Annual Report 2002
KOKUYO Co., Ltd.
Determined to see its structural reforms through to completion,
Kokuyo is renewing its mind-set and business processes.
We will pursue selectivity in our businesses and implement strategic investment.
The recent decline in earnings is only a temporary setback.
We are confident that we will achieve a rebound in earnings.
Financial Highlights
KOKUYO CO., LTD. AND CONSOLIDATED SUBSIDIARIES March 31, 2002 and 2001
Thousands of Millions of yen U.S. dollars
2002 2001 2002
For the year:
Net sales ¥276,584 ¥295,310 $2,075,677
Operating income 779 11,856 5,846
Net income (loss) (1,422) 7,192 (10,672)
At year-end:
Total assets 307,010 329,505 2,304,015
Total shareholders’ equity 190,274 200,442 1,427,947
Amounts per share (in yen and U.S. dollars):
Net income (loss) ¥(11.05) ¥55.44 $(0.08)
Diluted net income — 55.39 —
Cash dividends applicable to the year 15.00 17.50 0.11
Note: The U.S. dollar amounts are translated from yen, for convenience only, at the rate of ¥133.25=U.S.$1 the approximate exchange rate prevailing at March 31, 2002.
Contents
1 A LETTER FROM THE CHAIRMAN/FOUNDER’S PHILOSOPHY 2 AN INTERVIEW WITH THE PRESIDENT—
BUILDING 21ST CENTURY STRENGTHS
2 The Earnings and Business Environment in Fiscal 2002: A Year of Lessons
4 Building 21st Century Strengths
7 Accelerating Our Growth Strategy and Obtaining More Concrete Results
10 Outlook: Toward a V-Shaped Recovery 11 To Our Shareholders
12 REVIEW OF OPERATIONS 12 Stationery-Related Business 14 Furniture-Related Business
16 KOKUYO AND THE ENVIRONMENT 18 SIX-YEAR SUMMARY
19 MANAGEMENT’S DISCUSSION AND ANALYSIS 24 CONSOLIDATED BALANCE SHEETS
26 CONSOLIDATED STATEMENTS OF OPERATIONS
27 CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY 28 CONSOLIDATED STATEMENTS OF CASH FLOWS
29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 38 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 39 BOARD OF DIRECTORS/CORPORATE DATA/CONSOLIDATED
SUBSIDIARIES/OVERSEAS NETWORK
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 envi- ronment, 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 performance are not limited to the previously mentioned factors.
Net Sales
0 100,000 200,000 300,000 400,000
(Millions of yen)
1997 1998 1999 2000 2001 2002 276,584
0 3,000 6,000 9,000 12,000
1997 1998 1999 2000 2001 2002 (1,422)
0 20 40 60 80 100
1997 1998 1999 2000 2001 2002 1997 1998 1999 2000 2001 2002
(11.05)* (0.4)
(0.7)
Net Income (Loss)
(Millions of yen)
Net Income (Loss) Per Share
(Yen)
Primar y* Diluted
ROE & ROA
(%)
0 1 2 3 4 5 6 7
ROE ROA
Established in 1905, Kokuyo Co., Ltd., is the leader in its industry with operations currently focused on two primary business segments, the stationery-related business and the furniture-related business.
Staunchly working "to contribute to society through our products," we at Kokuyo are wholeheartedly engaged in the implementation of our strategies in anticipation of our 100th anniversary—which will be celebrated in 2005—as well as customer-focused operations. Kokuyo strives to be a compa- ny that delivers inspiration, efficiency, and amenity by con- stantly leading the evolution of customers' knowledge while simultaneously undergoing evolution itself and devoting its efforts to increasing shareholder value.
I look forward to the continued trust and support of our val- ued shareholders.
Shounosuke Kuroda Chairman
A Letter from the Chairman
Founder’s Philosophy
Upon entering the Company, new employees are introduced to the Kokuyo philosophy, which is reflected in the Company’s products and services as well as the heartfelt way in which they are provided to customers, both in Japan and overseas.
When born into this world, a child has nothing to call its own. Our bodies, minds, and spirits grow and are nourished by the love of our parents and fami- lies, the guidance and discipline of our teachers, and the encouragement of society as a whole.
We grow and mature and adopt vocations suitable to ourselves and the education instilled in us.
These vocations must be pursued with the utmost diligence to gain the trust of colleagues, clients, and communities around us. The only way to secure this trust is to act with absolute sincerity in every action and endeavor undertaken. In this way, our endeavors succeed in and of themselves and we are happy in our vocations.
“Sincerity not only in words but also in action,” this is the Kokuyo creed.
An Interview with the President
Building 21st Century Strengths
Kokuyo must complete its structural reforms at the earliest possible date.
To accomplish this, we have been radically changing our philosophies
and processes.
The Earnings and Business Environment in Fiscal
2002: A Year of Lessons
Q
Please describe the fiscal 2002 industry trends and Kokuyo’s performance.Business conditions in fiscal 2002, ended March 31, 2002, were extremely severe. A global economic setback
following the terrorist attacks on the United States and a weakening of IT sector demand led to an abrupt decline in business sentiment, prompting private corpo- rations and other organizations to curtail capital invest- ment and reduce expenses. Prices also continued to fall due to overall deflationary trends. Although Kokuyo’s net sales declined only 6.3%, to ¥276.6 billion, operating income tumbled 93.4%, to ¥0.8 billion, and the Company recorded a net loss of ¥1.4 billion, its first ever such loss.
The greatest contributing factor to these results was the decline in office furniture demand stemming from the eco-
nomic stagnation following the terrorist attacks of September 11, 2001. Other factors included an increase in SG&A expenses, to ¥82.9 bil- lion, due to the new consolidation of distribu- tion and sales subsidiaries, a ¥1.6 billion expense due to the amortization of consolida- tion difference, and a ¥1.4 billion write-down of investment securities.
Summary:
•Net sales: ¥276.6 billion; Operating income: ¥0.8 billion; Net loss: ¥1.4 billion, Kokuyo's first net loss since its establishment.
•Segment breakdown: Stationery segment sales: ¥138.6 billion; Operating loss: ¥1.2 billion. Furniture segment sales: ¥138.0 billion; operating income: ¥2.0 billion
•Factors leading to the net loss for the term included a decline in demand resulting from the terrorist attacks on the United States, an increase in sell- ing, general and administrative (SG&A) expenses stemming from the new consolidation of distribution and sales subsidiaries, and valuation losses on marketable securities.
Examined by individual segment, in the stationery segment, despite weak consumer spending, Kaunet performed well and we were able to maintain business levels and record a mar- ginal increase in sales of 0.3%, to ¥138.6 billion. However, despite our efforts to reduce costs, the gross profit ratio declined 2.8 percentage points due to increases in sales of low-profit copier paper and non-Kokuyo products. As a result of these factors, as well as initial investments in Kaunet, the segment recorded an operating loss of ¥1.2 billion, compared with operating income in the previous fiscal year.
In the furniture segment, although performance was strong in the first half of the year under review, business plummeted an unprecedented 17.0% in the second half, and sales for the year fell ¥19.2 billion, or 12.2%, to ¥138.0 billion. On the profit side, as a result of ongoing improvement to the gross profit ratio in furniture operations, cost reductions in production during the term, and an improved profit margin achieved by sales subsidiary KOKUYO OFFICE SYSTEM Co., Ltd., the gross profit ratio increased 1.9 percentage points, to 30.9%. However, due to the decline in sales, operating income dropped 51.8%, to ¥2.0 billion.
During the term, we continued to make initial investments in Kaunet and our distribution subsidiaries, investing approxi- mately ¥5 billion in each. We also invested a total of ¥5.7 billion in equipment, primarily in systems development, to which we assigned ¥3.4 billion. Depreciation and amortiza- tion expenses amounted to ¥6.9 billion. Shareholders’ divi- dends per share paid for the year under review amounted to ¥15 per share.
Although the Company saw such promising developments as the increase in Kaunet sales and improvement in the gross profit ratio in furniture operations, final results for fiscal 2002 were disappointing.
However, these setbacks are temporary, and I feel sure that our investors and stakeholders will recognize that we are poised for a swift recovery.
Nevertheless, fiscal 2002 was a year that brought home the need for us to adopt a new approach to business if we are to construct an earnings base for the 21st century that will be unperturbed by such unforeseen factors as the September 11, 2001, terrorist attacks.
0 50,000 100,000 150,000 200,000 250,000 300,000 350,000
(Millions of yen) (%)
(%)
(Millions of yen)
(Millions of yen)
2000 1999 1998
1997 2001 2002
0 20,000 40,000 60,000 80,000 100,000
2000 1999 1998
1997 2001 2002
0 4,000 8,000 12,000 16,000 20,000
2000 1999 1998
1997 2001 2002
Net Sales, Operating Income,
and Ratio of Operating Income to Net Sales SG&A Expenses
Ratio of Gross Profit to Net Sales by Segment Capital Expenditures
0 1 2 3 4 5 6 7
2000
1999 2001 2002
0 10 20 30 40
Net sales Operating income Operating income to net sales
Furniture segment Stationer y segment
Building 21st Century Strengths
Q
How do you view the challenges Kokuyo is facing and the Company’s potential for continuing growth in the 21st century?In the course of the 20th century, Kokuyo grew into one of Japan’s most trusted national brands with outstanding mar- ket recognition. Our high level of customer trust was obtained through the supply of numerous high-quality basic items, adaptation to changes in market needs, and constant evolu- tion in our solutions proposals.
In fiscal 2001, the Kokuyo Group drew up a vision for its 100th anniversary, which it will celebrate in 2005. The slo- gan for this vision is “Always Innovating for Your Knowledge,” and behind this concept lies Kokuyo’s belief that customer needs will change from such traditional quantitative concerns as products and pricing to qualitative concerns emphasizing high-quality services, and that Kokuyo itself must evolve and adapt to this new environment.
Driving this insight is Kokuyo’s dual role as both a manu- facturer and a distributor. As a manufacturer, Kokuyo is firmly rooted in its desire to provide “good products at reasonable prices,” and, as a distributor, Kokuyo delivers those products to all corners of the nation. We have devoted a great deal of time to both functions and have built up an organization that is able to deliver optimum products and services to our cus- tomers in a timely manner. However, it is a fact that progress in OA and the spread of the Internet has created a gap between the market environment and our business frame- work. As companies increasingly turn to outsourcing to reduce costs, by changing the way we outsource we will be
Summary:
•Although the 20th century business model was successful, a new model is required for survival in the 21st century.
•Conditions around the world will continue to be dogged by uncertainty due to such factors as wildly fluctuating market conditions and the threat of terrorism.
•Kokuyo will implement structural reforms to grow as a company and satisfy its customers.
able to expand the services that we provide. Through reform, Kokuyo will be able to precisely tailor its services to the needs of its customers.
One year has elapsed since the unveiling of our vision, and our determination to reform has grown even stronger. As the September 11, 2001, terrorist incident has demonstrated, the 21st century has brought with it an increasing number of uncertainties beyond the scope of prediction. Business condi- tions will continue to fluctuate dramatically and the global market environment will continue to undergo tremendous change, as illustrated by the entry into the WTO of China, which represents an enormous consumer and labor market. For Kokuyo, fiscal 2002 brought home the importance of such issues as expanding SG&A expenses, the decline in the gross profit ratio in the stationery-related business, and the increasingly interlocking nature of the office furniture market. In light of these issues, to achieve corporate growth and sat- isfy its customers, Kokuyo must implement structural reform.
Reforms are also essential if Kokuyo is to attain its future form as described in its 100 Year Vision: “The maximization of leading manufacturing functions supported by our cus- tomers, the pursuit of unparalleled strength in leading distri- bution functions, and the spread of Internet businesses, which will support future growth.”
Q
What is the content of these reforms?Until now, the Kokuyo Group has drawn up business policies based on a certain type of conventional forecast, with all employees striving to achieve policy goals. However, with the start of the 21st century, owing to a number of unexpected factors, we suddenly became unable to meet goals set in the traditional way. Given the dramatic changes in the business environment, we resolved to adopt an operational framework
Summary:
•Kokuyo has launched seven subcommittees of which the president is chairman.
•The Company will cut overall costs 20%, from ¥100 billion to ¥80 billion.
•Reforms will be implemented in distribution operations as well.
that is capable of generating profit whatever the circumstances. We will work to revolutionize our organization and mind-set accordingly.
We have established a structural reform committee com- posed of seven subcommittees and chaired by our president. These seven subcommittees are the Business Structural Reform Subcommittee, with the task of assembling the Kokuyo Group’s new framework; the Cost-Reduction Subcom- mittee, which implements Companywide cost-cutting mecha- nisms, including overseas procurement; the Marketing Subcommittee, which seeks out customer-focused products and methods of providing those products; the Logistics Reform Subcommittee, with the task of reconstructing the Company’s distribution networks; the SCM Implementation Subcommittee, with the objective of implementing supply chain management for all products handled by the Kokuyo Group; the Expenditure Reduction Subcommittee, which seeks to streamline the Company’s balance sheet and reduce liabilities; and the Risk Management Subcommittee, which seeks to strengthen corporate governance and is engaged in internal control, compliance, and environmental sustainability and protection activities. Through these sub- committees, we will leave no stone unturned in our efforts to implement structural reform.
On the quantitative side, the rise in fixed costs—which gradually swelled along with expansion in business volume over the years—has become a substantial burden on com- panies facing the current trough in the market cycle. Kokuyo perceives such expenses not as fixed expenses, but variable expenses, and with surgical precision is reducing these
expenses to the fullest extent possible. Specifically, one of the Company’s goals is to reduce overall expenses 20% over the next two years, from ¥100 billion to ¥80 billion.
In one typical case, we have long been operating a delivery system that is suboptimal for dealing with the increasingly complex logistical needs of our customers. In particular, in stationery delivery, the types of shipments provided have multiplied in terms of destination and volume. The effort involved in maintaining this unwieldy system has become a cost burden.
To reduce such logistical expenses, we will consolidate our depots—which currently include 100 locations through- out Japan—at seven locations and integrate our product mix while striving for greater efficiency through economies of scale. Although we expect to achieve a low-cost structure that is literally number one in the industry, this achievement will require the construction of additional warehouses. Hence, we estimate that these reforms will take three years to accomplish.
We also recognize that structural reforms are necessary for not only the parent company but also Kokuyo’s exclusive sales agents. Although these exclusive sales agents were
Structural Reform Committee
The Kokuyo Group’s
Structural Reform Committee
Business Structural Reform Subcommittee
Cost-Reduction Subcommittee
Marketing Subcommittee Logistics Reform Subcommittee SCM Implementation Subcommittee Expenditure Reduction Subcommittee Risk Management Subcommittee
the greatest factor supporting Kokuyo’s success in the 20th century, survival in the 21st century will not be possible with- out instigating radical changes in these agents’ business models. One of the most formidable conditions predicating Kokuyo’s future growth is the identification of methods for reforming the high-fixed-cost structure that has burdened this so-called bricks-and-mortar sales segment.
Addressing these circumstances, during fiscal 2002, Kokuyo newly consolidated a further three Distribution Affiliates, bringing the total number of consolidated sub- sidiaries to six. Consequently, the Company’s workforce increased by a total of 1,200 employees, resulting in a
¥5 billion increase in selling and general expenses. Orient- ing this increase in human resources toward profit genera- tion will lead to an improved revenue structure for the entire Kokuyo Group as well as enhanced customer focused service. As traditional wholesale operations serving retail branches will be retained, to increase the added value of our logistics
operations these Distribution Affiliates will need to make direct contact with customers and accurately grasp their needs.
Several Distribution Affiliates have succeeded in increasing profits by applying this business model. Although the reform of our exclusive agents is ongoing, with the proper implemen- tation of network strategy, we believe that these assets that had presented a burden will be converted into strengths, and these efforts are gradually producing results.
Q
How are Kokuyo’s cost-reduction efforts progressing?As products in the stationery- and furniture-related segments become more commonplace and customer needs become more price oriented, Kokuyo is being called upon to provide downward elasticity in pricing. Particularly regarding stationery, the quality of goods manufactured in China has improved great- ly, making competition no longer simply a domestic issue, and it is essential to adopt wide-ranging strategies that encompass not only Japan, but other regions in Asia as well.
The furniture-related segment is weak with regard to trans- portation efficiency, and, although we will not go so far as to import finished products, we will proactively leverage over- seas component procurement.
Summary:
•Costs will be reduced ¥20 billion in two years.
•Of this ¥20 billion, between 60% and 70% will be reinvested in the market.
•The rate of overseas procurement will be increased from 8% to 25%.
Distribution Reform (Results to be achieved within two years of fiscal 2003
2002 Actual 1989
Actual
2004 Targeted Reduction of Overall Expenses
¥75 billion
Total expenses
¥100 billion
¥80 billion
■ 20% of the current ¥100 billion in overall expenses (down ¥20 billion)
Targets:
FY2003 Down ¥7.5 billion FY2004 Down ¥12.5 billion
• Manufacturing expenses
• Construction expenses
• Labor costs
• Price discounts
• Personnel expenses
• Logistics expenses
• Other
■ Creation of strategic regional distribution centers (RDC)
(Stationer y-related business)
Current flow of distribution
Factor y
Warehouses nationwide Warehouses nationwide
Local warehouses
“Mortar”
warehouses warehouses A“Click” warehouses B“Click” 100 locations
nationwide 7 warehouses nationwide
The new flow of distribution
Factor y
Strategic RDC
Retailers Users Retailers Users
Henceforth, we will increase the rate of overseas production from the current 8% to 25% and reorganize our domestic pro- duction operations. We will also implement Value Analysis/ Value Engineering (VA/VE) principles, work to ensure the mutual compatibility of components, and pursue “e-procure- ment,” through these efforts reducing overall costs ¥20 bil- lion in two years. Between 60% and 70% of this ¥20 billion will be returned to the market in the form of price reductions.
