Annual Report 2006
Year ended March 31, 2006
& More
101 Years
K OKUY O’ s Evolut
100+1=101 Years
Established in 1905, Kokuyo today leverages 100 years
of expertise to prevail as the world’s unique provider
of general office supplies and services, with a major
focus on stationery, furniture, and store fixtures
businesses. In 2004, Kokuyo shifted to a holding
company structure, a step that has enabled it to fully
exert the Group’s collective strengths and aggressively
expand its business fields. Eyeing the coming century,
Kokuyo is poised to progress still further as a vibrant
company that, even after 101 years and more in
business, will continue to boast the spirit of innovation
and a unique business approach.
Stationery Furniture Store Fixtures
i
Annual Report 2006
Year ended March 31, 2006
& More
u t
ears
>>Kokuyo’s Corporate Logo Our new corporate logo expresses the dynamism of Kokuyo’s redesigned brand image as it embarks on its second century of develop- ment. The gently rounded font design expresses innovation, uniqueness, and vibrancy, while the connection between each letter symbolizes the trust Kokuyo builds with customers and its strong Group-wide team spirit.
ion will Continue
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 performance are not limited to the previously mentioned factors.
E
Annual Report 2006
Year ended March 31, 2006
& More
volving Products
Kokuyo constantly offers cutting-edge products
with superior designs unfettered by convention.
Going forward, Kokuyo will quickly respond to
diverse customer needs across the globe, provide
products that are always a step ahead of the
times, and make knowledge-based work more
comfortable and creative for its customers.
>>marimekko® A top textile brand in Scandinavia, marimekko®’s popular textile design was inte- grated into Kokuyo’s Texture Mouse. Its vivid and intimate design has gained popularity espe- cially among female users.
>>memoribo
memoribo is an electronic vocabulary learning system which allows users to either directly enter the words they wish to memorize or download dedicated web site content. Able to store data equiva- lent to up to 2,000 conventional vocabu- lary cards, the device is palm-sized and weighs only around 50g, so it can be carried in a pocket. memoribo is popular among both students, seniors, and others in Japan who are trying to improve their English language ability.
E
Developi
Annual Report 2006
Year ended March 31, 2006
& More
ng Sales Strength
As more options become available to purchase
products, Kokuyo has focused actively on the
development of a sales network encompassing
mail order as well as other types of sales.
In particular, Kokuyo’s online catalogs and
other marketing tools make it possible to deliver
merchandise quickly and directly to customers.
Looking ahead, Kokuyo will continue offering sales
tailored to customer needs.
>>Kaunet’s Sales System
Kaunet is a mail order service targeting corporate customers, offering around 20,000 items from stan- dard office supplies to other daily sundries. By simply sending an order online or by fax, customers can receive necessary office supplies on the same day or by the next business day.
08/3
(Target)
07/3
(Plan)
06/3 05/3
>>Sales Results and Targets: Office Supply Mail Order Business (2005-2008) (Billions of yen)
Kaunet Catalog and COCO de COW web site http://www.cocodecow.com/
31.8 40.6
57.4 67.0
Developi
>>Actus Co., Ltd. An interior goods and furniture retailer handling imported Scandinavian furniture and other quality- design products, Actus has earned high acclaim for offering new options for urban living to customers through its attractive product lineup. In Febru- ary 2006, Actus became part of the Kokuyo Group.
Focusing
Annual Report 2006
Year ended March 31, 2006
& More
Kokuyo is also taking active steps to expand its
businesses targeting individuals. Acknowledging
consumers’ increasingly discriminating tastes,
Kokuyo will offer unrivaled products and services
that propose new ways of living and
respond flexibly to customers who demand
high-added-value.
08/3
(Target)
07/3
(Plan)
06/3 05/3
>>Sales Results and Targets: B2C Business (2005-2008) (Billions of yen)
18.0 19.3 35.5
41.5
on the Individual
ing
Ex
Annual Report 2006
Year ended March 31, 2006
& More
panding Markets
Kokuyo is focusing on China, a robust growth
market, to develop overseas businesses. In China,
Kokuyo has established a strong position providing
comprehensive services, from office space
searches to interior design work and installation of
furniture and equipment. Combined with business
expansion including mail order and launch of
office and print services, Kokuyo is posting steady
annual growth in the number of operating bases.
