Defining
Cutting Edge
Annual Report 2009
Fiscal year ended December 31, 2009
Feature: Products on the Cutting Edge
The Kokuyo Group strives to create products
that feature cutting-edge innovation. T
o be
truly “cutting edge,” a product must not simply
be all-around excellent, but must also have one
special characteristic that has been perfected
to the height
of excellence
and elegance.
On the
next page, you can flip through a few of the
many hit products that have been created by
this philosophy
.
This insert was attached using Kokuyo’
s innovative
Staple-Free Stapler .
See page 3 of the insert for more.
Products
on the
Cutting Edge
Products
on the
Cutting Edge
Campus
Notebook
Dotted Ruled Lines Series
This innovative notebook was developed through research of the notebooks used by students who passed the entrance examinations at the prestigious University of Tokyo. Evenly spaced dots on the ruled lines make it easy to space characters and write neatly. To be considered a “hit,” a product must normally sell 1 million units per year, but the Campus Notebook Dotted Ruled Lines Series has sold an overwhelming 20 million units, actually growing the overall note- book market, which had been on a downturn. The notebook captured sixth place on magazine Nikkei Trendy’s hit ranking.
Notebook Market (Sales in Japan)
(Excl. Exercise Notebooks)
2000 2005 2009
¥57.2 billion
¥47.9 billion
Cutting
Edge Value
Dots on the ruled lines make it easy to write evenly and neatly.
AIROFIT
AIROFIT scissors feature proprietary Kokuyo blades structurally designed to prevent adhesive from sticking to them. Thanks to the introduction of the product at major convenience store chains and other measures, sales are five times as high as standard scissors.
Cutting
Edge Value
Blades do not become sticky even when cutting tape or other adhesive materials.
Staple-Free
Stapler
The Staple-Free Stapler lets users fasten together up to 10 sheets of stan- dard copy paper without using a staple. This represents the highest number in the industry. By eliminating the need for metal staples, the product not only conserves resources, but also eliminates the need to remove staples before disposing of documents. In the first four months after its release, orders have been roughly four times as high as sales targets.
Cutting
Edge Value
Allows users to fasten multi- ple sheets without using staples, and also functions as a two-hole punch.
meetima XVD
Communication System
Using XVD high-compression technology, meetima XVD enables transmission of high- definition video using 1Mbps bandwidth, viewable via a stan- dard optical Internet connection. The result is a videoconferenc- ing system that enables communication that feels truly face-to-face.
Cutting
Edge Value
Enables transmission of high- definition video over an Inter- net connection.
DOTLINER
Series
The adhesive on this dispenser comes in individual dots instead of a single continuous tape. This makes it easy to end application exactly where you want it, with no messy edges or uneven cutting. Over 20 million DOTLINER units have been sold since the product was launched in 2005, and it now holds the No. 1 share in the adhe-
sive tape market. 2005 2009
13%
Adhesive Tape Share
Kokuyo 36%
Cutting
Edge Value
Roller-type adhesive dispenser cuts tape cleanly.
Cautionary Statement With Respect to Forward-looking Statements
This annual report contains statements about Kokuyo’s future business plans and strategies as well as estimates. Statements regarding the Company’s projected business results are not based on historical facts and are subject to various risks and uncertainties. These risks and uncertainties relate to economic conditions in Kokuyo’s business environment, particularly the state of private-sector and public-sector capital investment, competitive pricing pressures in the marketplace, and Kokuyo’s ability to continue designing and developing products that will be accepted in markets. However, it should be noted that elements affecting per formance are not limited to the previously mentioned factors.
Profile
Established in 1905, Kokuyo Co., Ltd. now has over 100 years of
experience in stationery and furniture products, design and
construction of office and store interiors, and
distribution and staffing services.
The company has built up its operations
as a comprehensive office supplies and
services provider unparalleled world-
wide, and focused on responding to every
conceivable need, whether in the home, at
school, or at work. In 2004, Kokuyo shifted to a
holding c ompany s
tructure, enabling
it to exer t the Gro
up’s
collective strengths more fully and aggressively expand its
scope of operations to China and elsewhere overseas.
Looking ahead, Kokuyo is striving to become a unique eco-
friendly company
, accelerating voluntary environmental initia-
tives such as eliminating products that bear the proprietary
Eco-X mark. At the same time, it seeks to be a
vibrant and sustainable company with
an innovative spirit and a
unique business approach.
Kokuyo’
s Original Eco-X Mark
Kokuyo’s original Eco-X “non-eco” mark. Kokuyo intends to identify all non-envir
onmentally friendly products in its general catalog with the Eco-X mark and phase them out by the end of 2010.
Stationer y
Furniture
Contents
04
Message to Stakeholders05
Financial Highlights10
Review of Operations13
Kokuyo’s CSR Initiatives16
Corporate Governance17
Board of Directors18
In Memory of Chairman Emeritus Shonosuke Kur oda
20
Six-year Summary21
Management’s Discussion and Analysis for AR 2009/1228
Consolidated Balance Sheets30
Consolidated Statements of Operations31
Consolidated Statements of Changes in Net Assets32
Consolidated Statements of Cash Flows33
Notes to Consolidated Financial Statements52
Independent Auditors’ Repor t55
Corporate DataUniversal Design Ruler
This ruler’s 5 millimeter griding and wave-shaped marking make measuring as easy as looking. This is just one of many comfort- able, easy-to-use products that Kokuyo offers customers.
R&D
Kokuyo conducts technological development and research into advanced working styles in order to provide valuable products and services that are in tune with changing times and meet customer needs.
Environmental Efforts
Furniture made from thinned wood
This furniture is made from thinned wood culled from Kokuyo’s Yui no Mori corporate forest. Kokuyo focuses on eco-conscious business activities, including making all our products eco-friendly.
Message to Stakeholders
Reflections on
Fiscal 2009
Fiscal 2009 (the fiscal year ended December 31, 2009) came and went in the midst of a recession, with no signs of recovery in sight for the Japanese economy, which remained slug- gish as it was pounded by the waves of the worldwide recession. Although the first true change in Japan’s political administration since the end of World War Two brought a sense of hope for reform, the future remained unclear.
In the stationery industry, past recessions have seen many corporate customers quickly target office products and other consumables for economizing measures in order to raise cost-consciousness among employees. There is no question that this year we faced difficult circumstances, but I believe the drop in demand was not so great as could have been expected. Office furniture, in contrast, faced extremely harsh conditions. This was because much of the demand that was being generated by the financial industry evaporated after the Lehman Shock, while many other corporate clients exercised thorough restraint in capital investments. Other reasons for the dropoff included price competition spurred by the ongoing imbalance between supply and demand in a deflation economy.
As a result, net sales were down 18.2% to ¥266.7 billion. Although we reduced SG&A expenses by ¥13.3 billion through a rigorous review of costs, including cutting back on part- ner employees, reducing compensation and wages, and cutting back on overtime, these mea- sures were insufficient to cover the decline in net sales, resulting in operating income of ¥0.5 billion, 89.2% lower than the previous fiscal year. Net income was ¥0.5 billion, however, bring- ing us back into the black for the first time in three years.
Amid the current severe environment, Kokuyo is
working to change the very flow of its business, from a
manufacturer-initiated model to a customer-initiated
business. At the same time, we are working to develop
products that feature cutting-edge innovation to
transform our management structure so that we can
consistently achieve higher revenues and profits.
Akihiro Kuroda President
Strategies for
Fiscal 2010
Overall Strategy
We anticipate that market conditions in fiscal 2010 will prove just as difficult as in fiscal 2009. In order to pull through in this climate, we will implement a wide variety of measures and proceed with reforms to strengthen our management structure so that we can ensure consistent growth in both revenues and profits.
First of all, we will change the very flow of business from a manufacturer-initiated model to a customer-initiated business. This will include adjustments to our organization, ways of working, and methods of evaluating employees. In
addition, we will work to ensure our business types and formats are those for which sales are not subject to the fluctuations of the economy. Although private- sector office demand remains low, industries such as rail, electric power and food products are per forming steadily, and the market for medical, education, and public-sector clients is essentially on a par with the previous year. We intend to boost our sales to these sectors and shift to a structure that will be able to withstand even a second or third Lehman Shock.
Financial Highlights
KOKUYO CO., LTD. AND CONSOLIDATED SUBSIDIARIES Fiscal years ended December 31, 2008 and 2009
Millions of yen
Thousands of U.S. dollars
2009 2008 2009
For the year:
Net sales ¥266,726 ¥326,120 $2,896,048
Operating income 579 5,354 6,287
Net income (loss) 595 (11,991) 6,460
Return on equity (%) 0.4 (7.1)
At year-end:
Total assets 252,053 266,419 2,736,732
Net assets 158,074 159,820 1,716,330
Yen U.S. dollars
Per share data:
Basic net income (loss) per share ¥ 5.03 ¥ (101.36) $ 0.05
Cash dividends per share applicable to the year 15.00 15.00 0.16
Note: The U.S. dollar amounts are translated from yen, for convenience only, at the rate of ¥92.10 = U.S.$1.00, the approximate exchange rate prevailing on December 31, 2009.
Securing profits unaffected by economic cycles
¥271.1 billion
2003
¥270.0 billion
2010 2012 70.0 30.0
Portion of Sales Not Subject to Economic Cycles
Education, medicine, government offices, high-value-added products
Portion of Sales Subject to Economic Cycles
Market Development
(Billions of yen)
Delivery Delivery
Inventory Order
In the Past In the Future
Customer Estimated
production
Order
Production Production
Inventory
available not availableInventory
Customer
Meanwhile, we have no choice but to engage in price competition. Demand is down, but there has been no drop on the supply side, and on top of that we are said to be in a deflation- ary cycle. By bringing to market growth products, including products that feature cutting-edge innovation, we can remove ourselves from unproductive price-slashing. Last year several such cutting-edge products, including notebooks and scissors, were major hits, and we are confi- dent that if we can provide a clear added value to our products, customers will support us and buy them.
Over the past five to six years, we have conducted investments in overseas businesses and M&As. Unfortunately, we have not achieved a return on our investment in some of these projects. We will work to generate a return at an early date, and make decisions as soon as possible on withdrawing from projects where we cannot anticipate recovering our investment.
Furniture Business
Demand in the Japanese furniture business has dropped off by 30%, and we believe that we must move forward on the assumption that demand will not recover to its previous level. Going forward, the number of people working will decrease and office vacancy rates will rise, and in tandem companies will come to expect proportionately greater output from each employee. As these expectations rise, so will investment per employee, including investment in office envi- ronments, facilities, and equipment. We see this shift as an opportunity for Kokuyo.
In order to capitalize on this opportunity, we will change our ways of doing things, the mechanisms of our business, production formats at factories, sales methods—everything. For example, up to now with our ordering system, when customers placed an order we would set aside inventory, and accept the order because we had inventory. In future, we will build a system that enables us to respond more quickly and flexibly to customer needs. If we have information from the sales divisions as to when orders are likely to come in, we can start
production while we wait, and based on the time required let customers know how and when we need to receive an order so as to be able to meet the delivery dead- line. By adjusting production to meet this schedule, we can turn what used to be a matter of months into a matter or weeks. Despite the current severe business con- ditions, we are investing ¥3.7 billion in revamping our core system to make it more efficient.
We will also change the way we sell things. In the past, we have distributed furniture through a number of different channels, including dealers, direct sales, Building a Customer-Oriented Value Chain
over
20
million soldover
20
million sold in fiscal 2009and public-sector tenders. Going forward, we will integrate these channels. We will target customers who are not susceptible to economic fluctuations, and ensure that our distribution system is aimed at these customers. The point is that even if our sales force learns about higher quality expectations and needs of customers, if the manufacturers that transform these expectations and needs into products do not change, the added value will not be apparent. We will move quickly to integrate sales and manufacturing so that we can steadily capture customer needs with a system that provides cutting-edge value across the business.
Stationery Business
In order for Kokuyo to grow, we must increase sales of growth products (new products and high-value-added products) and boost our profit margins. We will therefore concentrate our product development on items and materials that feature cutting-edge value. To truly stand out, a product must not simply be all-around excellent, but must also have one special characteristic that has been per fected. One recent exam- ple of such cutting-edge value is the DOTLINER, which has sold over 20 million units since we launched it in 2005. Then there is the Campus Notebook Dotted Ruled Lines Series—to be considered a
“hit” in this industr y, a product must normally sell 1 million units per year, but the Campus Notebook Dotted Ruled Lines Series had sales
of over 20 million units in a single year. Even in this environment, sales of these products continue to grow.
Last year, as often as time permitted, I participated in stationery product development meetings. I went to these meetings to debate the meaning of cutting-edge value. During a meeting, I might say, “That prod- uct has no cutting-edge value,” and employees would tell me, “No, Mr. Kuroda, it does! It has this function too, and together with the main function it provides added value.” My response was, “There are just too many functions here, and none of them stands out. We can get rid of the whole thing. Make one of the functions truly cutting-edge, and then I’ll approve.” We went through this over and over, and now all employees are starting to truly understand the concept and apply it to their work. Moving forward, Kokuyo will not be making products that are merely all-around slightly better. Instead, for each product we will design one truly outstanding feature that only Kokuyo can offer. For adhesive tape, the selling point will be that there is no residue. Our scissor blades will be able to cut adhesives without getting stuck. In this way, our product develop- ment will focus on a single cutting-edge feature for each product.
DOTLINER
Campus Notebook
Dotted Ruled Lines Series
We will also strengthen the business-to-consumer field. Last year we acquired the Japanese sales rights for The Conran Shop products. Our goal is to cultivate development capabilities within Kokuyo that will allow us to create the kind of business-to-consumer products that are featured in Conran Shop stores. We are eager to learn about the types of cutting- edge value that The Conran Shop customers appreciate, and to use the know-how of The Conran Shop to add cutting-edge value to our own products.
Overseas Business Development
In overseas business development, we will focus our efforts on stationery sales in the Asian region. First, we will sell notebooks produced at our Viet-
nam factory in both China and Vietnam. We will be able to be competitive with other products being sold locally in terms of price. Last year we sold over 400,000 units in the region, and this year we are targeting sales of 6 million units in Vietnam and 4 million units in China. Three years from now, we aim to have a 15% market share in Vietnam and a 20% share in China. Vietnamese students are particularly diligent in their studies, purchasing twice as many notebooks as Japanese students, and our campaigns at local universities have received quite a response, with large numbers of people attending. Going forward, we will move into India and other areas of the Asian region, and later on to other BRIC countries, and Africa.
In China we are developing the office space construction and office supply mail order businesses, but we have not yet reached our targets. Our businesses have been directed mainly at Japanese companies operating in China, but with the recession the number of com-
panies moving into China has declined precipitously, and the office space construction business is strug- gling severely. The Easy buy office supply mail order business has not been able to raise sales or profit substantially, even as the Chinese economy becomes the first world economy to recover. This has been partly due to a number of reasons not related to economic conditions. We are aiming to achieve profitability as quickly as possible in both these businesses, by turn- ing attention in the office space construction business to local Chinese corporations, and by revising the busi- ness model with an eye to potentially withdrawing from the office supply mail order business within the year.
The Environment
Kokuyo strives to be an environmental innovator, apply- ing original ideas and ingenuity in a variety of initiatives to address environmental issues.
Vietnam
Africa
Russia China
India
Vietnam
South America Notebook Production
at Overseas Bases
Plans for Expanding Notebook Production
Stationery Segment
Results for the Fiscal
Period to December 31,
2009
Net sales amounted to ¥153.7 billion, down 9.0% year on year. However, operating income was recorded at ¥4.9 billion, up 10.2% year on year.
Market Conditions
The stationery market continues to face severe business conditions as companies limit their purchase of consumables amid the eco- nomic recession and competition intensifies in the office supply mail-order business.
Product Development
The Kokuyo Group sought to stimulate demand and expand its market share with the launch of a variety of original products. These
high-value-added products that
exceed customer expectations included the popular Campus Notebook Dotted Ruled Lines Series, which had annual sales of over 20 million units, developed through research of the notebooks used by students who passed the entrance examina- tions at the prestigious University of Tokyo; the Campus Notebook Handout-Keeper Version, a larger version of the classic Campus Notebook with pages large enough to insert standard- sized handouts received in class without need- ing to trim them; AIROFIT scissors, an ingenious Universal Design scissor with blades that do not become sticky even when cutting tape or other adhesive materials; the Staple- Free Stapler, which allows users to fasten multiple sheets without using staples; and the
“Will & Testament kit,” which provides all the necessary stationery for producing a last will and testament, including paper, an envelope,
and an instruction guide.
Office Supply Mail Order
Business
In the office supply mail order business, Kaunet Co., Ltd. achieved solid sales, striving to stimulate demand by reducing prices and adding to the lineup of original products. Net sales were firm, declining just 0.4% to
¥45.1 billion.
“Will & Testament” kit
This popular kit includes an illustrated instr uction guide that explains all the points necessar
y for drafting a last will and testament.
Review of Operations
Campus Notebook Handout-Keeper Version
The large pages of this notebook enable students to insert handouts received in class into their notebooks without needing to trim them.
Note: Kokuyo changed its fiscal year-end from March 31 to December 31, effective from fiscal 2008. For the fiscal year ended December 31, 2007, the accounting term for the Company was 9 months.
57.6%
153,656 168,903
127,168
07/12 08/12 09/12
4,872 4,423
1,733
07/12 08/12 09/12 Share of Total Net Sales
(09/12)
Net Sales
(Millions of yen)
Operating Income
(Millions of yen)
Furniture Segment
Results for the Fiscal
Period to December 31,
2009
Net sales were down 28.2% to ¥99.2 billion for an operating loss of ¥3.6 billion.
Market Conditions
Demand fell sharply as conditions r emained extremely severe as a result of heavy restraint in corporate capital expenditur
e due to the economic recession.
LiveOffice
Following the renovation of the Eco LiveOf fice Shinagawa, founded in 2008, the Kokuyo Group re-inaugurated the LiveOf
fice in Kasumigaseki, a next-generation model of
fice that promotes corporate innovations and changing work styles, as Resonance Field 3.0. It also opened the Kyushu LiveOf
fice. The new LiveOffice proposes solutions for reducing
environmental burden, boosting worker pr oduc- tivity, and reducing office expenses. Innova- tions include initiatives to r
educe CO2 emissions, as well as the
Office Darts II system, which enables employees to choose where to sit efficiently based on the type and quantity of work they have.
Kokuyo launched new pr
oducts designed to enhance worker and or
ganizational creativity and support reductions in fixed-costs, such as office space consolidation. The new of
ferings included the Worklink work station, which reduces the per-worker desk footprint by as much as 40% compar
ed to traditional rectan- gular desks, and the
ACTINA swivel desk chair, with a built-in tray under the seat for docu- ments and small items that makes it easy to implement a free-seating office layout.
ACTINA
A swivel desk chair with built-in storage,
ACTINA has a wide range of uses, fr
om free-seating office layouts to conference rooms.
Worklink
This innovative office furniture stimulates communication by enabling efficient office layouts while also reducing the per-worker desk footprint.
Note: Kokuyo changed its fiscal year-end from March 31 to December 31, effective from fiscal 2008. For the fiscal year ended December 31, 2007, the accounting term for the Company was 9 months.
37.2%
99,179 138,216 107,945
07/12 08/12 09/12
–3,613 1,506
–231
07/12 08/12 09/12 Share of Total Net Sales
(09/12)
Net Sales
(Millions of yen)
Operating Income (Loss)
(Millions of yen)
Store Fixtures Segment
Results for the Fiscal
Period to December 31,
2009
Net sales were down 26.9% to ¥13.9 billion for an operating loss of ¥0.7 billion.
Market Conditions
As a result of restraint in capital investment in the retail sector and stor
e consolidations and closings, both due to the economic recession, the market contracted and demand was stagnant.
Service Enhancement
The Company strengthened its environmental solutions by introducing product shelves using newly developed LED lighting that can reduce energy consumption by 50% over conventional lighting, and also worked to enhance service offerings that do not rely on customers’ opening new store locations, including proposing sales promotion activities to vitalize retail stores.
Concentration and
Selection
The Group worked to improve profitability, includ- ing by withdrawing fr
om low-margin projects.
LED Lighting System
This lighting system successfully conser
ves energy while providing bright illumination for product displays.
Note: Kokuyo changed its fiscal year-end from March 31 to December 31, effective from fiscal 2008. For the fiscal year ended December 31, 2007, the accounting term for the Company was 9 months.
Operating Income (Loss)
(Millions of yen)
5.2%
Share of Total Net Sales
(09/12)
13,891 19,001
17,711
07/12 08/12 09/12 Net Sales
(Millions of yen)
–680 –575
–100
07/12 08/12 09/12
Kokuyo’s CSR Initiatives
For the Kokuyo Group, corporate social responsibility
(CSR) means being accountable to and trusted by society.
Kokuyo aims to embrace its responsibility to society and
retain public trust by contributing to the realization of a
sustainable society through its business activities and
social contribution activities.
Corporate Philosophy
“Contributing to Society Through
the Provision of Superior Products”
Since its founding, the Kokuyo Group has aspired to support social and economic development through the provision of products that people use on a daily basis. In the years to come our aim will be the same: to pro- vide products that delight millions of customers through the uncompromising pursuit of ease of use and ready availability of products that people use with- out a second thought.
Socially Responsible
Management
Basic Policy on CSR
The standard that informs and imbues the Kokuyo Group’s CSR activities is the corporate philosophy of
“contributing to society through the provision of supe- rior products.” This philosophy derives from the Kokuyo Management Credo, which codifies the concept of
“Serving all customer needs” and the attitude of self- reliance advocated by Kokuyo founder Zentaro Kuroda.
In keeping with this standard, in 2004 Kokuyo established the Kokuyo Group CSR Charter with the aim of building and improving relationships with our various stakeholders as a good corporate citizen. In the Charter, Kokuyo sets forth specific action guide- lines for each of five areas of focus (customers, local communities, environmental protection, business activities, and human rights) to achieve the sustained
development of society and the Group, and conducts its activities based on these guidelines. The Company has also established the Kokuyo Corporate Ethics Code, a guideline for day-to-day actions of employees who interact with stakeholders.
Since 2008, Kokuyo has designated the two themes of preventing global warming and promoting eco-friendly products as priority measures in its CSR activities. The Company is working to combine busi- ness strategies with CSR activities by, for example, launching the Eco-X mark, which identifies all non- environmentally friendly products, and striving to eliminate such products from its lineup. In this manner, Kokuyo is stepping up efforts to fulfill its social responsibilities.
Management Credo
“Serving all customer needs” Corporate Philosophy
“Contributing to society through the provision of superior products”
Kokuyo Group CSR Charter
Kokuyo Corporate Ethics Code
Environment
Global Warming Prevention
Measures
In fiscal 2009, the KOKUYO Group achieved a 4,746-ton reduction in the volume of CO2 emissions compared to the previous year, for a total of 23,742 tons. We estimate that a 1,462-ton reduction resulted from operational improvements, a 245-ton reduction from facilities improvements, and a 3,039-ton reduc- tion from decreased production volume and merging and streamlining of facilities.
Last year, Kokuyo reduced emissions at the Shibayama Plant, which has installed a visualization system*, by 222 tons merely through operational improvements such as reducing the standby energy at night and on holidays, and introducing operating-time rules for equipment.
Office emissions were down 679 tons year on year. In addition, we continued to promote such pro- grams as Cool Biz and No Over time Day, and the two environmentally friendly offices, Eco LiveOffice Shinagawa and Resonance Field 3.0.
At the Shinagawa office, we kept tabs on energy consumption using a visualization system, and reduced emissions by 132 tons through such measures as reviewing the operating times of environmentally
burdensome air conditioning, reducing power at night and reducing the number of elevators in operation.
* A visualization system calculates the volume of CO2 emissions in a plant or office based on the actual energy consumption.
Providing Eco-Products
Two years have passed since Kokuyo started identify- ing products that are not environmentally friendly at any stage of the lifecycle with the Eco-X mark in its general catalog, and then phasing them out. In the year under review, the percentage of furniture products displaying the mark achieved its target. However, the percentage of stationery products did not meet the target despite ongoing specification changes for each product, including the proactive use of recyclable materials and compact packaging. This was because the number of products identified to be phased out was greater than expected and the planned measures were not executed.
Although we failed to achieve this target in fiscal 2009, as initially planned we will work to ensure that there are no Eco-X marked products in Kokuyo’s 2011 catalogs and that all products listed in these catalogs are environmentally friendly.
Resonance Field 3.0.
Eco LiveOffice Shinagawa
Uses CO2 Emissions Index from Version 1.5 of the Corporate Greenhouse Gas Emissions Volume Calculation Guidelines (Ministry of the Environment)
CO2 Emissions
(Tons of CO2)
31,220
06 05 90
28,780
07
28,488 29,311 28,337
08
23,742
09
Contributions to Society
In order to remain a good corporate citizen that enjoys the trust of local communities, the Kokuyo Group con- ducts a wide range of social contribution activities based on its corporate philosophy of “Contributing to society by providing superior products.” The Group’s operating companies carry out their independent activ- ities. In fiscal 2009, the Group was involved in envi- ronmental activities together with local communities and in utilizing product characteristics to conduct a total of 267 social contribution activities, including special classes featuring visiting lecturers, as well as plant and showroom tours.
Status of Inclusion in SRI Indices
Investors are growing increasingly interested in socially responsible investment (SRI), which involves investing in companies that are actively engaged in measures to protect the environment, offer expanded employment opportunities and otherwise contribute to society. In recognition of its engage- ment in these areas, the Kokuyo Group has been selected for inclusion in the prestigious Ethibel Sus- tainability Indexes run by Ethibel, one of the top SRI consultants in Europe and North America. The Kokuyo Group has also earned inclusion in other highly respected SRI indices including FTSE4Good, managed and calculated by UK-based FTSE International Ltd.
Ethibel Sustainability Indexes (Sweden)
FTSE4Good (UK)
Contributing to environmental education at junior high schools at Eco- Products 2008.
Collaborating with special-needs schools to conduct summer internships for disabled persons.
Kokuyo Group Governance System
Corporate Governance
The Kokuyo Group places great emphasis on corpo- rate governance based on the core values of transpar- ency, speed, and fairness, and is reinforcing working systems to uphold these values. While clarifying oper- ating authority and responsibilities under the holding company system, we are also making efforts to strengthen overall super visor y functions and enhance corporate governance. The Group’s management framework, basic structure, and essential points on Group operations under the new system are stipu- lated in the Kokuyo Group Governance Principles, established in line with the introduction of a holding company system in October 2004.
In addition, we have an auditing system in place, and each of the six members of the Board of Directors (no outside directors) is appointed to a term of only one year to allow flexible response to changes in the business environment. There are four statutory audi- tors (including two external auditors) and two employ- ees are engaged as full-time auditing staff. Four lawyers on an advisory contract provide legal advice as the need arises. We are also strengthening our system of internal auditing through improved cooperation between the holding company and Group operating companies, and sharing issues in auditing.
Internal Control System
The Kokuyo Group decided the basic policy for its inter- nal control system at a meeting of the Board of Direc- tors held in May 2006.
This basic policy establishes a framework for the Group’s internal control system, including document- handling rules governing the storing and safekeeping of information related to the duties executed by directors, and the establishment of ethical standards based on the Kokuyo Corporate Ethics Code.
Furthermore, with the enforcement of the Financial Instruments and Exchange Act, in January 2009 Kokuyo established a cross-organization J-SOX Commit- tee with the goal of actively maintaining and strength- ening internal controls with a focus on ensuring the reliability of financial reporting.
Compliance and Risk
Management
The Kokuyo Group has established a Risk and Compli- ance Committee to lead compliance promotion efforts. In April 2008, the positioning of the Risk and Compli- ance Committee changed when the President of the Kokuyo Group took the helm of the committee and the Group worked to speed up responses to crisis issues and enhance preventive measures. In addition, Kokuyo
cooperates with the Risk and Compliance Committee at each operating company to prevent risks from materializing and to respond quickly in such an event. Each operating company visualizes the current risk situation using a “risk map,” identifies key risks to be managed on an annual basis, and works to reduce risk.
In fiscal 2009, Kokuyo responded to the risk of improper environmental labeling, including that of the Kokuyo Group’s own Eco-X mark, and the Group worked to elimi- nate the risk. Also, Kokuyo established the Disaster Response Division and the New- Strain Influenza Response Division.
Internal auditing system Board of Directors
President
Head office divisions (for business execution)
Group Management Conference
Auditing
Internal auditing
Internal auditing Coordination
Control
Coordination Report
Coordination Report
Accounting audit Appointment and dismissal
Appointment, dismissal and supervision
Appointment and dismissal Appointment and dismissal Board of Auditors
Management Audit Division General Meeting of Shareholders
Holding company (Group parent company)
Central Workplace Safety and Hygiene Committee Diversity Promotion Committee
Environmental Committee Risk and Compliance Committee
J-Sox Committee
Independent auditor
Response Inquiry
Report Instructions
Group operating companies
For more details concerning Kokuyo’s CSR activities, please see: http://www.kokuyo.co.jp/english/csr/index.html
Akihiro Kuroda
President
Yasuhiro Kuroda
Vice-President
Toshifumi Okubo
Executive Director
Takuya Morikawa
Director
Yoshiaki Yoshimoto
Director
Hidekuni Kuroda
Director
Board of Directors
(As of March 30, 2010)
Directors
From fiscal 2008 to 2009, a number of cases of misconduct were discovered in the Kokuyo Group. These included improper acts committed by some employees, a violation of the Antimonopoly Law with respect to tendering and audits from the Japan Fair Trade Commission in relation to tendering. Kokuyo recognizes these facts as a serious management issue, and will work to eradicate all improper acts and implement thorough compliance. To do this, in fiscal 2009 a team of outside exper ts has been conducting a fact-finding compliance investigation of all Group employees, with the aim of changing the Kokuyo corporate culture at its roots.
Kokuyo also holds regular training sessions to raise awareness about compliance and ensure continued adherence to laws and regulations. In fiscal 2009, Kokuyo conducted mandatory compliance training at each level of the company, including introductory training for new employees and training for new managers. In addition to level-based training, Kokuyo implemented initiatives to raise awareness about risk by holding compliance discus- sion training using simulated examples at each operating company and to invigorate workplace communication.
Each employee of the Kokuyo Group is making every effort to regain the public’s trust by sincerely and thor- oughly carrying out compliance initiatives.