Accelerating our growth strategy and obtaining
more concrete results
Q
A year has past since the expeditious start-up of Kaunet. Given that Kaunet growth is crucial to Kokuyo, how are operations progressing?Kaunet has progressed steadily since its introduction in the previous fiscal year, recording sales of ¥12.5 billion and attaining 430,000 new customers, bringing the total to 700,000 customers. Due to initial investments in logistics equipment, an operating loss was recorded of ¥5.2 billion in fiscal 2002.
In February 2002, we published our third Kaunet catalog and strengthened the merchandising of environment-friendly
Summary:
•Sales: ¥12.5 billion; Customers: 700,000; Operating loss: ¥5.2 billion
•Fiscal 2003 targets: Sales: ¥26 billion; Operating loss: ¥1.7 billion
•Profitability in fiscal 2004
products while expanding into gift supply through a tie-up with the Takashimaya franchise of premier department stores.
In fiscal 2003, we will bring results up to ¥26.0 billion in sales and an operating loss of ¥1.7 billion, and in fiscal 2004 we expect to record ¥40.5 billion in sales and attain profitability for the year. Also, in March 2002, Kaunet made firm progress toward its objectives by passing the ¥100 mil- lion mark in daily sales.
The Kaunet business is unique in that the direct access to customer opinions it entails facilitates customer needs assessment and response. To provide not only the prices but the overall level of added value sought by our customers and enable the consistent and timely delivery of high-quality products, we are striving to strengthen Kaunet operations through improvements in the logistics network and emphasis on delivering clear customer benefits at our call centers and other operations. Furthermore, to augment the Kaunet menu, we will include DELIVO office furniture in our fourth catalog, which will be published in autumn 2002, thereby expanding Kaunet’s furniture offerings, which will lead to increased customer purchases.
Concurrently, we will strive to increase Internet purchases through campaigns and other promotions.
As a system for contributing not only to sales but also to profit, I firmly believe that the fine tuning of Kaunet’s opera- tions to customer needs will help meet the expectations of both Kokuyo and its shareholders.
-10 0 10 20 30 40 50 60 70 (Billions of yen)
2002/4~2003/3 2001/4~2002/3
2001/1~3
1.2270
(2.4) (5.2)
12.5
26.0
(1.7) 40.5
1,490
1,120
700
2003/4~2004/3 0 200 400 600 800 1,000 1,200 1,400 1,600
Sales Operating income (loss) Registered customers (offices)
Kaunet’s First-Year Results and Future Outlook
No. of offices (Thousands)
¥0.1 billion per day sales
0.7
The third version of the Kaunet catalog
Q
What is Kokuyo’s growth strategy for the PC supplies business?Kokuyo will position its PC supplies business as its third pil- lar of operations, following the stationery-related and furni- ture-related businesses, and carry out expansion strategies. The PC supply business represents an approximately ¥100 billion market and is expanding year on year. Kokuyo ranks third in this market, with approximate annual net sales of
¥8.8 billion, and in June 2002 the Company concluded a strategic alliance with the number four ranked Arvel Inc. (fiscal 2002 net sales of ¥5.4 billion). By adding Arvel’s appliance, PC, and camera mass-retailer distribution chan- nels to its own office supply retailer based sales routes, the Company will be able to cover all market channels and strengthen product development and distribution.
Furthermore, although the time frame has yet to be deter- mined, we will undertake a capital increase of as much as 40% and plan to include Arvel in the scope of consolidation.
In terms of products, Kokuyo will proactively introduce new products in the high-growth segments of printer supplies (paper, labels, and other supplies) and digital camera supplies.
Summary:
•Operational and capital alliance with Arvel Inc.
•Proactive introduction of new products in such growth areas as printer and digital camera supplies
Q
A rush to commence new building construction is emerging as urban redevelopment plans progress in the Tokyo area. How is this affecting Kokuyo’s office furniture operations?Approximately 2.2 million m2in large-scale office space is expected to be newly supplied and a concomitant ¥50 bil- lion in office furniture demand is predicted through 2003. Although Kokuyo’s nationwide share of the market for office furniture is more than 20%, the largest in the industry, in the greater Tokyo area—where it is a relative latecomer—its share is only around 10%. The goal we have set is to increase this share from 10% to 40%. To achieve this goal, we will implement initiatives to strengthen both products and services.
In terms of products, Kokuyo has won high levels of cus- tomer praise due to the addition to its product lineup of the INTHESIS panel system, Kybos aluminum frames with built-in wiring functions for configuring workspaces, the Flex Ceiling latticework ceiling, and the ALIOS desk system, which fea- tures a freely customizable desktop.
In services, rather than simply selling office furniture, Kokuyo will steadily branch out into the fee-based facility
Summary:
•Share of metropolitan redevelopment business to be raised to 40%
•Aggressive promotion of project management operations
0 5 10 15 20 25 30 (Billions of yen)
KOKUYO Sanwa Supply
Elecom Arvel
Expansion of the PC Supplies Business
24.9
18.5
8.8 5.4
14.2 KOKUYO
Sanwa Supply Elecom
Others
Arvel
PC Supplies Market (¥100 billion)
42%
25%
19%
9% 5%
(Figures based on Mori Building Co., Ltd.’s and Kokuyo's own calculations.)
2000 2001 2002 2003
Total Area of Office Space Provided in the Tokyo Metropolitan Area
(Unit:10,000m
2)
0 50 100 150 200 250
management (FM) business and the commercialization of project management operations, in which the Company pro- vides a comprehensive, one-stop service for office relocation, including transportation, layout, interior work, and internal LAN development. Particularly in this age in which speed and outsourcing are increasingly required, this type of service will continue to expand in content, as will the demand for it, and we are steadily accumulating greater administrative technolo- gies and service expertise to meet these demands. The Company has already provided several hundreds of millions of yen worth of such services for relocations following bank mergers and expects continued growth in this area. Further- more, providing these services on a continual basis to a steady customer base will lead to ongoing business that extends far beyond office furniture.
The strategy for Kokuyo’s furniture-related business is to quickly expand its share of large-scale metropolitan redevel- opment projects and garner the custom related to medium- scale projects as well as build the fee-based FM business that will develop from greater tenant mobility.
