

Partially offsetting the decrease were sales growth in our boys’ business and an increase in our licensing revenue as a result of growth in the kids’ business.

Europe net revenues

 

The following table shows our net sales and licensing revenue in our Europe region, including the changes in these results for the three months ended February 26, 2006 as compared to the same period in 2005:

 

 

Total net revenues in our Europe region decreased $57.0 million or 19.1% and, on a constant currency basis, decreased approximately 12%, for the three months ended February 26, 2006 as compared to the same period in 2005. The decrease in net revenues was primarily driven by the following:

 

 

We also experienced a decrease in net sales for our Dockers^® and Levi Strauss Signature^® brands sales during the period. Partially offsetting these factors were an increase in our average selling price for the three months ended February 26, 2006 as compared to the same period in 2005 resulting from our ongoing repositioning of the Levi’s^® brand in Europe, and a $1.1 million increase in licensing revenue as a result of licensing arrangements we entered into after February 27, 2005.

 

Asia Pacific net revenues

 

The following table shows our net sales and licensing revenue in our Asia Pacific region, including the changes in these results from the three months ended February 26, 2006 as compared to the same period in 2005:

 

 

Total net revenues in our Asia Pacific region increased $14.0 million or 8.9% and, on a constant currency basis, increased approximately 12%, for the three months ended February 26, 2006 as compared to the same period in 2005. The increase on a constant currency basis was primarily driven by increased net sales for our Levi’s^® brand products, which represents a large majority of our business in the region. Net revenues increased in most countries across our Asia Pacific region. Key drivers of our net revenues increase for the period included:

 

 

 

Partially offsetting the increase in net revenues for our Asia Pacific region was a 5% decrease in revenues on a constant currency basis for our business in Japan. This decrease was driven primarily by lower net sales to one of our key customers in Japan as a result of a decrease in unit sales volume and an increase in sales returns from the customer during the period.

 

Gross profit

 

Our gross profit decreased $42.5 million or 8.5% for the three months ended February 27, 2006 as compared to the same period in 2005. Our gross margin was 47.7%, reflecting a decrease of 1.4 percentage points, primarily driven by lower gross margin for our Europe region as a result of a change in sales mix and an increased investment in product. The primary drivers of the gross profit decrease were:

 

 

Partially offsetting these factors were increased net sales in our Asia Pacific region and our Mexico business, and increased licensing revenue across all of our businesses.

 

Our cost of goods sold is primarily comprised of cost of materials, labor and manufacturing overhead and also includes the cost of inbound freight, internal transfers, and receiving and inspection at manufacturing facilities as these costs vary with product volume. We include substantially all the costs related to receiving and inspection at distribution centers, warehousing and other activities associated with our distribution network in selling, 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.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses decreased $29.5 million or 9.4% for the three months ended February 26, 2006 as compared to the same period in 2005, primarily due to decreased advertising and promotion expense. On a constant currency basis, selling, general and administrative expenses were approximately $21.0 million lower in the three months ended February 26, 2006 as compared to the same period in 2005. As a percentage of net revenues, selling, general and administrative expenses were 29.7% for the three months ended February 26, 2006 as compared to 30.9% for the same period in 2005. We remain focused on cost discipline across our organization as we continue to invest in growing and strengthening our global businesses, including opening more company-operated stores and investing in our Asia Pacific region.

 

Key factors driving the decrease in selling, general and administrative expenses for the three months ended February 26, 2006 were as follows:

 

 

 

These decreases were partially offset by an increase in our selling expense of 14.1% to $61.7 million in the three months ended February 26, 2006, as compared to the same period in 2005. Selling expense as a percentage of net revenues was 6.4% in the three months ended February 26, 2006, compared to 5.3% in the same period 2005. The increase reflected additional selling costs associated with new company-operated stores dedicated to the Levi’s^® brand in Europe and the United States. We include all occupancy and buying costs associated with our company-operated stores in selling, general and administrative expenses.

 

Restructuring charges

 

Restructuring charges, net of reversals, were $3.2 million for the three months ended February 26, 2006 and February 27, 2005, respectively, and related primarily to activities associated with our U.S. and Europe reorganization initiatives. The 2006 amount primarily consisted of severance charges associated with headcount reductions in Europe and additional lease costs associated with exited facilities in the United States. The 2005 amount primarily consisted of charges for severance and employee benefits for our 2004 U.S. and Europe organizational changes.

 

Operating income

 

Operating income decreased 7.2% during the three months ended February 26, 2006 compared to the same period in 2005. Operating margin was 17.8% for the three months ended February 26, 2006, compared with 18.0% in the same period in 2005.

The following table shows our operating income by brand in the United States, for Canada and Mexico, and in total for our North America, Europe and Asia Pacific regions, the changes in results from the three month period ended February 26, 2006 to the three month period ended February 27, 2005 and the results presented as a percentage of net revenues: