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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 20-F
o | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDEDMARCH 31, 2008
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
OR
o | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
DATE OF EVENT REQUIRING THIS SHELL COMPANY REPORT
Commission file number0-11743
KABUSHIKI KAISHA WACOAL HOLDINGS
(Exact Name of Registrant as Specified in Its Charter)
WACOAL HOLDINGS CORP.
(Translation of Registrant’s Name Into English)
Japan
(Jurisdiction of Incorporation or Organization)
(Jurisdiction of Incorporation or Organization)
29 Nakajima-cho, Kisshoin, Minami-ku, Kyoto 601-8530, Japan
(Address of Principal Executive Offices)
(Address of Principal Executive Offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
None
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of class)
(Title of class)
American Depositary Receipts (each representing 5 shares of such Common Stock)
(Title of class)
(Title of class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period
covered by the annual report.
covered by the annual report.
Common Stock Outstanding:
143,378,085 shares
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes þ No o
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes o No þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer þ Accelerated Filer o Non-Accelerated Filer o
Indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 þ Item 18 o
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements that are based on our current expectations, assumptions, estimates and projections about our company and our industry. You can identify these statements by the fact that they do not relate strictly to historic or current facts. The forward-looking statements discuss future expectations, identify strategies, contain projections of results of operations or of financial condition, or state other “forward-looking” information. In particular, the forward-looking statements may include statements relating to our development and sale of products, the expansion and operation of our specialty retail store network, our sales activities through catalog and Internet channels, the implementation of our CAP 21 strategic plan through strategic investments, acquisitions and other initiatives, continued development of our overseas business and operations, developments in our product sourcing and manufacturing practices and strategies, sales efforts, expenses, outcomes of contingencies and financial results. Forward-looking statements are contained in the sections entitled “Item 3.D. Risk Factors”, “Item 4.B. Business Overview”, and “Item 5. Operating and Financial Review and Prospects”, and elsewhere in this annual report.
The forward-looking statements are subject to various risks and uncertainties. Information contained in the sections listed above and elsewhere in this annual report identifies factors that could cause our actual results, performance or achievements to differ materially from those expressed or implied in any forward-looking statement.
We undertake no obligation to update any forward-looking statements contained in this annual report, whether as a result of new information, future events or otherwise.
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CERTAIN REFERENCES
As used in this annual report, unless the context otherwise requires, the “Company” and “Wacoal Holdings” refer to Wacoal Holdings Corp., and “Wacoal”, “we,” “us,” “our” and similar terms refer to Wacoal Holdings Corp. and its consolidated subsidiaries.
The Company’s fiscal year end is March 31. In this annual report, “fiscal year 2008” refers to the Company’s fiscal year ended March 31, 2008, and other fiscal years are referred to in a corresponding manner.
CURRENCIES AND EXCHANGE RATES
We publish our financial statements in Yen. In this annual report, references to “U.S. dollars” or “$” are to the currency of the United States and references to “Yen” or “¥” are to the currency of Japan.
Solely for your convenience, certain Yen amounts in this annual report have been translated into U.S. dollars. The rate of translation is based on the noon buying rate for Yen in New York City as certified for customs purposes by the Federal Reserve Bank of New York on the various dates specified where the translations are set forth in this annual report. References to the “noon buying rate” in this annual report refer to this rate. These translations should not be taken as assurances that the Yen amounts actually represent these U.S. dollar amounts or that they were or could have been converted in U.S. dollars at the rate indicated or at any other rate. The noon buying rate was ¥107.68 to $1.00 on July 23, 2008.
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Table of Contents
PART I
Item 1. Identity of Directors, Senior Management and Advisers.
Not applicable.
Item 2. Offer Statistics and Expected Timetable.
Not applicable.
Item 3. Key Information.
A. Selected Financial Data.
The following selected historical consolidated financial data of Wacoal Holdings have been derived from the audited Consolidated Financial Statements of Wacoal Holdings as of and for the fiscal years ended March 31, 2008, 2007, 2006, 2005 and 2004. The selected consolidated income statement data for the fiscal years ended March 31, 2008, 2007 and 2006, and the selected consolidated balance sheet data as of March 31, 2008 and 2007, are derived from the audited Consolidated Financial Statements, prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP), included elsewhere in this Form 20-F. The selected consolidated income statement data for the fiscal years ended March 31, 2005 and 2004, and selected consolidated balance sheet data as of March 31, 2006, 2005 and 2004, are derived from Wacoal Holdings’ audited Consolidated Financial Statements not included in this Form 20-F.
Fiscal year ended/as of March 31, | ||||||||||||||||||||||||
2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||||||
(Yen in millions and U.S. dollars in thousands, except per share amounts or unless otherwise indicated) | ||||||||||||||||||||||||
Income Statement Data | ||||||||||||||||||||||||
Net sales | ¥ | 165,761 | $ | 1,660,100 | ¥ | 166,410 | ¥ | 164,122 | ¥ | 160,968 | ¥ | 163,155 | ||||||||||||
Operating income | 13,540 | 135,604 | 12,896 | 1,333 | 11,766 | 3,016 | ||||||||||||||||||
Net income | 4,966 | 49,735 | 9,029 | 2,821 | 6,790 | 2,902 | ||||||||||||||||||
Balance Sheet Data | ||||||||||||||||||||||||
Working capital1 | ¥ | 62,835 | $ | 629,294 | ¥ | 58,047 | ¥ | 75,208 | ¥ | 85,330 | ¥ | 89,951 | ||||||||||||
Total assets | 241,619 | 2,419,820 | 250,266 | 242,296 | 226,196 | 224,803 | ||||||||||||||||||
Long-term debt (including capital leases) | 81 | 811 | 111 | 32 | 99 | 122 | ||||||||||||||||||
Common stock | 13,260 | 132,799 | 13,260 | 13,260 | 13,260 | 13,260 | ||||||||||||||||||
Shareholders’ equity | 185,113 | 1,853,911 | 193,278 | 186,475 | 175,746 | 170,758 | ||||||||||||||||||
Per American Depositary Share Data | ||||||||||||||||||||||||
(One ADR represents 5 shares of common stock): | ||||||||||||||||||||||||
Net income | ¥ | 176 | $ | 1.76 | ¥ | 316 | ¥ | 98 | ¥ | 236 | ¥ | 99 | ||||||||||||
Cash dividends declared: | ||||||||||||||||||||||||
Japanese Yen | ¥ | 125 | — | ¥ | 110 | ¥ | 100 | ¥ | 100 | ¥ | 75 | |||||||||||||
U.S. dollars | — | $ | 1.25 | $ | 0.94 | $ | 0.85 | $ | 0.93 | $ | 0.72 | |||||||||||||
Other Data | ||||||||||||||||||||||||
Weighted average number of shares of common stock outstanding (thousands) | ||||||||||||||||||||||||
141,304 | 141,304 | 142,910 | 143,934 | 143,956 | 146,227 |
1. | Working capital equals total current assets less total current liabilities. |
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We publish our financial statements in Yen. The following table sets forth information regarding the noon buying rates for Yen in New York City as certified for customs purposes by the Federal Reserve Bank of New York, expressed in Yen per $1.00 during the periods shown. The noon buying rate was ¥107.68 to $1.00 on July 23, 2008.
Year ended March 31, | ||||||||||||||||||||
Yen exchange rates per U.S. dollar1 | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||
Period end2 | ¥ | 99.85 | ¥ | 117.56 | ¥ | 117.48 | ¥ | 107.22 | ¥ | 104.18 | ||||||||||
Average rate during period3 | 113.61 | 116.55 | 113.67 | 107.28 | 112.75 | |||||||||||||||
Highest rate during period | 124.09 | 121.81 | 120.93 | 114.30 | 120.55 | |||||||||||||||
Lowest rate during period | 96.88 | 110.07 | 104.41 | 102.26 | 104.18 |
Yen exchange rates | Highest rate | Lowest rate | ||||||
per U.S. dollar | during period | during period | ||||||
January 2008 | ¥ | 109.70 | ¥ | 105.42 | ||||
February 2008 | 108.15 | 104.19 | ||||||
March 2008 | 103.99 | 96.88 | ||||||
April 2008 | 104.56 | 100.87 | ||||||
May 2008 | 105.52 | 103.01 | ||||||
June 2008 | 108.29 | 104.41 |
1. | All figures have been derived from figures released through the web site of the Federal Reserve Bank of New York. | |
2. | The noon buying rate on such dates may differ from the rates used in preparation of our financial statements as of such dates. | |
3. | Average rates are calculated using the average of the exchange rates on the last day of each month during the period. |
B. Capitalization and Indebtedness.
Not applicable.
C. Reasons for the Offer and Use of Proceeds.
Not applicable.
D. Risk Factors.
Risk Factors.
Our business, performance and financial condition are subject to risks and uncertainties, including those described in the risk factors below. These risks and uncertainties could result in a material adverse effect on the results of operations and financial condition of Wacoal Holdings, and a material decline in the trading price of our common stock and American Depositary Shares, or ADSs.
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Weakness in the Japanese market would hurt our performance
During fiscal year 2008, the Japanese market accounted for approximately 84% of our sales, and we expect that our sales in Japan will account for approximately an equivalent proportion of our sales in fiscal year 2009. As a result, any weakness in the Japanese market or decrease in consumer spending in Japan would have an adverse impact on our net sales and profitability.
Continued difficulties faced or changes in business policies made by department stores, general merchandise stores and other general retailers in Japan would hurt our business
In fiscal year 2008, a substantial majority of our total sales were made to department stores, general merchandise stores and other general retailers in Japan. We are attempting to increase our sales made through our own specialty retail store network, our catalog business and our Internet operations. However, we expect that the majority of our total sales will continue to be made through department stores, general merchandise stores and other general retailers in Japan for the foreseeable future.
In recent years, many department stores, general merchandise stores and other general retailers in Japan have experienced business difficulties for a variety of reasons, including weak consumer spending, competition from convenience stores, catalog and Internet retailers and other sources. A number of department stores and general retailers have been able to improve their financial performance as a result of restructuring and other efforts. Nevertheless, the outlook for the sector remains uncertain, and poor performance could persist.
Weakness in the department store, general merchandise and specialty retail sector would make it difficult to increase sales to our customers in these sectors, and the failure of one or more of our important general retail customers could materially harm our business. This would mean an immediate loss of sales to such failed retailer and the potential inability to collect some or all of our outstanding accounts receivable from it. Likewise, increased consolidation of Japanese department stores and general merchandise stores in preparation for a shrinking market due to the future anticipated decrease in the population of Japan may allow our customers to increase their bargaining power in negotiating pricing and other terms of trade, which could have a material impact on our profitability. Any change in business policy by Japan’s leading retailers would have an adverse impact on our performance, such as net sales or return on sales.
As a result of any of the above factors or otherwise, any change in the business environment surrounding department stores, general merchandise stores or other general retailers in Japan would have a material impact on our business, profitability and financial condition.
Our sales may decline if we are unable to effectively anticipate and respond to consumer tastes and preferences and deliver high-quality products
Our success depends in part on our ability to effectively anticipate and respond to changing consumer tastes, preferences and demands, and to translate market trends into products that consumers want to buy at prices that will allow us to be profitable. Customer tastes and fashion trends change rapidly and are difficult to predict. If we are unable to successfully anticipate or respond to changing styles or trends, or if we lose the support of our customers, we would be unable to achieve our sales targets and our financial results would suffer as a result.
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In addition, we believe that we have established broad brand recognition in our core Japanese market for our high quality and fashionable women’s innerwear garments, and that this brand recognition is very important for our ability to target the high end of the women’s innerwear market. As a result, our brand image may suffer if we misjudge the market or sell defective merchandise causing consumers to believe that we are not able to offer attractive fashions and top-quality products. If any event were to occur that harms our reputation for producing high-quality products, our sales, operations and financial condition could be materially adversely affected.
The apparel market is highly competitive, and our share of sales or profitability may decline if we are unable to maintain our competitiveness
The sale of intimate and other apparel is highly competitive, and we must compete for sales with a wide range of other apparel companies. In addition to competition from wholesalers and direct retailers in the mid- to high-end undergarment market in Japan, we must also compete against door-to-door sales, catalog and Internet sales, and new entrants to the intimate apparel market, including mass-market and specialty apparel companies, such as Fast Retailing Co., Ltd., as well as outerwear fashion manufacturers.
An important factor affecting the competitive environment in our industry in recent years has been the increased penetration of lower priced garments in the market. Factors driving this trend include increased product sourcing and production in China, Vietnam and other lower-cost countries, the introduction of new manufacturing technologies, consolidation in the retail industry and a prolonged period of sluggish consumer spending, particularly in Japan. Our strategy of focusing on the higher end of the intimate apparel market may help us avoid potential negative effects of such trends on our business and performance, including possible loss of market share and reduced profitability. However, we are affected by these competitive trends and our strategy may not be successful.
Additionally, we continue to be challenged by the emergence of new and competitive retail concepts in the Japanese intimate apparel industry, which target customers through catalog marketing, e-commerce and other means. Increased competition could result in price reductions, increased marketing expenditures and loss of sales volume and market share, all of which could have a material adverse effect on our sales, financial condition and operating results.
Our specialty retail store network expansion may not lead to improved sales and profits
As of March 31, 2008 we had a total of 95 specialty retail stores, including 10 factory outlet stores. Through our specialty retail stores, we hope to increase our contact with younger women and other consumers who may have less awareness of our brand and products and who may be less likely to shop for intimate apparel in the general retail stores that carry our products.
In particular, we believe our ability to increase sales to younger women is key to our ability to increase our sales in the future. We entered into a strategic tie-up with Peach John Co., Ltd. (“Peach John”) in June 2006 by acquiring a 49% interest, and we acquired the remaining 51% interest in January 2008 in an effort to strengthen our specialty retail store marketing efforts aimed at younger women.
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However, there are a number of risks that we must address in order for our specialty retail stores to succeed, and we may not be successful in resolving these risks, especially in light of our limited experience in operating our own stores. For example:
• | our specialty retail store strategy depends in large part on our ability to find attractive store locations that will provide sufficient customer traffic to drive sales; | ||
• | we must compete for good store locations with other retailers pursuing similar strategies; | ||
• | we may not be able to open new stores with capital investment, leasing and other costs that will allow us to earn a reasonable return; and | ||
• | we must effectively recruit personnel, control inventory, market our stores and new product lines and otherwise operate our stores successfully. |
We are developing and marketing distinct lines of intimate apparel for our specialty retail stores under brands that do not feature the Wacoal name in order to reach the targeted customers for our stores and avoid competition with our general retail customers who carry our Wacoal brand apparel. This strategy carries risks, including the risk that our new apparel lines may not meet the fashion, function and other needs of our targeted customers.
We opened our first specialty retail store in 2001. However, rapid changes in the retail market in Japan in recent years, such as declines in the number and sales of department stores, new controls on mass-merchandising stores, increases in sales at direct sales outlets and on the Internet, and declines in the prices of innerwear and the number of innerwear items sold per person, make it difficult for us to evaluate the performance of our specialty retail stores to date and to estimate whether we will achieve success in the future. Further investment is necessary in order to expand our specialty retail store business, including costs for the development of new stores and the closure of underperforming stores, and improvement costs for the specialty retail store brand. Although we are working to recover our investment through increased earnings in our specialty retail stores, if new shops fail to secure the expected sales levels, if expenses such as shop rent or personnel costs increase due to changes in the market environment, or if the specialty retail store brand fails to be popular with customers, it is possible that we may not be able to make sufficient gains to recover the investment.
We may experience difficulties in successfully increasing our catalog and Internet sales
We believe that our catalog and Internet sales will be increasingly important in achieving sales growth, and we are seeking to strengthen our capabilities in these channels. However, we face challenges in our catalog and Internet sales strategies. Our sales through these channels currently represent a small share of our overall sales. We face intense competition in our catalog and Internet business, and many of our competitors have more experience and have devoted more resources to these channels than we have. Additionally, our profit margins on catalog and Internet sales are typically lower than our margins on products sold through our core general retailer channel, and thus even higher sales volume through the catalog and Internet channels may not adequately replace sales through our core channels. Although our acquisition of Peach John—which has a large share of catalog sales to young people in Japan—will contribute to our efforts in this area, we believe that we need to make further system investments in order to expand our catalog and Internet sales for our group as a whole. However, we may not be successful in increasing our catalog and Internet sales sufficiently to compensate for continued flat or declining sales through our core general retailer channel, which could have a material adverse effect on our financial condition and operating results and may lead to impairment charges against goodwill and intangible assets recorded in connection with our acquisition of Peach John.
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We are subject to inventory risks that could negatively impact our operating results
Fluctuations in the demand for our products may affect the inventory we own because we usually manufacture our products well in advance of the applicable season and sometimes before fashion trends are identified or evidenced by customer purchases. In addition, the cyclical nature of the retail business requires us to carry additional inventory, especially prior to peak selling seasons when we generally build up inventory levels. We generally enter into contracts for the purchase and manufacture of merchandise with our suppliers well in advance of the applicable selling season. As a result, we are vulnerable to demand and pricing shifts and to sub-optimal selection and timing of merchandise purchases. Therefore, if we are unable to successfully anticipate or respond to changing styles or trends and misjudge the market for our products or any new product lines, our sales will suffer and we may be faced with significant amounts of unsold inventory. In response, we may be forced to reduce our product prices, increase our marketing promotions or take other steps, which could have a material adverse effect on our sales, results of operations and financial condition.
In addition, we review our inventories on a regular basis for their salability and for indications of obsolescence to determine if a write-down to market value is necessary. The revaluation of inventories is based on the age of inventories, likelihood of obsolescence, actual product movements, changes in market demand, and other factors. Any write-downs of inventory resulting from such reviews may have an adverse impact on our earnings and profitability, depending on the extent of the markdowns and the amount of inventory affected.
Improvement in our profitability will largely depend on our ability to reduce costs
Reducing our cost of conducting business is a key element of our strategy to improve our profitability and business performance. In recent years we have taken certain steps intended to reduce our costs. For example, in order to improve the efficiency of our product distribution system, we reduced the number of our distribution centers from 18 in 1998 to 5 as of March 31, 2008. We are also taking steps to reduce our labor costs in Japan, such as closing production facilities, implementing an early retirement program and undertaking a reform of our pension plan. In addition, we are seeking to produce or otherwise source more of our apparel in China, Vietnam and other lower-cost countries, reorganizing production functions and taking other steps to reduce manufacturing costs.
However, with the possibility of an increase in product material prices or costs being incurred in response to changes in the business environment, we may not be successful in materially reducing our costs, and any cost reductions that we achieve may not be large enough to compensate for difficulties that we may face in increasing our sales. A failure to reduce our costs would have a material adverse effect on our profitability and results of operations.
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It may be difficult for us to attract and retain highly qualified personnel
The growth of our business depends significantly on our ability to attract, train and retain qualified personnel in areas such as product planning, manufacturing technology and sales and marketing. The competition for qualified personnel in Japan is intensifying due to factors such as a gradual reduction of the working population due to demographic trends in Japan and the increased demand for labor. Our ability to attract qualified personnel depends in large part on our ability to establish and maintain a positive image in the labor market. We may not be successful in attracting and retaining qualified personnel, which may have a material adverse effect on our financial condition and results of operations.
Our business may be adversely affected by seasonality
Our business performance and results are affected by seasonality. Because consumer demand for innerwear and other apparel is easily influenced by the weather, large temperature fluctuations and other adverse weather conditions can have a large impact on sales of our seasonal campaign items and other seasonal products. Because we produce and acquire merchandise in advance of peak selling periods, seasonal fluctuations also affect our inventory levels. We cannot predict future weather patterns or judge the effect that weather patterns may have on our sales and profitability.
We may face increasing risks relating to conducting business internationally
In fiscal year 2008, approximately 84% of our sales were made in Japan. However, we have gradually increased both the amount of goods we produce and the amount of raw materials we procure in lower-cost countries, such as China—a trend we expect to continue. In addition, we are making efforts to expand our product sales in overseas markets, including the U.S., Europe and China. These initiatives and trends may increasingly subject us to various risks relating to the conduct of our business abroad, including:
• | differing consumer tastes and preferences in overseas markets; | ||
• | political, social and economic instability in countries where we source, manufacture or sell our products; | ||
• | unexpected tax, legal or regulatory changes that may adversely impact our group; | ||
• | difficulty in staffing and managing widespread operations; | ||
• | changes in exchange rates; | ||
• | differing protection of intellectual property; and | ||
• | public health or similar problems in our important overseas markets or sourcing/production centers. |
We may not be successful with acquisitions and other strategic transactions with third parties
As part of our CAP 21 strategic plan, we intend to evaluate and pursue opportunities for acquisitions, investments and other strategic transactions that we believe will help us achieve our business objectives, including extending our product offerings in Japan and in overseas markets and strengthening our capabilities in the Internet, catalog and other marketing channels. For example, in June 2006 we entered into a business and capital alliance with Peach John, which markets innerwear, outerwear and other products of its own original design to younger women in Japan through catalog and company owned store sales, by acquiring a 49% interest. In January 2008, we acquired the remaining 51% interest and made Peach John a wholly owned subsidiary. However, Peach John operated below the initial plan following the initial capital alliance, and we recorded approximately ¥4,694 million yen in investment losses in equity in net loss of affiliated companies for fiscal year 2008.
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Any acquisitions or other strategic transactions that we have pursued or may pursue in the future may involve significant risks to our company and the value of your shares. For example, your equity in us may be significantly diluted if we issue shares as consideration in any significant strategic transaction. Also, our balance of available cash will be reduced to the extent that we pay cash as consideration in one or more strategic transactions.
Other potential risks that may arise from our strategic transactions include the following:
• | difficulty and expense of assimilating the operations, technology and personnel of an acquired business; | ||
• | our inability to retain the management, key personnel and other employees of an acquired business; | ||
• | our inability to maintain an acquired company’s relationships with customers, suppliers and other key third parties; | ||
• | exposure to legal claims for activities of the acquired business prior to the acquisition; | ||
• | the diversion of our management’s attention from our core business; | ||
• | impairment charges we would have to take if we were to conclude that there had been an other-than-temporary decline in the fair value of our investment in an investee company, below its carrying value if, for example, the investee business were not generating increasing cash flows as quickly as we had expected at the time of our initial investment; and | ||
• | possible impairment charges to goodwill or intangible assets. |
If any of these or any other material risks occur, it could have an adverse effect on a business we acquire, as well as the operations, financial condition and cash flow of our existing operations.
We may face infringement of our intellectual property rights or claims that we infringe the intellectual property rights of others
We are subject to certain risks in our business relating to intellectual property rights. In particular, we believe that our brands and related trademarks are important to our ability to create and sustain demand for our products, and to the value of our business. We may encounter trademark and related disputes in the future, and our actions to establish and protect our trademarks and other proprietary rights may not be adequate to prevent imitation of our products or the infringement of our trademarks and proprietary rights by others, which could materially harm our operations and financial condition. Additionally, other parties have asserted, and may assert in the future, that we have infringed their intellectual property rights. We cannot predict whether any such assertions or related claims will substantially harm our financial condition or results of operations.
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If we fail to protect our customers’ privacy and data and maintain the confidentiality of our trade secrets we may face proceedings against us and lose customer confidence
We must comply with laws and regulations regarding privacy and the protection of customer information in the jurisdictions where we conduct our business and operations. These laws and regulations change from time to time, and are not consistent across jurisdictions. Violations of these requirements could arise in a number of ways, including problems with our information systems and inadvertent or intentional disclosures of information by our employees. Any failure by us to comply with these laws and regulations could result in proceedings against us by governmental entities or others, which could potentially have an adverse effect on sales and profitability. Complying with varying privacy requirements could cause us to incur substantial costs and force us to change our business practices. Any failure by us or third parties to whom we entrust any of our operations to properly protect our customers’ privacy and data could cause customers to lose confidence in our business and products, which could result in a material adverse effect on our sales and profitability.
In order for us to maintain and secure an advantageous position in the market competition, we need to protect our trade secrets, such as manufacturing technology and product information. If these trade secrets are divulged by any party related to us or infringed by another company, our business or financial condition could be materially affected.
If we fail to maintain adequate internal controls over financial reporting we may not be able to produce reliable financial reports in a timely manner or prevent financial fraud
Beginning with the last annual report on Form 20-F for our fiscal year ending March 31, 2007, we are required to document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent registered public accounting firm addressing these assessments.
As a result of evaluations conducted by management and independent external auditors for fiscal years 2007 and 2008, we did not discover any material deficiencies. However, we recognize that there are certain improvements that we should make with particular aspects of our internal controls.
In addition, although we have a policy of actively responding to all of our inadequacies as a group, there is a possibility that we may not be able to successfully implement revised controls and procedures, and our revised controls and procedures may not be effective in remedying any deficiencies that are identified.
Furthermore, there is a chance that new deficiencies will arise owing to changes and amendments to the standards for establishing and maintaining effective internal controls or changes that affect the business environment generally, and we may not be able to conclude in our annual reports that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002.
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Moreover, effective internal controls are necessary for us to produce reliable financial reports and important in helping prevent financial fraud. If we cannot provide reliable financial reports on a timely basis or prevent financial fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our stock could drop significantly.
Our holdings of equity securities expose us to market risks
We hold equity and other securities in a number of publicly traded Japanese companies. A significant drop in the value of these securities, or in the Japanese equity markets in general, could have an adverse impact on our financial results in the relevant reporting period. For example, although our balance sheet as of the end of fiscal year 2008 shows an unrealized gain on securities of ¥5,295 million, we were required to recognize a valuation loss on our equity securities holdings of ¥923 million, which was primarily the result of a determination that a decrease in the fair market value of certain equity securities was other-than-temporary.
In addition, if there is a decrease in our pension assets due to adverse conditions in stock or bond markets or other factors, additional funding and accruals may be required, and such funding and accruals may adversely affect our performance and financial condition.
Natural disasters and epidemics could affect our manufacturing abilities or sales results
In the event of a large earthquake or other natural disaster, or the outbreak of an epidemic, that impacts our employees or our ability to continue using any of our sales or manufacturing facilities, our sales and marketing efforts would be adversely impacted and we would face the possibility of work delays or stoppages, any of which could have a negative affect on our business. In addition, any such natural disaster or epidemic would also have a large impact on consumer activity, which would have a significant impact on the sales of our products.
We may become classified as a passive foreign investment company, which could result in adverse U.S. tax consequences to U.S. holders of our stock or ADSs
It is possible that we may be classified as a passive foreign investment company (a “PFIC”) for U.S. federal income tax purposes for the fiscal year ended March 31, 2008, or for the current or any future fiscal year. Such characterization could result in adverse U.S. tax consequences to U.S. holders of our stock or ADSs. For example, if we are a PFIC, U.S. holders of our stock or ADSs would be subject to increased tax liabilities under U.S. federal income tax laws and regulations and burdensome reporting requirements.
The determination of whether or not we are a PFIC is made on an annual basis and depends on the composition of our income and assets, including goodwill. Specifically, we will be classified as a PFIC for U.S. tax purposes if, after applying certain look-through rules, either 50 percent or more of the gross value of our assets, based on annual quarterly averages, are passive assets, or 75 percent or more of our annual gross income is passive income. The composition of our assets will be affected by the extent to which we increase or reduce our active business assets and/or our cash, investment securities, and other passive assets, as well as any change in the valuation of our goodwill. In addition, if our acquisitions of active business assets, capital expenditures and certain other uses of cash do not match our projections, the likelihood that we are or will be classified as a PFIC may also increase. We cannot assure you that we will not be classified as a PFIC for the fiscal year ended March 31, 2008, or for the current or any future fiscal year. See “Item 10.E. Taxation—U.S. Federal Income Taxation—U.S. Holders—Passive Foreign Investment Companies”.
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Yen-dollar fluctuations could cause the market price of the ADSs to decline and reduce dividend amounts payable to ADS holders as expressed in U.S. dollars
Fluctuations in the exchange rate between the Japanese yen and the U.S. dollar will affect the U.S. dollar equivalent of the Japanese yen price of the shares on the Tokyo Stock Exchange and, as a result, are likely to affect the market price of the ADSs. If we declare cash dividends, dividends on the shares represented by the ADSs will be paid to the depositary in Japanese yen and then converted by the depositary into U.S. dollars. Therefore, exchange rate fluctuations will also affect the dividend amounts payable to ADS holders following conversion into U.S. dollars of dividends paid in Japanese yen on the shares represented by the ADSs.
As a holder of ADSs, you will have fewer rights than a shareholder has, and you must act through the depositary to exercise those rights
The rights of shareholders under Japanese law to take various actions, including voting their shares, receiving dividends and distributions, bringing derivative actions, examining our accounting books and records and exercising appraisal rights, are available only to holders of record on our register of shareholders or our register of beneficial shareholders. Because the depositary, through its custodian agents, is the registered holder of the shares underlying the ADSs, only the depositary can exercise those rights in connection with the deposited shares. The depositary will make efforts to vote the shares underlying a holder’s ADSs as instructed by the holder and will pay to the holder the dividends and distributions collected from us. However, in the holder’s capacity as an ADS holder, that holder will not be able to bring a derivative action, examine our accounting books and records or exercise appraisal rights through the depositary.
There are restrictions on the withdrawal of shares from our depositary receipt facility
Under our ADS program, each ADS represents the right to receive five shares of our common stock. To withdraw any shares, a holder of ADSs has to surrender for cancellation American Depositary Receipts, or ADRs, evidencing 200 ADSs or any integral multiple thereof. Each ADR bears a legend to that effect. As a result, holders of ADSs are unable to withdraw fractions of shares or units or receive any cash settlement from the depositary in lieu of withdrawal of fractions of shares or units. Holders of shares representing less than one unit, or 1,000 shares, may require us to repurchase those shares, whereas holders of ADSs representing less than one unit of shares are unable to exercise this right because the holders of these ADSs are unable to withdraw the underlying shares. Under our ADS program, an ADS holder cannot cause the depositary to require us to repurchase fractions of shares or units on its behalf. For a further discussion of the Japanese unit share system, see “Item 10.B. Memorandum and Articles of Association—Capital Stock—Unit Share System”.
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Item 4. Information on Wacoal Holdings.
A. History and Development of Wacoal Holdings.
Wacoal Holdings Corp. is a joint stock corporation that was incorporated under the laws of Japan in 1949 with the name Wako Shoji Kabushiki Kaisha. Our name was changed to Wacoal Kabushiki Kaisha in 1957 and was further changed to Kabushiki Kaisha Wacoal (or Wacoal Corp.) in 1964.
In October 2005, we transitioned to a holding company structure by spinning off all of our operations into a new wholly owned subsidiary. In connection with this, we changed our name to Wacoal Holdings Corp. and named our new subsidiary Wacoal Corp.
Our corporate headquarters are located at 29 Nakajima-cho, Kisshoin, Minami-ku, Kyoto 601-8530, Japan, and our telephone number at that location is +81-75-682-5111. Our agent in the United States is Wacoal America, Inc., located at 136 Madison Avenue New York, N.Y. 10016 U.S.A, and our telephone number at that location is +1-212-532-6100.
We conduct our business and operations principally in Japan. In addition, since our incorporation, we have established a number of overseas subsidiaries and joint venture companies, including in the U.S., China, France, the U.K., and several countries in Southeast Asia. These subsidiaries and joint venture companies are described in “Item 4.B. Business Overview”, and elsewhere in this annual report.
For a discussion of recent and current capital expenditures, please see “Item 5.B. Liquidity and Capital Resources—Capital Expenditures”.
We have not received any indication of any public takeover offers by third parties in respect of our shares, and we have no current intention to make any takeover offers in respect of other companies’ shares.
B. Business Overview.
Overview
We are a leading designer, manufacturer and marketer in Japan of women’s intimate apparel, with the largest share of the Japanese market for foundation garments and lingerie. Foundation garments (primarily brassieres and girdles) and lingerie (primarily slips, bra-slips and women’s briefs) accounted for approximately 74.4% of our consolidated net sales for fiscal year 2008. We also design, manufacture and sell nightwear, children’s underwear, outerwear, sportswear, hosiery and other apparel and textile products, and engage in restaurant businesses, certain cultural projects and (through our subsidiary, Nanasai Co., Ltd.) build interiors for commercial premises, including sales counters operated by our sales promoters in department stores and other retailers carrying our apparel.
Most of our business operations and sales are in Japan, where we believe that we have established broad brand recognition for high quality and fashion. In fiscal year 2008, a substantial majority of our total sales were made to department stores, general merchandise stores and other general retailers in Japan.
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In the U.S. market, our subsidiary Wacoal America, Inc. is engaged in sales of foundation garments and lingerie using the Wacoal brand and until December 31, 2008, the Donna Karan Intimates (DKI) brand and the DKNY brand. Wacoal America, Inc. operates from one facility in New Jersey and one facility in New York. One of our subsidiaries, Wacoal Dominicana Corp., manufactures products in the Dominican Republic and ships these products to Wacoal America, which in turn distributes the products, mostly to retailers in the U.S.
In France, our subsidiary Wacoal France S.A. designs and markets foundation garments and lingerie in Europe. Most of these products are manufactured by our subsidiaries in China.
In January 2002 we established Wacoal (UK) Limited in the U.K, which markets Wacoal products to Harrods, Selfridges and other major department stores in London and other large cities in the U.K.
In China, our subsidiaries Guangdong Wacoal Inc. and Wacoal China Co., Ltd. serve as manufacturing and marketing bases. We also hold a minority ownership interest in a joint venture company, Shanghai Yadie Fashion Co., Ltd., which serves as a production base for our foundation garments, all of which are shipped to Wacoal in Japan. In November 2002, we established Wacoal (Shanghai) Human Science R&D Co., Ltd. in China as a wholly owned subsidiary. We are using this subsidiary to help expand our sales in China, including by developing intimate apparel and other products designed for the Chinese market. We have also expanded our operations in China through our Dalian production facility, which we opened in August 2003.
Vietnam Wacoal Corp., which we established in Vietnam as a part of the expansion of our overseas manufacturing bases, commenced operations in April 1998. We also market our products through subsidiaries and affiliates in South Korea and a number of other countries in Asia, including Hong Kong, Singapore, the Philippines, Thailand, Taiwan, Indonesia and Malaysia.
In June 2006, we purchased 49% of the shares of Peach John Co., Ltd. (“Peach John”) for approximately ¥15,327 million ($153 million). In January 2008, we acquired the remaining 51% of Peach John for ¥9,266 million ($93 million), making it a wholly owned subsidiary of Wacoal. Peach John is engaged in mail-order sales of women’s apparel and various other apparel products.
The following table sets forth information with respect to our total sales by category of products during the fiscal years ended March 31, 2008, 2007 and 2006:
Total Sales (and Percentage) by Product Category
Year ended March 31, | ||||||||||||||||||||||||
2008 | 2007 | 2006 | ||||||||||||||||||||||
(Yen in millions) | ||||||||||||||||||||||||
Innerwear | ||||||||||||||||||||||||
Foundation Garments and Lingerie | ¥ | 123,460 | 74.4 | % | ¥ | 123,295 | 74.1 | % | ¥ | 119,875 | 73.0 | % | ||||||||||||
Nightwear | 10,611 | 6.4 | 10,081 | 6.0 | 10,440 | 6.4 | ||||||||||||||||||
Children’s Underwear | 1,953 | 1.2 | 2,069 | 1.2 | 2,216 | 1.3 | ||||||||||||||||||
Total Innerwear | ¥ | 136,024 | 82.0 | % | ¥ | 135,445 | 81.3 | % | ¥ | 132,531 | 80.7 | % | ||||||||||||
Outerwear and Sportswear | 8,920 | 5.4 | 8,751 | 5.3 | 9,128 | 5.6 | ||||||||||||||||||
Hosiery | 1,803 | 1.1 | 2,102 | 1.3 | 2,462 | 1.5 | ||||||||||||||||||
Textile Products | 3,963 | 2.4 | 4,051 | 2.4 | 4,598 | 2.8 | ||||||||||||||||||
Other | 15,051 | 9.1 | 16,061 | 9.7 | 15,403 | 9.4 | ||||||||||||||||||
Total | ¥ | 165,761 | 100.0 | % | ¥ | 166,410 | 100.0 | % | ¥ | 164,122 | 100.0 | % | ||||||||||||
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The following table sets forth information with respect to our total sales by region during the fiscal years ended March 31, 2008, 2007 and 2006:
Total Sales (and Percentage) by Region
Year ended March 31, | ||||||||||||||||||||||||
2008 | 2007 | 2006 | ||||||||||||||||||||||
(Yen in millions) | ||||||||||||||||||||||||
Japan | ¥ | 139,618 | 84.2 | % | ¥ | 141,676 | 85.2 | % | ¥ | 143,514 | 87.5 | % | ||||||||||||
United States and Europe | 18,497 | 11.2 | 18,021 | 10.8 | 14,823 | 9.0 | ||||||||||||||||||
Asia (excluding Japan) | 7,646 | 4.6 | 6,713 | 4.0 | 5,785 | 3.5 | ||||||||||||||||||
Total | ¥ | 165,761 | 100.0 | % | ¥ | 166,410 | 100.0 | % | ¥ | 164,122 | 100.0 | % |
Key business strategies
Our key business strategies include the following:
Maintain leadership position in our core innerwear business
We believe that our leadership position in the women’s innerwear market in Japan and broad consumer association of the Wacoal brand with high-quality innerwear products are key strategic assets for our company. We intend to maintain and build on our leadership position by continuing to bring to market high-quality innerwear products with innovative features that appeal to women in Japan. In addition, we have established the Wacoal brand as one with a reputation for high-quality products and high functionality in the U.S., European and ASEAN markets, and we are pursuing a policy of establishing the Wacoal Brand in China and Vietnam as well.
Pursue growth opportunities
We will seek to achieve profitable growth in our business by pursuing opportunities that we believe will allow us to leverage our market leadership and brand awareness in our core Japan market. Our efforts to achieve growth will include the following:
• | expanding our mid-priced innerwear offerings for young women, with an emphasis on more fashionable products; | ||
• | strengthening channels other than our traditional general retail store channel, such as our specialty retail store network, internet and catalog sales and ourDublevé custom-made intimate apparel business; | ||
• | expanding our overseas businesses, particularly in the United States and China, as well as in ASEAN countries where we introduced the ASEAN-widesorci ageproduct line, from March 2007; and | ||
• | continuing to develop and expand our sportswear business, including our CW-X product line, our X-FIT product group and our other products which are aimed at the promotion of good health. |
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Reducing costs and pursuing increased efficiencies
We will seek to improve our business and financial performance through cost reductions and greater efficiency in our operations. Over the past several years, we have made gains in this area by consolidating our production resources and distribution facilities in Japan, producing more garments and sourcing more materials in China, Vietnam and other lower-cost countries in Asia, and carrying out an early-retirement program and other efforts with respect to our work force in Japan. We will continue to seek improvements in our operating efficiency and cost base as a core part of our business strategy.
Operations
Principal Products
Our principal product categories are innerwear (consisting of foundation garments and lingerie, nightwear and children’s underwear), outerwear and sportswear, hosiery, textile products and other products.
Foundation garments and lingerie
Our foundation garments include brassieres, girdles and bodysuits (a one-piece combination brassiere and girdle). Most of these products are available in a variety of colors, with variations in lace, trim and detailing. Lingerie, consisting mainly of slips, bra-slips (a combination bra and slip), women’s briefs, undershirts and shorts, is produced in a variety of fashion styles. We market our foundation garments under a number of separate product lines, which are targeted at specific groups of consumers based on style, pricing and other factors.
We launch product campaigns for our core Wacoal brand and our Wing brand foundation garments and lingerie each year for the spring/summer and fall/winter seasons. Our business success depends in large part on the success of these seasonal product campaigns.
Our continued Wacoal brand campaign over the 2007 spring, summer and fall seasons featured our LALAN Bra series. In the fall of 2007 we also began selling ourOnaka Walker Light Type.
We offer foundation garments and lingerie under our Wing label through general retailers. Recent campaign products for our Wing brand includeArrange BraandSarahada Brafor spring and summer 2007, andKyutto-Up BraandStyle Up Pants Onakafor fall/winter 2007/2008.
We believe that sales to mature women will represent an increasingly important part of our business over time, as Japan’s population ages and mature women become a growing proportion of the apparel market. To address this opportunity, we have developed ourLa Vie AiséeandGra-Pproduct lines, and we intend to develop additional products in the future for this market segment.
In addition to our Wacoal and Wing brand products, our product line also includes our luxury productsTréfle, PARFAGE, Salute, L’geandLesiage. In February 2004, we launched a new luxury brand,WACOAL DIAand opened the brand’s first shop in the upscale Ginza shopping district in Tokyo. We are continuing to expand this new brand while limiting the number of stores and geographic areas in which it is available so as not to diminish its luxury image. Consistent with this policy, in addition to our direct sales outlet in the Ginza andTokyo Midtownin Roppongi, one of Japan’s foremost shopping areas, we also began limited expansion into first class department stores.
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Specialty Retail Stores.As part of our product and marketing strategy, we are developing a network of directly managed specialty retail stores. We began developing our specialty retail stores in 2001, and we had 95 stores in our network in Japan as of March 31, 2008, including 10 factory outlet stores. In the near future we plan to pursue a policy of improving profitability of our existing stores, and prioritize the goal of making our direct sales outlets profitable at an early stage, rather than increasing the number of direct sales outlets.
Through our specialty retail stores we intend to reach younger customers and others who prefer shopping for intimate apparel at malls or specialty stores rather than at department stores and other general retailers. We also intend to generally increase our points of contact with customers, and reduce our reliance on the general retailer channel to market our foundation garment and lingerie products.
We are segmenting our specialty retail stores to target particular customer groups and selling opportunities. Ourune nana coolstores are targeted towards younger women, ourSubitostores focus on intimate apparel for active career women, ouramphistores are located near train stations and other convenient urban locations, to reach customers with limited time for shopping, and ourSur la plagestores are located in suburban shopping malls. We expect that over time our segmented stores will represent most of the growth in our specialty retail store network.
In addition to our four core retail store brands described above, we operateDublevéstores, which specialize in custom-made intimate apparel, andCLAIREstores, which carry Wacoal brand products. In addition, we have 10 factory outlet stores where we take older items that have not sold at our usual retail locations and sell them at discounted prices, and we have expanded into several domestic large-scale outlet shopping malls as well. We plan to add 4 more factory outlet stores by March 2009. We believe that our factory outlet stores will continue to provide us with a new sales channel for discounted merchandise and additional opportunities for direct consumer contact and brand promotion.
Mail-order Catalog Business and Internet Sales.We are seeking to expand our mail order catalog and Internet sales, to increase our points of contact with new customers and provide new selling channels for selected products.
Although our catalog sales (including Internet sales) increased by only 3.9% to ¥5,176 million during fiscal year 2008, we experienced improved profitability as a result of our efforts at reducing intermediary costs and improving the makeup of our inventory.
Our main catalog isLOVE BODY, which targets women 40 and over and focuses on outerwear as well as selected innerwear items.
We are also seeking to expand our sales through the Internet as an alternate sales channel for selected products. Our Internet shopping site (http://store.wacoal.jp/) lists a number of over-the-counter innerwear products which are not included in our catalog sale items, and this approach expands the ways in which our customers can purchase Wacoal items.
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Nightwear
We design and market women’s nightwear, including pajamas, negligees, nightgowns and robes. Our nightwear products feature specialty offerings, such as ourtsumori chisatoromantic line targeted to younger women and our fashionableGrandérline targeted to mature women. Our nightwear products are primarily sold through department stores and chain stores.
Children’s underwear
Our children’s underwear products include undergarments for girls and teenage women, children’s sleepwear and other targeted garment offerings. Our children’s wear is also primarily sold through department stores, although there has been a shift of sales of children’s underwear in recent years away from general department stores and toward other stores that specialize in goods for children and infants.
Outerwear and sportswear
Our outerwear and sportswear product line consists of women’s outerwear, including dresses, skirts, slacks, jackets and sweaters, and sportswear, featuring our CW-X product line. Our outerwear products are sold only through our catalog operations. Our CW-X product line, a high-function conditioning wear product that was developed from years of research and development, enjoys a high reputation amongst top athletes, including both Japanese and U.S. professional baseball players. We are continuing to expand this product line to develop new products that meet the needs of participants in various fields of sports. Further, we aim to keep prices low by limiting their functionality, and by doing so, we also aim to increase sales by achieving popularity among the general sporting public. As part of these efforts, we are expanding our sales in the United States, including major sports shops, through our subsidiary, Wacoal Sports Science Corp.
Hosiery and Shoes
Our hosiery products include pantyhose, tights, knee-highs and anklets offered in various sizes and colors. We are developing high value-added products, with such effects as stimulation of leg muscles to improve blood circulation, which prevents foot swelling, and by using different denier and yarn combinations.
Although the scale is still small, we are also working on the development of shoe products that can be differentiated from competitors. These ergonomically designed products include, among others, shoes that prevent the feet from getting tired after many hours of wear and that prevent deformation of the toes from strain.
Other products
We are engaged in several business lines that are ancillary to our core apparel business. Our Nanasai subsidiary rents mannequins and fixtures, and designs and builds interiors for commercial premises, including sales counters used by our sales representatives in department stores and other general retailers carrying our apparel. In addition, we operate a restaurant business, and we are involved in various cultural projects and events, including exhibits by artists from around the world.
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Principal Markets and Methods of Distribution
We currently sell our products in Japan, the United States, China and certain countries in Europe and Southeast Asia.
Japan
In our core Japan market, we principally sell our apparel products to department stores, general merchandise stores and other general retailers and to specialty stores. Sales to general retailers in Japan represented a substantial majority of our total worldwide sales in fiscal year 2008. No single Wacoal customer constitutes 10% or more of our total sales, although our general retail customers that are consolidated companies in the Aeon Group collectively accounted for approximately 11.2% of our total sales in fiscal year 2008.
We also market our products in Japan by catalog mail order, direct sales, through the Internet and through our specialty retail stores. Our catalog mail order business was profitable in fiscal year 2008. However, direct sales, Internet sales and specialty retail store sales are not yet profitable, and we are currently focusing all of our efforts on improving their business performance.
United States
In the U.S. market, we sell foundation garments and lingerie through our Wacoal America subsidiary. These products are sold under our own Wacoal brand and, until December 31, 2008, pursuant to licensing arrangements, under the Donna Karan Intimates (DKI) brand and the DKNY brand. We sell products in the U.S. market principally at high-end and other department stores. Wacoal America operates from one facility located in New Jersey and one facility located in New York. Our Wacoal Dominicana Corp. subsidiary manufactures products in the Dominican Republic and ships them to Wacoal America, which distributes them principally to retailers in the U.S.
In August 2002, we established Wacoal Sports Science Corp. in the United States as a wholly owned subsidiary of Wacoal International Corp. for the purpose of expanding our CW-X sportswear line globally.
China
In China, we produce innerwear and other garments primarily for sale in Japan and China. Our marketing strategy in China is currently focused on developing relationships with local department stores and other retailers to strengthen our sales and distribution channels and on building consumer awareness of Wacoal as a premium brand for high-quality women’s innerwear. We believe that this strategy will help us to achieve profitable sales growth in China over time, as the spending power and sophistication of Chinese shoppers increases together with continued economic growth.
In China, our subsidiaries Guangdong Wacoal Inc. and Wacoal China Co., Ltd. serve as manufacturing and marketing bases. We have also expanded our operations in China through Dalian Wacoal Co. Ltd., our Dalian production facility, which we opened in August 2003.
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Beginning with Dalian, we have established sales offices in several major cities in China to strengthen our marketing efforts there. In order to underpin the new office’s product-planning functions, we also established Wacoal (Shanghai) Human Science R&D Co., Ltd., which is tasked with developing unique products for the Chinese market based on the principles of human science and ergonomics.
Other Asia
We market our products through subsidiaries and affiliates in South Korea and a number of other countries in Asia, including Hong Kong, Singapore, the Philippines, Thailand, Taiwan, Indonesia and Malaysia.
In March 2007, we launched our innerwear brandsorci agein the ASEAN region (Malaysia, Indonesia, the Philippines and Singapore) with standardized design and price.Sorci agetargets the 18 to 24 year old segment of the market, and we intend to develop this business with the aim of entering additional ASEAN markets over the next five years.
Europe
Our Wacoal France subsidiary designs and markets foundation garments and lingerie in Europe. Most of these products are manufactured by our subsidiaries in China.
In January 2002, we established Wacoal (UK) Limited in the U.K, which imports Wacoal products from the U.S. and France and distributes the products to Harrods, Selfridges and other major department stores in London and other large cities in the U.K.
Seasonality
Our business performance and results are affected by seasonality. We typically launch new intimate apparel product campaigns for the spring, summer, and fall/winter seasons of each year for our Wacoal and Wing brands. Our business success largely depends on the success of these seasonal product campaigns. Also, seasonal fluctuations may affect our inventory levels, since we produce and acquire merchandise in advance of peak selling periods and sometimes before new fashion trends are confirmed by consumer purchases.
Changes in seasonal weather patterns and extreme weather events have also adversely affected our sales in recent years, and may do so again in the future.
Production and Sources of Supply
Wacoal Corp. produces our apparel products through its subsidiaries in Japan, China, Vietnam and the Dominican Republic and through our joint venture companies in South Korea, Thailand, Taiwan and Indonesia. Our apparel products are also produced by third party subcontractors in Japan. All of these products are produced according to our specifications, using materials that we supply.
We work with our joint venture companies and subcontractors to help them produce products that meet our specifications. For example, we supply them with cutting patterns and sewing machine attachments. We also provide certain of these entities with debt and equity financing for working capital and other purposes (including for the purchase of our sewing machines and other equipment), although such financing is not material to us.
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The principal raw materials that we use in our apparel business include nylon and other synthetic fabrics, lace, stretch fabrics, cotton fabrics, fasteners, tape and threads. These materials are obtained from over 300 sources, most of them within Japan.
We have not experienced any significant difficulties in obtaining raw materials. However, although alternate sources of supply exist for our raw material requirements, we believe that our operations could be adversely affected by substantial increases in the price of such materials or by our suppliers having difficulty in obtaining materials essential to the manufacture of Wacoal products.
As described above, we depend on our relationships with subcontractors, joint ventures and suppliers to source and manufacture our products. We do not materially depend on patents or licenses or on new manufacturing processes for our business or profitability.
Government Regulation
We believe that regulation by governmental authorities in Japan and other countries where we operate does not significantly affect our business.
C. Organizational Structure.
The following table sets forth our significant subsidiaries, as well as the jurisdiction of incorporation and percentage of equity ownership that we hold directly or indirectly in each such subsidiary as of March 2008:
Jurisdiction of | Wacoal Holdings | |||
Principal Subsidiaries | Incorporation | Equity Owned (%) | ||
Wacoal Corp. | Japan | 100 | ||
Peach John Co., Ltd. | Japan | 100 | ||
Studio Five Corp. | Japan | 100 | ||
Wacoal Dublevé Corp. | Japan | 100 | ||
Kyushu Wacoal Manufacturing Corp. | Japan | 100 | ||
Niigata Wacoal Sewing Corp. | Japan | 100 | ||
Fukuoka Wacoal Sewing Corp. | Japan | 100 | ||
Hokuriku Wacoal Sewing Corp. | Japan | 90 | ||
Miyazaki Wacoal Sewing Corp. | Japan | 100 | ||
Torica Inc. | Japan | 57 | ||
Nanasai Co., Ltd. | Japan | 77 | ||
Wacoal Dominicana Corp. | U.S.A. | 100 | ||
Wacoal International Corp. | U.S.A. | 100 | ||
Wacoal America, Inc. | U.S.A. | 100 | ||
Wacoal Sports Science Corp. | U.S.A. | 100 | ||
Wacoal (UK) LTD. | U.K. | 100 | ||
Wacoal France S.A. | France | 100 | ||
Wacoal Singapore Pte. Ltd. | Singapore | 100 | ||
Wacoal Hong Kong Co., Ltd. | Hong Kong | 80 | ||
Wacoal International Hong Kong Co., Ltd. | Hong Kong | 100 |
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Jurisdiction of | Wacoal Holdings | |||
Principal Subsidiaries | Incorporation | Equity Owned (%) | ||
Wacoal China Co., Ltd. | China | 100 | ||
Guangdong Wacoal Inc. | China | 100 | ||
Dalian Wacoal Co., Ltd. | China | 100 | ||
Wacoal (Shanghai) Human Science R&D Co., Ltd. | China | 100 | ||
Vietnam Wacoal Corp. | Vietnam | 100 | ||
Philippine Wacoal Corp. | The Philippines | 67 |
D. Property, Plants and Equipment.
The principal facilities that we currently use in our business are as follows:
Floor | ||||||||
Space | ||||||||
(1,000 | ||||||||
square | Principal Activities or | |||||||
Facility | Location | feet)1 | Products Manufactured | |||||
Executive and sales office | Kyoto, Japan | 344 | Management, Sales and Administration | |||||
Western Japan distribution center | Shiga, Japan | 424 | Distribution | |||||
Kyoto South distribution center | Kyoto, Japan | 284 | Distribution | |||||
Tokyo distribution center | Tokyo, Japan | 170 | Distribution | |||||
Manufacturing plants: | ||||||||
Hokuriku Wacoal Sewing Corporation | Fukui, Japan | 40 | Lingerie | |||||
Kyushu Wacoal Manufacturing Corporation | ||||||||
Nagasaki plant | Nagasaki, Japan | 88 | Foundation Garments | |||||
Kumamoto plant | Kumamoto, Japan | 42 | Foundation Garments | |||||
Niigata Wacoal Sewing Corporation | Niigata, Japan | 15 | Nightwear | |||||
Fukuoka Wacoal Sewing Corporation | Fukuoka, Japan | 32 | Foundation Garments | |||||
Miyazaki Wacoal Sewing Corporation | Miyazaki, Japan | 48 | Children’s Innerwear, Foundation Garments | |||||
Torica Inc. | Tottori, Japan | 284 | Lingerie | |||||
Sales offices with warehouse facilities | Tokyo, Japan (3 offices) | 160 | Sales | |||||
Sapporo, Japan | 36 | Sales | ||||||
Osaka, Japan | 124 | Sales | ||||||
Kyoto, Japan | 144 | Sales | ||||||
Fukuoka, Japan | 54 | Sales | ||||||
SPIRAL Building | Tokyo, Japan | 107 | Cultural Activities | |||||
137 specialty retail stores and other select shops2 | Tokyo, Osaka, Kanagawa and other locations in Japan | 129 | Retail sales | |||||
Peach John Co., Ltd. | Tokyo, Osaka and other locations in Japan | 121 | Sales | |||||
Nanasai Co., Ltd. | Kyoto, Japan | 234 | Mannequins, Sales Equipment | |||||
Wacoal America, Inc. | New Jersey and New York, U.S. | 217 | Management and Sales | |||||
Wacoal Dominicana Corp. | Santo Domingo, Dominican Republic | 169 | Foundation Garments | |||||
Wacoal China Co., Ltd. | Beijing, China | 119 | Foundation Garments | |||||
Dalian Wacoal, Ltd. | Dalian, China | 556 | Foundation Garments |
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Floor | ||||||||
Space | ||||||||
(1,000 | ||||||||
square | Principal Activities or | |||||||
Facility | Location | feet)1 | Products Manufactured | |||||
Wacoal Hong Kong Co., Ltd. | Hong Kong | 47 | Sales | |||||
Guangdong Wacoal Inc. | Guangzhou, China | 70 | Foundation Garments | |||||
Philippine Wacoal | Manila, Philippines | 13 | Sales | |||||
Vietnam Wacoal Corp. | Bien Hoa, Vietnam | 163 | Foundation Garments |
1. | Of the foregoing facilities, our total owned space is 3,220,594 square feet and our total leased space is 1,012,259 square feet. | |
2. | As of March 31, 2008. |
We own all of the foregoing facilities except for the following, which we lease from third parties: (i) several of our sales offices in Tokyo (19,702 square feet), (ii) our 137 specialty retail stores as of March 31, 2008 (total of 128, 907 square feet for all stores), (iii) our management and sales facilities for Peach John (121,472 square feet) (iv) our office and warehouse facility for Nanasai (75,881 square feet), (v) our management and sales facility for Wacoal America, Inc. (85,961 square feet), (vi) our office and warehouse facility in China (34, 832 square feet), (vii) our manufacturing facility in Dalian, China (486,260 square feet), our sales facility in Hong Kong (46,618 square feet), (viii) our sales facility in Manila, Philippines (12,626 square feet).
We spent approximately ¥200 million during fiscal year 2008 for expansion of our specialty retail store network. For additional information on our capital expenditures during the fiscal years ended March 31, 2008, 2007 and 2006, see “Item 5.B. Liquidity and Capital Resources—Capital Expenditures”. We expect to spend approximately ¥300 million for further expansion of our specialty retail store network. We also expect to spend approximately ¥1,500 million on system-related investments, including investments aimed at integrating our Wacoal brand and Wing brand manufacturing operations. In addition, we expect to spend approximately ¥1,300 on the introduction of new business solutions at Peach John to revitalize sales, distribution and accounting systems. We also expect to continue to make expenditures for maintenance, to meet applicable legal requirements and to facilitate the manufacture of new products with new designs and specifications. Furthermore, we intend to evaluate and pursue opportunities for acquisitions, investments and other strategic transactions that we believe will help us achieve our business objectives, including extending our product offerings in Japan and in overseas markets and strengthening our capabilities in the Internet, catalog and other marketing channels. We expect to fund these capital expenditures and other expenditures through our cash from operations, existing cash reserves and other available sources of liquidity.
We have no material tangible fixed assets other than those discussed above.
Item 4A. Unresolved Staff Comments
Not Applicable
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Item 5. Operating and Financial Review and Prospects.
A. Operating Results
Overview
We are the leading designer, manufacturer and marketer of women’s intimate apparel in Japan, with the largest share of the Japanese market for foundation garments and lingerie. We also sell our foundation garments and lingerie products in several overseas markets. Sales of foundation garments (primarily brassieres and girdles) and lingerie (primarily slips, bra-slips and women’s briefs) accounted for approximately 74.4% of our consolidated net sales for fiscal year 2008. We also design, manufacture and sell nightwear, children’s underwear, outerwear, sportswear, hosiery and other apparel and textile products, and engage in several business lines that are ancillary to our core apparel business.
Revenues
We principally generate revenues from sales of innerwear (consisting of foundation garments and lingerie, nightwear and children’s underwear); outerwear and sportswear; hosiery, textile products; and other products.
The following table sets forth information with respect to our total sales by category of products for the fiscal years ended March 31, 2008, 2007 and 2006:
Total Sales (and Percentage) by Product Category
Year ended March 31, | ||||||||||||||||||||||||
2008 | 2007 | 2006 | ||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Innerwear | ||||||||||||||||||||||||
Foundation Garments and Lingerie | ¥ | 123,460 | 74.4 | % | ¥ | 123,295 | 74.1 | % | ¥ | 119,875 | 73.0 | % | ||||||||||||
Nightwear | 10,611 | 6.4 | 10,081 | 6.0 | 10,440 | 6.4 | ||||||||||||||||||
Children’s Underwear | 1,953 | 1.2 | 2,069 | 1.2 | 2,216 | 1.3 | ||||||||||||||||||
Total Innerwear | 136,024 | 82.0 | 135,445 | 81.3 | 132,531 | 80.7 | ||||||||||||||||||
Outerwear and Sportswear | 8,920 | 5.4 | 8,751 | 5.3 | 9,128 | 5.6 | ||||||||||||||||||
Hosiery | 1,803 | 1.1 | 2,102 | 1.3 | 2,462 | 1.5 | ||||||||||||||||||
Textile Products | 3,963 | 2.4 | 4,051 | 2.4 | 4,598 | 2.8 | ||||||||||||||||||
Other | 15,051 | 9.1 | 16,061 | 9.7 | 15,403 | 9.4 | ||||||||||||||||||
Total | 165,761 | 100.0 | % | 166,410 | 100.0 | % | ¥ | 164,122 | 100.0 | % | ||||||||||||||
In fiscal year 2008, approximately 88% of the sales of Wacoal Corp. (the total sales of which account for approximately 71% of our consolidated sales) were apparel sales made on a wholesale basis to department stores, general merchandise stores and other general retailers, and approximately 10% were apparel sales made through our own specialty retail stores, catalog sales and the Internet. Sales from our other businesses (which include store and home design services, restaurant businesses, cultural products and other services) comprised the remaining 2% of Wacoal Corp.’s sales in fiscal year 2008.
Over the past five fiscal years, fluctuations in our sales have typically reflected changes in unit volume, as average unit prices have generally remained stable during this period.
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Cost of Sales
Our cost of sales arises principally from material and manufacturing costs related to the production of our apparel products.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses principally consist of employee compensation and benefit expenses and promotional expenses, such as advertising costs and expenses associated with remodeling our sales counters at department stores. Other selling, general and administrative expenses include shipment costs, payment fees (including outsourcing payments) and rental payments for our specialty retail stores. Our selling, general and administrative expenses do not include any impairment charges on long-lived assets or any gains or losses on the sale or disposal of property, plant and equipment. However, these expenses are included in operating costs and expenses and thus impact our operating income.
Key Industry Trends
We believe that the following have been key trends in our industry during the last three fiscal years:
• | Consumer spending in Japan had been gradually recovering in recent years, but growth appears to have stalled in the second half of fiscal year 2008 following soaring fuel prices and volatility in the stock and currency exchange markets due to the U.S. sub-prime mortgage crisis. | ||
• | The number of and sales through department stores, one of our key distribution channels, are decreasing. Although sales at mass-merchandising stores remain constant, they are being forced to review their expansion strategies due to law reforms tightening controls on the development of large-scale stores in the suburbs. At the same time, sales at direct sales outlets and on the Internet are steadily rising. | ||
• | Due to the above changes in the retail industry coupled with factors such as a decline in the female population, the market for women’s innerwear garments in Japan is shrinking, and the price of innerwear continues to decline in terms of both overall prices and average price per item. The numbers of innerwear items purchased and owned per person are also decreasing. | ||
• | In addition, outerwear manufacturers and others continue to enter the market. These manufacturers offer their products by focusing on new elements, such as fashionability, lifestyle and price, rather than function and quality, and have come to be accepted by consumers. | ||
• | These manufacturers and other competitors are strengthening their cost reduction by, for example, sourcing fabric and producing garments in China and other lower-cost countries. Sales in Japan of lower priced women’s innerwear garments manufactured in these counties has increased, leading to an intensification of price competition in our industry. |
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• | Alternative marketing concepts for women’s innerwear garments, such as catalog marketing, direct marketing and e-commerce, are becoming more prevalent as apparel companies seek to diversify their sales channels and reach new customer groups. |
We have taken steps to address these key industry trends, in seeking to build on the core strengths of our market position and brand awareness with Japanese consumers. We believe that our strategic emphasis on higher-end products has helped us to reach consumers seeking high quality innerwear garments and to mitigate the adverse impact on sales and margins from lower priced garments. We have taken steps to reduce our cost structure, such as producing more products in lower-cost countries such as China and Vietnam, consolidating and modernizing our product distribution centers and expanding our early retirement program. We are also seeking to expand sales in overseas markets—in particular China, the U.S. and Europe, as well as in the ASEAN region, where we launched ourSorci agebrand —and increase sales through our own specialty retail stores, our catalog operations and the Internet. Pursuant to our CAP 21 strategic plan, we intend to extend our innerwear product offerings into the mid-price range and include more fashionable offerings in our products mix to help us reach a broader customer base. We believe that our acquisition of Peach John will help us to advance these goals. We will continue to implement these steps and evaluate other strategies to address challenges and opportunities in the industry going forward.
Results of Operations
The following table sets forth certain data from our consolidated statements of income for the last three fiscal years:
Year ended/as of March 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
(Yen in millions) | ||||||||||||
Net sales | ¥ | 165,761 | ¥ | 166,410 | ¥ | 164,122 | ||||||
Cost of sales | 83,127 | 84,658 | 84,322 | |||||||||
Selling, general and administrative expenses | 69,245 | 68,831 | 69,720 | |||||||||
Other income (expenses), net | 813 | 1,024 | 2,133 | |||||||||
Net income | 4,966 | 9,029 | 2,821 |
Fiscal Year 2008 Compared to Fiscal Year 2007
Sales
Consolidated net sales decreased approximately 0.4% in fiscal year 2008, from ¥166,410 million in fiscal year 2007 to ¥165,761 million as an aggregate ¥1,397 million decline in sales of hosiery, textiles and from our other businesses were only partially offset by an aggregate ¥748 million increase in sales of innerwear, outerwear and sportswear. Similarly, a ¥2,058 million decline in sales in Japan was only partially offset by an aggregate ¥1,409 million increase in sales in Asia, Europe and the U.S.
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Innerwear
Sales of our mainstay innerwear products (consisting of foundation wear, nightwear and children’s underwear), which comprised 82.0% of total consolidated sales, increased 0.4% in fiscal year 2008, to ¥136,024 million.
Wacoal Brand.In the spring, the Wacoal brand business department of Wacoal Corporation, which is our core operating company, launchedLALAN, our new campaign brassiere, which showed favorable sales performance.LALANmeets the needs of women of all bust sizes due to a unique design that is individually tailored to each size, and we believe that the new-style advertising campaign, which differs from traditional promotions that focus primarily on functionality, has reached new consumers beyond our existing customer base. Additionally, our switch in strategy from seasonal campaigns that promote new products to increasing the number and variety ofLALANseries products each season has extended the sales period for our campaign products and resulted in an improvement in sales and stock clearance rates. Fall/winter season sales ofSugoi, our newly developed line of lingerie that utilizes new materials, largely exceeded our expectations. This was due to wide acceptance of the product’s characteristics of being thinner, lighter and warmer than past products, as well as extensive media coverage of the product name, which gives the impression of a product that exceeds existing products in terms of image and functionality. On the other hand, sales of products from our Style Science brand category, which was introduced two years ago with new features for the lower body, was well below the sales levels of previous years. Our research shows that this was due to the fact that two years have passed since the release of the originalHip Walker, and in-store promotions have decreased. In addition, there has been a failure to capture new customers, and our attempts to encourage existing customers to buy replacement products have been ineffective. Due to poor sales performance of our Style Science series products, overall sales of our Wacoal brand business department were below the results of the previous fiscal year.
Sales of theGra-Pbrand, targeted at middle-age to senior consumers, grew 2.7% to ¥2,592 million compared to fiscal year 2007 thanks to market expansion and the development of new products. However, sales of our high value-added brandLa Vie Aisée, which is also targeted at middle-age to senior consumers, were ¥4,494 million, a decrease of 11.2% compared to fiscal year 2007 due to decreased sales of innerwear for the lower half of the body, centered on Style Science series products. Our luxury brandTréfle, which is primarily sold in department stores, suffered from tough competition, and sales decreased by 9.4% to ¥1,858 million compared to fiscal year 2007.
Wing Brand.In our Wing brand business department, as with our Wacoal brand, our core brassieres, particularly our standard products, performed well, as have girdles, body-suits and lingerie. On the other hand, sales of ourStyle Up Pantsfrom our Style Science series have declined. Nevertheless, aStyle Scienceproduct for men, theCross-Walker, was developed and officially went on sale in department stores under theDAMSbrand in February 2008 and in chain stores under theBROSbrand name in April 2008. There has been a very favorable consumer response to both products, and we expect this line to expand in the future. As a result, the overall business results in our Wing brand business department achieved a sales level in line with that of the previous fiscal year. With the scheduled introduction of special health checks and guidance aimed at preventing metabolic syndrome in April 2008 as a backdrop, we began sellingExwalker Style Scienceproducts at various locations, including gyms and corporate health insurance associations in January of this year. Although sales of our core lines of the Style Science series products aimed at women in fiscal year 2008 were disappointing, we believe that there are still good opportunities to capture new customers and encourage existing customers to continue purchasing these products by expanding our marketing channels and range of target customers and renewing our promotional strategies.
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Specialty Retail Business.Our specialty retail store business consists ofUne Nana Cool, an independently operated subsidiary, our Wacoal Corporation direct retail store business for ourAmphi,SUBITOandSur La Plagebrands, and our Wacoal Factory Stores chain of factory outlet stores.Une Nana Cool’s new and existing stores, as well asLuncH, a new type of store concentrating on lingerie, are all performing well and have shown fiscal year profits for the first time. In addition, efforts to limit the opening of new stores and focus on increasing and improving the earnings of existing stores have led to improved results for our direct retail store business as well.
Outerwear and Sportswear
In our outerwear and sportswear business, sales for fiscal year 2008 increased 1.9% to ¥8,920 million as compared to fiscal year 2007. Sales of our main sports conditioning wear product CW-X were lower than in fiscal year 2007 as a result of delivery adjustments for inventory maintenance purposes and product returns from stores.
Hosiery Sales
Hosiery sales decreased 14.2% to ¥1,803 million compared to fiscal year 2007. Although our entry into new businesses contributed positively to hosiery sales, our overall hosiery sales were lower than fiscal year 2007 because of the negative effects of weather on the performance of wet weather footwear and a reduction in department store sales of leggings.
Textile Products
Although sales of shoes and general merchandise were relatively favorable, a ¥167 million year-on-year decrease in the sales of materials to our overseas affiliates, which was due to an increase in materials sought overseas by our affiliates, resulted in an overall decrease in sales of textile products to ¥3,963 million, a decline of ¥88 million, or 2.2%, compared to fiscal year 2007.
Other
Sales from our other businesses (mannequins and fixtures rental, store design and construction, residential interiors, restaurants, culture, services) decreased 6.3% to ¥15,051 million. The mannequin and fixtures rental businesses exceeded sales of the previous year due to an increase in orders. However, sales in our shop and store construction business fell below sales of the previous year because it focused on making profits amid increasingly stiff competition from competitors, including competitive bidding. Our residential design business, which was transferred from Wacoal Corp. to Nanasai Co., Ltd., in fiscal year 2007, was significantly affected by a decrease in the number of new housing starts as a result of revisions to Japan’s building standards law, and this resulted in decreased revenues.
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Overseas Sales
In Asia, Wacoal’s business in China continues to grow. In addition to the expansion of Wacoal brand products, we have begun to expand our youth orientated brand,Amphi, and in the fiscal year ending March 2009, we plan to increase sales through a three-brand structure, including the high value-added brandSalute. Our sales in Asia outside of Japan (including China, Hong Kong and Singapore) grew 13.9% to ¥7,646 million from ¥6,713 million and represented 4.6% of total consolidated sales in fiscal year 2008 versus 4.0% of total consolidated sales in fiscal year 2007. Sales in China grew 42.3% over the previous year, which contributed to our overall strong performance in Asia.
Sales in the U.S. represented 10.5% of our total consolidated sales in fiscal year 2008, compared to 10.2% in 2007. Sales have been increasing in the U.S. over the last few years due to an increasing demand for luxury items and an increase in transactions with mid-level department stores that have not historically sold Wacoal products but that are repositioning themselves as up-scale department stores. However, decreased consumer confidence caused by the U.S. economic slowdown has led to sluggish store sales, and other factors, such as inventory adjustments, have also had an adverse effect, leading to sales levels that were up only slightly in fiscal year 2008 over the previous fiscal year. Earnings were down significantly due to a decrease in profitability, caused primarily by in-store price reductions and increased material shipment costs, and an increase in personnel costs brought on by an increase in the number of sales staff in connection with new store openings.
Our subsidiary Wacoal America, Inc. is currently engaged in sales of foundation garments and lingerie using the Wacoal brand and also the Donna Karan Intimates (DKI) brand and the DKNY brand. However, the licensing agreement for the Donna Karan Intimates (DKI) brand and the DKNY brand is set to expire on December 31, 2008 and will not be renewed. We are planning the launch of a new brand in the U.S. after the expiration of this licensing agreement, however we anticipate that sales in the U.S. will decline in the fiscal year ending March 31, 2009 as a result. We expect that income will also be affected by the decline in sales, however we expect the impact on income to be moderate since the operating margin for our licensing business is lower than our Wacoal Brand business. In addition, we anticipate an overall improvement in profitability in the U.S. in the fiscal year ending March 31, 2010, due to our plans to revive sales with the expansion of the new brand, in combination with decreased costs.
Cost of Sales
Our cost of sales decreased approximately 1.8% from ¥84,658 million in fiscal year 2007 to ¥83,127 million in fiscal year 2008. Cost of sales as a percentage of net sales decreased by 0.8%, from 50.9% in fiscal year 2007 to 50.1% in fiscal year 2008. This was primarily due to product consolidation and a decrease of forward inventory by our subsidiary Wacoal Corp., which resulted in fewer returned goods and fewer losses due to inventory write-downs. Wacoal Corp. also increased overseas production and raw material procurement, resulting in a 1% decrease in the cost ratio of Wacoal Corp.
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Selling, general and administrative expenses
Selling, general and administrative expenses were ¥69,245 million in fiscal year 2008, an increase of 0.6% from ¥68,831 million in fiscal year 2007. The selling, general and administrative expenses ratio increased by 0.4% to 41.8% in fiscal year 2008 compared to 41.4% in fiscal year 2007. This increase was primarily due to an increase in personnel expenses resulting from an increase in the number of non-manufacturing employees in Wacoal Corp., Wacoal America, Inc., and Wacoal China Co., Ltd.
At the operating profit level, although selling, general and administrative expenses increased slightly, the cost reductions were successful and we were able to increase our profits.
Total Other Income, Net
We had a net ¥813 million of other income in fiscal year 2008, as compared to a net ¥1,024 million of other income in fiscal year 2007. This decrease was primarily due to a ¥558 million increase in losses from impairment charges on investments, while profit on the sale or exchange of investment securities increased by ¥309 million compared to fiscal year 2007.
Net Income
Net income was ¥4,966 million in fiscal year 2008, a decrease of ¥4,063 million compared to fiscal year 2007. This decrease was primarily due to a ¥4,694 million yen write-down of our 49% interest in Peach John Co., Ltd., which we acquired in fiscal year 2007 as part of a capital alliance with Peach John. We acquired the remaining 51% equity interest in Peach John in January 2008 through a share exchange and prepared a new five-year business plan for the business. In connection with preparing the new five-year business plan, we reevaluated the fair value of our initial equity interest in Peach John, and we recognized an impairment because we concluded that there was an other-than-temporary decline in the value of our initial equity interest since a discounted cash flows analysis based on the new five-year business plan did not support the carrying value of the initial interest in Peach John on our balance sheet. The write-down was accounted for as an investment loss under equity in net (loss) income of affiliated companies.
Fiscal Year 2007 Compared to Fiscal Year 2006
Sales
Consolidated net sales increased approximately 1.4% in fiscal year 2007, from ¥164,122 million to ¥166,410 million.
Innerwear
Sales of our mainstay innerwear products (consisting of foundation wear, nightwear and children’s underwear), which comprised 81.3% of total consolidated sales, increased 2.2% in fiscal year 2007, to ¥135,445 million.
Wacoal Brand.With respect to the Wacoal brand business department of Wacoal Corporation, the overall sales of our core brassiere products declined because sales of our spring campaign product, theLove Bra, did not meet expectations due to its failure to adequately attract a wide range of customers, and because of a slump in sales of our core summer products, the strapless-type and seamless-type brassieres. On the other hand,Onaka Walker, which was launched in July 2006 and has new functionality that enhances mobility by stimulating the muscles while it is worn and shaping up the hips, as well as theHip Walker, our undergarment launched in July 2005 which has revolutionary functionality, continued to show strong performance. However, notwithstanding the favorable performance of these high value-added brands (including our luxury brands, as noted below), the above-mentioned decline in sales of our core products as well as the return and accumulation of products with poor sales, which was originally undertaken for the purpose of stimulating trade inventory, contributed to a decline in the overall sales of our Wacoal brand business department.
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While sales of our high value-added brandLa Vie Aisée, which is targeted toward the middle-age-to-senior markets, were down slightly (¥5,062 million, a 6% decrease), sales of our luxury brandTréfle(¥2,050 million, a 4% increase) and our other middle-age-to-senior targeted brandGra-P(¥2,525 million, a 13% increase) were favorable.
Wing Brand.Although the sales of our core brassiere products in our Wing brand business department were also generally weak, they showed some signs of recovery, including our summer campaign product, theSarahada Bra, which achieved sales beyond our initial plan, and our fall campaign product,Kyutto-Up Bra, as well as this year’s sales of ourKikonashi-Up Bra, both of which exceeded sales in the prior fiscal year. TheStyle Up Pants Onaka, having functionality similar to theOnaka Walker, were also added to theStyle Up Pantsproduct line, and sales of this product line, as well as undergarment products overall, significantly exceeded sales from the prior fiscal year. Our Wing brand business department is working aggressively to sell men’s innerwear and achieved favorable sales, with an expansion in the number of shops where they are sold and success in acquiring new customers through advertising and promotional activities. As a result, we achieved the initial overall sales plan of our Wing brand business department.
Specialty Retail Business.Our specialty retail store business, which includes such stores asune nana cool, which is operated as an independent subsidiary,amphi,Subito, andSur la plage, which are direct retail stores of Wacoal Corp., as well as the outlet Wacoal Factory Store, has not yet generated overall profitability, although there were varied results among brands.
Outerwear and Sportswear
In our outerwear and sportswear business, sales in fiscal year 2007 decreased 4.1% to ¥8,751 million as compared to fiscal year 2006. Sales of our main sports conditioning wear product CW-X were stagnant, because we focused less on opening and expanding new stores.
Hosiery Sales
Hosiery sales (which include products sold under our Carlson label) decreased 14.6% to ¥2,102 million as compared to fiscal year 2006. Sales ofStyle Cover, which is sold in the stocking section of department stores, as well as our internally developed foot-friendly shoes, showed favorable performance. Although we improved sales by selling these products through new sales channels, such as television shopping, drug stores and variety shops, sales of our panty stocking, a collaborative product with Seven Eleven Japan Co., Ltd., declined following the entry of other competitors into the market.
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Textile Products
Sales of textile products and related items was ¥4,051 million, an 11.9% decrease compared to fiscal year 2006. The main reasons for this decline were a decrease in catalog sales of shoes and general merchandise and a decrease in sales of raw materials by our subsidiary, Wacoal International Hong Kong Co., Ltd.
Other
Sales from our other businesses (mannequins, shop design and implementation, restaurant, culture, services) increased 4.3% to ¥16,061 million, primarily due to an increase in orders in our rental business of mannequins and/or fixtures, and an increase in orders in the store design and construction business conducted by our subsidiary Nanasai Co., Ltd.
Overseas Sales
Our overseas sales, which consists largely of sales of innerwear products, were strong overall. Our sales in Asia outside of Japan (including China, Hong Kong and Singapore) grew 16.0% to ¥6,713 million from ¥5,785 million and represented 4.0% of total consolidated sales in fiscal year 2007 versus 3.5% of total consolidated sales in fiscal year 2006. Sales in China grew 39.7% over the previous year, which contributed to our overall strong performance in Asia. The implementation of a control system for production and sales in China has helped clear inventory and led to an expansion in sales and improvement in revenue, and this has resulted in profitability for the first time. Taking AFTA (ASEAN Free Trade Area) into consideration, we maintained regional collaborations in connection with the design and production of a common line of products, and in March 2007, we launched our new brandSorci agein Singapore, Indonesia, Malaysia and the Philippines, targeting young career women. In the U.S., which represented 10.2% of our total consolidated sales in fiscal year 2007 (8.5% in fiscal year 2006), sales increased by approximately 22.4% in fiscal year 2007 as compared to fiscal year 2006. Our products have gained the attention of consumers through television and other mass media sources, which have reported on the importance of wearing the appropriate brassiere size. Our products and services focusing on consulting sales through trial fittings have particularly gained the support of consumers. Furthermore, while the market appears to be bifurcating into luxury products and low-end goods, an increase in sales through low-scale department stores has also been a contributing factor to the expansion of sales.
Cost of Sales
Our cost of sales increased approximately 0.4% in fiscal year 2007 to ¥84,658 million from ¥84,322 million in fiscal year 2006. Cost of sales as a percentage of net sales decreased by 0.5%, from 51.4% in fiscal year 2006 to 50.9% in fiscal year 2007. This increase in our gross margin was primarily due to the lower cost of sales per unit as a result of a continuing increase in the amount of goods we manufacture overseas, as well as a large increase in our U.S. sales, which has resulted in improved margins there.
Selling, general and administrative expenses
Selling, general and administrative expenses were ¥68,831 million in fiscal year 2007, a decrease of 1.3% from ¥69,720 million in fiscal year 2006. This decrease was primarily due to a decrease in labor costs after implementing our special voluntary retirement program in fiscal year 2006.
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Other Income (Expenses), Net
We had a net ¥1,024 million of other income in fiscal year 2007, as compared to a net ¥2,133 million of other income in fiscal year 2006. However, the drop was primarily the result of a gain of ¥1,149 million recorded in fiscal year 2006 as a result of the exchange of shares of UFJ Holdings held by Wacoal Corp. and Nanasai Co., Ltd. for shares of Mitsubishi UFJ Financial Group, the surviving entity in the merger of Mitsubishi Tokyo Financial Group and UFJ Financial Group.
Net Income
Net income in fiscal year 2007 was ¥9,029 million, or ¥316 per American Depository Receipt (“ADR”, equivalent to five shares of common stock), versus ¥2,821 million or ¥98 per ADR in fiscal year 2006. The increase in our net income in fiscal year 2007 was primarily due to the elimination of expenses related to our special voluntary retirement program and dissolution of Fukushima Wacoal Sewing Corp. as well as reduction in labor costs due to the implementation of a special voluntary retirement program in fiscal year 2006.
Critical Accounting Policies.
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of the financial statements requires our management to make estimates and assumptions. We believe that the following are some of the more critical judgment areas in applying our accounting policies in the preparation of our consolidated financial statements.
Allowance for Doubtful Receivables and Returns
We are required to assess the collectibility of notes and accounts receivable. A considerable amount of judgment is required in assessing the ultimate realization of these notes and receivables, including the current creditworthiness of each applicable customer, taking into account business conditions, turnover of receivables and financial positions for significant customers. We believe that our allowance for doubtful receivables is adequate, however in the event that a customer’s financial condition worsens, the allowance for doubtful receivables may increase and may adversely affect our financial condition and performance.
We allow our customers to return their unsold products when the customers meet certain criteria established by us, as outlined in our applicable trade terms. We establish the allowance for estimated returns for each operating department based on historical experience and sales movements on the retail level and on the situation of the retail industry overall. We review and revise the allowance every quarter, in consideration of actual returns, planned product discontinuances and promotional sales. We record the allowance for estimated returns as a reduction to sales. We believe that our allowance for returns is sufficient, however a weakening of store sales, or a higher rate of returns than our initial estimates, may have a negative impact on our financial condition or operating results.
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Deferred Tax Assets
We currently have significant deferred tax assets, which are subject to periodic recoverability assessments. Realization of our deferred tax assets is principally dependent upon the realization of projected future taxable income. Our estimated taxable income is also in consideration of future reversals of existing taxable temporary differences. Our judgments regarding future profitability may change due to future market conditions and other factors. These changes, if any, may require recognition of a significant valuation allowance for these deferred tax asset balances. In the event we determine that certain deferred tax assets may not be recoverable, such amounts will be reserved for and may adversely affect net income. We believe our deferred tax assets after adjustments for valuation allowance are recoverable, however if we record lower than expected earnings and our deferred tax assets become unrecoverable, a valuation allowance must be recorded against the amount that is not likely to be recovered, and this may have a negative impact on our profit and loss.
Impairment Charges on Investments
Impairment charges on investments are charged to earnings when a decline in fair value below the cost is other than temporary. We make a determination each quarter, and we principally consider that an other-than-temporary impairment has occurred when the decline in fair value below the carrying value continues for over nine consecutive months. We may also consider other factors, including our ability and intent to hold the applicable investment securities and the severity of the decline in fair value.
We believe that the criteria for evaluating impairment are reasonable. However, changes in the market or circumstances of each individual investment due to unforeseen changes in economic and business assumptions could affect the valuations of the investments.
Valuation of Intangible Assets and Goodwill
Under SFAS No. 142, “Goodwill and Other Intangible Assets”, we are required to perform an annual impairment test of our indefinite-lived intangible assets and goodwill. We also assess the impairment of intangible assets and goodwill whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Some of the factors we consider important which could trigger an impairment review include the following:
• | significant underperformance relative to historical or projected future operating results; | ||
• | significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and | ||
• | significant negative industry or economic trends. |
When we determine that the carrying amount of intangible assets and goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, we evaluate the carrying amount of the assets based on their fair value. If the fair value is less than the carrying amount of the assets, we record an impairment loss based on the difference between the carrying amount and the fair value of the assets.
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When carrying out such evaluation, we engage an independent appraiser to assist us in our determination of the fair values of our reporting units. In its determination of the fair values, the appraiser primarily utilizes a discounted cash flow analysis as well as other relevant valuation approaches including the stock price and market capitalization of the acquired entity and asset and liability structure of the reporting units. Significant assumptions used in this analysis include: (i) expected future revenue growth rates, profit margins and working capital levels of the reporting units; (ii) a discount rate; and (iii) a terminal value multiples. The revenue growth rates, profit margins and working capital levels of the reporting units are based on our expectation of future results. In evaluating the recoverability of other intangible assets which are allocated to the reporting units, we primarily utilize a discounted cash flow analysis as well as other applicable valuation approaches, and if applicable, independent valuations.
On March 31, 2008, we evaluated the recoverability of goodwill and intangible assets and concluded that there was no impairment in the carrying value of such assets for any of our reporting units.
Impairment of Long-Lived Assets
Long lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If the undiscounted future cash flows from the long-lived assets are less than the carrying value, a loss is recognized equal to the difference between the carrying value and the fair value of the assets. We believe that our assessment of estimated future cash flows and the fair values of such assets has been reasonably performed. However, changes in estimated future cash flows and fair values may affect our impairment assessment.
Employee Retirement Benefits
We provide a number of retirement benefit plans to a substantial portion of our employees. Our wholly owned subsidiary Wacoal Corp. has a contributory retirement plan and certain of our other subsidiaries have qualified pension plans. The amount of the projected retirement benefit obligation and pension costs are dependent on management’s assumptions used by actuaries in calculating such amount. The key assumptions include discount rates, expected long-term rate of return on plan assets, retirement rates, mortality expectations and other factors. Our management believes that these actuarial assumptions and methods are appropriate in light of our circumstances. However, due to a change in an actuarial assumption, the amount of the projected retirement benefit plan liabilities and costs may be adversely affected.
Wacoal Corp.’s approach to establishing the discount rate is based upon long term Japanese government bond rates and corporate bond indices. The discount rate assumption is based upon the five year average of the effective yields on the 20-year Japanese government bond, adjusted for an incremental yield of approximately 25 basis points that is achieved by selecting corporate bonds whose credit characteristics satisfy the quality requirements but whose yields are slightly higher than the yields on Japanese government bonds. At March 31, 2008, the discount rate used for the contributory retirement plan was 2.5%. For other plans, similar indices and methods are used.
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Wacoal Corp. determines the expected long-term rate of return on plan asset assumptions by evaluating both historical returns as well as estimates of future returns. Its expected return on assets was based on expected equity and debt securities returns weighted by the percentage of each of the major asset classes. Its estimate of the long-term rate of return on assets for the contributory retirement plan is 2.5%, 2.5% and 2.5% for the years ended March 31, 2008, 2007 and 2006, respectively. The estimated long-term rate of return is based on an asset allocation of equity securities of 36.0%, debt securities of 52.0% and other investments of 12.0%.
These assumptions have a significant effect on the amount of the obligation and periodic benefit cost reported. A change of 0.5% in the discount rate and the expected long-term rate of return on plan assets would have the following effects:
Thousands of | ||||||||||||||||
Millions of Yen | U.S. Dollars | |||||||||||||||
0.5% decrease | 0.5% increase | 0.5% decrease | 0.5% increase | |||||||||||||
Discount rate: | ||||||||||||||||
Effect on periodic benefit costs | (66 | ) | 75 | (661 | ) | 751 | ||||||||||
Effect on benefit obligation | (2,444 | ) | 2,243 | (24,477 | ) | 22,464 | ||||||||||
Expected long-term rate of return on plan assets: | ||||||||||||||||
Effect on periodic benefit costs | 139 | (138 | ) | 1,392 | (1,382 | ) | ||||||||||
Effect on benefit obligation | 0 | 0 | 0 | 0 |
The other retirement plans provide for either lump-sum termination benefits or periodic payments under certain conditions. Benefits are usually paid as a lump-sum at the earlier of the employee’s termination or the mandatory retirement age.
New Accounting Pronouncements.
Accounting for Uncertainty in Income Taxes.In June 2006, the FASB issued FASB Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109,” which clarifies the accounting for uncertainty in tax positions. FIN 48 is effective for fiscal years beginning after December 15, 2006. See Note 14 for further discussion of the effect of adopting FIN 48 on the consolidated financial statements of the Companies.
Fair Value Measurements.In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and, accordingly, does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Companies are currently in the process of assessing the impact the adoption of SFAS No. 157 will have on their consolidated financial position, cash flows or results of operations.
The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB Statement No. 115.In February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115.” SFAS No. 159 provides entities the option to report selected financial assets and liabilities at fair value, with changes in fair value recorded in earnings. It also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Companies are currently in the process of assessing the impact the adoption of SFAS No. 159 will have on their financial position, cash flows or results of operations.
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Business Combinations.In December 2007, the FASB issued SFAS No. 141(R) “Business Combinations”, which replaces SFAS No. 141, “Business Combinations”. This statement establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141(R) also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008. The Companies will apply SFAS No. 141(R) prospectively to all business combinations subsequent to April 1, 2009.
Noncontrolling Interests in Consolidated Financial Statements, an Amendment of Accounting Research Bulletin No. 51.In December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements, an Amendment of Accounting Research Bulletin No. 51”. This statement establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The Companies are currently evaluating the potential impact, if any, of the adoption of SFAS 160 on its financial position, results of operations or cash flows.
Disclosures about Derivative Instruments and Hedging Activities.In March 2008, the FASB issued FASB Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities”. The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Companies are currently evaluating the potential impact, if any, of the adoption of SFAS 161 on our financial statements.
B. Liquidity and Capital Resources.
Our main source of liquidity is cash from operations, which allows us to secure working capital, make capital investments and pay dividends without relying on substantial borrowings or other financing from outside of the group. Some of our overseas subsidiaries, however, have credit facilities at financial institutions to secure working capital. The aggregate amount of these credit facilities is ¥16,143, and the outstanding balance drawn from these facilities was ¥5,572 million as of March 31, 2008, including borrowings by Wacoal Service of ¥3,800 million and borrowings by Nanasai of ¥1,600 million.
We are not aware of any restrictions on the transfers of funds from a subsidiary to a parent company in the form of a cash dividend. We believe that our working capital is adequate for our present requirements and for our business operations both in the long- and short-term.
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Cash Flows
Our consolidated cash flows for fiscal years 2008, 2007 and 2006 were as follows:
Fiscal Year Ending March 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
(in millions of yen) | ||||||||||||
Net cash provided by operating activities | ¥ | 14,225 | ¥ | 9,339 | ¥ | 719 | ||||||
Net cash provided by (used in) investing activities | 3,590 | (1,185 | ) | (2,069 | ) | |||||||
Net cash used in financing activities | (9,400 | ) | (8,404 | ) | (3,428 | ) |
Cash provided by operating activities.
Cash Flows
Cash Provided by Operating Activities. Net cash from operating activities was ¥14,225 million in fiscal year 2008, an increase of ¥4,886 million compared to fiscal year 2007, primarily due to an adjustment to cash flow for equity in net loss of affiliated companies due to a valuation loss of shares of Peach John of ¥4,694 million, and a decrease in inventory assets as part of an effort to aggregate our inventory and to control forward inventory.
Net Cash Provided by Investing Activities. Net cash provided by investing activities was ¥3,590 million in fiscal year 2008 versus net cash used in investing activities of ¥1,185 in fiscal year 2007. This was primarily due to an increase in cash and cash equivalents of Peach John Co., Ltd., which became a wholly owned subsidiary through a share exchange in fiscal year 2008.
Net Cash Used in Financing Activities. Net cash used in financing activities was ¥9,400 million, primarily due to a repurchase of approximately ¥6,000 million of our shares in order to improve the efficiency of our capital and implement a more flexible capital strategy.
Capital Expenditures. Capital expenditures for fiscal year 2008 were ¥1,211. These expenditures were primarily for the repair of office facilities of our domestic subsidiaries and the expansion of our specialty retail store network.
We expect to spend approximately ¥300 million for further expansion of our specialty retail store network. We also expect to spend approximately ¥1,500 million on system-related investments, including investments aimed at integrating our Wacoal brand and Wing brand manufacturing operations. In addition, we expect to spend approximately ¥1,300 on the introduction of new business solutions at Peach John to revitalize sales, distribution and accounting systems. We also expect to continue to make expenditures for maintenance, to meet applicable legal requirements and to facilitate the manufacture of new products with new designs and specifications. Furthermore, we intend to evaluate and pursue opportunities for acquisitions, investments and other strategic transactions that we believe will help us achieve our business objectives, including extending our product offerings in Japan and in overseas markets and strengthening our capabilities in the Internet, catalog and other marketing channels. We expect to fund these capital expenditures and other expenditures through our cash from operations, existing cash reserves and other available sources of liquidity.
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C. Research and Development, Patents and Licenses.
We have been conducting long-term research into the Japanese woman’s body since the establishment of our Central Research Center in 1964 (currently, the Human Science Research Center). In order to accurately understand the Japanese woman’s physique, we have developed specialized equipment, such as silhouette analysis equipment and three-dimensional measuring equipment, and we are currently developing equipment that we believe will provide advanced measurement of sensory comfort. Our research and development activities are based on the proportional, physiological and mental aspects of garment design. As part of our recent research results, in 1995 we announced theGolden Canon, a set of indicators that characterize the ideal body for Japanese women, and we are also utilizing new sales methods. In 2000, we conducted an analysis on the physiological changes associated with ageing throughout a 25 year period from the teenage years to the 40s. We named the principles of these changesSPIRAL Ageing. From 1995 to 1998, we participated in a project led by the Ministry of Economy, Trade and Industry (formerly the Ministry of International Trade and Industry), enriching the basic study of sensory comfort, and conducted research based on reactions to three basic stimuli: pressure, heat and touch. Based on this research, we are focused on developing new products that are not only comfortable for the wearer but have a positive physiological effect. In addition, every year we take the measurements of 500 — 1,000 people and enlist the assistance of approximately 1,000 registered trial-fitting monitors, we scientifically collect and analyze the needs and attitudes towards the human body, and we are committed to understanding the needs of our customers.
Based on these studies, we continually develop products with new functions designed to satisfy the needs of our customers, such asCW-X(sportswear designed to alleviate muscle fatigue),Venus Return(comfort stockings designed to give the right amount of stimulation to the muscles while walking),Shakitto Bra(designed to make the figure look more attractive with the movement of the bone structure of the upper trunk) and ourNight Up Bra(designed to provide comfortable support to the bust while sleeping). We have recently been conducting a comprehensive study of walking motion and muscle movement and have developed products that represent a complete departure from conventional girdles and underpants, such asHip Training Bottoms, andStomach Training Bottoms. These products stimulate the muscles while walking and work the hip and stomach area, encouraging increased muscle activity. These are currently being sold as our Wacoal brandsHip WalkerandOnaka Walker, and our Wing brandsStyle Up Pants (Onaka)andStyle Up Pants (Hip).
From fiscal year 2007, we began research and development into men’s innerwear, and we are implementing the measurement of the male body and improving the organization of our monitoring system. In fiscal year 2008, we carried out various trials in relation toStyle Scienceproducts for men and were able to verify their effectiveness. As a result, we developed ourCross Walker product and began sales in department stores and chain stores. In addition, we developed ourExwalkerproduct as part of the Style Science series and began a new business with sales aimed at health insurance societies and fitness gyms. Overseas, we are promoting research into the Chinese woman’s body, focused in the Chinese Human Science Research Centre.
The cost of research and development in fiscal year 2008 was approximately ¥766 million, compared to ¥714 million and ¥638 million in 2007 and 2006, respectively, none of which we consider material.
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As mentioned above (see “Item 4. Information of Wacoal Holdings — Business Overview — Production and Sources of Supply”) we do not materially depend on patents or licenses or on new manufacturing processes for our business or profitability.
D. Trend Information.
Regarding the current fiscal year, it is difficult to anticipate the impact of various macroeconomic factors—such as the sub-prime mortgage crisis and increasing crude oil prices—on our domestic and foreign consumer markets. Nevertheless, we expect that domestic consumer spending will remain at the same level for the current fiscal year and that, in general, the Japanese market will continue to shrink as a result of a continuing decrease in the Japanese population, which will lead to flat or declining sales in the retail sector. We will also promote sales increases by expanding our men’s innerwear business, which is in the early stages of development, and by pursuing active investments in our China businesses. We do not expect the European market to expand, although we do expect growth in the Chinese market. A stronger yen may also impact sales and profits of our foreign subsidiaries.
We expect an increase in operating expenses such as increased pension costs to affect our operating income. In addition, an increase in non-operating expenses, including losses from write-downs of securities due to a decline in pension assets, and a decline in the value of securities we hold, is expected to increase expenses and to have an impact on our net income.
Under these circumstances, we will emphasize improving the profitability of existing domestic and foreign businesses, such as by reducing manufacturing costs through an integration of manufacturing operations for the Wacoal brand and Wing brand, and by enhancing operation profitability through infrastructure development of our directly-managed retail business.
As a result of these anticipated trends, we expect that sales for fiscal year 2009 will increase slightly even before increases associated with the consolidation of Peach John, and operating income and income before taxes will decrease. Net income is expected to grow in response to impairment losses for Peach John taken in fiscal year 2008, which are not expected to recur in 2009.
For a discussion of other trends that affect our business and operating results, see “Item 3.D. Risk Factors”, “Item 4.B. Business Overview” and “Item 5.A. Operating Results”.
The discussion above includes forward-looking statements based on management’s assumptions and beliefs as to the factors set forth above, as to market and industry conditions and as to our performance under those conditions, and are subject to the qualifications set forth in “Cautionary Statement Regarding Forward Looking Statements”, which can be found immediately following the table of contents. Our actual results could vary significantly from these projections and could be influenced by a number of factors and uncertainties, including changes in the market and industry conditions, competition and other factors and risks as discussed in “Risk Factors” in Item 3.D. Additionally, unanticipated events and circumstances may affect our actual financial and operating results. As a result, no representation can be or is made with respect to the accuracy of the foregoing projections.
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E. Off-Balance Sheet Arrangements.
We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating our business. We do not have any arrangements or relationship with entities that are not consolidated into our financial statements that are reasonably likely to materially affect our liquidity or the availability of capital resources.
F. Tabular Disclosure of Contractual Obligations.
Contractual Obligations and Commitments
For information regarding debt obligations including amounts maturing in each of the next five years, see note 7 to the consolidated financial statements.
The following table summarizes our contractual obligations as of March 31, 2008.
Less than | 1-3 | 3-5 | More than | |||||||||||||||||
Total | 1 year | years | years | 5 years | ||||||||||||||||
(in millions of yen) | ||||||||||||||||||||
Capital (Finance) Lease Obligations | 129 | 48 | 81 | |||||||||||||||||
Operating Lease Obligations | 5,103 | 1,102 | 1,531 | 1,081 | 1,389 | |||||||||||||||
Purchase Obligations | 6,276 | 6,276 | ||||||||||||||||||
Total | 11,508 | 7,426 | 1,612 | 1,081 | 1,389 |
1. | Contractual obligations above exclude related interest payments, as such payments are not material. | |
2. | With respect to employee retirement plans, our general funding policy regarding funded plans is to contribute amounts computed in accordance with actuarial methods accepted by Japanese tax law (excluded from this table). We expect to contribute ¥2,405 million to our plans in the year ending March 31, 2009. |
Item 6. Directors, Senior Management and Employees.