Q
What are the business prospects for small and medium- sized businesses outside of the greater Tokyo area?In addition to Tokyo metropolitan redevelopment, Kokuyo’s exclusive sales agents and Distribution Affiliates and will pro- vide account-based services for small and medium-sized and Small Office/Home Office (SOHO) businesses nationwide. In the areas of relocation and the setting up of new offices, there is significant market potential in the sector repre- sented by small and medium-sized business, but limited general affairs resources available for the provision of such infrastructure-type services as the installation of air-conditioning and other facilities and electric wiring. By procuring contracts
Summary:
Account business will be strengthened through exclusive sales agents.
Competitors
Metropolitan
redevelopment project
Development of
fee-based FM business
Strengthening of account business through exclusive agents
Share expansion
Securing of profit
KOKUYO OFFICE SYSTEMS Co., Ltd.
Project management Free regular inspection program
Plan administration services
Large-scale new construction
projects
Increased tenant mobility Medium-sized companies’
renewal projects
Small companies & SOHO Developing the Furniture-Related Business
Office service provider
for engineering work from this market sector, we will be able to expand the scope of our trade and augment the wholesale marketing of basic office furniture to our own sales subsidiaries. For example, it has been demonstrated that in the case of the relocation of a customer with 30 employees, whereas traditional furniture wholesale alone generates little more than ¥900,000 in gross profit, such comprehensive services can expand total sales to ¥8 million and thus raise the con- tract’s gross profit ratio between 3 and 5 percentage points. To actualize such business models, we will encourage the evolution of our nationwide exclusive sales agents into office service providers and enhance our engineering capabilities.
Kokuyo itself must accumulate greater skill, and, to this end, it has established an engineering subsidiary and will augment its human resources with personnel from major con- struction companies and other specialized areas.
Outlook: Toward a V-shaped recovery
Q
What is Kokuyo’s outlook for fiscal 2003?Although fiscal 2003 is expected to be a severe term charac- terized by continual economic uncertainty, Kokuyo will strive to regain its footing and achieve a V-shaped recovery in earnings.
We predict an 8.5% increase in net sales, to ¥300 billion, a 734.4% surge in operating income, to ¥6.5 billion, and net income of ¥4 billion. However, this does not factor in struc- tural reform costs; therefore, our forecasts may change depending on the outcome of our structural reform efforts.
Although the increase in human resources that resulted from the expansion in consolidated subsidiaries and reorgani- zation of exclusive sales agents hindered earnings in the pre- vious term, we will make every effort to efficiently leverage this increased workforce and rebuild the earnings structure of our consolidated Group.
By individual segment, propelled by Kaunet expansion, sales in the stationery segment are expected to increase 11.5%, to ¥154 billion. By narrowing the margin of loss in Kaunet operations and implementing cost reduction initia- tives, we expect to record operating income of ¥3.5 billion. In the furniture segment, with the commencement of
Summary:
•Net sales: ¥300 billion; Operating income: ¥6.5 billion; Net income: ¥4 billion
•Working toward a V-shaped recovery
Fee-Based FM Business
■ Project Management
Building management company
Removal and transport
OA equipment installation
Internal LAN wiring
Furniture layout
Interior furnishings
Client screening representative Process management Process coordination operations
Work contract Design contract
Electricity and telephone wiring
Air conditioning and fire alarm equipment Design company KOKUYO
Customer
metropolitan redevelopment projects in the second half of the current fiscal year, we anticipate a 5.6% increase in sales, to ¥146 billion, and 50.5% increase in operating income, to ¥3 billion.
We are scheduling ¥8.2 billion in capital investment. As I mentioned in the discussion of structural reforms, we will be aggressively investing in such items as logistics equipment and systems development. We anticipate ¥7.1 billion in depreciation and amortization.
Through these and other dynamic efforts, I hope to make fiscal 2003 a milestone in getting Kokuyo back on course toward the fulfillment of its 100 Year Vision in three years’ time.
To Our Shareholders
Q
Specifically, what measures are you taking to raise cor- porate value and shareholder value?To increase shareholder value, Kokuyo repurchased 4.31 mil- lion shares of its stock between February and May 2002, and will conduct an additional purchase in fiscal 2003 of up to 5 million shares. Also, the Company will strive to expand its investor base by lowering its minimum stock purchase unit
Summary:
•Kokuyo will carry out its structural reforms with unwavering resolve.
•Kokuyo repurchased 4.31 million of its shares from February through May 2002 and will repurchase an additional 5 million shares in fiscal 2003.
•Effective August 1, 2002, Kokuyo will lower its minimum stock purchase unit from 1,000 shares to 100 shares.
from 1,000 shares to 100 shares from August 1, 2002. Fiscal 2002 was a year of change for the Kokuyo Group as it took such steps as launching Internet operations and distri- bution and sales subsidiaries. However, fiscal 2003, as a year of structural reform in which we strive to rebuild the roots of our corporate structure, will be a year of great change.
While only a temporary setback, the recording of Kokuyo’s first ever net loss during the term under review engendered a sense of urgency among management and staff alike, and generated a strong shared sense of the need for change if the Company is to reach its objectives. It may take time to establish a new business model. However, the Kokuyo Group will swiftly implement a series of initiatives to achieve a V- shaped recovery from this downturn. We will vigilantly control the speed of our changes and the implementation of initiatives, and plot the course toward recovery, and we firmly intend to achieve ROE of 10% by our 100th anniversary in fiscal 2006.
As Kokuyo strives for change this year, I hope to continue to enjoy the understanding of our esteemed shareholders and even greater support and encouragement.
Akihiro Kuroda, President
This year Two years from now
Structural reforms
•New consolidation of distribution affiliates (increased SG&A expenses)
•Increase in unprofitable products (plain paper copier paper, etc.) Stationery-related business •Kaunet
Operating loss of ¥5.2 billion Furniture-related business ·Weak market and resulting decline in capital investment
Structural reforms
•Total expense reduction of ¥20.0 billion •Withdrawal from unprofitable business •Shift to overseas procurement of materials •Revitalization of distribution affiliates' financial positions
Stationery-related business •Profitability for Kaunet operations (fiscal 2004) Operating income: ¥0.7 billion Net sales: ¥40.5 billion Furniture-related business •An increased share of greater Tokyo area redevelopment projects (from 10% to 40%)
ROE
10%
FY2006
Target
Working toward a V-Shaped Recovery
Review of Operations
Stationery segment sales in fiscal 2002, ended March 31, 2002, amounted to ¥138.6 billion, up ¥474 million, or 0.3%, from the previous fiscal year. The segment recorded an oper- ating loss of ¥1.2 billion.
