WACOAL Annual Report Transformation for...

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1 WACOAL Annual Report 2002 Transformation for...

2 Wacoal Corp. has grown into a leading company in Japan s market for women s intimate apparel since its establishment in Known for their reliable quality, Wacoal s products have an extremely strong brand presence in the mid-to-high-end of the market centered on department stores and specialty stores. Recently, by working to establish a new business model through the development of directly managed SPA (specialty store retailing of private label apparel) shops, Wacoal is seeking to expand its customer base. The Company is also continuing to boost awareness of the Wacoal brand in overseas markets. In Southeast Asia, Wacoal is already a top brand in the Republic of Korea, Thailand, and Taiwan. Further, focusing on major department stores, Wacoal is building a sales network spanning the U.S. market while steadily enhancing its operating infrastructures in China and European markets. Body Designing is Wacoal s key business concept for the 21st century. The Company will utilize the core competence it has developed in the intimate apparel industry to offer products and services that are responsive to changes in the lifestyles and values of its customers. Transformation for Growth 1 Transformation for Increasing Its Value 2 Transformation for Expanding Its Territory 4 Transformation for Adapting to Its Changing Environment 6 Interview with the President 8 Wacoal Financial Highlights 12 Management s Discussion of Results of Operations and Financial Condition 13 Business overview Review of operations C O N T E N T S Operating results Liquidity and capital resources Dividend policy Trend information Forward-looking statements Financial Summary 17 Consolidated Financial Statements 18 Independent Auditors Report 31 Board of Directors, Corporate Auditors, and Corporate Officers 32 Corporate Data 32 International Network 33

3 Transformation for growth Transformation is vital to ensuring steady growth in today s rapidly evolving operating environment. While constantly adhering to its founding business concept of working to help women look and feel more beautiful, Wacoal has continued to take decisive steps to reform the Company so that it can adapt to changing market trends and customer purchasing requirements. Now, Wacoal has launched a package of reform measures that is aimed at moving the Company toward its next stage of development. At the same time, we will continue pursuing our mission to enhance women s lifestyles, to increase our points of contact with customers, and to build a sound corporate structure. 1

4 Transformation for Increasing Its Value Wacoal is increasing its corporate value through a transformation of its operations, in the same way that a tulip grows in value as it develops from a bulb to a bud and finally blooms. 2

5 Wacoal is transforming its operations to achieve its new business concept, Body Designing. Looking to the future, Wacoal is in the process of steadily shifting the focus of its operations from intimate apparel to Body Designing. This new business concept capitalizes on the results of our long-term research in the field of human science and on our product development know-how to bolster the development of intimate apparel and services that are in harmony with the lifestyles of our customers. In intimate apparel, we have worked to reorganize our brands, create new sales outlets, and develop products to allow us to respond precisely to customer requirements according to age and lifestyle. As a part of these efforts, we have expanded our Dublevé custommade intimate apparel service for customers Dublevé The Human Science Research Center Ergonomic foot products seeking an individual fit by opening directly managed and franchise shops that offer this service. In addition, we launched our good age business for the development of goods targeting older women. Wacoal is also focusing on its Wellness wear business. We have already launched a wide variety of products, including Wacoal s range of CW-X conditioning wear for athletes, swimwear co-developed with NIKE Japan, Inc., and ergonomic foot products. Wacoal will redouble efforts to promote its Body Designing business concept by retailing its mainstay products globally and strengthening business alliances that draw on the Company s renowned technology and know-how. Japanese pro-baseball player Ichiro Suzuki in CW-X conditioning wear 2002 NIKE, Inc. All rights reserved NIKE swimwear 3

6 Transformation for Expanding Its Territory Wacoal is extending its points of contact with customers by transforming its sales network, in the same way that a caterpillar, through metamorphosis in its chrysalis, extends its sphere of activity by becoming a butterfly. 4

7 Wacoal is transforming its sales network to achieve a three channel retailing strategy. Three channel retailing is a marketing strategy crucial to securing the Company s continued expansion in the 21st century. Due to limited growth that can be achieved by selling wholesale to department stores, specialty shops, and general merchandising stores, it is necessary to establish new sales channels to increase our points of contact with customers. Wacoal s three channel retailing strategy aims to expand the Company s network of directly managed SPA shops and Internet and mail-order catalog operations through effective cross-linking of each area. In our SPA business, which was launched in 2001, we had established 40 SPA shops as of the end of June 2002, and we plan to expand the network to approximately 150 shops, with annual sales of about 10 billion, by March By targeting different customer groups and lifestyles, Wacoal is developing a variety of brands that are retailed exclusively through SPA shops, including SUBITO, une nana cool, Intimates, QCVD, and CHERCHEZ. In an effort to create brand differentiation from Wacoal goods available through other retailing channels, we have focused our SPA product ranges on customers in their 20s and emphasized design and price. Meanwhile, we made a full-scale launch of intimate apparel sales utilizing Wacoal s Internet and mail-order catalog retailing channels during the year under review. Our website, WACOAL ONLINE, and our mail-order catalogs, SACHET and LOVE BODY, have become established strategic retailing tools. une nana cool (Sannomiya shop) 5

8 Transformation for Adapting to Its Changing Environment Wacoal is reforming the structure of its operations to enable it to adapt to changes in its business environment, in the same way that a tadpole undergoes a transformation as it matures into a frog to allow it to live both on land and in water. 6

9 Wacoal is transforming its operational structure to achieve strong profitability. Factory at Beijing Wacoal Beijing Wacoal Sales floor in a department store in Shanghai Vietnam Wacoal Given the increasingly intense competition among companies in the intimate apparel market, Wacoal is moving forward with structural reform measures aimed at creating a company with higher profitability. Specific structural reforms, which target cost reductions, will primarily entail consolidating distribution centers, reorganizing production bases in Japan and overseas, reassessing raw materials sourcing, reviewing product designs, and increasing the effectiveness of staff deployment. During the year under review, we introduced a new distribution system that utilizes only four distribution centers in Japan. This step has not only facilitated a reduction in distribution costs but also made a major contribution to lowering inventory losses and improved the efficiency of operations between our Head Office and branches. Moreover, Wacoal is targeting lower production costs by purchasing materials overseas and boosting production capacity at its subsidiaries in China, Vietnam, and other countries. In two years time, we plan to raise our overseas production ratio to 50% in volume terms. Further, we will reduce personnel costs through the utilization of diverse employment formats, including part-time and contract employees. In conjunction with these efforts, the Company will pursue reform of its personnel system, introducing rewards that reflect improvements in professional performance and other measures. By proceeding with this multifaceted structural reform package, our mid-to-long-term strategy is to build an organization that enables the supply of highly cost-competitive products globally and that can generate profits through a flexible response to changes in our operating environment, while ensuring we continue to create enduringly popular products that meet customer needs. 7

10 Interview with the President Performance Evaluation and Operating Environment Q: What is your assessment of Wacoal s performance given the business conditions that prevailed during the fiscal year under review? A: I think we effectively met the challenges presented by a difficult operating environment that was characterized by sluggish personal consumption and stronger deflationary trends in our main market, Japan. On the other hand, I do not feel that our results were satisfactory in all respects. Our performance was adversely affected by a series of failures and store closures among our major business partners, including department stores and general merchandising stores. However, we were unable to fully respond to these developments, which indicates we have to address the Company s management of such external factors. To that end, we are taking a variety of measures to ensure that the Company can maintain steady growth, even in such unfavorable business conditions. To increase profitability, we are actively pursuing a forward-looking operating strategy that focuses on achieving sustainable growth and undertaking structural reform. Yoshikata Tsukamoto President and Representative Director, Corporate Officer Q: What changes has weak personal consumption brought about in Japan s intimate apparel market? A: Although the intimate apparel market has been severely affected by stagnation in the retail industry, this does not signify a loss of interest in intimate apparel among women. On the contrary, women are tending to regard intimate apparel as fashion items, increasingly selecting foundation garments and other items according to the time, place, and occasion. As a result, customers are now seeking products ranging from the functional to the highly fashionable. In addition, certain new consumption trends have emerged. While, on the one hand, there has been a growing shift toward lowerpriced items, particularly among younger customers, there has also been an increase in the number of customers seeking luxury, brand name intimate apparel. 8

11 At present, based on its strategy of increasing points of contact with customers, Wacoal is creating new sales channels through such measures as the promotion of its SPA shop operations. Q: It is said that intimate apparel is a matured market sector. Do you think there is any room for further expansion? A: Yes, of course. For example, Wacoal has been taking the lead in the intimate apparel market by actively promoting increased sales of lingerie items, such as slips. In the past, Wacoal s intimate apparel sales were divided roughly equally between foundation garments and lingerie. Recently, however, fewer women are wearing slips, and the proportion of sales accounted for by lingerie has decreased. Our aim is to remind women of the attractiveness of lingerie by creating new products in keeping with the times. Also, we plan to develop a new market for intimate apparel targeting older women, accompanying growing numbers of senior women who are seeking fashion items that enhance their individuality, beauty, and self-confidence. Accordingly, we will draw on the results of Wacoal s human science research to offer products that are designed to take into account the changes the aging process brings about in women s body shapes, skeletal structure, skin sensitivity, and respiratory functions. These are only two examples of the wide-ranging opportunities that exist to invigorate and expand the intimate apparel market. Growth Strategy Q: What is Wacoal s strategy for achieving sustainable growth? A: Broadly speaking, we have two main strategies. First is our strategy targeting increased sales, which is indispensable if the Company is to maintain growth. Second is our strategy aimed at strengthening and reorganizing the Company s income structure so that Wacoal can achieve steady profitability even when sales are depressed. While we intend to establish time frames and to move forward quickly to implement these two key strategies, it will take time for the benefits of these strategies to be fully realized. Q: Could you be more specific about how Wacoal intends to increase sales? A: We are presently developing various initiatives based on our basic concept of expanding points of contact with customers. Until now, department stores and general merchandising stores have been our mainstay retailing channels; however, depressed conditions in the retailing industry have led to reductions in the number of retail outlets. Consequently, securing new retailing channels to increase our points of contact with customers has become a pressing issue for Wacoal. In concrete terms, we will principally expand our points of contact with customers by opening SPA shops targeting younger customers and by bolstering our Internet and mail-order catalog operations. By March 2004, we aim to have opened approximately 150 SPA shops, generating net sales of about 10 billion. Similarly, we plan to boost Internet and mailorder catalog sales from approximately 6 billion to about 7 billion by March Q: Could you tell us about the current state of progress and plans for Wacoal s SPA shop operations? A: As of the end of June 2002, Wacoal had opened 40 SPA shops. We have created several types of these shops to cater to specific customer groups and lifestyles and to reflect the characteristics of their respective locations. We plan to step up the pace of SPA shop openings while giving high priority to quality by carefully selecting store locations. At the same time, we will close low-performing SPA shops to build a highly profitable store network. Until recently, separate sections within the Company had conducted the development of our SPA shops. In January 2002, however, we integrated 9