A. Directors and Senior Management.
The following is a current list of Wacoal Holdings’ directors and corporate auditors:
Position(s) and | ||||||
Name | Office(s) with Wacoal | Business Experience and Position(s) and | ||||
(Date of Birth) | Holdings | Date | Office(s) with Wacoal Holdings* | |||
Yoshikata | Representative | Apr 1972 | Joins Wacoal Corp. | |||
Tsukamoto | Director | Nov 1977 | Director | |||
(Jan 29, 1948) | Nov 1981 | Managing Director | ||||
Sep 1984 — present | Representative Director | |||||
Sep 1984 | Executive Vice President | |||||
Jun 1987 — present | President and Director | |||||
Jun 2002 | Corporate Officer | |||||
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Position(s) and | ||||||
Name | Office(s) with Wacoal | Business Experience and Position(s) and | ||||
(Date of Birth) | Holdings | Date | Office(s) with Wacoal Holdings* | |||
Shoichi | Senior Managing | Mar 1970 | Joins Wacoal Corp. | |||
Suezawa | Director | Jun 1996 | Director | |||
(Jun 13, 1947) | Jun 2002 | Managing Director and Corporate Officer | ||||
Jun 2003 | Senior Corporate Officer | |||||
Apr 2005 | Supervisor for Corporate Staff | |||||
Jun 2005 | Senior Managing Corporate Officer | |||||
Oct 2005 | Director | |||||
Jun 2006 | Senior Managing Director | |||||
June 2008 — present | Director and Vice President | |||||
Hideo | Senior Managing | Apr 1965 | Joins Isetan Co., Ltd. | |||
Kawanaka (June 25, 1942) | Director | Jun 1992 | Director of Isetan Co., Ltd. and manager of Matsudo Branch | |||
Jul 1993 | Representative Director and President of West Japan Railway Isetan Ltd. | |||||
Jun 2001 | Corporate Officer and Managing Director, General Manager of Management and General Affairs of OMRON Corporation | |||||
Jun 2004 | Representative Director and Senior Manager, Sales Manager of Matsuzakaya Co., Ltd. | |||||
Jun 2007 | Advisor | |||||
Jul 2007 — present | Senior Managing Director | |||||
Tadashi | Director | Mar 1976 | Joins Wacoal Corp. | |||
Yamamoto | Apr 2002 | General Manager of Human Resources Department | ||||
(Nov 14, 1952) | Jun 2002 | Corporate Officer | ||||
Oct 2005 | Corporate Officer of Wacoal Corp. | |||||
Apr 2006 — present | General Manager of Personnel and Administration Department | |||||
Jun 2006 — present | Director | |||||
Tsuneo Shimizu | Director | Mar 1971 | Joined the Company | |||
(Oct 30, 1948) | Jun 2002 | Appointed Corporate Officer, Osaka Branch (specialty store) Manager of Wacoal Brand Operation Division | ||||
Jun 2005 | Appointed Managing Corporate Officer and General Manager of Wacoal Brand Operation Division of Wacoal Corp. | |||||
Apr 2006 | Appointed Senior Corporate Officer of Wacoal Corp. | |||||
Jun 2006 | Appointed Director and Senior Corporate Officer of Wacoal Corp. | |||||
Apr 2008 — present | Appointed Director and Senior Corporate Officer, Assistant Manager of sales Control Department | |||||
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Position(s) and | ||||||
Name | Office(s) with Wacoal | Business Experience and Position(s) and | ||||
(Date of Birth) | Holdings | Date | Office(s) with Wacoal Holdings* | |||
Kazuo Inamori (Jan 30, 1932) | Director | Apr 1959 | Established Kyoto Ceramic Co., Ltd. (currently Kyocera Corporation) | |||
May 1966 | President and Representative Director of Kyoto Ceramic Co., Ltd. | |||||
Apr 1984 — present | Established The Inamori Foundation; Chairman | |||||
Jun 1984 | Established DDI Corporation (currently KDDI Corporation); Chairman and Representative Director | |||||
Jun 1985 | Chairman and Representative Director and President of Kyocera Corporation | |||||
Jun 1997 | Chairman Emeritus and Director of Kyocera Corporation | |||||
Chairman Emeritus and Director of DDI Corporation | ||||||
Jun 2001 — present | Honorary Adviser of KDDI Corporation | |||||
Jun 2005 — present | Chairman Emeritus of Kyocera Corporation | |||||
Jun 2005 — present | Director of Wacoal Corp | |||||
Mamoru Ozaki | Director | Jun 1991 | Commissioner of National Tax Agency | |||
(May 20, 1935) | Jun 1992 | Administrative Vice-Minister of Finance | ||||
May 1994 | President of People’s Finance Corporation | |||||
Oct 1999 | President of National Life Finance Corporation | |||||
Feb 2003 — present | Advisor of Yazaki Sogyo Corporation | |||||
Jul 2003 | Advisor of Wacoal Corp. | |||||
Jun 2005 — present | Director of Wacoal Corp. | |||||
Atsushi Horiba | Director | Sep 1972 | Joined HORIBA, Ltd. | |||
(Feb 5, 1948) | Jun 1982 | Appointed Director and General Manager of Overseas Business | ||||
Jun 1989 | Appointed Senior Managing Director and General Manager of Sales Division | |||||
Jan 1992 | Appointed Representative Director and President | |||||
Jun 2005 — present | Appointed Representative Director and Chairman and President | |||||
Kimiaki | Standing Corporate | Aug 1976 | Joined Wacoal Corp. | |||
Shiraishi | Auditor | Apr 2001 | Manager of Fukuoka Branch | |||
(Mar 20, 1950) | Apr 2002 | General Manager of Wacoal Brand Products | ||||
Jun 2002 | Corporate Officer | |||||
Sep 2005 | Seconded to Wacoal Distribution Corp. | |||||
Jan 2006 | Director of Wacoal Distribution Corp. and head of Western Japan Distribution Center | |||||
Apr 2007 — present | Assistant to President of Wacoal Distribution Corp. | |||||
Jun 2007 — present | Standing Corporate Auditor | |||||
Yoshio | Corporate Auditor | Mar 1974 | Joined the Company | |||
Kawashima | Jul 1997 | Appointed full-time Manager of Finance Department | ||||
(Feb 5, 1952) | Jun 2001 | Appointed Business Management Group Manager of Overseas Business Division | ||||
Apr 2007 Apr 2008 — present | Audit Office Chief Manager Audit Office General Manager (acting) | |||||
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Position(s) and | ||||||
Name | Office(s) with Wacoal | Business Experience and Position(s) and | ||||
(Date of Birth) | Holdings | Date | Office(s) with Wacoal Holdings* | |||
Yutaka Hasegawa | Corporate Auditor | Apr 1962 | Joined Mitsubishi Bank, Ltd. (currently Bank of Tokyo-Mitsubishi UFJ, Ltd.) | |||
(Oct 8, 1939) | Jun 1989 | Director of Mitsubishi Bank, Ltd. | ||||
May 1993 | Managing Director of Mitsubishi Bank, Ltd. | |||||
Apr 1996 | Managing Director of Bank of Tokyo | |||||
Mitsubishi, Ltd. (following merger of | ||||||
Mitsubishi Bank, Ltd. and Bank of Tokyo Ltd.) | ||||||
Jun 1998 | Director and President of Diamond Business | |||||
Consulting Kabushiki Kaisha (currently Mitsubishi UFJ Research & Consulting Co., Ltd.) | ||||||
Jan 1999 | Corporate Auditor of Tokyo-Mitsubishi | |||||
Securities Kabushiki Kaisha (currently Mitsubishi UFJ Securities Co., Ltd.) | ||||||
Jun 2001 | Full time Corporate Auditor of Bank of Tokyo-Mitsubishi, Ltd. (currently Bank of Tokyo- Mitsubishi UFJ, Ltd.) | |||||
Jan 2006 | Standing Corporate Auditor of Bank of Tokyo-Mitsubishi UFJ, Ltd. (following merger of Bank of Tokyo-Mitsubishi, Ltd. and UFJ Bank | |||||
Jun 2006 — present | Corporate Auditor | |||||
Tomoharu Kuda | Corporate Auditor | Sep 1972 | Joined Deloitte Haskins & Sells | |||
(Dec 7, 1946) | Oct 1979 | Registered as Certified Public Accountant | ||||
Sep 1987 | Transferred to London Office | |||||
Feb 1990 | Partner of Deloitte Touche Tohmatsu | |||||
Jun 1997 Jul 2007 — present | Representative Partner of Deloitte Touche Tohmatsu Corporate Auditor | |||||
Yoko Takemura (Apr 7, 1952) | Corporate Auditor | Apr 1990 | Registered as lawyer (Tokyo), joins Miyake Imai Ikeda law firm. | |||
Jan 1997 — present | Partner at Miyake Imai Ikeda law firm. | |||||
Jun 2005 — present | Corporate Auditor of Wacoal Corp. |
* | Appointments to Wacoal Corp. prior to October 2005 that continue to the present were transferred to Wacoal Holdings at the time of our transition to a holding company structure. |
The terms of all of our directors expire in June 2009. The term as corporate auditor for Ms. Takemura expires in June 2009, the term as corporate auditor for Mr. Hasegawa expires in June 2010, the terms as corporate auditor for Messrs. Shiraishi and Kuda expire in June 2011, and the term as corporate auditor for Mr. Kawashima expires in June 2012.
B. Compensation.
Aggregate compensation, including bonuses, paid by Wacoal Holdings in fiscal year 2008 to our directors and corporate auditors was ¥313 million.
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We terminated our retirement allowance benefit for directors and corporate auditors of Wacoal Holdings. The balance of our existing liability for termination benefits for directors and corporate auditors was ¥368 million and ¥373 million at March 31, 2008 and 2007, respectively.
Stock option plan
Wacoal Holdings has one stock option plan pursuant to which up to ¥70 million worth of stock acquisition rights may be granted to directors (excluding outside directors) as a form of equity compensation and to align the interests of our directors with that of our shareholders. The board of directors resolved at meeting held on May 9, 2008 to submit the proposal for the stock option plan to our shareholders at the 60th ordinary general meeting of shareholders, and the plan was approved by our shareholders on June 27, 2008.
The amount and terms of stock acquisition rights to be granted to directors as stock options are as follows.
Terms of the Proposal
The stock acquisition rights will be for ordinary shares and will have an exercise price of ¥1. The number of shares represented by each stock acquisition right, or the conversion ratio, is the number of shares in a trading unit at the time such stock acquisition right is issued. The conversion ratio is subject to adjustment in the event of stock splits or reverse stock splits.
The maximum number of shares that can be acquired through the exercise of stock acquisition rights during any one-year period beginning on the date of the ordinary general meeting of shareholders is 70,000, which will be subject to adjustment in the event of stock splits or reverse stock splits.
The stock acquisition rights will be exercisable from the date immediately following the grant date of the stock acquisition right for a period of not more than 20 years to be set by the board of directors of the Company and will be subject to transfer restrictions.
In principle, holders of stock acquisition rights may exercise their stock acquisition rights from the date immediately following their loss of status as director (including officers of a company that has adopted the committee system), auditor or executive officer of the Company. Other stock acquisition right conditions shall be determined at a general meeting of shareholders or the board of directors of the Company where items regarding the offer stock acquisition rights will be determined.
Issuances to Directors of Wacoal Corp.:
We are planning to adopt a similar stock option plan to grant stock option rights to the directors of Wacoal Corp.
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C. Board Practices.
Wacoal Holdings’ Articles of Incorporation provide for a board of directors of not more than eight members and for not more than five corporate auditors. Shareholders elect the directors and corporate auditors at general shareholders’ meetings. The normal term of office of a director is one year and of a corporate auditor is four years. Directors and corporate auditors may serve any number of consecutive terms.
The board of directors may elect one chairman, one president and one or more vice chairman, executive vice presidents, senior managing directors and managing directors. The board of directors elects, pursuant to its resolutions, one or more representative directors. Each representative director represents Wacoal Holdings generally in the conduct of its affairs. The board of directors has the ultimate responsibility for the administration of Wacoal Holdings’ affairs. None of Wacoal Holdings’ directors is party to a service contract with Wacoal Holdings or any of its subsidiaries that provides for benefits upon termination of employment.
Under Company Law of Japan (the “Company Law”), Wacoal Holdings must have at least three corporate auditors. At least half of the corporate auditors will be required to be persons who have not been a director, accounting counselor (in case that an accounting counselor is a judicial person, a member of such judicial person), executive officer, general manager or employee of Wacoal Holdings or any of its subsidiaries at any time during the past. The corporate auditors may not at the same time be directors, accounting counselor (in case that an accounting counselor is a judicial person, a member of such judicial person), executive officers, general managers or employees of Wacoal Holdings or any of its subsidiaries. Together, these corporate auditors form a board of corporate auditors. The corporate auditors have the duty to examine the financial statements and business reports which are submitted by the board of directors to the general shareholders’ meeting. The corporate auditors also supervise the administration of Wacoal Holdings’ affairs by the directors. Corporate auditors are not required to be, and Wacoal Holdings’ corporate auditors are not, certified public accountants. They are required to participate in meetings of the board of directors but are not entitled to vote.
On May 9, 2007, we established a director and officer personnel and compensation advisory committee, which consists of the following members: Mitsuo Yamamoto, chair of the committee, Ikuo Otani, Shoichi Suezawa, Mamoru Ozaki and Naoki Hagiwara, the secretary. The committee was established with the goal of reforming the process of selecting our directors and officers and determining their compensation, and promoting objectivity and transparency in the process. The committee will be responsible for recommending new candidates and candidates for promotion, evaluating their performance and setting their compensation, as well as suggesting areas for improvement in the foregoing processes.
Under the Company Law and Wacoal Holdings’ Articles of Incorporation, Wacoal Holdings may enter into a liability limitation agreement with each outside director or corporate auditor which limits the maximum amount of their liabilities owed to Wacoal Holdings arising in connection with their failure to execute their duties to an amount equal to the minimum liability limit amount prescribed in the laws and regulations.
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D. Employees.
The following table lists the number of our full-time employees as of March 31, 2008, 2007 and 2006:
Asia (other | ||||||||||||||||||||
Total | Japan | U.S.1 | than Japan) | Others | ||||||||||||||||
March 31, 2008 | ||||||||||||||||||||
Textile Products and Related Products | 13,011 | 7,625 | 1,401 | 3,590 | 35 | |||||||||||||||
Other | 365 | 363 | — | 2 | — | |||||||||||||||
Corporate | 165 | 165 | — | — | — | |||||||||||||||
Total | 13,541 | 8,153 | 1,401 | 3592 | 35 | |||||||||||||||
March 31, 2007 | ||||||||||||||||||||
Textile Products and Related Products | 12,872 | 7,117 | 1,614 | 4,106 | 35 | |||||||||||||||
Other | 367 | 365 | — | 2 | — | |||||||||||||||
Corporate | 158 | 158 | — | — | — | |||||||||||||||
Total | 13,397 | 7,640 | 1,614 | 4,108 | 35 | |||||||||||||||
March 31, 2006 | ||||||||||||||||||||
Textile Products and Related Products | 12,422 | 7,118 | 1,558 | 3,715 | 31 | |||||||||||||||
Other | 450 | 443 | — | 7 | — | |||||||||||||||
Corporate | 148 | 148 | — | — | — | |||||||||||||||
Total | 13,020 | 7,709 | 1,558 | 3,722 | 31 |
1. | Includes employees in the Caribbean. |
During fiscal year 2008, we had an average of 1,337 temporary employees.
Except for Nanasai, Maruka and our six manufacturing subsidiaries in Japan, the employees of Wacoal Holdings and our Japanese subsidiaries are organized into one union. Each of Nanasai and our six manufacturing subsidiaries in Japan has an independent union for its respective employees. A number of labor unions have been formed with respect to our subsidiaries organized outside of Japan. We believe that the relations between management and these various unions are satisfactory.
E. Share Ownership.
The following table lists the number of shares owned by Wacoal Holdings’ directors and corporate auditors as of June 30, 2008. As of such date, our directors and corporate auditors collectively held a total of 1,373,136 shares of our common stock as set forth below, and this number of shares constituted 0.96% of all outstanding shares of our common stock.
Name | No. of Shares | % of Common Stock | ||||||
Yoshikata Tsukamoto | 1,337,136 | * | ||||||
Shoichi Suezawa | 10,000 | * | ||||||
Hideo Kawanaka | 7,000 | * | ||||||
Tadashi Yamamoto | 6,000 | * | ||||||
Tsuneo Shimizu | 4,000 | * | ||||||
Kimiaki Shiraishi | 3,000 | * | ||||||
Yoshio Kawashima | 2,000 | * | ||||||
Yoko Takemura | 4,000 | * |
* | Less than 1% of our total outstanding common shares. |
Other than as described in Section 6.B above, there are no arrangements that involve the issue or grant of options, shares or securities of Wacoal Holdings to our employees.
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Item 7. Major Shareholders and Related Party Transactions.
A. Major Shareholders.
As of March 31, 2008, 143,378,085 shares of our common stock were issued and outstanding, including 35,998 shares of treasury stock, which are held by Wacoal Holdings.
The following table shows information regarding beneficial ownership of our common stock by each shareholder known to us to beneficially own more than 5% of our common stock. The information in this table is based on reports filed with the U.S. Securities and Exchange Commission.
Percentage of Total | ||||||||||||
Name of Shareholder | Number of Shares | Held as of | Shares Issued | |||||||||
Tradewinds Global Investors, LLC | 26,110,213 | Dec 31, 2007 | 18.2 | % | ||||||||
Mitsubishi UFJ Financial Group, Inc. | 14,810,532 | Feb 29, 2008 | 10.6 | % |
Under the Financial Instruments and Exchange Law of Japan, any person who beneficially holds more than 5% of the total issued voting shares must file a report of substantial shareholding with the relevant local finance bureau. A similar report must be filed, with certain exceptions, if the percentage of shares held by a holder, either solely or jointly as a group, as applicable, of more than 5% of the total issued shares of a company, increases or decreases by 1% or more in the overall shareholding, or if any change to a material matter set forth in any previously filed reports occurs. (See “Item 10. Additional Information — B. Memorandum and Articles of Association — Reporting of Substantial Shareholdings”).
Based on filings made with the Kanto Local Finance Bureau over the past three years, the number of our shares beneficially held by Tradewinds Global Investors, LLC (formerly NWQ Investment Management Company, LLC) has increased from 10,357,001 shares, or 7.19% of our total issued shares, as of April 20, 2005, to 25,990,188 shares, or 18.05% of our total issued shares, as of October 31, 2007.
Our major shareholders have the same voting rights as other shareholders. To the extent known to Wacoal Holdings, Wacoal Holdings is not directly or indirectly owned or controlled by any other corporation, any government, or any other natural or legal person or persons severally or jointly. We do not know of any arrangements that may, at a subsequent date, result in a change of control of Wacoal Holdings Corp.
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As of March 31, 2008, approximately 2,718,765 shares, or 1.9% of the outstanding shares of our common stock other than in the form of American Depositary Shares, were held of record by 57 residents of the United States. The 23,701,095 shares of our common stock held of record by The Bank of New York on March 31, 2008 underlay the 4,740,219 American Depositary Shares of Wacoal Holdings held of record by 15 persons. Because some of these shares and ADRs were held by brokers or other nominees, the number of record holders with addresses in the United States might not fully show the number of beneficial owners in the United States.
B. Related Party Transactions.
Wacoal purchases merchandise from numerous suppliers throughout the world, including from certain affiliates. Wacoal purchased merchandise from affiliates in the amount of ¥1,031 million ($10,325 thousand) in fiscal year ended March 31, 2008.
Wacoal also sells supplies, materials and products to certain affiliates. Aggregate sales to affiliates were ¥803 million ($8,042 thousand) in the fiscal year ended March 31, 2008.
The Company does not consider the amounts involved in such transactions to be material to its business.
C. Interests of Experts and Counsel.
Not applicable.
Item 8. Financial Information.
A. Consolidated Statements and Other Financial Information.
Consolidated Financial Statements
See “Item 17. Financial Statements”.
Legal Proceedings
There are no material pending legal proceedings, other than ordinary routine litigation incidental to our business, to which we are a party or to which any of our property is subject.
Dividends and Divided Policy
See “Item 10.B. Memorandum and Articles of Association—Capital Stock—Distributions of Surplus”.
B. Significant Changes.
Except as provided above and elsewhere in this annual report, there has been no significant change in our financial position since March 31, 2008, the date of our consolidated financial statements included in this annual report.
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Item 9. The Offer and Listing.
A. Offer and Listing Details.
Price Range of Shares
Our common stock has been listed on the Tokyo Stock Exchange since 1964 and is traded on the First Section of that exchange. It is also listed on the Osaka Securities Exchange in Japan. Additionally, our American Depositary Shares are quoted for trading on the Nasdaq Market in the U.S. The depositary of the ADSs is The Bank of New York. Each ADS represents five shares of our common stock.
The following table sets forth for the periods shown the reported high and low sales prices of our common stock on the First Section of the Tokyo Stock Exchange and of our ADSs on the Nasdaq Market. The last reported sale price of our common shares on the Tokyo Stock Exchange on July 23, 2008 was ¥1,202, and the last reported sale price of our ADSs on the Nasdaq Market on July 23, 2008 was $56.25.
Tokyo Stock Exchange | Nasdaq Market | |||||||||||||||
Price Per Share | Price Per ADS | |||||||||||||||
High | Low | High | Low | |||||||||||||
Fiscal year ended March 31, | ||||||||||||||||
2004 | ¥ | 1,080 | ¥ | 833 | $ | 53.00 | $ | 35.51 | ||||||||
2005 | 1,500 | 1,033 | 69.99 | 46.62 | ||||||||||||
2006 | 1,690 | 1,300 | 75.70 | 58.77 | ||||||||||||
2007 | 1,821 | 1,358 | 80.99 | 57.00 | ||||||||||||
2008 | 1,620 | 1,229 | 77.48 | 51.26 | ||||||||||||
Fiscal quarter ended/ending | ||||||||||||||||
March 31, 2006 | ¥ | 1,667 | ¥ | 1,565 | $ | 72.17 | $ | 66.01 | ||||||||
June 30, 2006 | 1,821 | 1,508 | 80.99 | 64.42 | ||||||||||||
September 30, 2006 | 1,638 | 1,420 | 69.87 | 60.09 | ||||||||||||
December 31, 2006 | 1,684 | 1,358 | 70.90 | 57.00 | ||||||||||||
March 31, 2007 | 1,646 | 1,453 | 68.28 | 60.04 | ||||||||||||
June 30, 2007 | 1,578 | 1,454 | 64.49 | 60.34 | ||||||||||||
September 30, 2007 | 1,593 | 1,350 | 66.37 | 58.68 | ||||||||||||
December 31, 2007 | 1,553 | 1,229 | 69.61 | 51.26 | ||||||||||||
March 31, 2008 | 1,620 | 1,254 | 77.78 | 57.74 | ||||||||||||
June 30, 2008 | 1,573 | 1,255 | 76.85 | 58.26 | ||||||||||||
Month ended | ||||||||||||||||
January 31, 2008 | ¥ | 1,457 | ¥ | 1,254 | $ | 67.51 | $ | 57.74 | ||||||||
February 28, 2008 | 1,620 | 1,405 | 75.38 | 67.79 | ||||||||||||
March 31, 2008 | 1,566 | 1,410 | 77.48 | 68.86 | ||||||||||||
April 30, 2008 | 1,573 | 1,460 | 76.85 | 70.84 | ||||||||||||
May 31, 2008 | 1,527 | 1,321 | 72.96 | 63.40 | ||||||||||||
June 30, 2008 | 1,385 | 1,255 | 64.73 | 58.26 |
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B. Plan of Distribution.
Not applicable.
C. Markets.
See “Item 9.A. Offering and Listing Details” for information on the markets on which our common stock and ADSs are listed or quoted.
D. Selling Shareholders.
Not applicable.
E. Dilution.
Not applicable.
F. Expenses of the Issue.
Not applicable.
Item 10. Additional Information.
A. Share Capital.
Not applicable.
B. Memorandum and Articles of Association.
A copy of Wacoal Holdings’ Articles of Incorporation, amended as of June 28, 2007, is being filed as an exhibit to this annual report on Form 20-F. See “Item 10.H. Documents on Display”.
The following summarizes certain provisions of Wacoal Holdings’ organizational documents and applicable Japanese law. This summary is qualified in its entirety by reference to the Company Law and Wacoal Holdings’ Articles of Incorporation, the Share Handling Regulations and the Regulations of the Board of Directors, each as filed as an exhibit to this annual report on Form 20-F.
Organization
Wacoal Holdings is a joint stock corporation(kabushiki kaisha)incorporated in Japan under the Company Law. It is registered in the Commercial Register(shogyo tokibo)maintained by the Kyoto Local Registry Office of the Ministry of Justice.
Objects and purposes
Article 2 of the Articles of Incorporation of Wacoal Holdings provides the following objectives of Wacoal Holdings.:
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1. To control and manage the business activities of the companies which are engaged in the following businesses by holding the shares of such companies:
(1) | manufacture and sale of clothing and apparel and sundries pertaining to clothing and apparel; | ||
(2) | manufacture, sale and installation of furniture, bedding, interior decorations and other home furnishings; | ||
(3) | manufacture and sale of cosmetics, soap, cleansers, medical supplies and quasi-drugs and sale of health food; | ||
(4) | management of facilities for cultural, welfare, educational, sporting, entertainment, beauty and restaurant use, and manufacture and sale of commodities, provision of service, technical guidance and consulting pertaining to the above facilities; | ||
(5) | sale, purchase and brokerage of objects of art and curios and management and operation of picture galleries; | ||
(6) | acquisition, lease, alienation and technical guidance of intangible property rights such as industrial property rights and copyrights on literature, art, artistic handicraft, music, images and voice; | ||
(7) | publishing and advertising business; | ||
(8) | sale, purchase, lease, brokerage and management of real estate; | ||
(9) | lease and brokerage of personal property; | ||
(10) | non-life insurance agency, insurance agency under the Automobile Liability Security Law and life insurance solicitation agency; | ||
(11) | planning, design, supervision, execution, consulting and sale of construction work and interior decoration; | ||
(12) | sale of building materials and sale of equipment and apparatus pertaining to housing such as fittings, furniture, utensils, kitchens, modular baths and toilets; | ||
(13) | planning, design, supervision and consulting relating to community development, urban development and environmental conditioning; | ||
(14) | planning, design, supervision, execution and consulting relating to landscaping, gardening and stonecutting; | ||
(15) | production, sale and lease of trees, plants and materials for gardening; | ||
(16) | data processing, provision of information and development, purchase, sale, lease and consulting relating to computer hardware and software; |
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(17) | processing of jewelry, precious metals and accessories and manufacture and sale of watches, eyeglasses, footwear, bags and umbrellas; | ||
(18) | money lending, loan agency, guarantee, holding of and investment in securities and credit card business; | ||
(19) | dispatching of workers; | ||
(20) | education, training and consulting relating to development of ability of the human resource to appropriately adapt to profession; | ||
(21) | undertaking of financial and accounting affairs, calculation of wages, etc., preparation of documents relating to internal and external transactions, reception and telephone switching affairs, telephone marketing, translation and interpretation, operation of office and communication equipment and system programming, etc.; | ||
(22) | warehousing; | ||
(23) | manufacture and sale of mannequins and display equipment; | ||
(24) | investments incidental to Items (1) through (23) above; and | ||
(25) | any and all business incidental or relate to Items (1) through (24) above. |
2. Any and all business incidental or related to any of the foregoing.
Directors
Under the Company Law, our Board of Directors has the executive power and duty to manage our affairs, and each representative director, who is elected from among the directors by the Board of Directors, has the corporate authority to represent our company in all respects. Under both the Company Law and the Regulations of the Board of Directors of Wacoal Holdings, our directors must refrain from engaging in any business which competes with that of our company, unless approved by the Board of Directors. Any director who has a material interest in the subject matter of a resolution to be taken by the Board of Directors cannot vote on such resolution.
The Company Law and our Articles of Incorporation provide that the remuneration of directors and corporate auditors shall be determined at a general meeting of shareholders. Except as stated below, neither the Company Law nor our Articles of Incorporation sets forth any special provision as to a director’s or corporate auditor’s power to vote in connection with his or her compensation, the borrowing powers exercisable by a representative director (or a director who is given the power by a representative director to exercise such powers), the retirement age of any director or corporate auditor or any requirement to hold any shares of our capital stock.
The Company Law specifically requires a resolution of the Board of Directors of a corporation to, among other things, acquire or dispose of material assets, borrow substantial amounts of money, employ or discharge from employment important employees, such as executive officers, and establish, change or abolish a material corporate division such as a branch office. A resolution of the Board of Directors is also specifically required for the establishment of
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a control system to ensure the adequacy of Wacoal Holdings’ affairs, such as a control system to ensure the exercise of our directors’ duty to comply with laws and regulations and the Articles of Incorporation of Wacoal Holdings. The Regulations of the Board of Directors of our company require a resolution of the Board of Directors for the long-term borrowing or lending of significant amounts of money or the guarantee of debt by Wacoal Holdings. Our Regulations of the Board of Directors also require a resolution of the Board of Directors to approve any transaction between Wacoal Holdings and one of its directors, any allocation of the remuneration and bonuses of directors as previously determined or approved by the general meeting of shareholders and any determination of the amount and manner of payment of retirement allowances or condolence money payable to directors, the determination of which has been previously entrusted to the Board of Directors by the general meeting of shareholders in accordance with the Company Law.
Capital stock
Authorized Capital
Article 6 of the Articles of Incorporation of Wacoal Holdings provides that the total number of shares it is authorized to issue is 500,000,000 shares.
Distributions of Surplus
General
Under the Company Law, distributions of cash or other assets by a joint stock corporation to its shareholders, so called “dividends,” are referred to as “distributions of Surplus” (“Surplus” is defined in “Restriction on distributions of Surplus” below). Subject to certain limitations described in “Restriction on distributions of Surplus” below, Wacoal Holdings may make any number of distributions of Surplus per fiscal year to shareholders or pledgees of record as of March 31 of each year or any other record date set by the Board of Directors of which not less than two weeks’ prior public notice must be given. Distributions of Surplus are required in principle to be authorized by a resolution of a general meeting of shareholders, but may also be made pursuant to a resolution of the Board of Directors if all the requirements described in (a) through (c) are met:
(a) Wacoal Holdings’ Articles of Incorporation provide that the Board of Directors has the authority to decide to make distributions of Surplus;
(b) the normal term of office of Wacoal Holdings’ directors is not longer than one year; and
(c) Wacoal Holdings’ non-consolidated annual financial statements and certain documents for the latest fiscal year present fairly its assets and profit or loss, as required by ordinances of the Ministry of Justice.
In the case of Wacoal Holdings, at present, the requirements in (a) and (b) above are met.
Wacoal Holdings is not obligated to pay any dividends that remain unclaimed for a period of three years after the date on which they first become payable.
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Distributions of Surplus may be made in cash or in-kind in proportion to the number of shares held by each shareholder. A resolution of a general meeting of shareholders or the Board of Directors authorizing a distribution of Surplus must specify the kind and aggregate book value of the assets to be distributed, the manner of allocation of such assets to shareholders and the effective date of the distribution. If a distribution of Surplus is to be made in-kind, Wacoal Holdings may, pursuant to a resolution of a general meeting of shareholders or the Board of Directors, as the case may be, grant a right to its shareholders to require Wacoal Holdings to make such distribution in cash instead of in-kind. If no such right is granted to the shareholders, the relevant distribution of Surplus must be approved by a special resolution of a general meeting of shareholders (see “Voting rights” with respect to a “special resolution”).
In Japan the “ex-dividend” date and the record date for dividends precede the date of determination of the amount of the dividend to be paid. The market price of shares generally goes ex-dividend on the third business day prior to the record date.
Restriction on Distributions of Surplus
When Wacoal Holdings makes a distribution of Surplus, it must set aside in its additional paid-in capital and/or legal reserve an amount equal to one-tenth of the amount of Surplus so distributed until the sum of its additional paid-in capital and legal reserve reaches one-quarter of its stated capita.
The amount of Surplus at any given time must be calculated in accordance with the following formula:
A + B + C + D – (E + F + G)
In the above formula:
“A” | = | the total amount of other capital surplus and other retained earnings, each such amount being that appearing on Wacoal Holdings’ non-consolidated balance sheet as of the end of the last fiscal year | ||
“B” | = | (if Wacoal Holdings has disposed of its treasury stock after the end of the last fiscal year) the amount of the consideration for such treasury stock received by Wacoal Holdings less the book value thereof | ||
“C” | = | (if Wacoal Holdings has reduced its stated capital after the end of the last fiscal year) the amount of such reduction less the portion thereof that has been transferred to additional paid-in capital or legal reserve (if any) | ||
“D” | = | (if Wacoal Holdings has reduced its additional paid-in capital or legal reserve after the end of the last fiscal year) the amount of such reduction less the portion thereof that has been transferred to stated capital (if any) | ||
“E” | = | (if Wacoal Holdings has cancelled its treasury stock after the end of the last fiscal year) the book value of such treasury stock |
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“F” | = | (if Wacoal Holdings has distributed Surplus to its shareholders after the end of the last fiscal year) the total book value of the Surplus so distributed | ||
“G” | = | certain other amounts set forth in ordinances of the Ministry of Justice, including (if Wacoal Holdings has reduced Surplus and increased its stated capital, additional paid-in capital or legal reserve after the end of the last fiscal year) the amount of such reduction and (if Wacoal Holdings has distributed Surplus to its shareholders after the end of the last fiscal year) the amount set aside in its additional paid-in capital or legal reserve (if any) as required by ordinances of the Ministry of Justice |
The aggregate book value of Surplus distributed by Wacoal Holdings may not exceed a prescribed distributable amount (the “Distributable Amount”), as calculated on the effective date of such distribution. The Distributable Amount at any given time shall be equal to the amount of Surplus less the aggregate of (a) the book value of its treasury stock, (b) the amount of consideration for any of its treasury stock disposed of by it after the end of the last fiscal year and (c) certain other amounts set forth in ordinances of the Ministry of Justice, including (if the sum of one-half of goodwill and the deferred assets exceeds the total of stated capital, additional paid-in capital and legal reserve, each such amount being that appearing on Wacoal Holdings’ non-consolidated balance sheet as of the end of the last fiscal year) all or certain part of such exceeding amount as calculated in accordance with the ordinances of the Ministry of Justice.
If Wacoal Holdings has become, at its option, a company with respect to which the consolidated balance sheet should also be taken into consideration in the calculation of the Distributable Amount (renketsu haito kisei tekiyo kaisha), it will be required to further deduct from the amount of Surplus a certain amount which is calculated based on its non-consolidated and consolidated balance sheets as of the end of the previous fiscal year as provided by ordinance of the Ministry of Justice.
If Wacoal Holdings has prepared interim financial statements as described below, and if such interim financial statements have been approved by the Board of Directors or (if so required by the Company Law) by a general meeting of shareholders, then the Distributable Amount must be adjusted to take into account the amount of profit or loss and the amount of consideration for any of its treasury stock disposed of by it, during the period in respect of which such interim financial statements have been prepared. Wacoal Holdings may prepare non-consolidated interim financial statements consisting of a balance sheet as of any date subsequent to the end of the last fiscal year and an income statement for the period from the first day of the current fiscal year to the date of such balance sheet. Interim financial statements so prepared by Wacoal Holdings must be audited by its corporate auditors and independent certified public accountants, as required by ordinances of the Ministry of Justice.
General Meeting of Shareholders
Pursuant to the Articles of Incorporation of Wacoal Holdings, an ordinary general meeting of shareholders of Wacoal Holdings shall be convened in June of each year. In addition, Wacoal Holdings may hold an extraordinary general meeting of shareholders whenever necessary.
Notice of a shareholders’ meeting, setting forth the place, time and purpose thereof, must be mailed to each shareholder having voting rights (or, in the case of a non-resident shareholder, to
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the resident proxy or mailing address thereof in Japan) at least two weeks prior to the date set for the meeting. Under the Company Law, such notice may be given to shareholders by electronic means, subject to the consent of the relevant shareholders.
Any shareholder or group of shareholders holding at least 300 voting rights (see “Unit Share System” below) or one percent of the total number of voting rights for six months or more may propose a matter to be considered at a general meeting of shareholders and may propose to describe such matter together with a summary of the proposal to be submitted by shareholder in the notice to shareholders attending such general meeting, by submitting a written request to a representative director at least eight weeks prior to the date set for such meeting.
Voting Rights
A holder of shares constituting one or more whole units (see “Unit Share System” below) is entitled to one vote for each whole unit of shares. However, in general, neither Wacoal Holdings nor any corporate shareholder or certain other entity one-quarter or more of the total voting rights of which are directly or indirectly held by Wacoal Holdings, has voting rights in respect of the shares held by Wacoal Holdings or such entity.
Except as otherwise provided by law or by the Articles of Incorporation of Wacoal Holdings, a resolution can be adopted at a general meeting of shareholders by a majority of the total number of voting rights represented at the meeting. Under the Company Law and Wacoal Holdings’ Articles of Incorporation, however, the quorum for the election of directors and corporate auditors is one-third of the total number of voting rights. Wacoal Holdings’ shareholders are not entitled to cumulative voting in the election of directors. Shareholders may exercise their voting rights through proxies, provided that the proxies are also shareholders holding voting rights. Wacoal Holdings’ shareholders also may cast their votes in writing. Holders of shares who do not attend a general meeting of shareholders may also exercise their voting rights by electronic means if the Board of Directors approves such method of exercising voting rights.
The Company Law provides that certain important matters shall be approved by a “special resolution” of a general meeting of shareholders. Under Wacoal Holdings’ Articles of Incorporation, the quorum for a special resolution is one-third of the total number of voting rights and the approval of at least two-thirds of the voting rights represented at the meeting is required for adopting a special resolution. Such important matters include:
(i) purchase of shares by Wacoal Holdings from a specific shareholder other than Wacoal Holdings’ subsidiary;
(ii) consolidation of shares;
(iii) issuance or transfer of new shares or existing shares held by Wacoal Holdings as treasury stock to persons other than shareholders at a “specially favorable” price;
(iv) issuance of stock acquisition rights (including those incorporated in bonds with stock acquisition rights) to persons other than shareholders under “specially favorable” conditions;
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(v) removal of Wacoal Holdings’ corporate auditor;
(vi) exemption from liability of Wacoal Holdings’ directors, corporate auditors or independent auditors;
(vii) reduction of stated capital (subject to certain exceptions);
(viii) distribution of Surplus in-kind with respect to which shareholders are not granted the right to require Wacoal Holdings to make a cash distribution instead of an in-kind distribution;
(ix) any amendment to Wacoal Holdings’ Articles of Incorporation (except for such amendments that may be made without approval by shareholders under the Company Law);
(x) transfer of all or a substantial portion of Wacoal Holdings’ business;
(xi) acquisition of the business of another company requiring approval of the shareholders;
(xii) dissolution, merger or consolidation requiring approval of the shareholders;
(xiii) corporate split requiring approval of the shareholders; and
(xiv) establishment of a parent and wholly-owned subsidiary relationship by way of a share transfer (kabushiki-iten) or share exchange (kabushiki-kokan) requiring approval of the shareholders.