Conditions during the term were severe, with large fluctua- tions in demand and the distribution structure, tumbling prices due to ongoing deflation, and persistent weakness in consumer spending as well as a general reluctance to buy. Nevertheless, paper for plain paper copiers and ink-jet print- ers enjoyed healthy sales as did the universal design line of easy-to-use stationery products, which has grown to 30 items. Kaunet, the catalog sales service for office sundries that the Company launched in January 2000, also performed well, producing sales of ¥12.5 billion.
Stationery-Related Business
Stationery Segment Sales
Segment Operating Income (Loss)
0 40,000 80,000 120,000 160,000
(Millions of yen) (Millions of yen)
0 2,000 4,000 6,000 8,000 10,000 12,000 14,000
1999 2000 2001 2002 138,616
(1,186)
Segment Sales as a Percentage of Net Sales
0 10 20 30 40 50 60 (%)
1999 2000 2001 2002 1999 2000 2001 2002
50.1
Universal design products
WiLL ACTIC STATIONERY
Desktop materials designed to integrate stationery into interior design
On the profit side, due to increases in the volume of such low-profitability items as paper for plain paper copiers and non-Kokuyo products being handled in the Company’s Internet commerce operations, gross profit in the stationery segment declined ¥2.5 billion, to ¥41.0 billion. Moreover, during fiscal 2002 we made initial investments in logistics equipment and systems for Kaunet. Consequently, the seg- ment unfortunately recorded an operating loss of ¥1.1 billion for the year under review.
In fiscal 2003, we are aggressively marketing such IT prod- ucts as ink-jet printer paper—which has seen pronounced growth—OA equipment labels, and other innovative PC sup- plies, as well as multimedia projectors and mimio, which enables the real-time transfer of whiteboard data into a PC.
In addition, during the year under review the Kokuyo Design Awards 2002 attracted submissions of innovative ideas for
new universal design products from a vast number of general users. From more than 300 entries, 10 awards, including the Grand Prize, were given. We will make every effort to achieve the earliest possible market launch of these products.
In operations involving stationery commodities, Kokuyo strove to reduce costs and introduced lower-priced products by procuring a large number of items from China and other Asian countries.
Regarding Kaunet operations, we will publish a new catalog in autumn 2002 and vastly expand our furniture offerings. In the current fiscal year, we anticipate an increase in Kaunet sales of 108.0%, to ¥26.0 billion.
By proactively implementing these initiatives, we anticipate segment sales in fiscal 2003 will climb to ¥154.0 billion.
Segment Operating Income (loss) as a
Percentage of Consolidated Operating Income Depreciation and Amortization
(%) (Millions of yen)
0 1,000 2,000 3,000 4,000 5,000 6,000 7,000
0 10 20 30 40 50 60 70 80 90
1999 2000 2001 2002 1999 2000 2001 2002
(152.2)
3,109
Capital Expenditure
(Millions of yen)
0 1,000 2,000 3,000 4,000 5,000
1999 2000 2001 2002 3,521
Fit Curve
Writing instruments that are easy to hold and help prevent fatigue
mimio Xi
Handwritten information on a whiteboard is input into a PC
In the furniture segment, sales in fiscal 2002 amounted to
¥138.0 billion, a fall of ¥19.2 billion, or 12.2%. Operating income amounted to ¥2.0 billion.
Conditions remained severe in the furniture-related busi- nesses as private corporations and other organizations sought to curtail capital investment and reduce expenses. Against this backdrop, Kokuyo brought to market a variety of highly appealing products, including the INTHESIS system of easily linked panels; the Kybos aluminum frames; Flex Ceiling, a latticework ceiling that helps offices keep running costs low; and the easily customizable ALIOS desk system. However, the simultaneous terrorist attacks in the United
Furniture-Related Business
0 40,000 80,000 120,000 160,000
(Millions of yen) (Millions of yen)
0 2,000 4,000 6,000 8,000 10,000 12,000 14,000
2000
1999 2001 2002 1999 2000 2001 2002
137,968
1,965
0 10 20 30 40 50 60 (%)
1999 2000 2001 2002 49.9
Stationery Segment Sales Segment Operating Income
Segment Sales as a Percentage of Net Sales
INTHESIS
A system of panels that can be joined together easily
Kybos
Aluminum frames with built-in wiring functions
States were followed by a worldwide economic slowdown and brought substantial downward pressure to bear on the mar- ket. Also, due to the influence on demand of the early enforcement of the Large-Scale Retail Stores Law, sales of store fixtures were also weak.
On the profit side, due to the decline in sales, gross profit in the furniture-related segment decreased ¥2.8 billion, to
¥42.7 billion. However, the gross profit ratio increased for the first time in four years, to 30.9%, up 1.9 percentage points compared with the previous term, and we have nearly completed the assembly of a fiscal structure that will enable a revival in income along with recovery in sales.
In fiscal 2003, a pickup in office furniture demand stem- ming from urban development projects is expected to emerge in the second half, and Kokuyo foresees a ¥50 billion market
in this sector. In addition to the aggressive marketing of new product lines, we will strive to strengthen our service opera- tions and provide such fee-based facilities management services as comprehensive project management and facilities management, meeting all office relocation needs, from trans- port through layout, interior work, and LAN installment.
Through these initiatives, the Company will strive to attain a 40% market share. We will also work to further reduce costs by procuring components overseas and enhancing the mutual compatibility of parts.
Through the steadfast implementation of these initiatives, Kokuyo anticipates its furniture-related segment sales to reach ¥146.0 billion in fiscal 2003.