Statutory Auditors Akihiro Kondo
Yoichi Kotani
Outside Auditors Yoshio Terada Naoshige Nakada
On March 12, 2010, it was announced that the quality per for- mance assessment for some free access floor (generally called “OA floor”) building materials had been improperly procured from the Public Buildings Association, and these materials had been sold for 8 1/4 years as conforming to the Public Buildings Association or Japan Access Floor
Association (JAFA) standards.
This misconduct came to light when a team of outside experts conducted a fact-finding compliance investigation of all Kokuyo Group employees.
The Kokuyo Group has seriously reflected on this miscon- duct and is taking steps to ensure that it will not reoccur. We have strictly reprimanded the personnel involved and are preparing to reform and rebuild our organization such that a rigorous system will be in place to prevent any reoccurrence. We sincerely apologize to our customers, shareholders and other concerned parties for the trouble we have caused.
* The manufacture and sale of these materials was terminated completely in July 2008. Since August 2008, Kokuyo Furniture Co., Ltd. has been only selling products that conform both to the quality performance assessment of the Public Buildings Association and to JAFA standards. Therefore, there are currently no problems concerning these products. As regards the non-conforming products already sold, recent tests have confirmed that they pose no risk of causing serious accidents and are safe.
Improper Procurement of Quality Performance Assessment for Free Access Floor Materials
On December 23, 2009, we bade farewell to Chairman Emeritus Shonosuke Kuroda.
Shonosuke Kuroda maintained the account ledger, invoice and writing paper business pioneered by Kokuyo founder Zentaro Kuroda, and launched the office furniture business, establishing Kokuyo’s current position as a general office supplies manufacturer.
During his tenure, the manufacture of paper products shifted from hand-production to automated machine manufacturing. Shonosuke applied these same methods to office furniture, and established automated produc- tion systems for metal products. He also built up storage facilities and a logistics information network to enable the Company to cope with the intense demand at the end of each fiscal year. Through these efforts, he success- fully created a system by which Kokuyo can simultaneously deliver over 100,000 items anytime, anywhere.
In recognition of his extensive work in supporting Japan’s high economic growth through office supplies, he was appointed president of Kokuyo in 1960. At that time, the Company’ sales amounted to ¥4.5 billion; by the time he was appointed Chairman in 1985, that figure had grown to ¥163.9 billion.
For 37 years, he served as Director of the All-Japan Paper Manufacturers’ Association, and played a key role in numerous other industry organizations, including the Osaka Chamber of Commerce and Industry, the Kansai Economic Federation, and the Osaka Paper Manufacturers’ Association. Throughout his career, he worked hard for the development of industry and the local Kansai region.
In the last years of his life, he continued to pass on his management philosophy to the next generation, reminding Kokuyo Group employees whenever he spoke with them of the founding spirit of Kokuyo: “Our work may be troublesome and complicated, but through it we bring unique value to the world.”
In Memory of Chairman Emeritus
Shonosuke Kuroda
The Life of Shonosuke Kuroda
Born June 25, 1916
Died December 23, 2009 (age 94)
Education
March 1940 Graduated from Keio Secondary School.
Accomplishments at Kokuyo
February 1942 Manchuria Kokuyo Printing and Paper Manufacturing Company established, Shonosuke Kuroda appointed President.
April 1949 Appointed Vice President of Kuroda Kokkodo Co., Ltd.
October 1956 Visited Europe to research production equipment.
January 1960 Appointed President and Representa- tive Director of Kuroda Kokkodo. May 1960 Began sales of filing cabinets as the
basis for the office furniture business. June 1961 Company name changed to Kokuyo
Co., Ltd. Shonosuke Kuroda remained President and Representative Director of the renamed company.
August 1961 Construction of the Yao Plant, the world’s largest paper manufacturing plant, completed.
November 1969 Completion of current head office buildings in Osaka’s Higashinari Ward. March 1971 Kokuyo listed on the second section of
both the Tokyo and Osaka stock exchanges.
February 1972 Kokuyo listed on the first section of both the Tokyo and Osaka stock exchanges. August 1974 Sales and inventory management
system for wholesalers began operation.
November 1979 New company building in Tokyo completed.
December 1982 Large showroom opened in Tokyo. December 1985 Appointed Chairman of Kokuyo
Co., Ltd.
June 1986 Ordering via leased line begins for retailers.
March 2009 Named Chairman Emeritus of Kokuyo Co., Ltd.
January
1960
November
1969
March
1971
August
1961
Six-year Summary
KOKUYO CO., LTD. AND CONSOLIDATED SUBSIDIARIES
The years ended March 31, 2005, 2006 and 2007; and the years ended December 31, 2007, 2008 and 2009
Millions of yen
Thousands of U.S. dollars
2009.12 2008.12 2007.12 2007.3 2006.3 2005.3 2009.12
For the year:
Net sales ¥266,726 ¥326,120 ¥252,824 ¥339,559 ¥303,959 ¥283,519 $2,896,048
Cost of sales 180,260 221,574 175,512 228,959 202,879 187,008 1,957,220
Selling, general and
administrative expenses 85,887 99,192 75,910 99,237 86,975 84,352 932,541
Operating income 579 5,354 1,402 11,363 14,105 12,159 6,287
Net income (loss) 595 (11,991) (5,326) 5,622 4,145 5,207 6,460
Capital expenditure 3,479 4,988 7,733 4,999 6,042 6,431 37,774
Depreciation and amortization 6,334 6,488 4,430 6,057 6,082 6,220 68,773
Net cash and cash equivalents provided
by operating activities 13,737 16,153 3,286 7,936 11,488 10,168 149,153
Net cash and cash equivalents used
in (provided by) investing activities (1,930) (1,012) (11,333) 2,389 (17,217) (20,778) (20,955) Net cash and cash equivalents provided
by (used in) financing activities (4,746) (12,343) 7,349 (5,272) 2,059 7,075 (51,531)
At year-end:
Total assets 252,053 266,419 301,187 320,033 314,573 291,651 2,736,732
Working capital 49,483 50,755 44,584 56,120 50,733 58,486 537,275
Property, plant and equipment, net 78,050 79,534 81,195 79,349 89,733 94,778 847,449
Total liabilities 93,979 106,599 120,780 130,125 121,051 104,268 1,020,402
Interest-bearing debt 39,244 41,448 52,069 42,958 36,491 26,770 413,463
Total net assets 158,074 159,820 180,407 189,908 193,522 187,378 1,716,330
Minority interests 599 741 1,225 1,235 1,678 340 6,504
Net assets 157,475 159,079 179,182 188,673 191,844 187,038 1,709,826
Yen U.S. dollars
Per share data:
Basic net income (loss) ¥ 5.03 ¥ (101.36) ¥ (45.02) ¥ 46.94 ¥ 33.82 ¥ 41.88 $ 0.05
Diluted net income – – – – 31.80 – –
Cash dividends applicable to the year 15.00 15.00 11.25 15.00 15.00 18.50 0.16
Net assets 1,331.30 1,344.82 1,514.64 1,594.79 1,587.49 1,522.17 14.45
%
Ratios:
Ratio of operating income to net sales 0.2% 1.6% 0.6% 3.3% 4.6% 4.3%
Return on sales 0.2 (3.7) (2.1) 1.7 1.4 1.8
Return on equity 0.4 (7.1) (2.9) 3.0 2.2 2.8
Return on assets 0.2 (4.2) (1.7) 1.8 1.4 1.8
Equity ratio 62.5 59.7 59.5 59.0 61.0 64.1
Debt-to-equity ratio 24.9 26.1 29.1 22.8 19.0 14.3
Thousands of shares
Common stock:
Number of shares issued 128,742 128,742 128,742 128,742 128,742 128,742
Notes 1: The U.S. dollar amounts are translated from yen, for convenience only, at the rate of ¥92.10=U.S.$1.00, the approximate exchange rate prevailing at December 31, 2009. 2: Due to the change in Kokuyo’s fiscal year-end, the period ended December 31, 2007 was an irregular nine-month period.