Rights to be Allotted Shares
The holders of Wacoal Holdings’ shares of capital stock have no pre-emptive rights under its Articles of Incorporation. Authorized but unissued shares may be issued at such times and upon such terms as the Board of Directors determines, subject to limitations as to the offering of new shares at a “specifically favorable” price mentioned under “Voting Rights” above. The Board of Directors may, however, determine that shareholders of a particular class of stock shall be given subscription rights regarding a particular issuance of new shares of that class, in which case such rights must be given on uniform terms to all shareholders of that class of stock as of a record date of which not less than two weeks’ prior public notice must be given. Each shareholder to whom such rights are given must also be given notice of the expiration thereof at least two weeks’ prior to the date on which such rights expire.
The right to receive allotments of new shares may not be transferred. However, Wacoal Holdings may allot stock acquisition rights to shareholders without consideration and such stock acquisition rights are transferable. See “Stock Acquisition Rights” below.
Stock Acquisition Rights
Wacoal Holdings may issue stock acquisition rights (shinkabu yoyakuken). Holders of stock acquisition rights are entitled to acquire shares from Wacoal Holdings upon payment of the applicable exercise price and subject to other terms and conditions thereof. Wacoal Holdings may also issue bonds with stock acquisition rights (shinkabu yoyakuken-tsuki shasai). The issuance of stock acquisition rights and bonds with stock acquisition rights may be authorized by the Board of Directors unless it is made under “specially favorable” conditions, as described in “Voting Rights” above.
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Liquidation Rights
In the event of a liquidation of Wacoal Holdings, the assets remaining after payment of all debts and liquidation expenses and taxes will be distributed among the holders of our shares of common stock in proportion to the respective numbers of shares held by each holder.
Record Date
March 31 of each year is the record date for the determination of shareholders entitled to receive Wacoal Holdings’ year-end dividends and to vote at the ordinary general meeting of shareholders with respect to the fiscal year ending on such date. In addition, Wacoal Holdings may set a record date for determining the shareholders and/or beneficial shareholders entitled to other rights and for other purposes by giving at least two weeks’ prior public notice.
Acquisition by Wacoal Holdings of its Capital Stock
Wacoal Holdings may acquire its shares of capital stock (i) by soliciting all of its shareholders to offer to sell shares held by them (in such case, certain terms of such acquisition, such as the total number of shares to be purchased and the total amount of consideration, shall be set by an ordinary resolution of a general meeting of shareholders in advance, and such acquisition shall be effected pursuant to a resolution of the Board of Directors), (ii) from a specific shareholder other than any of Wacoal Holdings’ subsidiaries (pursuant to a special resolution of a general meeting of shareholders), (iii) from any of Wacoal Holdings’ subsidiaries (pursuant to a resolution of the Board of Directors), or (iv) by way of purchase on any Japanese stock exchange on which the shares are listed or by way of tender offer (in either case pursuant to an ordinary resolution of a general meeting of shareholders or a resolution of the Board of Directors). In the case of (ii) above, any other shareholder may make a request to Wacoal Holdings’ representative director that such other shareholder be included as a seller in the proposed purchase, provided that no such right will be available if the purchase price or any other consideration to be received by the relevant specific shareholder does not exceed the last trading price of the shares on the relevant stock exchange on the day immediately preceding the date on which the resolution mentioned in (ii) above was adopted (or, if there is no trading in the shares on the stock exchange or if the stock exchange is not open on such day, the price at which the shares are first traded on such stock exchange thereafter).
The total amount of the purchase price of shares may not exceed the Distributable Amount, as described in “Distributions of Surplus — Restriction on distributions of Surplus.”
The Company Law permits Wacoal Holdings to hold shares acquired by it as treasury stock. Treasury stock may be held by Wacoal Holdings for any time period and may be cancelled by resolution of its Board of Directors. Wacoal Holdings may also transfer shares held by it as treasury stock to any person, subject to a resolution of its Board of Directors and subject also to other requirements similar to those applicable to the issuance of new shares. Wacoal Holdings may also utilize its treasury stock for the purpose of transfer to any person upon the exercise of stock acquisition rights or for the purpose of acquiring another company by way of merger, share exchange or corporate split through the exchange of treasury stock for shares or assets of the acquired company. No specific approval by the Board of Directors or shareholders at a meeting of shareholders is required for such utilization of treasury stock, although the grant of the relevant stock acquisition rights or the relevant merger, share exchange or corporate split must be approved by the Board of Directors or shareholders at Wacoal Holdings’ shareholders’ meeting, as the case may be.
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Unit Share System
Under Wacoal Holdings’ Articles of Incorporation, 1,000 shares constitute one “unit”. The Board of Directors is permitted to reduce the number of shares constituting a unit or to abolish the unit share system in its entirety by amending Wacoal Holdings’ Articles of Incorporation without approval by the shareholders. The number of shares constituting one unit may not exceed 1,000.
Wacoal Holdings’ Articles of Incorporation and Share Handling Regulations provide that, in general, no stock certificates shall be issued with respect to any shares constituting less than one unit. Consequently, no certificates for shares other than a full unit or an integral multiple thereof will be issued (except for the purpose of protection of the holders of shares constituting less than one unit). As the transfer of shares normally requires delivery of the relevant stock certificates, any fraction of a unit for which no stock certificates are issued will not be transferable.
Under the unit share system, a shareholder has one vote for each unit of shares held by it. Shares not constituting a full unit will carry no voting rights and will be excluded for the purposes of calculating the quorum for voting purposes. Moreover, under Wacoal Holdings’ Articles of Incorporation, holders of shares constituting less than one unit will not have other shareholder rights, except that such holders may not be deprived of certain rights specified in the Company Law or an ordinance of the Ministry of Justice, including the right to receive distribution of Surplus.
A holder of shares constituting less than one unit may require Wacoal Holdings to purchase such shares at their market value. The request of such purchase may not be withdrawn without Wacoal Holdings’ consent.
A holder who owns ADRs evidencing less than 200 ADSs will indirectly own less than a whole unit. Although, as discussed above, under the unit share system holders of less than a unit have the right to require Wacoal Holdings to purchase their shares, holders of ADRs evidencing ADSs that represent other than integral multiples of whole units are unable to withdraw the underlying shares of capital stock representing less than a unit and, therefore, are unable, as a practical matter, to exercise the rights to require Wacoal Holdings to purchase such underlying shares. As a result, access to the Japanese markets by holders of ADRs through the withdrawal mechanism will not be available for dispositions of shares in lots of less than a unit. The unit share system does not affect the transferability of ADSs, which may be transferred in lots of any size.
Reporting of Substantial Shareholdings
Pursuant to the Financial Instruments and Exchange Law of Japan and regulations thereunder, a person or group of persons beneficially holding more than 5% of the total shares with voting rights (for this purpose shares issuable upon exercise of stock acquisition rights held by the person or persons are counted in the calculation of the holding and the total shares in issue) of a company listed on any Japanese stock exchange or traded on the over-the-counter market is required to file with the director of a competent local finance bureau, within five business days a report containing the identity of such person or persons, the purpose of such holding and certain other information prescribed by regulations. A similar report must also be made (with certain exceptions) if the percentage of such holding subsequently increases or decreases by 1% or more or if any change occurs in material matters set out in reports previously filed.
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Miscellaneous
Wacoal Holdings’ Articles of Incorporation has authorized the adoption of a basic policy for measures against the acquisition of a substantial shareholding (i.e., defensive measures against takeovers) (the “Basic Policy”) for the purposes of securing or enhancing corporate value and the common interests of shareholders. The Board of Directors of Wacoal Holdings has adopted certain measures (the “Plan”) under the Basic Policy in accordance with the Articles of Incorporation.
The outline of the Plan is as follows:
(a) Formulation of Procedures for Implementation of the Plan
Under the Plan, Wacoal Holdings will demand that any third party (a “Purchaser”) who launches or proposes a purchase or any similar act (a “Purchase”) provide information in advance concerning such Purchase, and after Wacoal Holdings ensures sufficient time to obtain such information and consider such Purchase, Wacoal Holdings will present a plan of the management of Wacoal Holdings to its shareholders or otherwise negotiate with the Purchaser.
(b) Gratis Allocation of Share Acquisition Rights and Independent Committee
If the Purchaser fails to comply with the procedures as prescribed by the Plan and conducts a Purchase, or in the event of any Purchase by a Purchaser that threatens the corporate value of Wacoal Holdings and the common interests of its shareholders, Wacoal Holdings will conduct a gratis allocation of acquisition rights for the subscription of new shares with terms that prohibit the Purchaser from exercising such rights and with call rights for the acquisition of new shares from Wacoal Holdings by shareholders other than the Purchaser (the “Share Acquisition Rights”) at such time and in the manner prescribed in Article 277 et al. of the Company Law.
The Company shall comply with the Regulations of the Independent Committee in order to prevent the Board of Directors from making an arbitrary decision concerning the trigger or non-trigger of the gratis allocation of the Share Acquisition Rights or other matters concerning the acquisition. In addition, Wacoal Holdings shall ensure transparency by seeking the judgment of an Independent Committee, which will be comprised of members appointed from (i) outside directors of Wacoal Holdings, (ii) outside corporate auditors of Wacoal Holdings or (iii) independent experts (experienced company managers, persons with a governmental background, legal counsel, certified public accountants, academic experts, etc.) who shall be independent from the executive officers of Wacoal Holdings as well as through timely disclosure of relative information to its shareholders.
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There are no sinking fund provisions relating to Wacoal Holdings.
C. Material Contracts.
None.
D. Exchange Controls.
There are no foreign exchange control laws or regulations in Japan that materially affect the import or export of capital, including the availability of cash and cash equivalents for use by our company, or the remittance of dividends or other payments to nonresident holders of our shares or ADSs.
E. Taxation.
The discussion below is not intended to constitute a complete analysis of all tax consequences that may be relevant with respect to the acquisition, ownership and disposition of shares of our common stock or ADSs. Prospective purchasers of shares or ADSs should consult their own tax advisors concerning their particular situations and the U.S. federal income and estate tax consequences to them of owning and disposing share or ADSs, as well as any tax consequences arising under the laws of any state, local, or foreign or other tax jurisdiction and the possible effects of changes in U.S. federal or other tax laws.
The following is a general summary of the material U.S. federal and Japanese tax consequences of the acquisition, ownership and disposition of shares of our common stock or ADSs by an investor that holds those shares or ADSs as capital assets within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the “Code”). This summary does not purport to address all the material tax consequences that may be relevant to holders of our common stock or ADSs and does not take into account the specific circumstances of any particular investors, some of which (such as tax-exempt organizations; banks and financial institutions; insurance companies; broker-dealers; real estate investment trusts; regulated investment companies; qualified retirement plans, individual retirement accounts, and other tax-deferred accounts; expatriates of the United States; persons who acquired shares or ADSs pursuant to the exercise of any employee stock option or otherwise as compensation for services; traders in securities that elect to use a mark-to-market method of accounting for their securities holdings; investors liable for alternative minimum tax, investors that own or are treated as owning 10% or more of our voting stock; investors that hold shares of our common stock or ADSs as part of a straddle, hedge, conversion transaction or other integrated transaction and investors whose functional currency is not the U.S. dollar) may be subject to special tax rules. This summary is based on the tax laws of the United States and Japan, including the Code, judicial decisions, published rulings, administrative pronouncements and United States Treasury regulations, as well as on the income tax convention between the United States and Japan, all as currently in effect on the date hereof of and all of which are subject to change (possibly with retroactive effect), and to differing interpretations. Such change could materially and adversely affect the tax consequences described below. No assurance can be given that the Internal Revenue Service (the “IRS”) would not assert, or that a court would not sustain, a position contrary to any of the tax consequences described below.
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U.S. Holders (as defined below) should note that the Income Tax Treaty between United States and Japan (the “Treaty”) may apply to income and gain derived from the shares of our common stock or ADSs. Where relevant, U.S. Holders are urged to confirm with their tax advisors whether they are entitled to the benefits provided under the Treaty.
For purposes of this discussion, a “U.S. Holder” is any beneficial owner of shares of our common stock or ADSs that, for U.S. federal income tax purposes, is:
(1) | a citizen or resident of the United States, | ||
(2) | a corporation or other entity taxable as a corporation for U.S. federal income tax purposes created or organized in or under the laws of the United States or any political subdivision thereof, | ||
(3) | an estate, the income of which is subject to U.S. federal income tax without regard to its source, or | ||
(4) | a trust, if such trust validly elects to be treated as a U.S. person under applicable Treasury Regulations, or if (a) a court within the U.S. can exercise primary supervision over its administration and (b) one or more U.S. persons have the authority to control all of the substantial decisions of such trust. |
If a partnership (including for this purpose any entity treated as a partnership for U.S. tax purposes) is a beneficial owner of shares of our common stock or ADSs, the U.S. tax treatment of a partner in the partnership will generally depend on the status of the partner and the activities of the partnership. A holder of shares of our common stock or ADSs that is a partnership and partners in such partnership should consult their individual tax advisors about the U.S. federal income tax consequences of holding and disposing of shares of our common stock or ADSs.
An “Eligible U.S. Holder” is a U.S. Holder that:
(1) is a resident of the United States for purposes of the Treaty, as applicable from time to time;
(2) does not maintain a permanent establishment or fixed base in Japan to which shares of common stock or ADSs are attributable and through which the U.S. Holder carries on or has carried on business (or, in the case of an individual, performs or has performed independent personal services); and
(3) is not otherwise ineligible for benefits under the Treaty with respect to income and gain derived in connection with the shares of common stock or ADSs.
A “Non-U.S. Holder” is any beneficial owner of shares of common stock or ADSs that is not a U.S. Holder.
This summary does not address any aspects of U.S. federal tax law other than income taxation and does not discuss any aspects of Japanese tax law other than income taxation, inheritance and gift taxation. Investors are urged to consult their tax advisors regarding the U.S. federal, state and local and Japanese and other tax consequences of acquiring, owning and disposing of shares of our common stock or ADSs. In particular, where relevant, investors are urged to confirm their status as Eligible U.S. Holders with their tax advisors and to discuss with their tax advisors any possible consequences of their failure to qualify as Eligible U.S. Holders.
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As relates to the ADSs, this discussion is based in part upon the representations of The Bank of New York and the assumption that each obligation in the deposit agreement and any related agreement will be performed in accordance to its terms. In general, taking into account the earlier assumptions, for purposes of the Treaty and for U.S. federal income and Japanese tax purposes, holders of ADSs will be treated as the beneficial owners of the shares of common stock represented by those ADSs, and exchanges of shares of common stock for ADSs, and exchanges of ADSs for shares of common stock, will not be subject to U.S. federal income or Japanese tax. The holder’s adjusted tax basis in the ADSs or share received in the exchange will be the same as the adjusted tax basis in the shares or ADSs surrendered in exchange therefore, and the holding period for the ADSs or shares received will include the holding period for the surrendered shares or ADSs.
Japanese Taxation
The following is a summary of the principal Japanese tax consequences (limited to national taxes) to holders of shares of common stock and of ADSs who are either individuals who are not residents of Japan or non-Japanese corporations without a permanent establishment in Japan (“non-resident Holders”).
Generally, a non-resident Holder is subject to withholding of Japanese income tax on dividends paid by Japanese corporations. Stock splits are, in general, not subject to withholding of Japanese income tax.
In general, the rate of Japanese withholding tax applicable to dividends paid by Japanese corporations to a non-resident Holder is 20%. With respect to dividends paid on listed shares issued by a Japanese corporation (such as the shares of Wacoal Holdings) to any corporate or individual shareholders (including those shareholders who are non-resident Holders), except for any individual shareholder who holds 5% or more of the outstanding total of the shares issued by the relevant Japanese corporation, the aforementioned 20% withholding tax rate is reduced to (i) 7% for dividends due and payable on or before March 31, 2009 and (ii) 15% for dividends due and payable thereafter.
Under the Treaty, the maximum rate of Japanese withholding tax which may be imposed on dividends paid by a Japanese corporation to an Eligible U.S. Holder that is a portfolio investor is generally limited to 10% of the gross amount actually distributed, and Japanese withholding tax with respect to dividends paid by a Japanese corporation to an Eligible U.S. Holder that is a pension fund is exempt from Japanese taxation by way of withholding or otherwise unless such dividends are derived from the carrying on of a business, directly or indirectly, by such pension fund.
The amount of such withholding tax imposed on dividends payable to the holders of our common stock and ADSs who reside in a country other than the United States is dependent upon the provisions of such treaties, conventions or agreements as may exist between such country and Japan. If the maximum tax rate provided for in the income tax treaty applicable to dividends paid by Wacoal Holdings to any particular non-resident Holder is lower than the withholding tax rate
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otherwise applicable under Japanese tax law or any particular non-resident Holder is exempt from Japanese income tax with respect to such dividends under the income tax treaty applicable to such particular non-resident Holder, such non-resident Holder who is entitled to a reduced rate of or exemption from Japanese withholding tax on payment of dividends on shares of common stock by Wacoal Holdings is required to submit an Application Form for Income Tax Convention Regarding Relief from Japanese Income Tax on Dividends in advance through Wacoal Holdings to the relevant tax authority before the payment of dividends. A standing proxy for non-resident Holders of a Japanese corporation may provide this application service. With respect to ADSs, this reduced rate or exemption is applicable if the depositary or its agent submits two Application Forms (one before payment of dividends, the other within eight months after Wacoal Holdings’ fiscal year-end). To claim this reduced rate or exemption, any relevant non-resident Holder of ADSs will be required to file a proof of taxpayer status, residence and beneficial ownership (as applicable) and to provide other information or documents as may be required by the depositary. A non-resident Holder who is entitled, under an applicable income tax treaty, to a reduced treaty rate lower than the withholding tax rate otherwise applicable under Japanese tax law or an exemption from the withholding tax, but failed to submit the required application in advance will be entitled to claim the refund of withholding taxes withheld in excess of the rate under an applicable tax treaty (if such non-resident Holder is entitled to a reduced treaty rate under the applicable income tax treaty) or the whole of the withholding tax withheld (if such non-resident Holder is entitled to an exemption under the applicable income tax treaty) from the relevant Japanese tax authority.
Gains derived from the sale of shares of common stock or ADSs outside Japan by a non-resident Holder holding such shares of common stock or ADSs as portfolio investors are, in general, not subject to Japanese income or corporation tax. Eligible U.S. Holders are not subject to Japanese income or corporation tax with respect to such gains under the Treaty.
Japanese inheritance and gift taxes at progressive rates may be payable by an individual who has acquired our common stock or ADSs as legatee, heir or donee, even though neither the individual nor the decedent nor the donor is a resident in Japan.
Holders of shares of our common stock or ADSs should consult their tax advisors regarding the effect of these taxes and, in the case of U.S. Holders, the possible application of the Estate and Gift Tax Treaty between the U.S. and Japan.
U.S. Federal Income Taxation
U.S. Holders
Taxation of Distributions
Subject to the discussion in “Passive Foreign Investment Companies” below, the gross amount of any distribution made by us in respect of our shares of common stock or ADSs (without reduction for Japanese withholding taxes) will constitute a taxable dividend to the extent paid out of our current or accumulated earnings and profits, as determined for U.S. federal income tax purposes. If you are a non-corporate U.S. Holder, dividends paid to you in taxable years beginning before January 1, 2011, that constitute qualified dividend income will be taxable to you at a maximum tax rate of 15% provided that you hold our ADSs or common stock for more than 60 days during the 120-day period beginning 60 days before the ex-dividend date and meet other
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holding period requirements. A dividend generally will be included in the gross income of a U.S. Holder when the dividend is actually or constructively received by the U.S. Holder, in the case of shares of common stock, or by the depositary, in the case of ADSs. The dividend will not be eligible for the dividends-received deduction generally allowed to U.S. corporations under the Code with respect to dividends received from certain domestic corporations. A dividend paid in Japanese yen will be included in gross income in a U.S. dollar amount based on the Japanese yen/U.S. dollar exchange rate in effect on the date that dividend is included in the income of the U.S. Holder, regardless of whether the payment is in fact converted into U.S. dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date the dividend payment is included in the gross income of a U.S. Holder through the date that payment is converted into U.S. dollars (or otherwise disposed of) will be treated as U.S. source ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income.
To the extent that the amount of any distribution received by a U.S. Holder in respect of shares of our common stock or ADSs exceeds our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes, the distribution first will be treated as a tax-free return of capital to the extent of the U.S. Holder’s adjusted tax basis in those shares or ADSs, and any balance in excess of that adjusted tax basis will be treated as capital gain. Preferential tax rates for long-term capital gain may be applicable to non-corporate U.S. Holders.
Distributions of additional shares of common stock or ADSs that are made to U.S. Holders with respect to their shares of common stock or ADSs and that are part of a pro rata distribution to all of our shareholders generally will not be subject to U.S. federal income tax. The basis of the new shares of common stock so received will be determined by allocating the U.S. Holder’s basis in the old shares of common stock or ADSs between the old shares of common stock or ADSs and the new shares of common stock received, based on their relative fair market values on the date of distribution. However, the basis of the new shares will be zero if the fair market value of the new shares is less than 15% of the fair market value of the old shares of common stock or ADSs at the time of distribution and the U.S. Holder does not make an election to determine the basis of the new shares by allocation as described above. A U.S. Holder’s holding period in the new shares will generally include the holding period of the old shares of common stock or ADSs on which the distribution was made.
For U.S. foreign tax credit purposes, dividends included in gross income by a U.S. Holder in respect of shares of our common stock or ADSs will constitute income from sources outside the United States, and generally will be treated separately, together with other items of “passive income” (or, in the case of some U.S. holders, “general category income”) in computing foreign tax credit limitations. Special foreign tax credit rules apply to qualified dividend income received by individuals. Subject to generally applicable limitations under U.S. federal income tax law and the Treaty, any Japanese withholding tax imposed in respect of the dividend may be claimed as a credit against the U.S. federal income tax liability of a U.S. Holder (or as a deduction from that U.S. Holder’s taxable income, if that U.S. Holder elects). To the extent a refund of the Japanese withholding tax is available to a U.S. Holder, the amount of tax withheld that is refundable may not be claimed as a credit. A U.S. Holder that (i) has held shares of our common stock or ADSs for less than a specified minimum period during which it is not protected from risk of loss, (ii) is obligated to make payments related to the dividends, or (iii) holds the shares of common stock or ADSs in an arrangement in which the holder’s expected economic profit, after non-U.S. taxes, is insubstantial, will not be allowed a foreign tax credit for foreign taxes imposed on dividends paid on our shares of common stock or ADSs.
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Investors are urged to consult their tax advisors regarding the availability of the foreign tax credit under their particular circumstances. The Internal Revenue Service (the “IRS”) has expressed concern that parties to whom ADSs are pre-released may be taking actions that are inconsistent with the claiming of foreign tax credits by U.S. Holders of ADSs. Such actions would also be inconsistent with the claiming of the preferential tax rates applicable to qualified dividend income. Accordingly, investors should be aware that the creditability of Japanese withholding tax on dividends and the availability of such preferential tax rates could be affected by future actions that may be taken by the IRS.
Taxation of Capital Gains
Subject to the discussion in “Passive Foreign Investment Companies” below, a U.S. Holder’s tax basis in an ADS generally will equal the U.S. Holder’s cost of that ADS in U.S. dollars. In general, upon a sale or other disposition of shares of our common stock or ADSs, a U.S. Holder will recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the U.S. dollar value of the amount realized on the disposition (i.e., the amount of cash plus the fair market value of any property received) and the U.S. Holder’s adjusted tax basis, also determined in U.S. dollars, in those shares or ADSs. That gain or loss generally will be capital gain or loss and, if the U.S. Holder’s holding period for those shares or ADSs exceeds one year, will be long-term capital gain or loss. Some non-corporate U.S. Holders are eligible for preferential tax rates (generally 15%) in respect of long-term capital gain recognized in taxable years beginning before January 1, 2011. If the U.S. Holder’s holding period for those shares or ADSs is one year or less, such capital gain or loss will be short-term capital gain or loss taxable as ordinary income at the U.S. Holder’s marginal income tax rate. A U.S. Holder may deduct any loss resulting from the sale or exchange of shares or ADSs only against other capital gains. For a U.S. Holder who is an individual, up to $3,000 of capital loss in excess of capital gains may be deducted against ordinary income. Excess losses may be carried forward. Any gain or loss recognized by a U.S. Holder in respect of the sale or other disposition of shares of our common stock or ADSs generally will be treated as U.S. source income or loss for foreign tax credit purposes, except that a loss will be treated as foreign source loss to the extent a U.S. Holder received dividends that were includible in the “financial services income” basket during the 24-month period prior to the sale or other disposition.
Passive Foreign Investment Companies
It is possible that we may be classified as a passive foreign investment company (a “PFIC”) for U.S. federal income tax purposes for the taxable year ended March 31, 2008, or for the current or future taxable years. If we are classified as a PFIC, U.S. Holders who own our stock or ADSs during the taxable year in which we become or are a PFIC generally will be subject to increased U.S. tax liabilities and reporting requirements for that taxable year and all succeeding years, regardless of whether we continue to meet the income or asset test for PFIC status, although shareholder elections may apply in certain circumstances. U.S. Holders should consult their own tax advisors regarding our status as a PFIC and the consequences of an investment in a PFIC.
A company is considered a PFIC for any taxable year if either
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(1) at least 75% of its gross income is passive income, or
(2) at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the production of passive income.
We will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other corporation in which we own, directly or indirectly, more than 25% (by value) of the stock. In addition, passive income does not include any interest, dividends, rents, or royalties that are received or accrued by us from a “related person” (as defined in the Code), to the extent such items are properly allocable to income of such related person that is not passive income.
We must make a separate determination each year as to whether we are a PFIC. As a result, our PFIC status may change. The determination of whether or not we are a PFIC depends on the composition of our income and assets, including goodwill, from time to time. The composition of our assets will be affected by the extent to which we increase or reduce our active business assets and/or our cash, investment securities and other passive assets. In addition, if our actual acquisitions and capital expenditures do not match our projections, the likelihood that we are or will be classified as a PFIC may also increase. Our determination is based on a current valuation of our assets, including goodwill. In calculating goodwill, we have valued our total assets based on our market capitalization, determined using the market price of our shares and ADSs. Such market price may fluctuate. If our market capitalization is less than anticipated or subsequently declines, this will decrease the value of our goodwill and we may become a PFIC. Moreover, we have made a number of assumptions regarding the amount of value allocable to goodwill. Although we believe our valuation approach is reasonable, such valuation is always subject to challenge by the IRS, and any resulting change in the value of our goodwill may result in our being a PFIC. We cannot assure you that we were not a PFIC for prior taxable years and cannot predict whether we will be treated as a PFIC or for the current or any future taxable year.
If we are a PFIC for any taxable year during which you hold stock or ADSs, you will be subject to special tax rules with respect to any “excess distribution” that you receive and any gain you recognize from a sale or other disposition (including a pledge) of the stock or ADSs, unless you make a “mark-to-market” election as discussed below. Distributions you receive in a taxable year that are greater than 125% of the average annual distributions you received during the shorter of the three preceding taxable years or your holding period for the stock or ADSs will be treated as an excess distribution. Under these special tax rules:
(1) the excess distribution or gain will be allocated ratably over your holding period for the stock or ADSs;
(2) the amount allocated to the current taxable year, and any period prior to the first day of the first taxable year in which we were a PFIC will be treated as ordinary income in the current taxable year; and
(3) the amount allocated to each other year will be treated as ordinary income and subject to tax at the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.
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The tax liability for amounts allocated to years prior to the year of disposition or “excess distribution” cannot be offset by any net operating losses, and gains (but not losses) realized on the sale of the stock or ADSs cannot be treated as capital, even if you hold the stock or ADSs as capital assets.
If we are a PFIC, you may avoid taxation under the rules described above by making a “qualified electing fund” election to include your share of our income on a current basis, or a “deemed sale” election once we no longer qualify as a PFIC. However, you may make a qualified electing fund election only if we agree to furnish you annually with certain tax information, and we do not presently intend to prepare or provide such information.
Alternatively, a U.S. Holder of “marketable stock” in a PFIC may make a mark-to-market election for stock of a PFIC to elect out of the tax treatment discussed three paragraphs above. If you make a mark-to-market election for the stock or ADSs, you will be required to include in income each year an amount equal to the excess, if any, of the fair market value of the stock or ADSs as of the close of your taxable year over your adjusted basis in such stock or ADSs. You will also be allowed a deduction as an ordinary loss for the excess, if any, of the adjusted basis of the stock or ADSs over their fair market value as of the close of the taxable year. However, deductions are allowable only to the extent of any net mark-to-market gains on the stock included in your income for prior taxable years. Amounts included in your income under a mark-to-market election, as well as gain on the actual sale or other disposition of the stock or ADSs, are treated as ordinary income. Ordinary loss treatment also applies to the deductible portion of any mark-to-market loss on the stock or ADSs, as well as to any loss realized on the actual sale or disposition of the stock or ADSs, to the extent that the amount of such loss does not exceed the net mark-to-market gains previously included for such stock or ADSs. Your basis in the stock or ADSs will be adjusted to reflect any such amounts included or deducted. The tax rules that apply to distributions by corporations which are not PFICs would apply to distributions by us.
The mark-to-market election is available only for stock which is regularly traded on a national securities exchange that is registered with the Securities and Exchange Commission or on Nasdaq, or an exchange or market that the U.S. Secretary of the Treasury determines has rules sufficient to ensure that the market price represents a legitimate and sound fair market value. The ADSs are listed on the Nasdaq Market. Accordingly, the mark-to-market election would be available to you if we were to become a PFIC.
Notwithstanding any election you may make, dividends paid by a PFIC are not “qualified dividend income” for purposes of the preferential tax rate on qualified dividends discussed above.
If you hold stock or ADSs in any year in which we are a PFIC, you would be required to file Internal Revenue Service Form 8621 regarding distributions received on the stock or ADSs and any gain realized on the disposition of the stock or ADSs even if we cease to be a PFIC. The PFIC rules are complex. U.S. Holders are urged to consult their own tax advisors regarding the application of these rules and how they may affect the U.S. federal income tax consequences of the ownership and disposition of our shares of common stock or ADSs.
Non-U.S. Holders
A Non-U.S. Holder generally will not be subject to any U.S. federal income or withholding tax in respect of distributions on shares of our common stock or ADSs unless the Non-U.S. Holder conducts a trade or business within the United States and the distributions are effectively connected with that trade or business.
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A Non-U.S. Holder generally will not be subject to U.S. federal income tax in respect of gain recognized on a sale or other disposition of our shares of common stock or ADSs, unless (i) the gain is effectively connected with a trade or business conducted by the Non-U.S. Holder within the United States, or (ii) the Non-U.S. Holder is an individual who was present in the United States for 183 or more days in the taxable year of the disposition and certain other conditions are present.
Dividends and gains that are effectively connected with a Non-U.S. Holder’s conduct of a trade or business in the United States generally will be subject to tax in the same manner as they would be for U.S. Holder. Effectively connected dividends and gains received by a corporate Non-U.S. Holder may also be subject to an additional branch profits tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty.
Special rules may apply to a Non-U.S. Holder resident of a country with an income tax treaty with the United States requiring the dividend income or gains to be attributable to U.S. permanent establishment in order to be subject to U.S. federal income tax.
Backup Withholding and Information Reporting
In general, information reporting requirements will apply to dividends in respect of our shares of common stock or the ADSs or the proceeds received on the sale, exchange or redemption of shares or ADSs paid within the United States (and in certain cases, outside the United States) to U.S. Holders other than certain exempt recipients, such as corporations, and a backup withholding tax may apply (at a 28% rate through 2010) to such amounts if the U.S. Holder fails to provide an accurate taxpayer identification number, report interest and dividends required to be shown on its U.S. federal income tax returns, or make other appropriate certifications in the required manner. Backup withholding is not an additional tax. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against the U.S. Holder’s U.S. federal income tax liability provided that the appropriate returns are filed with the IRS in a timely manner.
A Non-U.S. Holder generally may eliminate the requirement for information reporting and backup withholding by providing certification of its foreign status to the payor, under penalties of perjury, on IRS Form W-8BEN.
F. Dividends and Paying Agents.
Not applicable.
G. Statement by Experts.
Not applicable.
H. Documents on Display.
Documents referred to in this Annual Report on Form 20-F that have been filed with the SEC and Wacoal Holdings’ annual reports on Form 20-F, periodic reports on Form 6-K and other
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documents with the SEC can be inspected and copied without charge at the SEC’s public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Investors may also get copies by writing the SEC and paying the prescribed fee. Our SEC filings are also available to the public on the SEC’s website (located at www.sec.gov) and from commercial document retrieval services.
In addition, documents referred to in this 20-F filing may be inspected at our Kyoto headquarters, located at 29 Nakajima-cho, Kisshoin, Minami-ku, Kyoto 601-8530, Japan.
I. Subsidiary Information.
Not applicable.
Item 11. Quantitative and Qualitative Disclosures about Market Risk.
Market Risk Exposures
We are exposed to market risk, including changes in foreign exchange rates, interest rates and prices of marketable securities and marketable investments. We use derivative financial instruments to reduce our exposure to market risks from changes in interest rates and foreign exchange rates. The instruments primarily used are foreign exchange forward contracts and interest rate swaps. We believe our credit risk is minimal on these transactions, as the counterparties are major financial institutions. We do not hold or issue financial instruments for trading purposes.
Maturities and fair values of our marketable securities as of March 31, 2008 were as follows:
Year ended | ||||||||||||||||||||||||||||||||
March 31, | Debt | Due within | Due after one | Due from two | Due from three | Due from four | Due after | Equity | ||||||||||||||||||||||||
2008 | securities | one year | to two years | to three years | to four years | to five years | five years | securities | ||||||||||||||||||||||||
Cost | 12,186 | 2,593 | 1,397 | 3,544 | 1,597 | 5 | 3,050 | 25,762 | ||||||||||||||||||||||||
Fair Value | 12,048 | 2,595 | 1,366 | 3,577 | 1,597 | 4 | 2,909 | 36,981 |
Maturities and fair values of our marketable securities as of March 31, 2007 were as follows:
Year ended | ||||||||||||||||||||||||||||||||
March 31, | Debt | Due within | Due after one | Due from two | Due from three | Due from four | Due after | Equity | ||||||||||||||||||||||||
2007 | securities | one year | to two years | to three years | to four years | to five years | five years | securities | ||||||||||||||||||||||||
Cost | 13,971 | 3,199 | 2,608 | 1,398 | 3,845 | 1,598 | 1,323 | 26,842 | ||||||||||||||||||||||||
Fair Value | 13,893 | 3,189 | 2,580 | 1,382 | 3,825 | 1,580 | 1,337 | 53,119 |
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Equity Price Risk
We hold marketable securities for short-term investment. In general, highly-liquid and low-risk instruments are preferred in the portfolio. Marketable securities included in other assets are held as longer-term investments. Our investments in equity securities consist mainly of stocks of financial institutions. We do not hold marketable securities for trading purposes.