12 these sections to enhance the management and operational efficiency of our SPA development activities. Q: What are Wacoal s strategies for increasing sales in areas other than its SPA shop operations? A: In intimate apparel, we are working to develop new value-added products and services. For example, through our Dublevé intimate apparel fitting service, we have been able to provide customers with a value-added service that gives meticulous attention to detail. During the year under review, we opened 10 shops that offer this service, bringing the total to 17. In other areas of our operations, we are working to increase sales of our range of CW-X conditioning wear, which was developed based on the results of Wacoal s research in the field of human science, and to promote sales of the swimwear range we developed through an alliance with NIKE Japan. Wacoal intends to boost sales of both of these lines through a marketing strategy that takes into consideration opportunities in overseas markets. Furthermore, as I mentioned earlier, we also intend to focus on meeting the specific needs of older women by drawing on our human science research work to offer products that are designed to suit the body shapes, skeletal structure, skin sensitivity, and respiratory functions of older women. Q: What successes did the Company have in the fiscal year under review with structural reform aimed at securing profitability? A: During the year, we undertook a variety of structural reform measures to reduce distribution costs and reorganize our production centers in Japan and overseas. Thanks to these steps, we hope to achieve total savings of approximately 3.2 billion by March To give an example of the success that we have had thus far, two years ago Wacoal had 17 distribution centers in Japan. Thanks to the measures taken to consolidate these operations, we reduced the number of distribution centers to four. In addition to lower distribution costs, the rationalization of our distribution centers has led to reduced inventory losses. Meanwhile, we have also cut costs by shifting production to our subsidiaries in China and Vietnam and increasing our overseas procurement of materials. The implementation of these comprehensive structural reform measures reduced costs by approximately 1.0 billion in the fiscal year under review. Overseas Operations Q: Would it be correct to say that bolstering the Company s operating infrastructure in China is an integral part of Wacoal s overseas strategy? A: For the manufacturing sector, China is crucial in two respects. First, it is a potential market, and, second, it is important as a production center for the development of global business. Now that China has gained membership of the World Trade Organization, we expect the opening up of markets to accelerate. Wacoal realized the potential of the Chinese market from an early stage, commencing local production and retailing activities through a joint venture company established in Beijing in Subsequently, in December 2000, the company became a wholly owned subsidiary of Wacoal, forming the strategic base for the Company s future operations in China. Q: Could you explain the details of Wacoal s business plan for China? A: By 2004, we aim to complete the operating infrastructure required for a full-scale expansion of our business in China. Plans call for building an efficient, nationwide retailing network by bolstering and improving existing production and Our plans call for constructing a sales network covering 200 mainstay department stores in China by

