Coach 2002 Annual Report Download - page 66

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Table of Contents
COACH, INC.
Notes to Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
On July 31, 2001, Coach Japan completed the purchase of 100% of the capital stock of P.D.C. Co. Ltd. (“PDC”) from the Mitsukoshi
Department Store Group (“Mitsukoshi”) for a total purchase price of $9,018. Mitsukoshi established PDC in 1991 to expand Coach
distribution to select department stores throughout Japan. At the time of acquisition PDC operated 63 retail and department store locations in
Japan. The strength of the going concern and the established locations supported a premium above the fair value of the individual assets.
The fair value of assets acquired was $22,351, and liabilities assumed were $20,732. Excess purchase price over fair market value is
reported as goodwill. Results of the acquired business are included in the consolidated financial statements from August 1, 2001, onward.
Unaudited pro forma information related to this acquisition are not included, as the impact of this transaction is not material to the
consolidated results of the Company.
On January 1, 2002, Coach Japan completed the buyout of the distribution rights and assets, related to the Coach business, from
J. Osawa and Company, Ltd. (“Osawa”) for $5,792 in cash. At the time of the acquisition, Osawa operated 13 retail and department store
locations in Japan. The strength of the going concern and the established locations supported a premium above the fair value of the individual
assets. The assets acquired of $5,371 were recorded at estimated fair values as determined by the Company’s management. Goodwill of
$421 has been recognized for the excess of the purchase price over the estimate of fair market value of the net assets acquired. Results of the
acquired business are included in the consolidated financial statements from January 1, 2002, onward. Unaudited pro forma information
related to this acquisition are not included, as the impact of this transaction is not material to the consolidated results of the Company.
As of June 28, 2003 there were 95 Coach locations in Japan, including 75 department stores and 18 retail stores managed by Coach
Japan and two airport locations operated by a distributor.
12. Derivative Instruments and Hedging Activities
Effective July 2, 2000, the Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. SFAS
No. 133, as amended and interpreted, establishes accounting and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. All derivatives, whether designated in hedging relationships or not, are
required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in fair value of the
hedged item are recorded in the statements of operations in the period incurred. If the derivative is designated as a cash flow hedge, effective
changes in the fair value of the derivative are recorded in other comprehensive income and are recognized in the statement of operations
when the hedged items affect earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings
immediately. It is the Company’s policy not to enter into derivative instruments for trading or speculative purposes.
Substantially all purchases and sales involving international parties are denominated in U.S. dollars, the majority of which are not
hedged using any derivative instruments. However, the Company is exposed to market risk from foreign currency exchange rate fluctuations
with respect to Coach Japan as a result of its U.S. dollar-denominated inventory purchases. The Company, through Coach Japan, enters into
certain foreign currency derivative contracts, primarily foreign exchange forward contracts, to manage these risks. Prior to the formation of
Coach Japan, the Company had not used foreign currency derivative instruments. In addition, the Company is exposed to foreign currency
exchange rate fluctuations related to the euro-denominated expenses of its Italian sourcing office. During the third quarter of fiscal 2003, the
Company began a program to enter into certain foreign currency derivative contracts, primarily foreign exchange forward contracts, in order to
manage these fluctuations.
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