Foreign Exchange Risk
Our international operations expose us to the risk of changes in foreign currency exchange rates. The Company occasionally uses forward currency exchange contracts to manage its exposure to foreign currency fluctuation on the transactions denominated in foreign currencies. As of March 31, 2008, the notional amount of our open forward currency contract was for the purchase of $18.8 million dollars. The Company recorded the drop in the fair value of the derivative contract of ¥35 million ($351,000) in other losses since it was not designated as a hedge in the year ended March 31, 2008. No derivative contract was outstanding as of March 31, 2007 and March 31, 2006.
Interest Rate Risk
As of March 31, 2008, our interest rate risk on short-term borrowings (¥5,572 million) was not material, since the amount of interest due is reasonably low (¥78 million) and we do not expect interest rates to rise sharply in the near future. Although our lease obligations (¥129 million, including the current portion) have fixed interest rates, the amount outstanding is not material.
As of March 31, 2007, our interest rate risk on short-term borrowings (¥5,822 million) and lease obligations (¥162 million) was also immaterial.
The following table provides information about our lease obligations that are sensitive to changes in interest rates as of March 31, 2008.
Lease Obligations (including due within one year)
Wacoal Holdings and subsidiaries
Wacoal Holdings and subsidiaries
Expected maturity date | ||||||||||||||||||||||||||||||||
Year ended | (Yen in millions and percent) | Estimated | ||||||||||||||||||||||||||||||
March 31, 2008 | Total | 2009 | 2010 | 2011 | 2012 | 2013 | Thereafter | fair value | ||||||||||||||||||||||||
Lease Obligations | 129 | 48 | 81 | — | — | — | — | 129 |
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The following table provides information about our lease obligations that are sensitive to changes in interest rates as of March 31, 2007.
Lease Obligations (including due within one year)
Wacoal Holdings and subsidiaries
Wacoal Holdings and subsidiaries
Expected maturity date | ||||||||||||||||||||||||||||||||
Year ended | (Yen in millions and percent) | Estimated | ||||||||||||||||||||||||||||||
March 31, 2007 | Total | 2008 | 2009 | 2010 | 2011 | 2012 | Thereafter | fair value | ||||||||||||||||||||||||
Lease Obligations | 162 | 51 | 111 | — | — | — | — | 162 |
We had no outstanding interest rate swaps as of March 31, 2008 or March 31, 2007.
Item 12. Description of Securities Other than Equity Securities.
Not applicable.
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PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies.
None.
Item 14. Material Modifications to Rights of Security Holders and Use of Proceeds.
None.
Item 15. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As required by Securities Exchange Act Rule 13a-15(b), our management, including our principal executive officer and principal financial officer, conducted an evaluation, as of the end of the period covered by this report, of the effectiveness of our company’s disclosure controls and procedures as defined in Securities Exchange Act Rule 13a-15(e) and 15d-15(e). Based on that evaluation, our principal executive officer and principal financial officer concluded that our company’s disclosure controls and procedures were effective as of the end of the period covered by this report.
As required by Securities Exchange Act Rule 13a-15(d), our management, including our principal executive officer and principal financial officer, also conducted an evaluation of our company’s internal control over financial reporting to determine whether any changes occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our company’s internal control over financial reporting. Based on that evaluation, our management concluded that there has been no such change during the period covered by this report, and that our internal controls are functioning effectively.
Management’s Report on Internal Control over Financial Reporting
The management of Wacoal Holdings Corp. is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
• | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; | ||
• | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and |
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• | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Wacoal Holdings Corp’s management assessed the effectiveness of internal control over financial reporting as of March 31, 2008. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (the COSO criteria).
Based on its assessment, management concluded that, as of March 31, 2008, Wacoal Holdings Corp’s internal control over financial reporting was effective based on the COSO criteria.
Management excluded Peach John from its assessment of internal controls over financial reporting as of March 31, 2008. We acquired a 100% ownership interest in Peach John on January 10, 2008 and held a 49% ownership interest prior to that, which was initially acquired on June 2, 2006. Peach John’s total assets and net assets represented 3.4% and 3.0%, respectively, of our consolidated total assets and consolidated net assets as of March 31, 2008. Peach John was consolidated as of February 29, 2008, the end of its most recent fiscal year, and included in our consolidated balance sheet as of March 31, 2008. However, because Peach John’s results of operations and change in financial position between January 10, 2008 and March 31, 2008 were immaterial, income from Peach John’s operations for the fiscal year ended February 29, 2008 was accounted for using the equity method and included in equity in net (loss) income of affiliated companies in our statements of income.
Wacoal Holdings Corp’s independent registered public accounting firm, Deloitte Touche Tohmatsu has issued an audit report on our assessment of internal control over financial reporting, as stated in its report which appears on page F-3.
Changes in Internal Control Over Financial Reporting
As required by Securities Exchange Act Rule 13a-15(d), our management, including our principal executive officer and principal financial officer, also conducted an evaluation of our company’s internal control over financial reporting to determine whether any changes occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our company’s internal control over financial reporting. Based on that evaluation, our management concluded that there has been no such change during the period covered by this report, and that our internal controls are functioning effectively.
Item 16A. Audit Committee Financial Expert.
Wacoal’s board of auditors has determined that Tomoharu Kuda qualifies as an “audit committee financial expert” as defined in Item 16A of Form 20-F. Mr Kuda was appointed as an outside corporate auditor pursuant to the Japanese Company Law on June 28, 2007, and is independent from us and our management. Please refer to Item 6.A for more information regarding Mr. Kuda.
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Item 16B. Code of Ethics.
Wacoal Holdings has adopted a code of ethics that applies to all of its directors, officers and employees, including its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of Wacoal Holdings’ code of ethics, which was amended on January 31, 2007 primarily to reflect Wacoal’s transition to a holding company structure, is attached as an exhibit to this annual report on Form 20-F.
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Item 16C. Principal Accountant Fees and Services.
Fees and Services of Deloitte Touche Tohmatsu.
Deloitte Touche Tohmatsu (DTT) serves as Wacoal Holdings’ principal accountant. The following table presents fees for audit and other services rendered by DTT for the years ended March 31, 2008 and March 31, 2007.
DTT Fees for Audit and Other Services
(Yen in millions)
(Yen in millions)
Years ended March 31, | ||||||||
2008 | 2007 | |||||||
Audit Fees | ¥ | 204 | ¥ | 197 | ||||
Audit Related Fees | 3 | 11 | ||||||
Tax Fees | 37 | 29 | ||||||
Other Fees | 33 | 24 | ||||||
Total | ¥ | 277 | ¥ | 261 | ||||
Audit Feesinclude fees billed for professional services rendered for audits of Wacoal Holdings’ annual consolidated financial statements, statutory audits of the Company and its subsidiaries, and the audit of the Company’s internal controls over financial reporting.
Audit Related Feesinclude fees billed for assurance and related services, such as due diligence, accounting consultations and audits in connection with mergers and acquisitions.
Tax Feesinclude fees billed for services related to tax compliance, including the preparation of tax returns and claims for refunds, and tax planning and tax advice, including assistance with tax audits and appeals, tax services for employee benefit plans and assistance with respect to requests for rulings from tax authorities.
Other Feesinclude fees billed for services related to the costs of consultation regarding information security measures and risk management.
Policy on Pre-Approval of Audit and Non-Audit Services of Independent Auditors
With respect to audit and audit related services, each year we require our independent auditors to submit to us its annual audit plan, including its fee estimate for carrying out the audit plan, which is then submitted to our Corporate Planning Division for evaluation. Thereafter, our board of corporate auditors determines whether to pre-approve the audit plan, which decision is based in part on the recommendations of the Corporate Planning Division.
The pre-approval of our board of corporate auditors is required before our independent auditors may perform any non-audit related services. Non-audit related services must be limited to providing advice on matters relating to taxation, mergers and acquisitions and internal accounting controls.
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Item 16D. Exemptions from the Listing Standards for Audit Committees.
With respect to the requirements of Rule 10A-3 under the Securities Exchange Act of 1934 relating to listed company audit committees, which apply to us through Rules 4350(d)(3) and 4350(d)(2)(A)(ii) of the NASD Manual, we rely on an exemption provided by paragraph (c)(3) of that Rule available to foreign private issuers with boards of corporate auditors meeting certain requirements. For a Nasdaq-listed Japanese company with a board of corporate auditors, the requirements for relying on paragraph (c)(3) of Rule 10A-3 are as follows:
• | the board of corporate auditors must be established, and its members must be selected, pursuant to Japanese law expressly requiring such a board for Japanese companies that elect to have a corporate governance system with corporate auditors; | ||
• | Japanese law must and does require the board of corporate auditors to be separate from the board of directors; | ||
• | none of the members of the board of corporate auditors may be elected by management, and none of the listed company’s executive officers may be a member of the board of corporate auditors; | ||
• | Japanese law must and does set forth standards for the independence of the members of the board of corporate auditors from the listed company or its management; and | ||
• | the board of corporate auditors, in accordance with Japanese law or the registrant’s governing documents, must be responsible, to the extent permitted by Japanese law, for the appointment, retention and oversight of the work of any registered public accounting firm engaged (including, to the extent permitted by Japanese law, the resolution of disagreements between management and the auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the listed company, including its principal accountant which audits its consolidated financial statements included in its annual reports on Form 20-F. |
To the extent permitted by Japanese law:
• | the board of corporate auditors must establish procedures for (i) the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls, or auditing matters, and (ii) the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters; | ||
• | the board of corporate auditors must have the authority to engage independent counsel and other advisers, as it determines necessary to carry out its duties; and | ||
• | the listed company must provide for appropriate funding, as determined by its board of corporate auditors, for payment of (i) compensation to any registered public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for us, (ii) compensation to any advisers employed by the board of corporate auditors, and (iii) ordinary administrative expenses of the board of corporate auditors that are necessary or appropriate in carrying out its duties. |
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In our assessment, our Board of Corporate Auditors, which meets the requirements for reliance on the exemption in paragraph (c)(3) of Rule 10A-3 described above, is not materially less effective than an audit committee meeting all the requirements of paragraph (b) of Rule 10A-3 (without relying on any exemption provided by that Rule) at acting independently of management and performing the functions of an audit committee as contemplated therein.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
(c) Total Number of | (d) Maximum Number | |||||||||||||||
Shares Purchased as | of Shares that May | |||||||||||||||
(b) Average Price | Part of Publicly | Yet Be Purchased | ||||||||||||||
(a) Total Number of | Paid Per Share | Announced Plans or | Under the Plans or | |||||||||||||
Shares Purchased | (yen) | Programs | Programs | |||||||||||||
Apr 1 — Apr 30, 2007 | 774 | 1,520 | 0 | 0 | ||||||||||||
May 1 — May 31, 2007 | 719 | 1,491 | 0 | 0 | ||||||||||||
Jun 1 — Jun 30, 2007 | 1,247 | 1,526 | 0 | 0 | ||||||||||||
Jul 1 — Jul 31, 2007 | 1,936 | 1,509 | 0 | 0 | ||||||||||||
Aug 1 — Aug 31, 2007 | 90 | 1,505 | 0 | 0 | ||||||||||||
Sep 1 — Sep 30, 2007 | 1,065 | 1,388 | 0 | 0 | ||||||||||||
Oct 1 — Oct 31, 2007 | 914 | 1,405 | 0 | 0 | ||||||||||||
Nov 1 — Nov 30, 2007 | 974 | 1,323 | 0 | 0 | ||||||||||||
Dec 1 — Dec 31, 2007 | 1,593,683 | 1,511 | 1,593,000 | 2,407,000 | ||||||||||||
Jan 1 — Jan 31, 2008 | 299 | 1,417 | 0 | 0 | ||||||||||||
Feb 1 — Feb 28, 2008 | 2,334,081 | 1,540 | 2,333,000 | 0 | ||||||||||||
Mar 1 — Mar 31, 2008 | 100 | 1,510 | 0 | 0 | ||||||||||||
Total | 3,935,882 | 1,528 | 3,926,000 | 0 |
Note:For each month, the number of shares shown in column (a) in excess of the number of shares shown in column (c) represents the aggregate number of shares representing less than one unit that Wacoal Holdings purchased from the holders thereof upon their request. For an explanation of the right of such holders, see “Capital Stock—Unit Share System” under Item 10.B of this Annual Report.
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PART III
Item 17. Financial Statements.
The information required by this item is set forth beginning on page F-2 of this annual report.
Item 18. Financial Statements.
We have responded to Item 17 in lieu of responding to this item.
Item 19. Exhibits.
Exhibits filed as part of this Annual Report.
Exhibit | ||
Number | Description | |
1.1 | Articles of Incorporation of the Registrant (English Translation)* | |
1.2 | Share Handling Regulations of the Registrant (English Translation)** | |
1.3 | Regulations of the Board of Directors of the Registrant (English Translation)** | |
1.4 | Regulations of the Board of Corporate Auditors of the Registrant (English Translation)* | |
2.1 | Specimen common stock certificate of the Registrant (English Translation)** | |
2.2 | Form of Deposit Agreement dated as of January 15, 1977, as amended and restated as of October 1, 1982, among Wacoal Corp., ChaseMellon Shareholder Services, as Depositary, and all Holders from time to time of American Depositary Receipts issued thereunder (Previously filed) | |
8.1 | Subsidiaries of the Registrant (See “Organizational Structure” in Item 4.C. of this Form 20-F) | |
11.1 | Code of Ethics of the Registrant* | |
12.1 | Certification of the principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
12.2 | Certification of the chief financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
13.1 | Certification of the principal executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
13.2 | Certification of the chief financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
(*) | Incorporated by reference to the corresponding exhibit to our annual report on Form 20-F (File No. 0-1) filed on July 20, 2007. | |
(**) | Incorporated by reference to the corresponding exhibit to our annual report on Form 20-F (File No. 0-1) filed on July 7, 2006. |
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SIGNATURES
Wacoal Holdings hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
WACOAL HOLDINGS (Registrant) | ||||
By | /s/ Masaya Wakabayashi | |||
Masaya Wakabayashi | ||||
General Manager, Corporate Planning | ||||
Date: July 24, 2008
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INDEX OF EXHIBITS
EX-12.1 | Certification of the principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
EX-12.2 | Certification of the chief financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
EX-13.1 | Certification of the principal executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
EX-13.2 | Certification of the chief financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
Wacoal Holdings Corp. and Subsidiaries
Index
Page | ||||
F-2-4 | ||||
FINANCIAL STATEMENTS: | ||||
F-5-6 | ||||
F-7-8 | ||||
F-9 | ||||
F-10 | ||||
F-11-12 | ||||
F-13-40 |
SCHEDULES:
Schedules are omitted because they are not applicable, not required, or because the required information is included in the consolidated financial statements or notes thereto.
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Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Wacoal Holdings Corp.
Kyoto, Japan:
We have audited the accompanying consolidated balance sheets of Wacoal Holdings Corp. and Subsidiaries (the “Companies”) as of March 31, 2008 and 2007, and the related consolidated statements of income, comprehensive (loss) income, shareholders’ equity and cash flows for each of the three years in the period ended March 31, 2008, all expressed in Japanese yen. These financial statements are the responsibility of the Companies’ management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
Certain information required by Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information” has not been presented in the accompanying financial statements. In our opinion, presentation of segment information concerning the Companies’ operations is required for a complete presentation of the Companies’ consolidated financial statements.
In our opinion, except for the omission of segment information, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Wacoal Holdings Corp. and Subsidiaries as of March 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2008, in conformity with accounting principles generally accepted in the United States of America.
Our audits also comprehended the translation of the Japanese yen amounts into U.S. dollar amounts and, in our opinion, such translation has been made in conformity with the basis stated in Note 2. The translation of the financial statement amounts into U.S. dollars has been made solely for convenience of readers outside of Japan.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Companies’ internal control over financial reporting as of March 31, 2008, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 27, 2008 expressed an unqualified opinion on the Companies’ internal control over financial reporting.
June 27, 2008
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Wacoal Holdings Corp.
Kyoto, Japan:
We have audited the internal control over financial reporting of Wacoal Holdings Corp. and Subsidiaries (the “Companies”) as of March 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in Management’s Report on Internal Control over Financial Reporting, management excluded Peach John Co., Ltd. (“PJ”) which was acquired on January 10, 2008, from its assessment of internal control over financial reporting. PJ’s total assets and net assets represented 3.4% and 3.0% respectively, of the consolidated balance sheet as of March 31, 2008. Accordingly, our audit did not include the internal control over financial reporting at PJ. The Companies’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Companies’ internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
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Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Companies maintained, in all material respects, effective internal control over financial reporting as of March 31, 2008, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended March 31, 2008 of the Companies and our report dated June 27, 2008 expressed an unqualified opinion on those financial statements, except for the omission of segment information required by Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information.”
June 27, 2008
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Table of Contents
Wacoal Holdings Corp. and Subsidiaries
Consolidated Balance Sheets
March 31, 2008 and 2007
March 31, 2008 and 2007
Thousands of | ||||||||||||
U.S. Dollars | ||||||||||||
Millions of Yen | (Note 2) | |||||||||||
ASSETS | 2008 | 2007 | 2008 | |||||||||
CURRENT ASSETS: | ||||||||||||
Cash and cash equivalents: | ||||||||||||
Cash | ¥ | 15,857 | ¥ | 10,613 | $ | 158,808 | ||||||
Time deposits and certificates of deposit | 12,186 | 9,203 | 122,043 | |||||||||
Total | 28,043 | 19,816 | 280,851 | |||||||||
Marketable securities (Note 3) | 12,614 | 14,392 | 126,330 | |||||||||
Notes and accounts receivable: | ||||||||||||
Trade notes | 353 | 550 | 3,535 | |||||||||
Trade accounts | 22,337 | 22,882 | 223,706 | |||||||||
Allowance for returns and doubtful receivables (Note 4) | (3,145 | ) | (2,979 | ) | (31,497 | ) | ||||||
Inventories (Note 5) | 30,020 | 30,199 | 300,651 | |||||||||
Deferred income taxes (Note 14) | 5,411 | 4,980 | 54,191 | |||||||||
Other current assets | 3,212 | 3,075 | 32,168 | |||||||||
Total current assets | 98,845 | 92,915 | 989,935 | |||||||||
PROPERTY, PLANT AND EQUIPMENT: | ||||||||||||
Land | 20,711 | 20,874 | 207,421 | |||||||||
Buildings and building improvements | 58,575 | 59,168 | 586,630 | |||||||||
Machinery and equipment | 14,448 | 14,179 | 144,697 | |||||||||
Construction in progress | 99 | 472 | 991 | |||||||||
Total | 93,833 | 94,693 | 939,739 | |||||||||
Accumulated depreciation | (42,285 | ) | (41,911 | ) | (423,485 | ) | ||||||
Net property, plant and equipment | 51,548 | 52,782 | 516,254 | |||||||||
OTHER ASSETS: | ||||||||||||
Investments in affiliates (Note 6) | 18,942 | 34,012 | 189,705 | |||||||||
Investments (Note 3) | 38,056 | 54,117 | 381,132 | |||||||||
Goodwill (Notes 9 and 10) | 11,203 | 112,198 | ||||||||||
Other intangible assets (Notes 9 and 10) | 13,216 | 3,470 | 132,358 | |||||||||
Prepaid pension expense (Note 11) | 3,444 | 7,089 | 34,492 | |||||||||
Deferred income taxes (Note 14) | 1,462 | 1,048 | 14,642 | |||||||||
Other | 4,903 | 4,833 | 49,104 | |||||||||
Total other assets | 91,226 | 104,569 | 913,631 | |||||||||
TOTAL | ¥ | 241,619 | ¥ | 250,266 | $ | 2,419,820 | ||||||
See notes to consolidated financial statements.
F-5
Table of Contents
Thousands of | ||||||||||||
U.S. Dollars | ||||||||||||
Millions of Yen | (Note 2) | |||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | 2008 | 2007 | 2008 | |||||||||
CURRENT LIABILITIES: | ||||||||||||
Short-term bank loans (Note 7) | ¥ | 5,572 | ¥ | 5,822 | $ | 55,804 | ||||||
Notes and accounts payable: | ||||||||||||
Trade notes | 1,935 | 1,503 | 19,379 | |||||||||
Trade accounts | 9,394 | 10,536 | 94,081 | |||||||||
Other payables | 6,327 | 6,900 | 63,365 | |||||||||
Accrued payroll and bonuses | 6,645 | 6,416 | 66,550 | |||||||||
Income taxes payable | 3,872 | 1,378 | 38,778 | |||||||||
Current portion of long-term debt (Notes 7 and 17) | 48 | 51 | 481 | |||||||||
Other current liabilities | 2,217 | 2,262 | 22,203 | |||||||||
Total current liabilities | 36,010 | 34,868 | 360,641 | |||||||||
LONG-TERM LIABILITIES: | ||||||||||||
Long-term debt (Notes 7 and 17) | 81 | 111 | 811 | |||||||||
Liability for termination and retirement benefits (Note 11) | 2,181 | 2,072 | 21,843 | |||||||||
Deferred income taxes (Note 14) | 14,527 | 16,959 | 145,488 | |||||||||
Other long-term liabilities (Note 14) | 1,356 | 517 | 13,581 | |||||||||
Total long-term liabilities | 18,145 | 19,659 | 181,723 | |||||||||
MINORITY INTERESTS | 2,351 | 2,461 | 23,545 | |||||||||
COMMITMENTS AND CONTINGENCIES (Note 8) | ||||||||||||
SHAREHOLDERS’ EQUITY (Note 12): | ||||||||||||
Common stock, no par value - authorized, 500,000,000 shares in 2008 and 2007; issued 143,378,085 shares and 144,016,685 shares in 2008 and 2007 | 13,260 | 13,260 | 132,799 | |||||||||
Additional paid-in capital | 29,262 | 25,242 | 293,060 | |||||||||
Retained earnings | 136,589 | 140,666 | 1,367,942 | |||||||||
Accumulated other comprehensive income (Note 13): | ||||||||||||
Foreign currency translation adjustments | 248 | 716 | 2,484 | |||||||||
Unrealized gain on securities | 5,295 | 14,428 | 53,029 | |||||||||
Pension liability adjustments | 514 | 4,130 | 5,148 | |||||||||
Total accumulated other comprehensive income | 6,057 | 19,274 | 60,661 | |||||||||
Less treasury stock at cost - 35,998 shares and 3,440,116 shares in 2008 and 2007 | (55 | ) | (5,164 | ) | (551 | ) | ||||||
Total shareholders’ equity | 185,113 | 193,278 | 1,853,911 | |||||||||
TOTAL | ¥ | 241,619 | ¥ | 250,266 | $ | 2,419,820 | ||||||
F-6
Table of Contents
Wacoal Holdings Corp. and Subsidiaries
Consolidated Statements of Income
Years Ended March 31, 2008, 2007 and 2006
Years Ended March 31, 2008, 2007 and 2006
Thousands of | ||||||||||||||||
U.S. Dollars | ||||||||||||||||
Millions of Yen | (Note 2) | |||||||||||||||
2008 | 2007 | 2006 | 2008 | |||||||||||||
NET SALES | ¥ | 165,761 | ¥ | 166,410 | ¥ | 164,122 | $ | 1,660,100 | ||||||||
OPERATING COSTS AND EXPENSES (INCOME): | ||||||||||||||||
Cost of sales | 83,127 | 84,658 | 84,322 | 832,519 | ||||||||||||
Selling, general and administrative | 69,245 | 68,831 | 69,720 | 693,490 | ||||||||||||
Impairment charges on long-lived assets | 33 | 614 | 330 | |||||||||||||
(Gain) loss on sale or disposal of property, plant and equipment | (184 | ) | 25 | 612 | (1,843 | ) | ||||||||||
Special retirement related expenses (Note 11) | 7,521 | |||||||||||||||
Total operating costs and expenses | 152,221 | 153,514 | 162,789 | 1,524,496 | ||||||||||||
OPERATING INCOME | 13,540 | 12,896 | 1,333 | 135,604 | ||||||||||||
OTHER INCOME (EXPENSES): | ||||||||||||||||
Interest income | 303 | 236 | 213 | 3,034 | ||||||||||||
Interest expense | (78 | ) | (73 | ) | (56 | ) | (781 | ) | ||||||||
Dividend income | 641 | 603 | 493 | 6,420 | ||||||||||||
Gain on sale or exchange of marketable securities and investments (Note 3) | 715 | 406 | 1,656 | 7,161 | ||||||||||||
Impairment charges on investments (Note 3) | (923 | ) | (365 | ) | (65 | ) | (9,244 | ) | ||||||||
Other — net | 155 | 217 | (108 | ) | 1,552 | |||||||||||
Total other income, net | 813 | 1,024 | 2,133 | 8,142 | ||||||||||||
INCOME BEFORE INCOME TAXES, EQUITY IN NET (LOSS) INCOME OF AFFILIATED COMPANIES, AND MINORITY INTERESTS (Note 14) | 14,353 | 13,920 | 3,466 | 143,746 | ||||||||||||
INCOME TAXES (Note 14): | ||||||||||||||||
Current | 5,577 | 2,874 | 3,268 | 55,854 | ||||||||||||
Deferred | 276 | 3,628 | (1,809 | ) | 2,764 | |||||||||||
Total income taxes | 5,853 | 6,502 | 1,459 | 58,618 | ||||||||||||
INCOME BEFORE EQUITY IN NET (LOSS) INCOME OF AFFILIATED COMPANIES, AND MINORITY INTERESTS | 8,500 | 7,418 | 2,007 | 85,128 | ||||||||||||
EQUITY IN NET (LOSS) INCOME OF AFFILIATED COMPANIES (Note 6) | (3,392 | ) | 1,771 | 1,122 | (33,971 | ) | ||||||||||
MINORITY INTERESTS | (142 | ) | (160 | ) | (308 | ) | (1,422 | ) | ||||||||
NET INCOME | ¥ | 4,966 | ¥ | 9,029 | ¥ | 2,821 | $ | 49,735 | ||||||||
See notes to consolidated financial statements.
F-7
Table of Contents
Yen | U.S. Dollars | |||||||||||||||
2008 | 2007 | 2006 | 2008 | |||||||||||||
EARNINGS PER SHARE (Note 16) | ¥ | 35 | ¥ | 63 | ¥ | 20 | $ | 0.35 | ||||||||
EARNINGS PER AMERICAN DEPOSITARY RECEIPT (5 shares of common stock) (Note 16) | ¥ | 176 | ¥ | 316 | ¥ | 98 | $ | 1.76 | ||||||||
See notes to consolidated financial statements.
F-8
Table of Contents
Wacoal Holdings Corp. and Subsidiaries
Consolidated Statements of Comprehensive (Loss) Income
Years Ended March 31, 2008, 2007 and 2006
Years Ended March 31, 2008, 2007 and 2006
Thousands of | |||||||||||||||||
U.S. Dollars | |||||||||||||||||
Millions of Yen | (Note 2) | ||||||||||||||||
2008 | 2007 | 2006 | 2008 | ||||||||||||||
NET INCOME | ¥ | 4,966 | ¥ | 9,029 | ¥ | 2,821 | $ | 49,735 | |||||||||
OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX (Note 13): | |||||||||||||||||
Foreign currency translation adjustments | (468 | ) | 1,452 | 3,084 | (4,687 | ) | |||||||||||
Unrealized gains (losses) on securities | (9,133 | ) | 117 | 7,746 | (91,467 | ) | |||||||||||
Pension liability adjustments | (3,616 | ) | (36,215 | ) | |||||||||||||
OTHER COMPREHENSIVE (LOSS) INCOME | (13,217 | ) | 1,569 | 10,830 | (132,369 | ) | |||||||||||
COMPREHENSIVE (LOSS) INCOME | ¥ | (8,251 | ) | ¥ | 10,598 | ¥ | 13,651 | $ | (82,634 | ) | |||||||
See notes to consolidated financial statements.
F-9
Table of Contents
Wacoal Holdings Corp. and Subsidiaries
Consolidated Statements of Shareholders’ Equity
Years Ended March 31, 2008, 2007 and 2006
Years Ended March 31, 2008, 2007 and 2006
Millions of Yen | ||||||||||||||||||||||||
Shares of | Accumulated | |||||||||||||||||||||||
Outstanding | Additional | Other | ||||||||||||||||||||||
Common Stock | Common | Paid-in | Retained | Comprehensive | Treasury | |||||||||||||||||||
(Thousands) | Stock | Capital | Earnings | Income | Stock | |||||||||||||||||||
BALANCE, APRIL 1, 2005 | 143,944 | ¥ | 13,260 | ¥ | 25,242 | ¥ | 134,572 | ¥ | 2,745 | ¥ | (73 | ) | ||||||||||||
Net income | 2,821 | |||||||||||||||||||||||
Other comprehensive income | 10,830 | |||||||||||||||||||||||
Cash dividends paid, ¥100 per 5 shares of common stock | (2,878 | ) | ||||||||||||||||||||||
Repurchase of treasury stock | (28 | ) | (44 | ) | ||||||||||||||||||||
BALANCE, MARCH 31, 2006 | 143,916 | 13,260 | 25,242 | 134,515 | 13,575 | (117 | ) | |||||||||||||||||
Net income | 9,029 | |||||||||||||||||||||||
Other comprehensive income | 1,569 | |||||||||||||||||||||||
Cash dividends paid, ¥100 per 5 shares of common stock | (2,878 | ) | ||||||||||||||||||||||
Repurchase of treasury stock | (3,339 | ) | (5,047 | ) | ||||||||||||||||||||
Adjustment to initially apply SFAS No. 158, net of tax (Note 11) | 4,130 | |||||||||||||||||||||||
BALANCE, MARCH 31, 2007 | 140,577 | 13,260 | 25,242 | 140,666 | 19,274 | (5,164 | ) | |||||||||||||||||
Net income | 4,966 | |||||||||||||||||||||||
Other comprehensive loss | (13,217 | ) | ||||||||||||||||||||||
Cash dividends paid, ¥110 per 5 shares of common stock | (3,093 | ) | ||||||||||||||||||||||
Repurchase of treasury stock | (3,936 | ) | (6,015 | ) | ||||||||||||||||||||
Cancellation of treasury stock | (5,950 | ) | 5,950 | |||||||||||||||||||||
Issuance of new shares to acquire a subsidiary (Note 9) | 3,261 | 4,474 | ||||||||||||||||||||||
Distribution of treasury stock to acquire a subsidiary (Note 9) | 3,440 | (454 | ) | 5,174 | ||||||||||||||||||||
BALANCE, MARCH 31, 2008 | 143,342 | ¥ | 13,260 | ¥ | 29,262 | ¥ | 136,589 | ¥ | 6,057 | ¥ | (55 | ) | ||||||||||||
Thousands of U.S. Dollars (Note 2) | ||||||||||||||||||||
Accumulated | ||||||||||||||||||||
Additional | Other | |||||||||||||||||||
Common | Paid-in | Retained | Comprehensive | Treasury | ||||||||||||||||
Stock | Capital | Earnings | Income | Stock | ||||||||||||||||
BALANCE, MARCH 31, 2007 | $ | 132,799 | $ | 252,799 | $ | 1,408,773 | $ | 193,030 | $ | (51,718 | ) | |||||||||
Net income | 49,735 | |||||||||||||||||||
Other comprehensive loss | (132,369 | ) | ||||||||||||||||||
Cash dividends paid, $1.10 per 5 shares of common stock | (30,977 | ) | ||||||||||||||||||
Repurchase of treasury stock | (60,240 | ) | ||||||||||||||||||
Cancellation of treasury stock | (59,589 | ) | 59,589 | |||||||||||||||||
Issuance of new shares to acquire a subsidiary (Note 9) | 44,807 | |||||||||||||||||||
Distribution of treasury stock to acquire a subsidiary (Note 9) | (4,546 | ) | 51,818 | |||||||||||||||||
BALANCE, MARCH 31, 2008 | $ | 132,799 | $ | 293,060 | $ | 1,367,942 | $ | 60,661 | $ | (551 | ) | |||||||||
F-10
Table of Contents
Wacoal Holdings Corp. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended March 31, 2008, 2007 and 2006
Years Ended March 31, 2008, 2007 and 2006
Thousands of | ||||||||||||||||
U.S. Dollars | ||||||||||||||||
Millions of Yen | (Note 2) | |||||||||||||||
2008 | 2007 | 2006 | 2008 | |||||||||||||
OPERATING ACTIVITIES: | ||||||||||||||||
Net income | ¥ | 4,966 | ¥ | 9,029 | ¥ | 2,821 | $ | 49,735 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 3,908 | 3,735 | 3,433 | 39,139 | ||||||||||||
Provision for returns and doubtful receivables | 190 | 173 | 503 | 1,903 | ||||||||||||
Deferred income taxes | 276 | 3,628 | (1,809 | ) | 2,764 | |||||||||||
(Gain) loss on sale or disposal of property, plant and equipment | (184 | ) | 25 | 612 | (1,843 | ) | ||||||||||
Impairment charges on long-lived assets | 33 | 614 | 330 | |||||||||||||
Gain on sale or exchange of marketable securities and investments | (715 | ) | (406 | ) | (1,659 | ) | (7,161 | ) | ||||||||
Impairment charges on investments | 923 | 365 | 65 | 9,244 | ||||||||||||
Equity in net loss (income) of affiliated companies, less dividends | 4,198 | (1,164 | ) | (674 | ) | 42,043 | ||||||||||
Changes in assets and liabilities: | ||||||||||||||||
Decrease (increase) in notes and accounts receivable | 1,822 | 401 | (1,799 | ) | 18,248 | |||||||||||
Decrease (increase) in inventories | 1,218 | (2,897 | ) | 274 | 12,198 | |||||||||||
Decrease (increase) in other current assets | 49 | (371 | ) | (958 | ) | 491 | ||||||||||
(Decrease) increase in notes and accounts payable | (2,614 | ) | 219 | (252 | ) | (26,179 | ) | |||||||||
Decrease in liability for termination and retirement benefits | (2,613 | ) | (2,472 | ) | (2,068 | ) | (26,169 | ) | ||||||||
Increase (decrease) in accrued expenses, income taxes and other current liabilities | 2,681 | (696 | ) | 1,667 | 26,850 | |||||||||||
Other | 87 | (230 | ) | (51 | ) | 871 | ||||||||||
Net cash provided by operating activities | 14,225 | 9,339 | 719 | 142,464 | ||||||||||||
INVESTING ACTIVITIES: | ||||||||||||||||
Proceeds from sales and redemption of marketable securities | 10,506 | 28,509 | 32,161 | 105,218 | ||||||||||||
Payments to acquire marketable securities | (9,892 | ) | (9,929 | ) | (21,525 | ) | (99,069 | ) | ||||||||
Proceeds from sales of property, plant and equipment | 1,057 | 524 | 513 | 10,586 | ||||||||||||
Capital expenditures | (1,211 | ) | (2,536 | ) | (6,456 | ) | (12,128 | ) | ||||||||
Payments to acquire intangible assets | (1,678 | ) | (984 | ) | (668 | ) | (16,805 | ) | ||||||||
Proceeds from sales of investments | 1,414 | 8 | 1,231 | 14,161 | ||||||||||||
Payments to acquire investments in affiliated companies | (15,326 | ) | ||||||||||||||
Payments to acquire investments | (618 | ) | (1,887 | ) | (7,905 | ) | (6,189 | ) | ||||||||
Cash balances of subsidiary acquired in excess of cash paid | 80 | |||||||||||||||
Cash balances of subsidiary acquired through share exchanges (Note 9) | 4,115 | 41,212 | ||||||||||||||
Other | (103 | ) | 356 | 580 | (1,032 | ) | ||||||||||
Net cash provided by (used in) investing activities | 3,590 | (1,185 | ) | (2,069 | ) | 35,954 | ||||||||||
FINANCING ACTIVITIES: | ||||||||||||||||
Decrease in short-term bank loans, net | (259 | ) | (575 | ) | (409 | ) | (2,594 | ) | ||||||||
Proceeds from issuance of long-term debt | 18 | 130 | 19 | 180 | ||||||||||||
Repayments of long-term debt | (51 | ) | (34 | ) | (116 | ) | (511 | ) | ||||||||
Repurchase of treasury stock | (6,015 | ) | (5,047 | ) | (44 | ) | (60,240 | ) | ||||||||
Dividends paid on common stock | (3,093 | ) | (2,878 | ) | (2,878 | ) | (30,976 | ) | ||||||||
Net cash used in financing activities | (9,400 | ) | (8,404 | ) | (3,428 | ) | (94,141 | ) | ||||||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | (188 | ) | 173 | 476 | (1,883 | ) | ||||||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS — (Forward) | ¥ | 8,227 | ¥ | (77 | ) | ¥ | (4,302 | ) | $ | 82,394 |
(Continued)
F-11
Table of Contents
Wacoal Holdings Corp. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended March 31, 2008, 2007 and 2006
Years Ended March 31, 2008, 2007 and 2006
Thousands of | ||||||||||||||||
U.S. Dollars | ||||||||||||||||
Millions of Yen | (Note 2) | |||||||||||||||
2008 | 2007 | 2006 | 2008 | |||||||||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS — (Forward) | ¥ | 8,227 | ¥ | (77 | ) | ¥ | (4,302 | ) | $ | 82,394 | ||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | 19,816 | 19,893 | 24,195 | 198,457 | ||||||||||||
CASH AND CASH EQUIVALENTS, END OF YEAR | ¥ | 28,043 | ¥ | 19,816 | ¥ | 19,893 | $ | 280,851 | ||||||||
ADDITIONAL CASH FLOW INFORMATION: | ||||||||||||||||
Cash paid for: | ||||||||||||||||
Interest | ¥ | 78 | ¥ | 70 | ¥ | 56 | $ | 781 | ||||||||
Income taxes | 2,542 | 4,667 | 1,832 | 25,458 | ||||||||||||
NONCASH INVESTING ACTIVITIES: | ||||||||||||||||
Fair value of marketable securities received in exchange for certain other marketable securities with a recorded amount of ¥48 million ($481 thousand) and ¥172 million in 2008 and 2006 | ¥ | 143 | ¥ | 1,321 | $ | 1,432 | ||||||||||
Acquisition of subsidiary through share exchanges (Note 9) | 9,194 | 92,078 |
See notes to consolidated financial statements.