13 In the year under review, Wacoal carried out a buy-back and retirement of 2 million shares, at a market value of 2.4 billion. marketing operations in Beijing, Shanghai, and Guangzhou and by establishing new retailing bases in Dalian and Chengdu, which will give Wacoal the capacity to merchandise its products in 200 department stores across China. Q: What developments have there been in Wacoal s performance in the United States? A: In 2001, the business results of Wacoal America were satisfactory. Wacoal has three brands in the U.S. market: DKI, Wacoal, and DKNY. Although our DKNY brand, which targets the casual wear market, struggled in 2000, its performance recovered substantially in 2001 thanks to a return to market competitiveness. Our DKI and Wacoal brands, which already have firmly established positions in mid-to-high-end markets, also recorded robust sales in As a result, Wacoal America s net sales rallied to approximately $100 million. Corporate Governance Q: What is Wacoal s basic philosophy with respect to corporate governance? A: In today s dynamically changing business environment, we are striving to create an efficient system of management in order to enhance the corporate value of Wacoal Group companies. In June 2002, the Company introduced an corporate officer system, which clarifies the process for formulating operating strategies as well as the operating responsibilities of executive officers on the board of directors. Also, we intend to reform the Company s management processes by accelerating decision making and bolstering functions for assessing the Company s operations. At the same time, we will realize open management by introducing a system under which executive officers from outside the Company become members of the board of directors. Further, to increase the transparency of management, the Company will actively promote greater disclosure of information to its shareholders and investors. Q: Could you explain Wacoal s policy for enhancing corporate value and returns to shareholders? A: The Company s basic policy is to continue providing steady returns to its shareholders while taking steps to bolster Wacoal s financial position from a long-term perspective. In the fiscal year under review, Wacoal carried out a buy-back and retirement of 2 million shares, at a total market value of 2.4 billion. We will use our internal reserves to invest in distribution and information technology as well as in the expansion of our network of SPA shops, which will in turn enable us to pass on to our shareholders the benefits derived from our improved performance. Outlook Q: In closing, what is the performance outlook for Wacoal in the current fiscal year? A: Although a strong sense of uncertainty surrounds the future direction of the Japanese economy, and personal consumption is not yet on course for recovery, the current economic slump has almost bottomed out, and we can expect a gradual upturn in consumer spending. Based on its medium-term operating plan, Wacoal will continue to actively implement strategies to increase its points of contact with customers. We will also work to improve our financial performance by seeking more efficient business management, giving greater priority to such performance indicators as ROE, operating profit margins, and operating cash flows. We anticipate net sales of 165 billion and operating income of 8.7 billion in the current fiscal year. 11

14 W A C O A L Financial Highlights WACOAL CORP. AND SUBSIDIARIES Years ended March 31, 2002, 2001 and 2000 Thousands of Millions of Yen U.S. Dollars* % Change vs 2001 Net sales , , ,937 $1,227, % Operating income ,186 9,624 11,117 54, Income before income taxes, equity in net income of affiliated companies, minority interests and cumulative effect of accounting change ,613 20,129 11,401 57, Net income ,983 10,889 7,254 37, Per 5 shares of common stock (in yen/dollars): Net income $ Cash dividends Shareholders equity , , ,612 $1,267, Total assets , , ,721 1,687, * The U.S. dollar amounts represent translations of Japanese yen solely for convenience at the rate of =$1. SALES BY PRODUCT CATEGORY Millions of Yen % Change vs 2001 Foundation garments and lingerie ,096 ( 71.3) 115,072 ( 71.0) 118,096 ( 71.2) +0.9% Nightwear ,714 ( 7.8) 12,634 ( 7.8) 13,213 ( 8.0) +0.6 Children s underwear ,470 ( 1.5) 2,755 ( 1.7) 3,052 ( 1.8) 10.3 Outerwear and sportswear ,588 ( 5.9) 9,337 ( 5.8) 9,831 ( 5.9) +2.7 Hosiery ,777 ( 1.1) 1,638 ( 1.0) 1,725 ( 1.0) +8.5 Other textile products ,793 ( 2.3) 4,282 ( 2.6) 4,887 ( 3.0) 11.4 Other businesses ,391 ( 10.1) 16,305 ( 10.1) 15,133 ( 9.1) +0.5 Note: Figures in parentheses represent percent of total sales. 162,829 (100.0) 162,023 (100.0) 165,937 (100.0) +0.5 SHARE OF NET SALES 12

15 Management s Discussion of Results of Operations and Financial Condition Financial information contained in this section is based on the consolidated financial statements included in this annual report, which have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). Business Overview Wacoal is a leading manufacturer and retailer of women s intimate apparel in Japan. Foundation garments primarily brassieres and girdles and lingerie mainly slips, knitted undergarments and women s briefs accounted for approximately 70% of the Company s consolidated net sales in the fiscal year ended March 31, Wacoal has the largest share of the market for foundation garments and lingerie in Japan (according to the Nihon Body Fashion Association), boasting an overwhelming presence among products in the higher-quality, higher-price bracket. In department stores, the Company s principal sales channel, Wacoal has a considerable share of retail sales of foundation garments and lingerie. In addition to innerwear, Wacoal manufactures and sells nightwear, children s underwear, outerwear and sportswear, hosiery, and other apparel items. The Company has earned a strong reputation for quality and design in Japan, its mainstay market. Wacoal sells most of its products wholesale to department stores, specialty stores, and general merchandising stores. At the same time, the Company is also actively developing its network of directly managed SPA shops. Wacoal also has operations in overseas markets. Since establishing joint venture companies with local capital in the Republic of Korea, Taiwan, and Thailand in 1970 and commencing the production and sale of Wacoal products, the Company has expanded its business throughout Asia as well as to Europe and North America. In the United States, Wacoal s main overseas market, Wacoal America, Inc., manufactures and retails three brands Wacoal, DKI, and DKNY targeted at mid-to-high-end markets. Elsewhere, Wacoal France S.A. designs and markets products for the European market. And, in Asia, Beijing Wacoal Co., Ltd., serves as a production and retailing base, while Guangdong Wacoal Inc., Ltd., and Vietnam Wacoal Corp. carry out manufacturing operations. Furthermore, other subsidiaries in Hong Kong, Singapore, the Philippines, and Indonesia are actively developing their operations and steadily building a presence in Southeast Asian markets. Review of Operations Foundation Garments and Lingerie Although sales of foundation garments and lingerie remained weak in Japan, subsidiaries in the United States and Asia performed favorably, with total category sales increasing 0.9% from the previous year, to billion. In the domestic market, we endeavored to leverage our brand power and aggressively develop our business. Among Wacoal brand items, our campaign item KIME BRA and the Attaka Kenkyujo undergarment range gained further popularity during the spring/summer and fall/ winter seasons, respectively. Meanwhile, sales of the Salute range of underwear, sold mainly through specialty stores, were weak due to sluggishness in the specialty store sector. In addition, to respond to the needs of the expanding senior market, we increasingly focused on products for older women, and our La Vie Aisée and Gra-P ranges of intimate apparel continued to do well. In the Wing brand lingerie category, as well as our hit product Secret Hips shorts, which we developed in response to the current fashion trend of low-rise bottoms, and our stylish Lesiage lingerie range, mainly sold through general merchandising stores, were well received. On the other hand, a slumping domestic retail industry heavily affected by depressed personal consumption and a series of business failures and store closures among major retailing groups had an adverse impact on the intimate apparel market. In response to these unfavorable conditions, we continued to actively open stores as part of our SPA strategy, which is aimed at increasing points of 13