08/3
(Target)
07/3
(Plan)
06/3 05/3
>>Sales Results and Targets: Business in China (2005-2008) (Billions of yen)
0.5 1.6
4.0 10.0
>>Easy buy Easy buy is the Kokuyo Group’s mail order business targeting the Shanghai region in China. Over 130,000 companies are now registered custom- ers of Easy buy since its business launch in June 2005. Easy buy sells approximately 4,000 items, making it the most extensive catalog of its type in China, and provides high-quality products and services to a wide range of corporate customers.
Ex
Offering P
Annual Report 2006
Year ended March 31, 2006
& More
fering Peace of Mind
A rising number of companies are seeking to
introduce an information security system to their
office environments. In response to this demand,
Kokuyo offers reliable and convenient products,
alongside proposing solutions to customers,
leveraging its expertise in office supplies and
furnishing. Going forward, Kokuyo will endeavor to
become the leading brand in office security.
>>Side-view Prevention Filters These sheets, which are attached to the screens of laptop PCs and LCD monitors, restrict visibility to within 60 degrees, preventing people other than the user from viewing information on the screen. Side-view prevention filters offer convenience when handling sensitive information, or when outside the office or in transit, allowing users to concentrate on their tasks with peace of mind.
08/3
(Target)
07/3
(Plan)
06/3 05/3
>>Sales Results and Targets: Security-related Business (2005-2008)
(Billions of yen)
1.3 3.5
5.5 10.0
01 101 Years & More
14 Message to Stakeholders
16 Interview at the Kokuyo Tokyo Showroom
20 A Letter From the Chairman
21 Kokuyo’s CSR Initiatives
26 Six-year Summary
27 Management’s Discussion and Analysis
34 Consolidated Balance Sheets
36 Consolidated Statements of Income
37 Consolidated Statements of Shareholders’ Equity
38 Consolidated Statements of Cash Flows
39 Notes to Consolidated Financial Statements
51 Independent Auditors’ Report
52 Overview of 16 Main Operating Companies
53 Board of Directors/Corporate Data/
Consolidated Subsidiaries/Overseas Network/
Stock Price Movement and Total Trading Volume
Contents
Slim B5 Notebook
>>Slim B5 Notebook
This notebook features ergonomically designed dimensions. It takes the “effec- tive field of vision” into account to allow the user to view the entire content of a double-page spread immediately. It is also easy to hold with one hand. The Slim B5 Notebook represents Kokuyo’s basic approach of developing products from the users’ standpoint.
Standard-size Kokuyo notebook
Annual Report 2006
Year ended March 31, 2006
& More
Kokuyo’s products and services, and the brand which
identifies them, are about to become even more
appealing. For a hundred years already, the Kokuyo
brand and its products and services have been the
popular choice in Japan, and now we are on the verge
of a big evolutionary step.
101 Years
14
Kokuyo Co., Ltd. Annual Report 2006
Message to Stakeholders
In fiscal 2006, the year ended March 31, 2006, the
Kokuyo Group dedicated itself to achieving the
targets of its medium-term management plan by
reforming its business portfolio and reinforcing its
earnings base. Undaunted by challenging market
conditions, Kokuyo intends to create new markets,
continuing to evolve and grow. To this end, it will
develop new products offering high added value
and provide services leveraging the unique
collective strengths of the Group.
Akihiro Kuroda President
Kokuyo’s Evolution Gains Pace
In October 2005, Kokuyo celebrated its 100th anniversary. This was possible only with the support and cooperation of our shareholders, the customers who buy our products, and all
other stakeholders in the Kokuyo Group. I would like to take this opportunity to express my heartfelt gratitude to these people.
Fiscal 2006 was the first year of Kokuyo’s medium-term management plan, “The Next 100—Creating an Alliance of the Best.” Under the plan, Kokuyo successfully
achieved its third consecutive year of sales growth and its fourth of earnings growth, booking net sales of ¥304.0 billion and operating income of ¥14.1 billion.
However, these results were not achieved in a single year. Rather, they reflect our painstaking efforts with structural reforms, which were made amid a challenging environment three years ago. Another contributing factor was the move to a holding company system, whereby authority was devolved to individual Group companies, making them self-supporting in terms of earnings. As a result, we realized agile management comprising 16 independently operating companies without a safety net to fall back on. Moreover, every employee has progressively changed his thinking, realizing the urgency of the situation and the need to be more responsible. This gave rise to employee-initiated proposals and other efforts.