Overview
In running its operations, the Kokuyo Group remains steadfast to its basic management principle of “con- tributing to society through the provision of superior products.” Under the management vision of “Always Innovating For Your Knowledge,” the Group constantly works to innovate in response to changes in society to ensure that its activities play a useful social role. The Group’s brand message highlights “Inspiration, Efficiency, and Amenity” as the types of added value that Kokuyo aims to continue delivering to assist users in their “knowledge work.”
As of December 31, 2009, the Kokuyo Group consisted of the holding company (Kokuyo Co., Ltd.), 49 subsidiaries, and 18 affiliates. Of these, 24 com- panies were consolidated subsidiaries and 2 were affiliates accounted for by the equity method.
During the period under review (from January 1, 2009 to December 31, 2009), the Japanese econ- omy showed signs of improvement in some quarters, but restraint in capital expenditure, sluggish personal consumption, and other factors meant that these trends stopped short of a full-fledged recovery, and overall conditions remained severe.
Under this operating environment, the Kokuyo Group aimed to develop a lean corporate structure capable of securing earnings under any economic conditions by reviewing its business structure and thoroughly implementing measures to cut costs. At the same time, Kokuyo worked to enhance its prod- ucts and services as high-value-added products that customers ask for by name.
Net Sales
Consolidated net sales for the year under review amounted to ¥266.7 billion, due in part to a decrease in demand resulting from the economic recession. The breakdown by segment is as follows:
stationery, 57.6%, furniture, 37.2%, and store fix- tures, 5.2%. Because the decline in profitability of the stationery segment compared to the furniture seg- ment was small, the contribution of the stationery segment rose 5% and the furniture segment fell 5% year on year.
Cost of Sales and Cost of Sales
Ratio, Gross Profit and Gross
Profit Ratio
Cost of sales amounted to ¥180.3 billion, with a cost of sales ratio of 67.6%. Gross profit was ¥86.5 billion, and the gross profit ratio was 32.4%. The Group took measures to boost the gross profit ratio by reducing costs and expanding offerings of high value-added products and services.
SG&A Expenses
Selling, general and administrative (SG&A) expenses amounted to ¥85.9 billion, down ¥13.3 billion year on year, with an SG&A expenses ratio of 32.2%. The major contributing factor was a thorough revision of expenses.
Research and Development
Expenses
Research and development expenses for the fiscal year amounted to ¥1.6 billion, comprising ¥1.1 billion for the stationery segment, ¥0.4 billion for the furniture segment, and ¥0.1 billion for the store fixtures segment.
Operating Income and Operating
Income Ratio
Operating income totaled ¥0.6 billion. This was largely due to factors such as the substantial effect of lower gross profit caused by the decrease in net sales, despite measures to reduce SG&A expenses. The operating income ratio was 0.2%.
Management’s Discussion and Analysis
for AR 2009/12
Due to the change in Kokuyo’s fiscal year-end, the period ended December 31, 2007 was an irregular nine-month period.
Extraordinary Income (Loss)
During the fiscal year under review, the Group recorded extraordinary gains of ¥3.0 billion, including
¥2.3 billion in gains on sales of property, plant and equipment, net. The Group also recorded an extraor- dinary loss of ¥1.6 billion, including ¥0.9 billion loss on valuation of investments in securities and a ¥0.3 billion loss on allowance for doubtful accounts.
Net Income
The Company posted net income of ¥0.6 billion for the fiscal year under review. The reasons for this include ¥3.0 billion in extraordinary gains offset by
¥1.6 billion in extraordinary loss.
Capital Expenditure
Capital expenditure amounted to ¥3.5 billion.
By Segment
Stationery Segment
The value of the Japanese stationery market is esti- mated at around ¥1 trillion*1. The stationery seg- ment continues to face severe business conditions as companies limit their purchase of consumables amid the economic recession and competition inten- sifies in the office supply mail-order area. Amid this environment, the Kokuyo Group, as the only compre- hensive manufacturer of stationery goods in Japan, holds the leading market share of approximately 11%.