16 contact with new customers. During the year under review, we opened 16 new SPA shops, bringing the total number to 39 as of March 31, Based on a clarification of store concepts and store location strategies, we intend to steadily open new shops to build a 150-store network with annual sales of 10 billion by March We successfully increased catalog sales, and our Internet-based sales also continued to grow. In overseas operations, Wacoal subsidiaries and affiliates in Asia recorded generally strong sales performances. In the United States, we achieved higher sales than in the previous year, despite the temporary downturn brought about by the September 2001 terrorist attacks. This recovery in performance was supported by increased sales of DKNY brand items, which registered low sales in the previous year, and of Wacoal brand products in mid-to-high-end markets. Nightwear Although nightwear sales were affected by reductions in the nightwear market and a further divergence in pricing between high- and low-end products, a reorganization of our brands and a rethink of our sales promotional strategies with the needs of our customers in mind proved successful, and category sales edged up 0.6%, to 12.7 billion. Children s Underwear Despite steady sales of Wacoal s Junior Bra, sales at department stores were weak due to the strengthening trend among customers of purchasing lower-priced children s underwear. Sales fell 10.3% from the previous fiscal year, to 2.5 billion. Outerwear and Sportswear Wacoal primarily sells its outerwear products under the HAI brand through department stores and specialty shops. During the year, orders were lower than expected, due to store closures and weak sales, particularly in the specialty store sector. Focusing mainly on catalog sales, we developed merchandise and sought new customers for our outerwear range; however, sales remained flat due to the adverse impact of falling apparel prices and the emergence of new and competitive retailing concepts. In sportswear, sales of our CW-X range of conditioning wear and our range of swimwear supplied through OEM to NIKE Japan continued to grow steadily. As a result, category sales increased 2.7%, to 9.6 billion. Hosiery A recovery in sales of our completely redesigned Kokochi E and Sevoy women s stockings and our Carlson slacks made from stretch fabric resulted in an 8.5% jump in sales in the hosiery category, to 1.8 billion. Other Textile Products Sales of other textile products dropped 11.4% from the previous year, to 3.8 billion, mainly due to a fall in exports of raw materials and fabric products from Japan. Other Businesses This category is comprised of housing and restaurant businesses, cultural projects, and Nanasai Co., Ltd., a subsidiary that builds interiors for commercial premises. Although we recorded a higher number of new contracts in our housing business, fewer dwellings were completed compared with the previous year. Consequently, sales were held to a 0.5% rise, to 16.4 billion. Operating Results Income and Expenses In the fiscal year ended March 31, 2002, although Wacoal companies in Japan struggled due to the unfavorable economic environment, an overall increase in sales at subsidiaries in the United States and Southeast Asia and the impact of a weak yen resulted in the Company s consolidated net sales edging up 0.5%, to billion. Accompanying a slight decrease in the cost of 14