But we are still only at the start line. We have lost excess weight and rejuvenated our business systems to make ourselves more agile, but we still lack the capacity to stay the course at top speed. Going forward, we will strive day in, day out to ensure that Kokuyo continues to evolve constantly and rapidly. In doing so, we aim to make it clear to all our customers that Kokuyo, its products and employees have made an unprecedented change for the better.
15
Kokuyo Co., Ltd. Annual Report 2006
Thousands of Millions of yen U.S. dollars
2006 2005 2006
For the year:
Net sales ¥303,959 ¥283,519 $2,587,326
Operating income 14,105 12,159 120,063
Net income 4,145 5,207 35,283
Return on equity 2.2 2.8
At year-end:
Total assets 314,573 291,651 2,677,673
Total shareholders’ equity 191,832 187,043 1,632,891
Yen U.S. dollars
Per share data:
Basic net income ¥ 33.82 ¥ 41.88 $ 0.29
Cash dividends applicable to the year 15.00 18.50 0.13
Note: The U.S. dollar amounts are translated from yen, for convenience only, at the rate of ¥117.48=U.S.$1, the approximate exchange rate prevailing at March 31, 2006.
>>Financial Highlights
KOKUYO CO., LTD. AND CONSOLIDATED SUBSIDIARIES Years ended March 31
Workplaces Where Camaraderie and Job Fulfillment Meet
It is crucial to me that every single Kokuyo employee enjoys his or her work. For Kokuyo to serve society, it first needs to offer customers good quality, affordable products and service—a feat that one person could never achieve alone. The related companies and all other stakeholders that support us are essential allies in our team effort. We must also not forget the customers who have high expectations of our products and provide us
feedback. Having these people on our side is what enables us to do our job. Moreover, by enjoying what we do and doing it well, we encourage more people to feel the same way and join our efforts. This approach leads to better CSR initiatives, as well as better corporate governance and compliance. It is of course a priority to target sound management for Kokuyo through appropriate corporate governance and compliance with laws and regulations. But, in addition, I am convinced that if we make Kokuyo a company where everybody, including myself, derives true enjoyment from work, their proactive efforts will naturally improve CSR initiatives and compliance, and bring about further growth for the Group. We have taken the first step in the next hundred years of our corporate history. Now everybody at Kokuyo is coming together with renewed determination to take the next leap forward.
We ask our stakeholders for their continued support and understanding as we take on this challenge.
August 2006
Akihiro Kuroda, President
16
Kokuyo Co., Ltd. Annual Report 2006
Interview at the Kokuyo Tokyo Showroom
Mr. Kuroda is sitting on the Foster office chair, which boasts a beautiful design with sophisticated functions. The chair offers a “3-D fit”: the backrest moves in different directions according to the user’s position. Allowing unrestricted movement whether the user is reclining, turning round, or reaching out his hand, the Foster chair ensures a truly flexible fit.
Kokuyo has now completed the first
year of its medium-term manage-
ment plan, “The Next 100—
Creating an Alliance of the Best.”
We interviewed Akihiro Kuroda,
Kokuyo’s president, who took us on
a tour of the Kokuyo Tokyo Show-
room. Mr. Kuroda addressed many
issues, including progress on
business portfolio restructuring—
the plan’s major theme—and the
relative strengths of each business
within the Kokuyo Group. He also
talked about the overall progress
of the plan and future strategies,
as well as plans to bolster Group
businesses through collaboration
with new partners.
Question 01>>
How would you evaluate the progress made during the first
year of the medium-term management plan?
With Kokuyo reborn under a holding company structure, 2005 was truly the year of our “second founding.” In April 2005, we formulated a three-year medium-term management plan, “The Next 100—Creating an Alliance of the Best,” based on our resolve to spend the following three years building the Group’s foundation for the next century. By seeking out customers’ opinions, every employee will approach customers directly to understand their preferences and provide products and services that deliver better satisfaction.
In fiscal 2006, the plan’s first year, we achieved initial targets with net sales of ¥304.0 billion, up 7.2% year on year, and operating income of ¥14.1 billion, up 16.0%. This performance was due to business portfolio restructuring by creating New Businesses, incubating Growth Busi- nesses, and streamlining Mature Businesses. Having embarked on our 101st year in April 2006, I am delighted to report such positive news at this historic juncture.