Depreciation and Amortization
(%) (Millions of yen)
0 1,000 2,000 3,000 4,000 5,000 6,000 7,000
1999 2000 2001 2002 1999 2000 2001 2002
252.2
3,288
Capital Expenditure
(Millions of yen)
0 1,000 2,000 3,000 4,000 5,000
2000
1999 2001 2002
1,882
Segment Operating Income as a Percentage of Consolidated Operating Income
0 10 20 30 40 50 240 250 260
ALIOS
An easily customizable desk system
AGATA
A chair that adjusts to a variety of sizes and shapes
Kokuyo and the Environment
Overview
As society progresses further into the 21st century, a paradigm shift is taking place toward satisfaction derived from quality rather than quantity. The growing focus on environmentally sound business is part of this shift. Kokuyo’s primary goal has always been “to contribute to society through our products,” and now this aim has taken on the greater meaning of help- ing to find solutions to global environmen- tal problems. Kokuyo is a supplier as well as a consumer. We constantly strive to stay “green” in both respects and seek to forge ahead as an environmentally advanced company.
In the 21st century—the “environmental century”—meeting the challenges posed by environmental issues is a crucial theme that all companies must embrace not only to further their business operations but also to fulfill their responsibilities as upstanding global citizens. It is the duty of those of us living now and in the years to come to ensure that we can pass on a healthy global environment to future generations. Kokuyo has just completed the assembly of a comprehensive Company- wide ISO 14001 system that oversees all business activities from product planning and development, through production, distribution, and service. By effectively leveraging this system, we will strive to stay one step ahead of our customers and instill in the minds of all employees environmental management concepts, in which contribution to the environmental is a natural and integral part.
Kokuyo will continue to supply environ- mentally sound products and services. Unfettered by pre-existing notions or past experience, all employees will continue to strive in the 21st century toward the achievement of business operations as a company with true market presence that is at the same time firmly committed to the environment.
Kokuyo’s
Environmental Policy
Fundamental Philosophy When it was founded, the Company set a high corporate goal—to contribute to society through its products—and it has maintained that goal ever since. We are acutely aware of the natural extension of this philosophy— the preservation of the global environment— which is also a pressing issue for the planet as a whole, and we are drawing on the collective wisdom of all personnel and acting Companywide to address this issue.
Prevention of global warming
Kokuyo works to reduce greenhouse gasses (CO2
emission volumes) to prevent global warming.
Resource conservation and recycling To aid in the realization of a recycling-based society, Kokuyo makes as effec- tive use of resources as possible and strives to fulfill its obligation to the Reduce, Reuse, Recycle program.
Procurement, development, and supply of eco-products Kokuyo engages in green procurement for the compo- nents that go into its products and develops and supplies eco-products. It also strives to minimize environmental impact through environmental technology innovation and the development of eco-business models.
Environmental management
Kokuyo strives to implement environmental management that fulfills both environmental and business objectives. The Company sets objectives for environmental impact reduction that all employees work together to achieve and continually improve upon.
Through the maintenance and improvement of frameworks to achieve these objectives and the nurturing of human resources and establishment of evaluation systems, Kokuyo strives to enhance both its environmental protection activities and economic effectiveness.
Information disclosure
& communication Kokuyo proactively discloses environmental information and puts it to use in its efforts to achieve communications with its customers and other external parties as well as to continually enhance its environmental protection efforts. Legal compliance and pollution prevention Compliance with the law goes without saying. In addition, Kokuyo observes industry policies and conforms with voluntary standards that it has agreed to abide by and strives to prevent the pollution of the environment.
Kokuyo’s Vision
Products 217 billion
Landfill disposal volume 615t
Volume of recycling 6,632t
Total emissions 7,247t
Wastewater 81km3 Other
substances 5,552t Cloth substances 111t Wood substances 1,574t Resin substances 3,310t Paper substances 72,923t Metallic substances 23,580t
(Chemicals subject to PRTR) 101t
(Net sales of Eco-products:
¥90.1 billion)
INPUT INPUT
OUTPUT
Chemicals 1,166t
Water 103km3
Electricity 222,876GJ
CH4 11t–CO2 N2O 37t–CO2
CO2
13,342t–CO2 NOX 1.4t SOX 0.1t Fuel
79,841GJ Total
substance volume
Figures in this chart represent data from Kokuyo’s Yao, Mie, and Shibayama plants and the plants of affiliates KOKUYO MEIBEL Co., Ltd., KOKUYO PRODUCT SHIGA Co., Ltd., and KOKUYO STATIONERY INDUSTRY Co., Ltd.
Relations with Society and Environmental Impact
Overview of Environmental Impact
Kokuyo supplies more than 130,000 products. Although no serious impact on the environment is posed by either the man- ufacture or use of stationery and furniture, Kokuyo strives to reduce the environmental impact of the disposal of such products right from the planning stage by carefully selecting materials and production processes. The lower chart on the facing page is an illustration of the link between Kokuyo, ecosystems, and society. It indicates the procurement of resources from ecosystems (input) and emissions into ecosystems (output) as well as product supply and collection and communications with society.
Climate Change
The Kokuyo Group implements various activities to prevent global warming.
Resource Conservation and Recycling
The Kokuyo Group is making thorough and effective use of resources by reducing its emissions of industrial and general waste and increasing its recycling rate.
Environmental Expenditures
0 5 10 15 20 (%)
(t-CO2)
(FY)
Trends in CO2 Emission Volumes
0 5,000 10,000 15,000 20,000 25,000 30,000
2000 1999 1997 1998
1990 2001 2003 2010
Plant Distribution Office 15.00 13.00 14.52
Target Change from
the 1990 level (%) 11.97 16.86 16.88
0.00
26,016 24,176
21,624 21,63022,901 22,237
4,416 4,191
4,174 3,841 4,016 3,917 6,564 6,000
5,561 5,569 5,760 5,848
15,036 13,985 11,889 12,220 13,125 12,472 7.07
0 500 1,000 1,500 (Millions of yen)
(FY) 1998 1999 2000 2001
Environmental Protection Expenses and Economic Benefits
Total investment 265.9
1,217.3
85.0 189.3
1,335.3
101.2129.7 1,125.1
165.8 48.9
1,122.6
146.6
Environmental costs Economic benefits -20
0 20 40 60 80 100 (%)
(t-CO2)
(FY)
Trends in Waste Emission Volumes
0 5,000 10,000 15,000 20,000
2000 1999
1997 1998 2001 2003 2005
Final waste output Recycled waste 85.0
Target Recycling rate (%)
76.5 80.8 81.4 84.0
75.7
0.0 2.1
-4.5 10.4
19.4 25.0 30.0
13,180 13,742
15,164 15,874 14,743
9,772 10,405 11,602 12,819 11,998
3,408 3,337 3,562 3,055 2,745 74.1
Target
Changes from the 1997 final waste output level (%)
Environmentally Conscious Products
As a manufacturer and supplier of products, Kokuyo rec- ognizes that reducing the environmental impact of the products it manufactures and sells is one of the most crucial elements of its environmental protection efforts. From as early as the development stage, Kokuyo adopts designs that consider the entire lifecycle of its products.