17 sales, to 86.6 billion, the cost to sales ratio improved 0.8 percentage points, to 53.2%. Selling, general and administrative expenses rose 6.4%, to 69.1 billion, due to higher expenses associated with the payment of retirement benefits and a loss on sale of real estate held by our subsidiary Nanasai. As a result, operating income decreased 25.3%, to 7.2 billion, and the operating profit margin declined from 5.9% in the previous fiscal year, to 4.4%. In other income and expenses, Wacoal recorded net other income of 0.4 billion, approximately 10.0 billion less than the previous year. This sharp decrease was mainly attributable to an 11.0 billion gain on sale, transfer or exchange of investments recorded in the previous fiscal year. Consequently, income before income taxes, equity in net income of affiliated companies, minority interests and cumulative effect of accounting change fell 62.2%, to 7.6 billion. Income taxes decreased 58.2%, to 3.8 billion, and the effective tax rate was 49.7%. Due to the abovementioned factors, net income in the year under review was down 54.2%, to 5.0 billion, and net income per American Depositary Receipt (ADR, equivalent to five shares of common stock) declined from 356 in the previous fiscal year to 166. Cash dividends per ADR were 68, 15 lower than the previous fiscal year s dividend payment, which included a special dividend to commemorate the 50th anniversary of the establishment of Wacoal. Due to the decrease in net income, the dividend payout ratio rose to 40.9%, from 23.3% in the previous fiscal year. Return on equity fell from 6.3% to 2.9%, and return on assets decreased from 4.6% to 2.2%. Return on sales for the year under review was 3.1%, compared with 6.7% in the previous fiscal year. With a view to raising its corporate value, Wacoal has set a target of maintaining return on equity at more than 6% and is working to raise its profitability and the efficiency with which shareholders equity is managed. In addition, aiming for an operating profit margin of more than 9%, the Company will ensure efficient management by seeking to curb costs and expenses. Cash Flow Net cash provided by operating activities decreased to 8.7 billion, from 11.5 billion in the previous fiscal year, primarily due to the fall in net income. Depreciation and amortization amounted to 3.5 billion. Net cash used in investing activities decreased from 13.7 billion to 9.4 billion, mainly attributable to a 4.4 billion decrease in net increment of marketable securities in the year under review. Net cash used in financing activities declined to 5.5 billion, from 6.5 billion in the previous fiscal year. This decrease was primarily due to a reduction in short-term bank loans and the reduced buy-back of Company stock as well as to lower dividends paid on common stock, which rose temporarily in the previous fiscal year because of the commemorative dividend payout. As a result of the above activities, cash and cash equivalents were down 5.8 billion from the previous fiscal year-end, to 35.4 billion. Free cash flow (net cash provided by operating activities less capital expenditures and cash dividends paid) decreased to 4.1 billion, from 7.8 billion in the previous year, remaining at a healthy level of cash generation. Liquidity and Capital Resources Compared with the previous fiscal year-end, Wacoal s total current assets decreased 1.6%, to billion, and total current liabilities fell 10.5%, to 37.1 billion. Working capital was 90.3 billion equivalent to 55.5% of net sales, compared with 54.3% at the end of the previous fiscal year. The current ratio improved from 312% to 343% at fiscal year-end. Wacoal maintains adequate levels of working capital, in addition to cash provided by operating activities, to fund its operating costs and capital investments. Capital expenditures increased from 1.2 billion in the previous fiscal year, to 2.5 billion. This rise principally reflected expenses associated with the decoration of and installation of equipment in our directly managed SPA shops, accompanying network expansion. 15

18 Long-term debt amounted to 1.2 billion, a 0.3 billion increase from the previous fiscal year-end. Shareholders equity decreased 2.5%, to billion, primarily attributable to a reduction in unrealized gain on securities and the recording of a minimum pension liability. The equity ratio was 75.1%, compared with 74.3% at the previous year-end. Mainly due to lower shortterm bank loans, the debt-to-equity ratio edged down from 5.5% at the end of the previous year to 5.2%. Net property, plant and equipment declined 2.3% at year-end, to 57.3 billion, and total assets decreased 3.6% at fiscal yearend, to billion. Dividend Policy In keeping with its dividend policy, Wacoal endeavors to bolster its financial position to ensure a stable operating base. At the same time, the Company works to achieve steady dividend payments while taking into account the dividend payout ratio. The Company intends to invest its internal reserves to build an integrated corporate structure that spans manufacturing, distribution, and retailing and to use its resources to improve information systems and develop new sales channels through its SPA shops. Through such investments, Wacoal will work to improve returns by enhancing corporate profitability. Furthermore, as part of efforts to return profits to shareholders and boost share value, during the year under review the Company carried out the buy-back and retirement of two million shares, following the retirement of three million shares in the previous year. Wacoal will continue to evaluate the merits of this policy in light of market trends. Wacoal gives high priority to encouraging the long-term, stable retention of its shares by investors and to expanding its base of investors. To those ends, with individual investors in mind, the Company believes that lowering investment units is an effective policy. While assessing stock market trends, Wacoal will carefully examine the cost and effectiveness of such a policy, and, in the event that it is judged to be appropriate, the Company will respond promptly. Trend Information In the fiscal year under review, conditions in the Japanese economy were extremely challenging. In addition to a downturn that started in the IT sector and spread to household spending, the rate of unemployment rose and personal consumption remained sluggish. Overseas, the sudden slump in the U.S. economy resulting from the September 2001 terrorist attacks slowed the global economy as a whole, with the Asian economies being particularly hard hit due to their high dependency on exports. Amid slumping consumer spending, difficult conditions in Japan s retail industry continued, precipitating a series of store closures and business failures. And, the subsequent reduction of sales areas severely impacted the intimate apparel sector. Based on the premise that such dramatic changes in the operating environment are possible in the future, Wacoal will implement a variety of policies. As well as bolstering its area strategy, which aims to maintain and boost sales by responding to changes in business conditions in different regions and in retailing categories, Wacoal will construct a highly profitable corporate structure by further strengthening the Company s overall brand power. Forward- Looking Statements Statements contained in this annual report that are not historical facts are forward-looking statements that reflect Wacoal s plans and expectations. These forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the Company s actual results, performance, or achievements to differ materially from those anticipated in these statements. 16