(Concluded)
F-12
Table of Contents
Wacoal Holdings Corp. and Subsidiaries
Notes to Consolidated Financial Statements
1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | |
Basis of Financial Statements- Wacoal Holdings Corp. (the “Company”) and subsidiaries are predominantly engaged in one industry, the manufacture and sale of apparel, including foundation garments, lingerie, nightwear and outerwear in Japan, the United States of America, Europe and certain Asian countries. | ||
On October 1, 2005, the Company, which was formerly known as “Wacoal Corp.” moved to a holding company structure and changed its name to Wacoal Holdings Corp. The business of the Company was transferred to a new wholly owned subsidiary. | ||
The accompanying consolidated financial statements, stated in Japanese yen, have been prepared on the basis of accounting principles generally accepted in the United States of America except for the omission of segment information as required by Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information.” | ||
Consolidation- The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries (collectively, the “Companies”). All intercompany transactions and balances are eliminated. | ||
Certain foreign subsidiaries of the Company have a fiscal year ending December 31. The accounts of those subsidiaries are included in the Company’s consolidated financial statements based on the subsidiaries’ fiscal year. As further described in footnote 9 to the financial statements, on January 10, 2008, the Company acquired the remaining 51% interest in a domestic subsidiary with a fiscal year ending February 29, 2008. Prior to January 10, 2008, the Company accounted for its original investment of 49% in this subsidiary using the equity method. As of March 31, 2008, the subsidiary is included in the Company’s consolidated balance sheet based on the subsidiary’s fiscal year end. However, because the subsidiary’s results of operations and change in financial position between January 10, 2008 and March 31, 2008 were not significant, the Company continued to account for its investment using the equity method and the income from the subsidiary’s operations for the fiscal year ended February 29, 2008 was included in equity in net (loss) income of affiliated companies in the consolidated statements of income. | ||
Investments in affiliates where the Company’s ownership is 20% to 50% are accounted for using the equity method. | ||
Significant influence is generally deemed to exist if the Companies have an ownership interest in the voting stock of the investee of between 20% to 50%, although other factors are considered in determining whether the equity method of accounting is appropriate. | ||
Use of Estimates —The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. | ||
Cash and Cash Equivalents- Cash and cash equivalents include all time deposits and certificates of deposit (all of which are interest-bearing) with original maturities of three months or less, which can be withdrawn at face value at any time without diminution of principal. |
F-13
Table of Contents
Foreign Currency Translation- Assets and liabilities of international subsidiaries have been translated to Japanese yen at period-end exchange rates and income and expenses have been translated using weighted-average exchange rates for the period. Translation adjustments are included in other comprehensive income, a separate component of shareholders’ equity. Exchange gains and losses resulting from foreign currency transactions and the conversion of monetary assets and liabilities denominated in foreign currencies are included in the consolidated statements of income. | ||
Marketable Securities and Investments- The Companies classify their debt and marketable equity securities as available-for-sale and carry them at fair value with a corresponding recognition of unrealized holding gains or losses (net of tax) in other comprehensive income (loss), a separate component of shareholders’ equity, until realized. Equity securities that do not have readily determinable fair values are recorded at cost. Gains and losses on sales of investments are computed based on cost determined using the average cost method. | ||
If a decline in the fair value of marketable securities is determined to be other than temporary, an impairment charge is recorded in the consolidated statements of income. The Companies have generally included that an other-than-temporary impairment is indicated when the decline in fair value below the carrying value continues for over nine consecutive months. The Companies may also consider other factors, including their ability and intent to hold the applicable investment securities until maturity, and the severity of the decline in fair value. | ||
Inventories- Inventories are stated at the lower of cost or market, cost being determined on the first-in, first-out method for raw materials and the average cost method for work in process and finished products. | ||
Property, Plant and Equipment- Property, plant and equipment is stated at cost less accumulated depreciation. Depreciation of property, plant and equipment is computed by the declining-balance method, except for buildings acquired on or after April 1, 1998, which are depreciated using the straight-line method, based upon the estimated useful lives of the assets. The estimated useful lives are as follows: |
Buildings and building improvements: | 5 — 50 years (Mainly 38 years) | |
Machinery and equipment: | 2 — 20 years (Mainly 5 years) |
Impairment of Long-lived Assets- The carrying values of long-lived assets, held and used by the Companies, are evaluated for impairment whenever there is an event or change in circumstances that indicates that such assets have been impaired or that the carrying amounts of such assets might not be recoverable. | ||
The Companies recorded ¥33 million ($330 thousand) and ¥614 million in impairment charges on long-lived assets for the years ended March 31, 2008 and 2006, respectively, which resulted from the impairment of primarily land and buildings of a company residence in 2008, and a building which was part of the Companies’ branch office in Nagoya in 2006. In 2008, the Company decided to sell the company residence to an unrelated party. The Company entered into a sales contract on March 31, 2008 and the sales transaction completed in April 2008. Therefore, the Companies recognized an impairment of the asset to be disposed of by sale at the amount of the difference between the sales price and the Company’s book value. In 2006, the Company decided to close its Nagoya office and to demolish the building. The office was closed on March 31, 2006 and the Companies recognized an impairment of the asset to be abandoned. No impairment charges were recorded in the year ended March 31, 2007. |
F-14
Table of Contents
Goodwill and Other Intangible Assets- Goodwill represents the excess of the purchase price over the related underlying tangible and intangible net asset values of business acquired. Annually, or more frequently if conditions indicate an earlier review is necessary, the carrying value of the goodwill of reporting unit is compared to an estimate of its fair value. | ||
Other intangible assets with estimable useful lives consist primarily of customer list and software and are amortized over their estimated useful lives using the straight-line method. The estimated useful lives are as follows: |
Customer list: | 7 years | |
Software: | 5 years |
Other intangible assets with indefinite useful lives are evaluated for potential impairment in a manner consistent with goodwill. | ||
Derivatives- Derivative instruments, including certain derivative instruments embedded in other contracts, are accounted for in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities an Amendment of the Financial Accounting Standards Board (“FASB”) Statement No. 133,” and SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” Changes in the fair value of a derivative are recorded in other comprehensive income or in earnings, depending on its intended use. Changes in fair value of foreign currency forward exchange contracts designated as fair value hedges of recognized assets and liabilities and firm commitments are recognized in income. Changes in fair value of forward exchange contracts designated and qualifying as cash flow hedges of recognized assets and liabilities and firm commitments are reported in accumulated other comprehensive income. These amounts are reclassified into income in the same period as the hedged items affect income. | ||
Asset Retirement Obligations —The Companies have obligations arising from contractual commitments to remove leasehold improvements from leased facilities and return the property to a specified condition when the lease terminates. Lease contracts have automatic renewal articles and therefore, the Companies use their best estimate to determine the lease termination dates for the purpose of calculating asset retirement obligations. | ||
Termination and Retirement Plans- Termination and retirement benefits are accounted for in accordance with SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” Provisions for termination and retirement benefits include those for directors and corporate auditors of the Companies. | ||
As allowed under SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” the Companies do not recognize a gain or loss on settlement of the pension obligation when the cost of all settlements in a year is less than or equal to the sum of the service cost and interest cost components of net periodic pension cost for the plan for the year. | ||
Leases —Certain noncancelable leases are classified as capital leases and the leased assets included as part of property, plant and equipment. Such leasing arrangements involve the computer aided design system and the computer hardware. Other leases are classified as operating leases and are not capitalized. The payments on such leases are recorded as expense. The rental expense under operating leases is recognized on a straight-line basis. | ||
Treasury Stock —The Companies account for treasury stock under the cost method and include treasury stock as a component of Shareholders’ Equity. |
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Acquisition- The Company accounts for acquisitions using the purchase method in accordance with SFAS No. 141, “Business Combinations.” The Company allocates the purchase price to the assets acquired and liabilities assumed based on the estimated fair values at the date of acquisition, including intangible assets that can be identified and named. The purchase price in excess of the fair value of the net assets and liability is recorded as goodwill. | ||
Revenue Recognition- The Companies recognize revenue on sales to retailers, mail order catalog sales and internet sales when (1) persuasive evidence of an arrangement exists, (2) delivery has occurred resulting in transfer of title and risk of loss, (3) the sales price is fixed or determinable, and (4) collectibility is reasonably assured. The Companies establish allowances for estimated returns based on historical experience. As for consignment sales, the Companies recognize revenue when the products are sold to the ultimate customer. The Companies recognize revenue on direct retailing sales at the Companies’ directly managed retail stores at the point of sale to the customer. | ||
Advertising Expenses —Advertising costs are expensed as incurred. Advertising expenses for the years ended March 31, 2008, 2007 and 2006 were ¥11,768 million ($117,857 thousand), ¥12,084 million and ¥11,888 million, respectively and have been included in selling, general, and administrative expenses. | ||
Shipping and Handling Costs —Shipping and handling costs for the years ended March 31, 2008, 2007 and 2006 were ¥4,062 million ($40,681 thousand), ¥4,186 million and ¥4,239 million, respectively, and have been included in selling, general, and administrative expenses. | ||
Research and Development Costs —Research and development costs are expensed as incurred. Research and development costs for the years ended March 31, 2008, 2007 and 2006 were ¥766 million ($7,671 thousand), ¥714 million and ¥638 million, respectively, and have been included in selling, general, and administrative expenses. | ||
Income Taxes —The provision for income taxes is determined under the asset and liability method pursuant to SFAS No. 109, “Accounting for Income Taxes.” Under this method, deferred tax assets and liabilities are determined for temporary differences between the financial statement and tax bases of assets and liabilities at presently enacted tax rates. A valuation allowance is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized in the future. | ||
Provisions are made for taxes on undistributed earnings and cumulative translation adjustments of foreign subsidiaries whose earnings are not deemed to be permanently invested. | ||
Reclassifications- Certain reclassifications have been made to the prior years’ financial statements to conform with the current year’s presentation. | ||
To conform to the 2008 presentation, the Companies have reclassified “Other intangible assets,” which had previously been presented as “Other” in other assets, in the consolidated balance sheets. In addition, the Companies have reclassified “Payments to acquire software,” which had previously been presented as “Other” in investing activities, in the consolidated statements of cash flows. | ||
Recent Accounting Pronouncements: | ||
Accounting for Uncertainty in Income Taxes-In June 2006, the FASB issued FASB Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109,” which clarifies the accounting for uncertainty in tax positions. FIN 48 is effective for fiscal years beginning after December 15, 2006. See Note 14 for further discussion of the effect of adopting FIN 48 on the consolidated financial statements of the Companies. |
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Fair Value Measurements —In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and, accordingly, does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Companies are currently in the process of assessing the impact the adoption of SFAS No. 157 will have on their consolidated financial position, cash flows or results of operations. | ||
The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115- In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115.” SFAS No. 159 provides entities the option to report selected financial assets and liabilities at fair value, with changes in fair value recorded in earnings. It also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Companies are currently in the process of assessing the impact the adoption of SFAS No. 159 will have on their financial position, cash flows or results of operations. | ||
Business Combinations- In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS No. 141(R)”), which replaces SFAS No. 141, “Business Combinations.” This statement establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS No. 141(R) also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008. The Companies will apply SFAS No. 141(R) prospectively to all business combinations subsequent to April 1, 2009. | ||
Noncontrolling Interest in Consolidated Financial Statements- In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an Amendment of Accounting Research Bulletin No. 51” (“SFAS No. 160”). This statement establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS No. 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. The Companies are currently evaluating the potential impact, if any, of the adoption of SFAS No. 160 on its financial position, results of operations or cash flows. | ||
Disclosure about Derivative Instruments and Hedging Activities- In March 2008, the FASB issued FASB Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities.” The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Companies are currently evaluating the potential impact, if any, of the adoption of SFAS No. 161 on our financial statements. |
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2. | TRANSLATION INTO U.S. DOLLAR STATEMENTS | |
The financial statements are stated in Japanese yen, the currency of the country in which the Company is incorporated and operates. The translations of Japanese yen amounts into U.S. dollar amounts are included solely for convenience of readers outside of Japan and have been made at the rate of ¥99.85 to $1, the noon buying rate for yen in New York City at March 31, 2008. Such translations should not be construed as representations that the Japanese yen amounts could be converted into U.S. dollars at the above or any other rate. | ||
3. | MARKETABLE SECURITIES AND INVESTMENTS | |
The fair value of debt and marketable equity securities is based on quoted market prices at March 31, 2008 and 2007. The fair values of the debt and marketable equity securities were as follows: |
Millions of Yen | ||||||||||||||||
Gross | Gross | |||||||||||||||
Unrealized | Unrealized | |||||||||||||||
2008 | Cost | Gain | Loss | Fair Value | ||||||||||||
Current: | ||||||||||||||||
Corporate debt securities | ¥ | 4,302 | ¥ | 4 | ¥ | 127 | ¥ | 4,179 | ||||||||
Bank debt securities | 100 | 1 | 99 | |||||||||||||
Mutual fund | 5,475 | 118 | 144 | 5,449 | ||||||||||||
National debt securities | 2,309 | 12 | 2,321 | |||||||||||||
Total | ¥ | 12,186 | ¥ | 134 | ¥ | 272 | ¥ | 12,048 | ||||||||
Noncurrent: | ||||||||||||||||
Equity securities | ¥ | 25,762 | ¥ | 13,333 | ¥ | 2,114 | ¥ | 36,981 | ||||||||
Millions of Yen | ||||||||||||||||
Gross | Gross | |||||||||||||||
Unrealized | Unrealized | |||||||||||||||
2007 | Cost | Gain | Loss | Fair Value | ||||||||||||
Current: | ||||||||||||||||
Corporate debt securities | ¥ | 6,304 | ¥ | 4 | ¥ | 125 | ¥ | 6,183 | ||||||||
Bank debt securities | 700 | 2 | 698 | |||||||||||||
Mutual fund | 4,187 | 166 | 43 | 4,310 | ||||||||||||
National debt securities | 3,210 | 3 | 12 | 3,201 | ||||||||||||
Total | ¥ | 14,401 | ¥ | 173 | ¥ | 182 | ¥ | 14,392 | ||||||||
Noncurrent: | ||||||||||||||||
Equity securities | ¥ | 26,842 | ¥ | 26,378 | ¥ | 101 | ¥ | 53,119 | ||||||||
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Thousands of U.S. Dollars | ||||||||||||||||
Gross | Gross | |||||||||||||||
Unrealized | Unrealized | |||||||||||||||
2008 | Cost | Gain | Loss | Fair Value | ||||||||||||
Current: | ||||||||||||||||
Corporate debt securities | $ | 43,084 | $ | 40 | $ | 1,272 | $ | 41,852 | ||||||||
Bank debt securities | 1,002 | 10 | 992 | |||||||||||||
Mutual fund | 54,832 | 1,182 | 1,442 | 54,572 | ||||||||||||
National debt securities | 23,125 | 120 | 23,245 | |||||||||||||
Total | $ | 122,043 | $ | 1,342 | $ | 2,724 | $ | 120,661 | ||||||||
Noncurrent: | ||||||||||||||||
Equity securities | $ | 258,007 | $ | 133,530 | $ | 21,171 | $ | 370,366 | ||||||||
There were no securities which had been in a continuous unrealized loss position for more than 12 months at March 31, 2008 and 2007. Gross unrealized holding losses and fair values of debt and marketable equity securities, all of which have been in a continuous unrealized loss position for less than 12 months at March 31, 2008 and 2007, were as follows:
Millions of Yen | Thousands of U.S. Dollars | |||||||||||||||
Gross | Gross | |||||||||||||||
Unrealized | Unrealized | |||||||||||||||
2008 | Fair Value | Loss | Fair Value | Loss | ||||||||||||
Current: | ||||||||||||||||
Corporate debt securities | ¥ | 3,675 | ¥ | 127 | $ | 36,805 | $ | 1,272 | ||||||||
Bank debt securities | 99 | 1 | 992 | 10 | ||||||||||||
Mutual fund | 2,943 | 144 | 29,474 | 1,442 | ||||||||||||
National debt securities | 810 | 8,112 | ||||||||||||||
Total | ¥ | 7,527 | ¥ | 272 | $ | 75,383 | $ | 2,724 | ||||||||
Noncurrent: | ||||||||||||||||
Equity securities | ¥ | 5,351 | ¥ | 2,114 | $ | 53,590 | $ | 21,171 | ||||||||
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Millions of Yen | ||||||||
Gross | ||||||||
Unrealized | ||||||||
2007 | Fair Value | Loss | ||||||
Current: | ||||||||
Corporate debt securities | ¥ | 4,979 | ¥ | 125 | ||||
Bank debt securities | 498 | 2 | ||||||
Mutual fund | 2,554 | 43 | ||||||
National debt securities | 2,099 | 12 | ||||||
Total | ¥ | 10,130 | ¥ | 182 | ||||
Noncurrent: | ||||||||
Equity securities | ¥ | 1,711 | ¥ | 101 | ||||
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The unrealized losses on investments were caused primarily by a general decline in stock prices in Japan as of the end of the fiscal year. The Companies have generally concluded that an other than temporary impairment is indicated when there is a decline in fair value below the carrying value for over nine consecutive months as described in Note 1. No investments were identified that meet the Companies’ criterion for recognition of an impairment loss on investments in unrealized loss position presented above. Therefore, the Companies do not believe the unrealized losses represent an other-than-temporary impairment as of March 31, 2008 and 2007.
Future maturities of debt securities and mutual fund classified as available-for-sale at March 31, 2008 were as follows:
Thousands of | ||||||||||||||||
Millions of Yen | U.S. Dollars | |||||||||||||||
Fair | Fair | |||||||||||||||
Cost | Value | Cost | Value | |||||||||||||
Due within one year | ¥ | 2,593 | ¥ | 2,595 | $ | 25,969 | $ | 25,989 | ||||||||
Due after one year through five years | 6,543 | 6,544 | 65,528 | 65,538 | ||||||||||||
Due after five years through ten years | 1,323 | 1,305 | 13,250 | 13,070 | ||||||||||||
After ten years | 1,727 | 1,604 | 17,296 | 16,064 | ||||||||||||
Total | ¥ | 12,186 | ¥ | 12,048 | $ | 122,043 | $ | 120,661 | ||||||||
Proceeds from sales of available-for-sale securities were ¥2,136 million ($21,392 thousand), ¥2,573 million and ¥2,903 million for the years ended March 31, 2008, 2007 and 2006, respectively. The gross realized gains on the sales of available-for-sale securities for the years ended March 31, 2008, 2007 and 2006 were ¥557 million ($5,578 thousand), ¥408 million and ¥510 million, respectively. The gross realized losses on the sales of available-for-sale securities for the year ended March 31, 2007 were ¥2 million. No realized losses were recorded in 2008 and 2006.
During the years ended March 31, 2008 and 2006, the Companies exchanged certain equity securities for other securities. The Companies recorded the newly received securities at fair value and recognized a gain of ¥95 million ($951 thousand) and ¥1,149 million in the years ended March 31, 2008 and 2006. No such exchanges were made in the year ended March 31, 2007.
The Companies recognized impairment charges on investments of ¥923 million ($9,244 thousand), ¥365 million and ¥65 million in the years ended March 31, 2008, 2007 and 2006, respectively.
Investments in non-marketable equity securities for which there is no readily determinable fair value were accounted for using the cost method and aggregated ¥1,019 million ($10,205 thousand) and ¥945 million at March 31, 2008 and 2007, respectively. The Companies write down these investments whenever the recorded value exceeds the Companies’ share of net assets of the investees. These investments were not evaluated for further impairment as the Companies did not identify any events or changes in circumstances that might have a significant adverse effect on the carrying value of the investments. It is not practicable to estimate the fair value of the investments.
The Company’s subsidiary in the United States of America adopted a non-qualified deferred compensation plan and trust agreement. Investments consist of several mutual funds, which are recorded at the fair market value of ¥56 million ($561 thousand) and ¥53 million as of March 31, 2008 and 2007, respectively.
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4. | VALUATION AND QUALIFYING ACCOUNTS | |
Information related to the Companies’ allowance for doubtful receivables was as follows: |
Thousands of | ||||||||||||||||
Millions of Yen | U.S. Dollars | |||||||||||||||
2008 | 2007 | 2006 | 2008 | |||||||||||||
Balance at beginning of year | ¥ | 82 | ¥ | 92 | ¥ | 72 | $ | 821 | ||||||||
Charged to costs and expenses | 10 | 10 | 29 | 100 | ||||||||||||
Balances written-off/reversed | (15 | ) | (20 | ) | (9 | ) | (150 | ) | ||||||||
Balance at end of year | ¥ | 77 | ¥ | 82 | ¥ | 92 | $ | 771 | ||||||||
Information related to the Companies’ allowance for returns was as follows: |
Thousands of | ||||||||||||||||
Millions of Yen | U.S. Dollars | |||||||||||||||
2008 | 2007 | 2006 | 2008 | |||||||||||||
Balance at beginning of year | ¥ | 2,897 | ¥ | 2,686 | ¥ | 2,142 | $ | 29,014 | ||||||||
Charged to costs and expenses | 3,068 | 2,897 | 2,686 | 30,726 | ||||||||||||
Balances utilized | (2,897 | ) | (2,686 | ) | (2,142 | ) | (29,014 | ) | ||||||||
Balance at end of year | ¥ | 3,068 | ¥ | 2,897 | ¥ | 2,686 | $ | 30,726 | ||||||||
5. | INVENTORIES | |
Inventories at March 31, 2008 and 2007 were as follows: |
Thousands of | ||||||||||||
Millions of Yen | U.S. Dollars | |||||||||||
2008 | 2007 | 2008 | ||||||||||
Finished products | ¥ | 25,653 | ¥ | 24,691 | $ | 256,915 | ||||||
Work in process | 3,097 | 4,110 | 31,017 | |||||||||
Raw materials | 1,270 | 1,398 | 12,719 | |||||||||
Total | ¥ | 30,020 | ¥ | 30,199 | $ | 300,651 | ||||||
6. | INVESTMENTS IN AFFILIATES | |
Investments are accounted for using the equity method of accounting if the investment provides the Companies the ability to exercise significant influence, but not control, over an investee. Significant influence is generally deemed to exist if the Companies have an ownership interest in the voting stock of the investee of between 20% to 50%, although other factors are considered in determining whether the equity method of accounting is appropriate. The Companies record investments in equity method investees meeting these characteristics as “Investments in affiliates.” Under the equity method, the Companies record their proportionate share of an affiliate’s income or loss based on the most recently available financial statements. The difference between the amount at which an investment is carried and the amount of underlying equity in net assets consists of goodwill and other intangible assets. Intangible assets with estimable useful lives are amortized over such useful lives. |
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The Companies’ investments in affiliated companies and percentage of ownership at March 31, 2008 and 2007 include, among others, the following companies:
2008 | ||||||||||||||||||||
Thousands of | ||||||||||||||||||||
Millions of Yen | U.S. Dollars | |||||||||||||||||||
Yen | Aggregate Value | U.S. Dollar | Aggregate Value | |||||||||||||||||
Percentage of | Quoted Market | of Quoted Market | Quoted Market | of Quoted Market | ||||||||||||||||
Name of Investee | Ownership (%) | Price | Price | Price | Price | |||||||||||||||
Thai Wacoal Public Company Limited | 34 | ¥ | 111 | ¥ | 4,488 | $ | 1,112 | $ | 44,947 | |||||||||||
Shinyoung Wacoal Inc. | 25 | 15,064 | 3,389 | 150,866 | 33,941 | |||||||||||||||
Indonesia Wacoal Co., Ltd. | 42 | |||||||||||||||||||
Taiwan Wacoal Co., Ltd. | 50 | |||||||||||||||||||
House of Rose Co., Ltd. | 20 | 1,370 | 1,302 | 13,721 | 13,040 |
2007 | ||||||||||||
Millions of Yen | ||||||||||||
Yen | Aggregate Value | |||||||||||
Percentage of | Quoted Market | of Quoted Market | ||||||||||
Name of Investee | Ownership (%) | Price | Price | |||||||||
Thai Wacoal Public Company Limited | 34 | ¥ | 130 | ¥ | 5,225 | |||||||
Shinyoung Wacoal Inc. | 25 | 12,309 | 2,769 | |||||||||
Indonesia Wacoal Co., Ltd. | 42 | |||||||||||
Taiwan Wacoal Co., Ltd. | 50 | |||||||||||
House of Rose Co., Ltd. | 20 | 1,663 | 1,580 | |||||||||
Peach John Co., Ltd. | 49 |
The following tables represent the summarized information from the balance sheets and statements of operations for the affiliated companies which are accounted for under the equity method as of and for the years ended March 31, 2008 and 2007. As described in Note 9, Peach John Co., Ltd. (“PJ”), which was formerly accounted for under the equity method, became consolidated subsidiaries during the year.