•Reduction of environmental impact through materials
•Reduction of environmental impact during product use
•Reduction of environmental impact through recycling
Six-Year Summary
KOKUYO CO., LTD. AND CONSOLIDATED SUBSIDIARIES Years ended March 31
Thousands of
Millions of yen U.S. dollars
2002 2001 2000 1999 1998 1997 2002
For the year:
Net sales ¥276,584 ¥295,310 ¥280,335 ¥291,664 ¥317,218 ¥334,370 $2,075,677
Cost of sales 192,894 206,322 198,190 214,950 233,287 246,335 1,447,609
Selling, general and
administrative expenses 82,911 77,132 67,823 65,284 64,409 63,427 622,222
Operating income 779 11,856 14,322 11,430 19,522 24,608 5,846
Net income (loss) (1,422) 7,192 1,192 4,986 8,706 10,893 (10,672)
At year-end:
Total assets 307,010 329,505 314,039 309,099 304,774 310,012 2,304,015
Working capital 70,860 82,803 89,688 88,874 78,559 82,660 531,783
Property, plant and equipment—net 98,522 102,207 103,342 102,318 104,452 96,614 739,377
Total liabilities 115,925 128,570 120,321 117,244 115,858 127,806 869,981
Interest-bearing debt 20,554 21,861 21,120 19,536 7,815 8,569 154,251
Total shareholders’ equity 190,274 200,442 193,380 190,676 187,732 181,060 1,427,947
Yen U.S. dollars
Per share data:
Net income (loss) ¥ (11.05) ¥ 55.44 ¥ 9.13 ¥ 38.14 ¥ 66.59 ¥ 83.32 $ (0.08)
Diluted net income — 55.39 9.16 38.11 66.51 83.20 —
Cash dividends applicable
to the year 15.00 17.50 17.50 15.00 15.00 15.00 0.11
Shareholders’ equity 1,498.49 1,544.92 1,490.49 1,458.41 1,435.89 1,384.87 11.09
%
Ratios:
Ratio of operating income to net sales 0.3 4.0 5.1 3.9 6.2 7.4
Return on sales (0.5) 2.4 0.4 1.7 2.7 3.3
Return on equity (0.7) 3.6 0.6 2.6 4.7 6.2
Return on assets (0.4) 2.2 0.4 1.6 2.8 3.6
Equity ratio 62.0 60.8 61.6 61.7 61.6 58.4
Debt-to-equity ratio 10.8 10.9 10.9 10.2 4.2 4.7
Thousands of shares
Common stock:
Number of shares issued 128,742 129,742 129,742 130,742 130,742 130,741 Note: The U.S. dollar amounts are translated from yen, for convenience only, at the rate of 133.25=US$1, the approximate
exchange rate prevailing at March 31, 2002.
Management’s Discussion and Analysis
Overview
During fiscal 2002, ended March 31, 2002, conditions in the Japanese economy were extremely severe. Reflecting the effects of the slowdown in the global economy caused by the September 11, 2001, terrorist attacks on the United States as well as the decline in IT demand, Japan’s econo- my weakened rapidly. Prices remained in free fall due to the increased efforts of private-sector companies and other entities to curtail capital investment and reduce expenses as well as the overall deflationary trend.
Against this backdrop, Kokuyo Co., Ltd. (“the Company”), and its consolidated subsidiaries (collectively, “the Group”) worked hard to create the kind of products sought after by its customers, and the Company continued to provide stylish and sophisticated products, with 23 of its products winning Good Design Awards in fiscal 2002, making Kokuyo the leader in its industry and sixth nationwide in terms of industry awards won.
Also, to adapt to the drastic changes in distribution frameworks, we are determined to strengthen our opera- tional structure and become a comprehensive supplier capable of meeting our customers’ every office need. As a step toward accomplishing this goal, the Company engaged in the vertical integration of its sales functions as a manufacturer with exclusive agents in the western Japan region and established three distribution affiliates.
Meanwhile, in our Kaunet operations, which were launched in January 2001 to provide office supply catalog order sales services, we published the third version of our catalog featuring a larger selection of environment-friendly
products and worked to enhance customer satisfaction through such measures as expanding the geographic range of same-day-delivery service and offering a wider variety of payment options. In addition, we introduced a number of logistical cost reductions and aggressively con- tinued to establish a firm foundation for the business. The number of registered customers continued to grow steadi- ly and in March 2002 exceeded the 700,000 mark. Kokuyo also made efforts to elevate customer services offered through its @office (“at office”) operations—which provide catalog business support for retail branches—by upgrad- ing @office Internet features and digital catalogs as well as augmenting related logistics functions through same-day- delivery and other initiatives.
Although the Company strove to implement these and other measures, due to the substantial effects of declining demand and other factors, net sales fell 6.3% compared with the previous term. On the profit side, the Kokuyo Group united in its efforts to curtail expenditures and cut costs. However, due to such factors as initial investment in Kaunet, operating income plummeted sharply. Further- more, the Company recorded a substantial amortization of consolidation difference due to the new consolidation of subsidiaries as well as a large write-down of investment securities. Consequently, the Company recorded a net loss for the term of ¥1.4 billion. On the financial side, to improve capital efficiency and provide good returns to shareholders, Kokuyo applied free cash flow and funds in hand to the repayment of interest-bearing debt and the buyback and retirement of common stock.