19 FINANCIAL SUMMARY WACOAL CORP. AND SUBSIDIARIES Years ended March 31 Millions of Yen For the year: Net sales , , , , ,967 Cost of sales ,567 87,493 89,290 91,951 91,474 % of net sales % 54.0% 53.8% 54.1% 53.8% Selling, general and administrative expenses ,076 64,906 65,530 66,613 62,066 % of net sales % 40.1% 39.5% 39.2% 36,5% Operating income ,186 9,624 11,117 11,432 16,427 Other income and expenses, net , (110) Net interest income (expense) (54) Income before income taxes, equity in net income of affiliated companies, minority interests and cumulative effect of accounting change ,613 20,129 11,401 12,222 16,573 Income taxes ,785 9,058 4,961 4,749 8,170 Net income ,983 10,889 7,254 8,489 8,929 Return on assets % 4.6% 3.1% 3.6% 3.9% Return on equity % 6.3% 4.2% 5.0% 5.5% Net cash provided by operating activities ,653 11,480 8,451 8,813 12,971 Net cash provided by (used in) investing activities... (9,412) (13,686) (9,624) (10,624) 2,045 Net cash used in financing activities (5,472) (6,478) (2,611) (105) (296) Depreciation and amortization ,533 3,265 3,157 2,447 2,269 Capital expenditures ,484 1,182 7,757 8,604 5,941 Per 5 shares of common stock (in yen): Net income Cash dividends Shareholders equity ,640 5,709 5,632 5,485 5,314 At year-end: Total current assets , , , , ,319 Total current liabilities ,095 41,449 38,490 39,541 42,319 Cash and cash equivalents ,381 41,196 49,889 53,933 55,622 Net property, plant and equipment ,291 58,644 59,990 56,339 52,878 Total assets , , , , ,226 Short-term bank loans and long-term debt, including current portion ,795 9,497 10,273 11,263 9,247 Shareholders equity , , , , ,800 17

20 CONSOLIDATED BALANCE SHEETS WACOAL CORP. AND SUBSIDIARIES March 31, 2002 and 2001 ASSETS Thousands of U.S. Dollars Millions of Yen (Note 3) Current Assets: Cash and cash equivalents: Cash ,656 7,634 $ 80,301 Time deposits and certificates of deposit ,725 33, ,323 Total ,381 41, ,624 Marketable securities (Note 4) ,203 34, ,962 Notes and accounts receivable: Trade notes ,206 2,651 16,624 Trade accounts ,537 22, ,298 Allowance for returns and doubtful receivables (Note 5) (2,965) (2,869) (22,344) Inventories (Note 6) ,899 25, ,634 Deferred income taxes (Note 11) ,604 4,647 34,695 Other current assets ,525 1,734 11,492 Total current assets , , ,985 Property, Plant and Equipment (Note 7): Land ,649 25, ,750 Buildings ,786 55, ,392 Machinery and equipment ,314 11,530 92,796 Construction in progress ,409 Total ,936 92, ,347 Accumulated depreciation (35,645) (33,367) (268,614) Net property, plant and equipment ,291 58, ,733 Other Assets: Investments in affiliates ,247 8,670 77,219 Investments (Note 4) ,509 28, ,623 Lease deposits and other ,548 6,563 49,345 Total other assets ,304 44, ,187 Total , ,262 $1,687,905 See notes to consolidated financial statements. 18

21 LIABILITIES AND SHAREHOLDERS EQUITY Thousands of U.S. Dollars Millions of Yen (Note 3) Current Liabilities: Short-term bank loans (Note 7) ,397 8,088 $ 55,742 Notes and accounts payable: Trade notes ,061 8,513 45,674 Trade accounts ,147 7,214 61,394 Accrued payroll and bonuses ,484 7,743 56,398 Income taxes payable ,096 3,093 15,795 Other current liabilities ,747 6,281 43,309 Current portion of long-term debt (Notes 7 and 13) ,228 Total current liabilities ,095 41, ,540 Long-Term Liabilities: Long-term debt (Notes 7 and 13) , ,307 Liability for termination and retirement benefits (Note 8) ,334 6,709 92,946 Deferred income taxes (Note 11) ,346 8,957 25,215 Total long-term liabilities ,915 16, ,468 Minority Interests ,770 1,697 13,338 Shareholders Equity (Notes 9, 10 and 14): Common stock, no par value authorized, 235,000,000 and 237,000,000 shares in 2002 and 2001; issued 149,116,685 and 151,116,685 shares in 2002 and ,260 13,260 99,925 Additional paid-in capital ,242 25, ,219 Retained earnings , ,322 1,001,439 Accumulated other comprehensive income (loss) (Note 10): Foreign currency translation adjustments (937) (2,418) (7,061) Unrealized gain on securities ,152 1,500 Minimum pension liability (2,445) (18,425) Total accumulated other comprehensive income (loss) (3,183) 1,734 (23,986) Less treasury stock at cost 4,991 shares in (5) (38) Total shareholders equity , ,558 1,267,559 Total , ,262 $1,687,905 19