Thousands of | ||||||||||||
Millions of Yen | U.S. Dollars | |||||||||||
2008 | 2007 | 2008 | ||||||||||
Current assets | ¥ | 40,330 | ¥ | 48,058 | $ | 403,906 | ||||||
Noncurrent assets | 37,690 | 32,291 | 377,466 | |||||||||
Total | ¥ | 78,020 | ¥ | 80,349 | $ | 781,372 | ||||||
Current liabilities | ¥ | 13,223 | ¥ | 12,527 | $ | 132,429 | ||||||
Noncurrent liabilities | 5,885 | 5,569 | 58,938 | |||||||||
Minority interests | 1 | 1 | 10 | |||||||||
Net assets | 58,911 | 62,252 | 589,995 | |||||||||
Total | ¥ | 78,020 | ¥ | 80,349 | $ | 781,372 | ||||||
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Thousands of | ||||||||||||
Millions of Yen | U.S. Dollars | |||||||||||
2008 | 2007 | 2008 | ||||||||||
Net sales | ¥ | 81,466 | ¥ | 75,414 | $ | 815,884 | ||||||
Gross profit | 44,063 | 38,260 | 441,292 | |||||||||
Income before income taxes | 7,480 | 7,011 | 74,912 | |||||||||
Net income | 5,087 | 5,052 | 50,946 |
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Dividends received from the affiliated companies were ¥806 million ($8,072 thousand), ¥607 million and ¥448 million during the years ended March 31, 2008, 2007 and 2006, respectively. | ||
Acquisition of PJ- On June 2, 2006, the Company acquired 49% of the issued common shares of PJ, at the amount of ¥15,327 million and paid in cash. The Company accounted for this investment using the equity method for the year ended March 31, 2007, and recorded ¥358 million of equity net income for the year ended March 31, 2007. The amount recorded as investment in affiliated companies as of March 31, 2007 included goodwill of ¥6,297 million and intangible assets of ¥6,521 million, if consolidated. | ||
During the year ended March 31, 2008, the Company identified a decline in fair value of PJ’s shares and recognized an impairment loss of ¥4,694 million ($47,011 thousand), which was included in equity in net loss of affiliated companies. | ||
On January 10, 2008, the Company acquired remaining 51% common shares of PJ, and made it a wholly owned subsidiary. The Company consolidated the balance sheet of PJ as of February 29, 2008 which was the most recent fiscal year end of PJ subsequent to the acquisition date. Income from PJ’s operation for the period from March 1, 2007 to February 29, 2008 was accounted for under equity method and included in equity in net (loss) income of affiliated companies in the consolidated statements of income. As such, balance sheet information of PJ is included in the table above as of March 31, 2007, but not as of March 31, 2008. Also the income statement information of PJ for the years ended March 31, 2007 and 2008 is included in the table above. | ||
7. | SHORT-TERM BANK LOANS AND LEASE OBLIGATIONS | |
Short-term bank loans at March 31, 2008 and 2007 consisted of the following: |
Thousands of | ||||||||||||
Millions of Yen | U.S. Dollars | |||||||||||
2008 | 2007 | 2008 | ||||||||||
Unsecured bank loans | ¥ | 5,572 | ¥ | 5,822 | $ | 55,804 |
The weighted average annual interest rates on short-term bank loans as of March 31, 2008 and 2007 were 1.3% and 0.9%, respectively. | ||
Lease obligations at March 31, 2008 and 2007 consisted of the following: |
Thousands of | ||||||||||||
Millions of Yen | U.S. Dollars | |||||||||||
2008 | 2007 | 2008 | ||||||||||
Lease obligations | ¥ | 129 | ¥ | 162 | $ | 1,292 | ||||||
Less current portion | (48 | ) | (51 | ) | (481 | ) | ||||||
Lease obligations, less current portion | ¥ | 81 | ¥ | 111 | $ | 811 | ||||||
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The future minimum payments required at March 31, 2008 were as follows: |
Millions of | Thousands of | |||||||
Year Ending March 31 | Yen | U.S. Dollars | ||||||
2009 | ¥ | 48 | $ | 481 | ||||
2010 | 81 | 811 | ||||||
Total | ¥ | 129 | $ | 1,292 | ||||
In 2008 and 2007, no assets were pledged as collateral. | ||
8. | LEASES | |
The Companies lease most of their store premises, some of their distribution centers, and certain equipment. Most leases have automatic renewal provisions and allow the Companies to extend the lease term beyond the initial base period, subject to the terms agreed at lease inception. Future minimum rental commitments on non-cancelable operating leases are presented below: |
Millions of | Thousands of | |||||||
Year Ending March 31 | Yen | U.S. Dollars | ||||||
2009 | ¥ | 1,102 | $ | 11,037 | ||||
2010 | 876 | 8,773 | ||||||
2011 | 655 | 6,560 | ||||||
2012 | 543 | 5,438 | ||||||
2013 | 538 | 5,388 | ||||||
Thereafter | 1,389 | 13,911 | ||||||
Total | ¥ | 5,103 | $ | 51,107 | ||||
Rental expenses were ¥3,979 million ($39,850 thousand), ¥3,795 million and ¥3,844 million for the years ended March 31, 2008, 2007 and 2006, respectively. | ||
9. | ACQUISITION | |
On January 10, 2008, the Company acquired the remaining 51% of the outstanding common shares of PJ, primarily a mail-order innerwear retailer, through share exchange. Until then, the Company had held a 49% of the issued common shares since the initial acquisition on June 2, 2006. This acquisition enables the Company to expand its innerwear operations’ market area by including customer age groups and product styles that it has not been able to develop fully. | ||
This transaction was accounted for as a purchase. PJ is included in the Company’s consolidated balance sheet as of March 31, 2008 based on PJ’s fiscal year end, which is February 29, 2008. However, because PJ’s results of operations and change in financial position between January 10, 2008 and March 31, 2008 were not significant, the Company continued to account for its investment using the equity method and the income from PJ’s operations for the fiscal year ended February 29, 2008 was included in equity in net (loss) income of affiliated companies in the consolidated statements of income. | ||
The purchase cost of the additional shares was ¥9,266 million ($92,799 thousand), which consisted of the fair value of the shares distributed to the shareholder of PJ and the direct costs of the business combination. As consideration for the acquisition, the Company distributed 3,261,400 new shares and 3,440,000 shares of treasury stock to the shareholder of PJ. Those shares were valued at ¥1,372 per share which is the five-day average stock price before the acquisition announcement on November 9, 2007. |
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The purchase price of additional PJ shares has been allocated based upon the estimated fair value of the identifiable assets acquired and liabilities assumed. The Company’s new basis of investments in PJ was ¥21,814 million ($218,468 thousand), including the initial investment of ¥10,670 million for the 49% shares and the corresponding amount of deferred tax liability of ¥1,878 million for the outside basis temporary differences, which the Company recognized on investment in PJ upon the acquisition. | ||
As a result of the allocation of new basis of investment in PJ, the Company recognized goodwill of ¥11,203 million ($112,198 thousand) and intangible assets of ¥8,677 million ($86,900 thousand), in aggregate, which were classified as goodwill and other intangible assets in the consolidated balance sheets. Intangible assets consist of trademark of ¥5,316 million ($53,240 thousand) and customer list of ¥3,361 million ($33,660 thousand). The trademark is not subject to amortization and the customer list is subject to amortization over estimated useful life of 7 years. Goodwill is not deductible for tax purpose. | ||
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. |
2008 | ||||||||
Millions of | Thousands of | |||||||
Yen | U.S. Dollars | |||||||
Current assets | ¥ | 6,808 | $ | 68,182 | ||||
Property, plant, and equipment | 698 | 6,991 | ||||||
Intangible assets | 8,677 | 86,901 | ||||||
Goodwill | 11,203 | 112,198 | ||||||
Other assets | 692 | 6,930 | ||||||
Total assets acquired | 28,078 | 281,202 | ||||||
Current liabilities | 2,432 | 24,356 | ||||||
Long-term debt | 3,832 | 38,378 | ||||||
Total liabilities assumed | 6,264 | 62,734 | ||||||
Net assets acquired | ¥ | 21,814 | $ | 218,468 | ||||
Unaudited Pro Forma Results
Unaudited pro forma financial information is presented below as if the acquisition of PJ occurred at the beginning of the 2007 and fiscal year. |
Thousands of | ||||||||||||
Millions of Yen | U.S. Dollars | |||||||||||
2008 | 2007 | 2008 | ||||||||||
Pro forma sales | ¥ | 180,407 | ¥ | 181,820 | $ | 1,806,780 | ||||||
Pro forma operating income | 14,627 | 14,219 | 146,490 | |||||||||
Pro forma net income | 5,492 | 9,802 | 55,003 |
Yen | U.S. Dollars | |||||||||||
2008 | 2007 | 2008 | ||||||||||
Pro forma earnings per share | ¥ | 39 | ¥ | 66 | $ | 389 |
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10. | GOODWILL AND OTHER INTANGIBLE ASSETS | |
Intangible assets acquired during the year ended March 31, 2008 totaled ¥10,568 million ($105,839 thousands) which are primarily consist of trademark of ¥5,316 million ($53,240 thousand), customer list of ¥3,361 million ($33,660 thousand) and software of ¥1,807 million ($18,097 thousand). Trademark and customer list are recorded from acquired business. Trademark is not subject to amortization and customer list is subject to amortize over estimated useful life of 7 years. | ||
The components of acquired intangible assets excluding goodwill at March 31, 2008 and 2007 were as follows: |
2008 | ||||||||||||||||
Millions of Yen | Thousands of U.S. Dollars | |||||||||||||||
Gross | Gross | |||||||||||||||
Carrying | Accumulated | Carrying | Accumulated | |||||||||||||
Year Ending March 31 | Amount | Amortization | Amount | Amortization | ||||||||||||
Amortized intangible assets: | ||||||||||||||||
Customer list | ¥ | 3,361 | $ | 33,660 | ||||||||||||
Software | 5,633 | ¥ | 2,356 | 56,415 | $ | 23,595 | ||||||||||
Other | 1,414 | 251 | 14,161 | 2,514 | ||||||||||||
Total | ¥ | 10,408 | ¥ | 2,607 | $ | 104,236 | $ | 26,109 | ||||||||
Unamortized intangible assets: | ||||||||||||||||
Trademark | ¥ | 5,316 | $ | 53,240 | ||||||||||||
Other | 99 | 991 | ||||||||||||||
Total | ¥ | 5,415 | $ | 54,231 | ||||||||||||
2007 | ||||||||
Millions of Yen | ||||||||
Gross | ||||||||
Carrying | Accumulated | |||||||
Year Ending March 31 | Amount | Amortization | ||||||
Amortized intangible assets: | ||||||||
Software | ¥ | 4,047 | ¥ | 1,893 | ||||
Other | 1,451 | 229 | ||||||
Total | ¥ | 5,498 | ¥ | 2,122 | ||||
Unamortized intangible assets: | ||||||||
Other | ¥ | 94 |
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Aggregate amortization expenses related to intangible assets and future estimated amortization expense was as follows:
Millions | Thousands of | |||||||
Year Ending March 31 | of Yen | U.S. Dollars | ||||||
Aggregate amortization expense | ||||||||
2008 | ¥ | 909 | $ | 9,104 | ||||
Estimated amortization expense | ||||||||
2009 | 1,379 | 13,811 | ||||||
2010 | 1,260 | 12,619 | ||||||
2011 | 1,200 | 12,018 | ||||||
2012 | 1,084 | 10,856 | ||||||
2013 | 841 | 8,423 | ||||||
Total | ¥ | 5,764 | $ | 57,727 | ||||
The changes in the carrying amount of goodwill for the year ended March 31, 2008, were as follows:
Millions | Thousands of | |||||||
of Yen | U.S. Dollars | |||||||
Balance at April 1, 2007 | ¥ | $ | ||||||
Reclassification from an investment accounted for using the equity method | 3,908 | 39,138 | ||||||
Goodwill acquired during year | 7,295 | 73,060 | ||||||
Balance at March 31, 2008 | ¥ | 11,203 | $ | 112,198 | ||||
11. | TERMINATION AND RETIREMENT PLANS | |
Employee Retirement Plans— The Companies sponsor termination and retirement benefit plans that cover substantially all employees. Benefits are based on the employee’s years of service, position and performance. If the termination is involuntary or caused by death, the employee is usually entitled to greater payments than in the case of voluntary termination. | ||
The Companies have a contributory defined retirement benefit plan, several partially funded plans administered by independent trustees and several unfunded termination plans administered by the Companies. Benefits under the contributory defined retirement benefit plan are usually paid in a lump sum at the earlier of termination or retirement, although periodic payments are available under certain conditions. Benefits under the other termination and retirement benefit plan are paid either as a lump-sum payments or a periodic payments under certain conditions. The benefits are usually paid as a lump-sum payment, if the employee resigns before the mandatory retirement age. |
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On March 31, 2007, the Companies adopted the recognition and disclosure provision of SFAS No. 158, “Employers Accounting for Deferred Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R).” SFAS No. 158 required the Companies to recognize the funded status of their pension plans in the March 31, 2007 consolidated balance sheet, with a corresponding adjustment to accumulated other comprehensive income. The adjustment to accumulated other comprehensive income at adoption consisted of the unrecognized actuarial gain and the unrecognized prior service benefit, all of which were previously netted against the plans’ funded status in the consolidated balance sheet pursuant to the provisions of SFAS No. 87. Upon adoption, the Companies recorded a net-of-tax amount of ¥4,130 million to the ending balance of accumulated other comprehensive income. The adoption of SFAS No. 158 had no effect on the consolidated statements of income for the year ended March 31, 2007, or for any prior period presented. | ||
The following provides a reconciliation of benefit obligations, plan assets and funded status of the plans: |
Thousands of | ||||||||||||
Millions of Yen | U.S. Dollars | |||||||||||
2008 | 2007 | 2008 | ||||||||||
Change in benefit obligation: | ||||||||||||
Benefit obligation at beginning of year | ¥ | 33,059 | ¥ | 32,687 | $ | 331,087 | ||||||
Service cost | 858 | 936 | 8,593 | |||||||||
Interest cost | 761 | 748 | 7,622 | |||||||||
Participants’ contributions | 73 | 75 | 731 | |||||||||
Actuarial loss | (1,041 | ) | (245 | ) | (10,426 | ) | ||||||
Benefits paid from plan assets | (394 | ) | (883 | ) | (3,946 | ) | ||||||
Settlement paid from plan assets | (569 | ) | (105 | ) | (5,699 | ) | ||||||
Settlement paid by the Companies | (187 | ) | (154 | ) | (1,873 | ) | ||||||
Increase due to change in scope of consolidation | 259 | 2,594 | ||||||||||
Benefit obligation at end of year | 32,819 | 33,059 | 328,683 | |||||||||
Change in plan assets: | ||||||||||||
Fair value of plan assets at beginning of year | ¥ | 38,048 | ¥ | 35,860 | $ | 381,052 | ||||||
Actual return on plan assets | (5,581 | ) | 581 | (55,894 | ) | |||||||
Employer contributions | 2,490 | 2,520 | 24,938 | |||||||||
Participants’ contributions | 73 | 75 | 731 | |||||||||
Benefit payments | (394 | ) | (883 | ) | (3,946 | ) | ||||||
Settlement payments | (569 | ) | (105 | ) | (5,699 | ) | ||||||
Fair value of plan assets at end of year | 34,067 | 38,048 | 341,182 | |||||||||
Funded status at end of year | ¥ | 1,248 | ¥ | 4,989 | $ | 12,499 | ||||||
Amounts recognized in the consolidated balance sheets at March 31, 2008 and 2007 consist of:
Thousands of | ||||||||||||
Millions of Yen | U.S. Dollars | |||||||||||
2008 | 2007 | 2008 | ||||||||||
Prepaid pension cost | ¥ | 3,444 | ¥ | 7,089 | $ | 34,492 | ||||||
Accrued expenses | (104 | ) | (113 | ) | (1,042 | ) | ||||||
Reserves for retirement benefit | (2,092 | ) | (1,987 | ) | (20,951 | ) | ||||||
¥ | 1,248 | ¥ | 4,989 | $ | 12,499 | |||||||
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Amounts recognized in accumulated other comprehensive income at March 31, 2008 and 2007 were as follows:
Thousands of | ||||||||||||
Millions of Yen | U.S. Dollars | |||||||||||
2008 | 2007 | 2008 | ||||||||||
Actuarial (loss) gain | ¥ | (4,705 | ) | ¥ | 702 | $ | (47,121 | ) | ||||
Prior service benefit | 5,572 | 6,263 | 55,803 | |||||||||
¥ | 867 | ¥ | 6,965 | $ | 8,683 | |||||||
The accumulated benefit obligation for all domestic defined benefit plans at March 31, 2008 and 2007 were as follows:
Thousands of | ||||||||||||
Millions of Yen | U.S. Dollars | |||||||||||
2008 | 2007 | 2008 | ||||||||||
Accumulated benefit obligation | ¥ | 31,842 | ¥ | 31,022 | $ | 318,898 |
Net periodic benefit costs for the Companies’ plans consisted of the following for the year ended March 31:
Thousands of | ||||||||||||||||
Millions of Yen | U.S. Dollars | |||||||||||||||
2008 | 2007 | 2006 | 2008 | |||||||||||||
Service cost | ¥ | 858 | ¥ | 936 | ¥ | 1,228 | $ | 8,593 | ||||||||
Interest cost on projected benefit obligation | 761 | 748 | 722 | 7,622 | ||||||||||||
Expected return on plan assets | (788 | ) | (726 | ) | (608 | ) | (7,892 | ) | ||||||||
Net amortization | (770 | ) | (826 | ) | 12 | (7,712 | ) | |||||||||
Settlement gain | (256 | ) | ||||||||||||||
¥ | 61 | ¥ | 132 | ¥ | 1,098 | $ | 611 | |||||||||
The unrecognized net actuarial loss and prior service benefit are being amortized over 12 years (the average remaining service life of active participants) using the declining-balance method and the straight-line method, respectively.
Other changes in plan assets and benefit obligations recognized in other comprehensive income for the year ended March 31, 2008 were as follows:
Millions | Thousands of | |||||||
of Yen | U.S. Dollars | |||||||
Current year actuarial loss | ¥ | (5,328 | ) | $ | (53,360 | ) | ||
Amortization of actuarial gain | (79 | ) | (791 | ) | ||||
Amortization of prior service benefit | (691 | ) | (6,920 | ) | ||||
¥ | (6,098 | ) | $ | (61,071 | ) | |||
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The estimated amounts that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next year are summarized as follows:
2008 | ||||||||
Millions | Thousands of | |||||||
of Yen | U.S. Dollars | |||||||
Actuarial gain | ¥ | 823 | $ | 8,242 | ||||
Prior service benefit | (691 | ) | (6,920 | ) |
The Companies use a March 31 measurement date for the majority of its plans. The weighted-average assumptions used as of March 31, in computing the benefit obligation liabilities shown above were as follows:
2008 | 2007 | |||||||
Discount rate | 2.5 | % | 2.5 | % | ||||
Rate of increase in future compensation | 0.0 | % | 0.5 | % |
The weighted-average assumptions used as of March 31, in computing the net periodic benefit cost shown above were as follows:
2008 | 2007 | 2006 | ||||||||||
Discount rate | 2.5 | % | 2.5 | % | 2.5 | % | ||||||
Expected long-term rate of return on plan assets | 2.5 | % | 2.5 | % | 2.5 | % | ||||||
Rate of increase in future compensation | 0.5 | % | 0.5 | % | 0.5 | % |
The Company’s wholly owned subsidiary, Wacoal Corp.’s approach to establishing the discount rate is based upon long term Japanese government bond rates and corporate bond indices. The discount rate assumption is based upon the five-year average of the effective yields on the 20-year Japanese government bond, adjusted for an incremental yield of approximately 25 basis points that is achieved by selecting corporate bonds whose credit characteristics satisfy the quality requirements but whose yields are slightly higher than the yields on Japanese government bonds. For other plans, similar indices and methods are used.
The expected long-term rate of return on plan assets is derived proportionally from return assumptions determined for each of the major asset classes. The return expectations for each of the asset classes are based largely on assumptions about economic growth and inflation, which are supported by long-term historical data. The estimated long-term rate of return is based on an asset allocation of equity securities of 36.0%, debt securities of 52.0%, and other investments of 12.0%.
The Companies’ investment strategy is to maintain actual asset weightings within a preset range of target allocations. The Companies’ investments are broadly diversified, typically consisting primarily of equity and debt securities. The Companies believe these ranges represent an appropriate risk profile for the planned benefit payments of the plans based on the timing of the estimated benefit payment.
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The asset allocation at March 31, 2008 and 2007 was as follows:
2008 | 2007 | |||||||
Equity securities | 45.4 | % | 54.8 | % | ||||
Debt securities | 44.4 | % | 34.9 | % | ||||
Life insurance company general accounts | 8.4 | % | 5.7 | % | ||||
Cash and cash equivalents | 1.8 | % | 4.6 | % |
The target allocation percentages are reviewed and approved by the Pension Committee. The actual allocations for 2008 and 2007 are different from the target allocation percentages primarily because the Company maintained additional equity securities as the separate plan asset which was contributed to the plan based on an agreement between the Company and employees and are not governed by the Pension Committee. As such, the actual allocation percentage of equity securities to the total plan assets is higher than the target allocation, and similarly, the actual allocation for the debt securities and other types of assets are lower than the target allocation.
The general funding policy of the funded plans is to contribute amounts computed in accordance with actuarial methods accepted by Japanese tax law. The Companies expect to contribute ¥2,331 million ($23,345 thousand) to their plans in the year ending March 31, 2009.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid as follows:
Millions | Thousands of | |||||||
Year Ending March 31 | of Yen | U.S. Dollars | ||||||
2009 | ¥ | 1,109 | $ | 11,107 | ||||
2010 | 1,158 | 11,597 | ||||||
2011 | 1,249 | 12,509 | ||||||
2012 | 1,365 | 13,671 | ||||||
2013 | 1,537 | 15,393 | ||||||
2014 — 2018 | 9,203 | 92,168 |
Employee Early Retirement Program— The Companies provide additional benefits to employees that elect to participate in the Companies’ early retirement program. Retirement benefits of ¥51 million ($511 thousand), ¥14 million and ¥364 million were paid in addition to normal benefits and charged to selling, general and administrative for the years ended March 31, 2008, 2007 and 2006, respectively.
Special Termination Benefit— In November 2005, the Company announced a special voluntary retirement plan to eliminate approximately 300 positions to improve the labor structure at March 31, 2006. Employees who would be more than 50 years-old at March 31, 2006 could apply to this program. As of March 31, 2006, the Company had eliminated 362 positions and paid the special termination benefit of ¥6,931 million.
In March 2006, Fukushima Wacoal Sewing Corp., a subsidiary of the Companies, terminated its operations and paid an aggregate ¥590 million in special termination benefits to its employees. Those payments were also charged to special retirement related expenses. In addition to those charges, a gain on settlement of ¥256 million was credited to selling, general and administrative.
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Termination Plan for Directors and Corporate Auditors- The Company and certain subsidiaries had termination plans for directors and corporate auditors. Payment of termination benefits to directors and corporate auditors is made in a lump sum upon termination and requires the approval of the shareholders before payment. In June 2005, the Company rescinded its termination plan for directors and corporate auditors upon the approval of its shareholders. The amount of benefit for each individual was fixed as of June 29, 2005 and will remain frozen until the retirement of each respective director and corporate auditor. The outstanding liabilities at March 31, 2008 and 2007 were ¥368 million ($3,686 thousand) and ¥373 million, respectively, and were recorded in other long-term liabilities. Subsidiaries still maintain plans for their directors and corporate auditors. In accordance with EITF 88-1, the subsidiaries recorded a liability for termination benefits for directors and corporate auditors at the amount that would be needed if all directors and corporate auditors were to resign at each balance sheet date. The liabilities for termination benefits for directors and corporate auditors at March 31, 2008 and 2007 were ¥90 million ($901 thousand) and ¥85 million, respectively, and were included in liability for termination and retirement benefits. | ||
12. | SHAREHOLDERS’ EQUITY | |
Since May 1, 2006, Japanese companies have been subject to the Corporate Law of Japan (the “Corporate Law”), which reformed and replaced the Commercial Code of Japan. The significant provisions in the Corporate Law that affect financial and accounting matters are summarized below: |
(a) | Dividends | ||
Under the Corporate Law, companies can pay dividends at any time during the fiscal year in addition to the year-end dividend upon resolution at the shareholders meeting. For companies that meet certain criteria such as; (1) having the Board of Directors, (2) having independent auditors, (3) having the Board of Corporate Auditors, and (4) the term of service of the directors is prescribed as one year rather than two years of normal term by its articles of incorporation, the Board of Directors may declare dividends (except for dividends in kind) at any time during the fiscal year if the company has prescribed so in its articles of incorporation. The Company meets all the above criteria. The Board of Directors of companies with board committees (an appointment committee, compensation committee and audit committee) can also do so because such companies with board committees already, by nature, meet the above criteria under the Corporate Law, even though such companies have an audit committee instead of the Board of Corporate Auditors. | |||
The Corporate Law permits companies to distribute dividends-in-kind (non-cash assets) to shareholders subject to a certain limitation and additional requirements. | |||
Semiannual interim dividends may also be paid once a year upon resolution by the Board of Directors if the articles of incorporation of the company so stipulate. The Corporate Law provides certain limitations on the amounts available for dividends or the purchase of treasury stock. The limitation is defined as the amount available for distribution to the shareholders, but the amount of net assets after dividends must be maintained at no less than ¥3 million. | |||
The amount of retained earnings available for dividends under the Corporate Law was ¥101,694 million ($1,018,468 thousand) as of March 31, 2008, based on the amount recorded in the parent company’s general books of account. |
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(b) | Increases/decreases and transfer of common stock, reserve and surplus | ||
The Corporate Law requires that an amount equal to 10% of dividends must be appropriated as a legal reserve (a component of retained earnings) or as additional paid-in capital (a component of capital surplus) depending on the equity account charged upon the payment of such dividends until the total of aggregate amount of legal reserve and additional paid-in capital equals 25% of the common stock. Under the Corporate Law, the total amount of additional paid-in capital and legal reserve may be reversed without limitation. The Corporate Law also provides that common stock, legal reserve, additional paid-in capital, other capital surplus and retained earnings can be transferred among the accounts under certain conditions upon resolution of the shareholders. | |||
(c) | Treasury stock and treasury stock acquisition rights | ||
The Corporate Law also provides for companies to purchase treasury stock and dispose of such treasury stock by resolution of the Board of Directors. The amount of treasury stock purchased cannot exceed the amount available for distribution to the shareholders which is determined by specific formula. Under the Corporate Law, stock acquisition rights, which were previously presented as a liability, are now presented as a separate component of equity. The Corporate Law also provides that companies can purchase both treasury stock acquisition rights and treasury stock. Such treasury stock acquisition rights are presented as a separate component of equity or deducted directly from stock acquisition rights. |
13. | OTHER COMPREHENSIVE (LOSS) INCOME | |
The changes in the components of accumulated other comprehensive (loss) income were reported net of income taxes as follows: |
Millions of Yen | ||||||||||||||||||||||||||||||||||||
2008 | 2007 | 2006 | ||||||||||||||||||||||||||||||||||
Pre-Tax | Tax | Net | Pre-Tax | Tax (Expense) | Net | Pre-Tax | Tax (Expense) | Net | ||||||||||||||||||||||||||||
Amount | Expense | Amount | Amount | Credit | Amount | Amount | Credit | Amount | ||||||||||||||||||||||||||||
Foreign currency translation adjustments | ¥ | (506 | ) | ¥ | 38 | ¥ | (468 | ) | ¥ | 1,598 | ¥ | (146 | ) | ¥ | 1,452 | ¥ | 3,345 | ¥ | (261 | ) | ¥ | 3,084 | ||||||||||||||
Unrealized (loss) gain on securities: | ||||||||||||||||||||||||||||||||||||
Unrealized holding (loss) gain | (14,658 | ) | 5,972 | (8,686 | ) | 56 | (15 | ) | 41 | 13,761 | (5,531 | ) | 8,230 | |||||||||||||||||||||||
Reclassification adjustments | (754 | ) | 307 | (447 | ) | 129 | (53 | ) | 76 | (816 | ) | 332 | (484 | ) | ||||||||||||||||||||||
Net unrealized (loss) gain | (15,412 | ) | 6,279 | (9,133 | ) | 185 | (68 | ) | 117 | 12,945 | (5,199 | ) | 7,746 | |||||||||||||||||||||||
Pension liability adjustment | (6,098 | ) | 2,482 | (3,616 | ) | |||||||||||||||||||||||||||||||
Other comprehensive (loss) income | ¥ | (22,016 | ) | ¥ | 8,799 | ¥ | (13,217 | ) | ¥ | 1,783 | ¥ | (214 | ) | ¥ | 1,569 | ¥ | 16,290 | ¥ | (5,460 | ) | ¥ | 10,830 | ||||||||||||||
Thousands of U.S. Dollars | ||||||||||||
2008 | ||||||||||||
Pre-Tax | Tax | Net | ||||||||||
Amount | Expense | Amount | ||||||||||
Foreign currency translation adjustments | $ | (5,068 | ) | $ | 381 | $ | (4,687 | ) | ||||
Unrealized loss on securities: | ||||||||||||
Unrealized holding loss | (146,800 | ) | 59,810 | (86,990 | ) | |||||||
Reclassification adjustments | (7,552 | ) | 3,075 | (4,477 | ) | |||||||
Net unrealized loss | (154,352 | ) | 62,885 | (91,467 | ) | |||||||
Pension liability adjustment | (61,071 | ) | 24,856 | (36,215 | ) | |||||||
Other comprehensive loss | $ | (220,491 | ) | $ | 88,122 | $ | (132,369 | ) | ||||
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14. | INCOME TAXES | |
Income before income taxes, equity in net income of affiliated companies, and minority interests is summarized as follows: |
Thousands of | ||||||||||||||||
Millions of Yen | U.S. Dollars | |||||||||||||||
2008 | 2007 | 2006 | 2008 | |||||||||||||
Japan | ¥ | 15,959 | ¥ | 14,487 | ¥ | 4,695 | $ | 159,830 | ||||||||
Foreign | (1,606 | ) | (567 | ) | (1,229 | ) | (16,084 | ) | ||||||||
Total | ¥ | 14,353 | ¥ | 13,920 | ¥ | 3,466 | $ | 143,746 | ||||||||
Income taxes expense consists of: |
Thousands of | ||||||||||||||||
Millions of Yen | U.S. Dollars | |||||||||||||||
2008 | 2007 | 2006 | 2008 | |||||||||||||
Current: | ||||||||||||||||
Japan | ¥ | 4,652 | ¥ | 1,446 | ¥ | 2,669 | $ | 46,590 | ||||||||
Foreign | 925 | 1,428 | 599 | 9,264 | ||||||||||||
¥ | 5,577 | ¥ | 2,874 | ¥ | 3,268 | $ | 55,854 | |||||||||
Deferred: | ||||||||||||||||
Japan | ¥ | 280 | ¥ | 3,854 | ¥ | (1,845 | ) | $ | 2,804 | |||||||
Foreign | (4 | ) | (226 | ) | 36 | (40 | ) | |||||||||
¥ | 276 | ¥ | 3,628 | ¥ | (1,809 | ) | $ | 2,764 | ||||||||
Total income taxes | ¥ | 5,853 | ¥ | 6,502 | ¥ | 1,459 | $ | 58,618 | ||||||||
The Companies are subject to a number of different taxes based on income. The effective income tax rates differed from the normal statutory rates for the following reasons for the years ended March 31, 2008, 2007 and 2006: |
2008 | 2007 | 2006 | ||||||||||
Normal Japanese statutory rates | 40.7 | % | 40.7 | % | 40.7 | % | ||||||
Increase in taxes resulting from: | ||||||||||||
Permanently non-deductible expenses | 2.9 | 6.5 | 9.9 | |||||||||
Change in valuation allowance | (1.5 | ) | (2.0 | ) | 0.0 | |||||||
Undistributed earnings of foreign subsidiaries | 2.6 | 0.8 | 2.9 | |||||||||
Differences in subsidiaries’ tax rate | (2.5 | ) | (0.8 | ) | (4.7 | ) | ||||||
Tax exemption | (0.2 | ) | (1.3 | ) | (3.2 | ) | ||||||
Tax loss on investment in subsidiaries | (4.9 | ) | ||||||||||
Other — net | (1.2 | ) | 2.8 | 1.4 | ||||||||
Effective tax rates | 40.8 | % | 46.7 | % | 42.1 | % | ||||||
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The approximate effect of temporary differences and tax loss carryforwards that gave rise to deferred tax balances at March 31, 2008 and 2007 were as follows: |
Thousands of | ||||||||||||||||||||||||
Millions of Yen | U.S. Dollars | |||||||||||||||||||||||
2008 | 2007 | 2008 | ||||||||||||||||||||||
Deferred | Deferred | Deferred | Deferred | Deferred | Deferred | |||||||||||||||||||
Tax | Tax | Tax | Tax | Tax | Tax | |||||||||||||||||||
Assets | Liabilities | Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||
Sales returns | ¥ | 1,082 | ¥ | 1,117 | $ | 10,836 | ||||||||||||||||||
Allowance for doubtful receivables | ¥ | 252 | ¥ | 383 | $ | 2,524 | ||||||||||||||||||
Inventory valuation | 1,201 | 1,273 | 12,028 | |||||||||||||||||||||
Intercompany profits | 248 | 218 | 2,484 | |||||||||||||||||||||
Accrued bonuses | 1,420 | 1,392 | 14,221 | |||||||||||||||||||||
Valuation loss on investments | 1,141 | 760 | 11,427 | |||||||||||||||||||||
Gain on sales of property, plant and equipment | 1,753 | 1,724 | 17,556 | |||||||||||||||||||||
Undistributed earnings of foreign subsidiaries | 2,695 | 2,742 | 26,990 | |||||||||||||||||||||
Net unrealized gain on securities | 4,511 | 10,691 | 45,178 | |||||||||||||||||||||
Net realized gain on exchange of equity securities | 2,453 | 2,415 | 24,567 | |||||||||||||||||||||
Capitalized supplies | 291 | 330 | 2,914 | |||||||||||||||||||||
Enterprise taxes | 363 | 126 | 3,636 | |||||||||||||||||||||
Accrued vacation | 902 | 812 | 9,034 | |||||||||||||||||||||
Pension expense | 966 | 815 | 753 | 2,331 | 9,675 | 8,162 | ||||||||||||||||||
Fixed assets | 1,343 | 1,445 | 13,450 | |||||||||||||||||||||
Tax loss carryforwards | 2,054 | 1,795 | 20,571 | |||||||||||||||||||||
Intangible assets | 3,532 | 35,373 | ||||||||||||||||||||||
Investment in a subsidiary | 1,878 | 18,808 | ||||||||||||||||||||||
Other temporary differences | 679 | 37 | 838 | 39 | 6,800 | 371 | ||||||||||||||||||
Total | 11,690 | 17,926 | 10,859 | 20,325 | 117,076 | 179,529 | ||||||||||||||||||
Valuation allowance | (1,418 | ) | (1,465 | ) | (14,202 | ) | ||||||||||||||||||
Total | ¥ | 10,272 | ¥ | 17,926 | ¥ | 9,394 | ¥ | 20,325 | $ | 102,874 | $ | 179,529 | ||||||||||||
A valuation allowance was recorded against the deferred tax assets, primarily related to loss carryforwards of certain domestic and foreign subsidiaries. The valuation allowance decreased by ¥47 million ($471 thousand) for the year ended March 31, 2008 and decreased by ¥186 million for the year ended March 31, 2007. | ||
At March 31, 2008, certain subsidiaries had loss carryforwards which are available to offset future taxable income of such subsidiaries expiring as follows: |
Millions of | Thousands of | |||||||
Year Carryforward Expires | Yen | U.S. Dollars | ||||||
2009 | ¥ | 84 | $ | 841 | ||||
2010 | 821 | 8,222 | ||||||
2011 | 934 | 9,354 | ||||||
2012 | 654 | 6,550 | ||||||
2013 | 408 | 4,086 |
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Millions of | Thousands of | |||||||
Year Carryforward Expires | Yen | U.S. Dollars | ||||||
2014 | 722 | 7,231 | ||||||
2015 | 638 | 6,390 | ||||||
Indefinitely until utilized | 1,136 | 11,377 | ||||||
Total | ¥ | 5,397 | $ | 54,051 | ||||
The portion of the undistributed earnings of foreign subsidiaries which are deemed to be permanently invested amounted to ¥5,239 million ($52,469 thousand) and ¥3,556 million at March 31, 2008 and 2007, respectively. It is not practicable to determine the unrecognized deferred tax liability on these earnings. |
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The Companies adopted FIN 48 effective April 1, 2007. As a result of implementation of FIN 48, the Companies recognized a tax benefit of ¥181 million ($1,813 thousand) as of April 1, 2007, and did not require a cumulative-effect adjustment to retained earnings. | ||
A reconciliation of beginning and ending amount of unrecognized tax benefits was as follows: |
Millions of | Thousands of | |||||||
Yen | U.S. Dollars | |||||||
Balance at beginning of year | ¥ | 181 | $ | 1,813 | ||||
Additions based on tax positions related to the current year | 332 | 3,325 | ||||||
Additions for tax positions of prior years | 29 | 290 | ||||||
Reductions for tax positions of prior years | (122 | ) | (1,222 | ) | ||||
Balance at end of year | ¥ | 420 | $ | 4,206 | ||||
Total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is ¥420 million ($4,206 thousand). | ||
The Companies recognize interest and penalties accrued related to unrecognized tax benefits in income taxes in the consolidated statements of income. Total amounts of interest and penalties recognized in the consolidated statements of income for the year ended March 31, 2008 were not material. | ||
The Companies file income tax returns in Japan and various foreign tax jurisdictions. With few exceptions, the Companies are no longer subject to regular income tax examinations by the tax authority for years before 2007. The tax authorities are currently conducting transfer pricing examinations of certain subsidiaries in Japan and the United States. | ||
15. | RELATED PARTY TRANSACTIONS | |
The Companies purchase merchandise from numerous suppliers throughout the world, including certain affiliates of the Companies. The Companies purchased merchandise from affiliates in the amount of ¥1,031 million ($10,325 thousand), ¥1,588 million, and ¥1,811 million in the fiscal years ended March 31, 2008, 2007 and 2006. The accounts payable to affiliates were ¥48 million ($481 thousand) and ¥9 million at March 31, 2008 and 2007, respectively. | ||
The Companies also sell supplies, materials and products to certain affiliates. Aggregate sales to affiliates were ¥803 million ($8,042 thousand), ¥1,042 million, and ¥1,494 million in fiscal years ended March 31, 2008, 2007 and 2006. The accounts receivable from affiliates were ¥60 million ($601 thousand) and ¥103 million at March 31, 2008 and 2007, respectively. | ||
16. | EARNINGS PER SHARE AND AMERICAN DEPOSITARY RECEIPT | |
The Company accounts for its earnings per share in accordance with SFAS No. 128, “Earnings per Share.” Basic net income per share has been computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during each year. Fully diluted income per share is not computed as there are no common stock equivalents. |
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The computation of earnings per American Depositary Receipt (“ADR”), each ADR representing 5 shares of common stock, is based on the weighted average number of common shares outstanding. The weighted average number of common shares outstanding used in the computations was 141,304,256 shares for 2008, 142,910,187 shares for 2007 and 143,933,607 shares for 2006. | ||
17. | FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK | |
Fair Value of Financial Instruments —The carrying amount of cash and cash equivalents and short-term bank loans approximates fair value because of the short maturities of these instruments. The fair values of current and noncurrent marketable securities, as presented in Note 3, are primarily estimated based on quoted market prices for these securities. However, the fair values of investments in non-marketable equity securities are impracticable to estimate as the investments represent stocks of companies which are not publicly traded. | ||
The fair value of long-term debt, including current portion, consists of lease obligation, and there is no long-term debt which is required to disclose its fair value at March 31, 2008 and 2007. | ||
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. | ||
Forward Currency Exchange Contracts- The Company occasionally uses forward currency exchange contracts to manage its exposure to foreign currency fluctuation on the transactions denominated in foreign currencies. At March 31, 2008, the notional amount of its open forward currency contract was for the purchase of $18,800 thousand U.S. dollars. The Company recorded the changes in the fair value of the derivative contract of ¥35 million ($351 thousand) in other expense since it was not designated as a hedge in the year ended March 31, 2008. No derivative contract was outstanding as of March 31, 2007 and 2006. | ||
Concentration of Credit Risk —The Companies’ business consists primarily of sales of women’s intimate apparel to a large number of diverse customers in the Japanese retail industry, which include well established department stores, general merchandise stores and other general retailers and to specialty stores. No single customer constitutes 10.0% or more of the total sales, although the general retail customers that are consolidated companies in the Aeon Group collectively accounted for approximately 11.2%, 10.1% and 10.1% of the total sales in fiscal years ended March 31, 2008, 2007 and 2006, respectively. | ||
18. | SUBSEQUENT EVENT | |
On May 29, 2008, the Board of Directors resolved to pay a cash dividend of ¥125 ($1.25) per 5 shares of common stock to holders of record as of March 31, 2008 (aggregate amount of ¥3,584 million ($35,894 thousand)). |
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