Under these conditions, the Kokuyo Group sought to stimulate demand and expand its market share with the launch of a variety of original products. These high-value-added products that exceed cus- tomer expectations included the popular Campus Notebook Dotted Ruled Lines Series, which had annual sales of over 20 million units, developed through research of the notebooks used by students who passed the entrance examinations at the presti- gious University of Tokyo; the Campus Notebook Handout-Keeper Version, a larger version of the clas- sic Campus Notebook with pages large enough to
0 100,000 200,000 300,000 400,000
06/3 07/3 07/12 08/12 09/12 06/3 07/3 07/12 08/12 09/12 06/3 07/3 07/12 08/12 09/12
266,726
32.4
0 10 20 30 40
32.2
0 5,000 10,000 15,000 20,000 25,000
0 1 2 3 4 5
579 0.2
Net Sales
(Millions of yen)
Stationery Segment Furniture Segment Store Fixtures Segment
Ratio of Gross Profit to Net Sales and SG&A Expenses to Net Sales
(%)
Operating Income and Ratio of Operating Income to Net Sales
(Millions of yen, %)
Ratio of Gross Profit to Net Sales Ratio of SG&A Expenses to Net Sales
Operating Income (Left Scale)
Ratio of Operating Income to Net Sales (Right Scale)
insert standard-sized handouts received in class without needing to trim them; AIROFIT scissors, an ingenious Universal Design scissor with blades that do not become sticky even when cutting tape or other adhesive materials; the Staple-Free Stapler, which allows users to fasten multiple sheets without using staples; and the “Will & Testament” kit, which pro- vides all the necessary stationary for producing a last will and testament, including paper, an envelope, and an instruction guide.
In order to strengthen the business-to-consumer field, Kokuyo established the trystrams line of luxury stationery, releasing new products created in collabo- ration with well-known designers and overseas brands. In addition, the Group acquired The Conran Shop, which sells a selection of sophisticated and highly practical home and office products, with a view to providing a physical store setting where customers can connect with the design messages that these products convey about the world.
In the office supply mail order business, Kaunet achieved strong sales, striving to stimulate demand by reducing prices and adding to the lineup of original products. In Shanghai and Beijing, the Easy buy office
supply mail order business worked to expand its share through a low-price strategy, and to expand its customer base through a mail order service targeting individual consumers and a gift catalog sales service. Consequently, the stationer y segment posted net sales of ¥153.7 billion and operating income of
¥4.9 billion.
*1 Kokuyo’s own estimate based on industrial and commercial data, and Kokuyo Group research.
Furniture Segment
The total Japanese office furniture market (including office furniture, building materials, and ser vices) is wor th around ¥600 billion annually*2, about ¥300 billion of which was conventionally said to come from office furniture sales. Because the market for office furniture is highly correlated to trends in the economic climate, however, it is believed to have contracted by approximately 30% to around ¥200 billion as a result of the major economic recession following the Lehman Shock. Kokuyo is estimated to hold the leading market position, with a 17% share, which it has captured by leveraging its nationwide sales network.
–12,000 –8,000 0 4,000
–4,000 8,000
06/3 07/3 07/12 08/12 09/12 06/3 07/3 07/12 08/12 09/12 06/3 07/3 07/12 08/12 09/12
595 5.03
3,479 6,334
0.4
–8 –4 0 4 8
–120 –80 0 40
–40 80
0 2,000 4,000 6,000 8,000
Net Income (Loss) and Basic Net Income (Loss) per Share
(Millions of yen, Yen)
Net Income (Loss) (Left Scale)
Basic Net Income (Loss) per Share (Right Scale)
ROE
(%)
Capital Expenditure and Depreciation and Amortization
(Millions of yen)
Capital Expenditure Depreciation and Amortization
Business conditions in the furniture segment remained harsh during the fiscal year under review, due in part to substantially decreased capital expen- ditures as a result of the economic slowdown.
Under these conditions, following the renovation of the Eco LiveOffice Shinagawa, founded in 2008, the Kokuyo Group re-inaugurated the LiveOffice in Kasumigaseki, a next-generation model office that promotes corporate innovations and changing work styles, as Resonance Field 3.0. It also opened the Kyushu LiveOffice. The new LiveOffice proposes solu- tions for reducing environmental burden, boosting worker productivity, and reducing office expenses. Innovations include initiatives to reduce CO2 emis- sions, as well as the Office Darts II system, which enables employees to choose where to sit efficiently based on the type and quantity of work they have.
We also launched new products designed to enhance worker and organizational creativity and support reductions in fixed-costs, such as office space consolidation. The new offerings included the Worklink work station, which reduces the per-worker desk footprint by as much as 40% compared to tradi- tional rectangular desks, and the ACTINA swivel desk chair, with a built-in tray under the seat for docu- ments and small items that makes it easy to imple- ment a free-seating office layout.
In the Chinese market, meanwhile, Kokuyo worked to bring in new customers by strengthening sales activities targeting local Chinese companies and European and U.S. companies in China, as well as Japanese companies that are major customers of Kokuyo in China.
However, as a result of the significant drop in demand, net sales in the furniture segment
amounted to ¥99.2 billion, with an operating loss of
¥3.6 billion.
*2 Kokuyo’s own estimate based on industrial and commercial data, and Kokuyo Group research. The ¥600-billion office furniture market breakdown comprises roughly ¥200 billion for office furniture, ¥150 billion for building materials and ¥250 billion for planning and services.
Store Fixtures Segment
The ¥170-billion Japanese store fixtures market is strongly affected by the number of new retail store openings. Due to the economic slowdown during the fiscal year under review, there were few new openings of retail stores, and it is believed that the market contracted. The Kokuyo Group is estimated to have an 8% share of this market, placing it third in Japan.*3
Demand was stagnant amid restraint in retailers’ capital expenditure resulting from the economic slowdown, as major customers postponed the open- ing of new stores. Never theless, the Kokuyo Group conducted active marketing of store fixtures, secured new customers, and proposed storefront promotional fixtures.
As a result, net sales in the store fixtures seg- ment amounted to ¥13.9 billion, with the decrease in sales resulting in an operating loss of ¥0.7 billion.
*3 Kokuyo’s own estimate based on industrial and commercial data, and Kokuyo Group research.
Liquidity and
Capital Resources
1) Fund Procurement Policy and
Liquidity Management
Kokuyo’s capital structure policy centers on the use of retained earnings but calls for the flexible use of direct and indirect financing as necessary.
Kokuyo has been assigned a long-term credit rating of A- and a short-term credit rating of a-1 by Rating and Investment Information, Inc. of Japan. Kokuyo intends to fund future business expansion from internal resources.
2) Assets, Liabilities, and Total
Net Assets
Total assets as of December 31, 2009 amounted to
¥252.1 billion, a decrease of ¥14.4 billion from December 31, 2008.