22 CONSOLIDATED STATEMENTS OF INCOME WACOAL CORP. AND SUBSIDIARIES Years ended March 31, 2002, 2001 and 2000 Thousands of U.S. Dollars Millions of Yen (Note 3) Net Sales , , ,937 $1,227,046 Operating Costs and Expenses: Cost of sales ,567 87,493 89, ,351 Selling, general and administrative (Note 1) ,336 64,831 66, ,966 (Gain) loss on sale or disposal of property, plant and equipment (474) 5,577 Total operating costs and expenses , , ,820 1,172,894 Operating Income ,186 9,624 11,117 54,152 Other Income and Expenses: Interest income ,683 Interest expense (239) (333) (339) (1,801) Dividend income ,515 Gain on sale, transfer or exchange of investments (Notes 4 and 8) , ,783 Other net (393) (850) (458) (2,962) Total other income and expenses , ,218 Income before Income Taxes, Equity in Net Income of Affiliated Companies, Minority Interests and Cumulative Effect of Accounting Change ,613 20,129 11,401 57,370 Income Taxes (Note 11): Current ,405 5,181 5,443 33,195 Deferred (620) 3,877 (482) (4,672) Total income taxes ,785 9,058 4,961 28,523 Income before Equity in Net Income of Affiliated Companies, Minority Interests and Cumulative Effect of Accounting Change ,828 11,071 6,440 28,847 Equity in Net Income of Affiliated Companies ,148 1,271 1,096 8,651 Minority Interests (167) (282) 53 Income before Cumulative Effect of Accounting Change... 4,983 12,175 7,254 37,551 Cumulative Effect of Accounting Change (Note 2) (1,286) Net Income ,983 10,889 7,254 $ 37,551 U.S. Dollars Yen (Note 3) Amounts per American Depositary Receipt (5 shares of common stock) (Note 12): Net income before cumulative effect of accounting change $1.25 Net income $1.25 Cash dividends $0.51 See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME WACOAL CORP. AND SUBSIDIARIES Years ended March 31, 2002, 2001 and Thousands of U.S. dollars Millions of yen (Note 3) Net Income ,983 10,889 7,254 $ 37,551 Other Comprehensive Loss, Net of Tax (Note 10): Foreign currency translation adjustments , (1,672) 11,161 Unrealized gains (losses) on securities (3,953) (7,409) 1,046 (29,789) Minimum pension liability (2,445) (18,425) Other Comprehensive Loss (4,917) (6,596) (626) (37,053) Comprehensive Income ,293 6,628 $ 498 See notes to consolidated financial statements.

23 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY WACOAL CORP. AND SUBSIDIARIES Years ended March 31, 2002, 2001 and 2000 Millions of Yen Outstanding Accumulated Shares of Additional Other Common Stock Common Paid-in Retained Comprehensive Treasury (Thousands) Stock Capital Earnings Income Stock Balance, April 1, ,117 13,260 25, ,607 8,956 Net income ,254 Other comprehensive loss (626) Cash dividends paid, 68 per 5 shares of common stock (2,081) Balance, March 31, ,117 13,260 25, ,780 8,330 Net income ,889 Other comprehensive loss (6,596) Cash dividends paid, 83 per 5 shares of common stock (2,544) Repurchase of treasury stock for retirement... (3,000) (2,803) Balance, March 31, ,117 13,260 25, ,322 1,734 Net income ,983 Other comprehensive loss (4,917) Cash dividends paid, 68 per 5 shares of common stock (2,040) Repurchase of treasury stock for retirement... (2,000) (2,374) Repurchase of treasury stock other, net (5) (5) Balance, March 31, ,112 13,260 25, ,891 (3,183) (5) Thousands of U.S. Dollars (Note 3) Accumulated Additional Other Common Paid-in Retained Comprehensive Treasury Stock Capital Earnings Income Stock Balance, March 31, $99,925 $190,219 $ 997,151 $ 13,067 Net income ,551 Other comprehensive loss (37,053) Cash dividends paid, $0.51 per 5 shares of common stock (15,373) Repurchase of treasury stock for retirement (17,890) Repurchase of treasury stock other, net $(38) Balance, March 31, $99,925 $190,219 $1,001,439 $(23,986) $(38) See notes to consolidated financial statements. 21