However, our financial results during fiscal 2006 represent only the first step in the process of reform. We must not be complacent; rather we must work relentlessly and make Group-wide
17
Kokuyo Co., Ltd. Annual Report 2006
efforts to achieve new record-high net sales of ¥345.0 billion in fiscal 2007. Going forward, we will devote ourselves wholeheartedly to further accelerate the speed of reform, targeting even greater and more stable growth.
Question 02>>
Please describe the progress in Kokuyo’s strategies under
the plan. First, how are New Businesses developing?
Although New Businesses do not yet contribute to earnings, we are actively investing to make them the Group’s future growth pillars.
Chinese operations encompass two businesses: stationery and furniture. In fiscal 2006, net sales in Chinese operations tripled year on year to ¥1.6 billion. While the figure is still small, the operating base is steadily taking shape. In stationery, Kokuyo was the first Japanese company to start an office supply mail order business with Easy buy, launched in June 2005. We leveraged the know-how cultivated through our domestic mail order business to make concerted local marketing efforts, and had over 130,000 companies registered at June 30, 2006. In
furniture, we propose “total solutions” to assist Japanese companies moving into China with office start-ups and relocations. Our service ranges from selecting an office space and installing electrical and communications con- nections to interior fittings and office furniture. Our ability to provide broad, full-line support to clients has won trust, confidence, and acclaim. We will continue extending our geographical reach from Shanghai to Beijing, Shenzhen, Suzhou and beyond.
Net sales in Kokuyo’s security-related business were 2.7 times higher than fiscal 2005, achieving the target of ¥2.2 billion. This reflects Kokuyo’s unique ability to propose solutions for any level of security system. Its one- stop service incorporates both hardware- and software-based approaches, from conventional “analog” filing solutions to the latest technology using IC
cards. Kokuyo’s image as the undisputed choice for office-related needs has also drawn customers who seek our advice. In this way, Kokuyo has earned public recognition for its expertise in resolving office-related issues, underpinned by its ability to provide comprehensive solutions that address each client’s specific problems and needs.
Question 03>>
What is the current situation in Kokuyo’s Growth Businesses?
Kokuyo is channeling resources into areas such as B2C operations and office supply mail order, which are positioned as the Group’s drivers of earnings growth.
Currently, the majority of Kokuyo’s sales are derived from B2B businesses, but future growth depends on us changing our approach to customers by expanding B2C businesses and their busi- ness domains. To this end, in February 2006, we brought the major interior goods and furniture
Business portfolio restructuring
2006 Mature Businesses 150.9 billion yen (49%)
Growth Businesses 145.4 billion yen (48%)
New Businesses 7.6 billion yen (3%)
145.0 billion yen
(42%) 180.0 billion yen
(52%) 20.0 billion yen
(6%) 2007
Office Supply B2C Security-related
Wholesaling Public Sector-related Business Process Outsourcing Mail Order China-related
Activities Activities Activities
18
Kokuyo Co., Ltd. Annual Report 2006
retailer Actus Co., Ltd. into the Group. Actus commands expertise and superior customer satisfac- tion with its provision of life-scene proposals. It excels in services tailored to individual customers and high-added-value products. By leveraging these strengths, the Group will expand the opera- tional reach of its furniture business. In parallel, we will enhance the strength of both companies through initiatives including joint product development and personnel exchanges.
In its stationery business, Kokuyo successively launched unprecedented products that are unique and offer high added value, including the memoribo electronic vocabulary learning system, popular among seniors, and the ergonomic Slim B5 Notebook, small enough to hold in one hand only. In addition, we will continue launching esthetically pleasing products designed—like our 100th anniversary commemorative goods—through collaboration with artists. As a result of these and other efforts, the B2C business recorded net sales of ¥19.3 billion, up 7.2% year on year, and we expect sales to increase substantially next fiscal year to ¥35.5 billion. We will expand profit further by not only rolling out products with higher earnings potential, but also by cutting costs.
To improve results in the office supply mail order business, Kokuyo made Forest Co., Ltd. a consolidated subsidiary in July 2005. The company, ranked fourth in the mail order industry in Japan, operates the ForestWay business. Net sales of office supply mail order business combined amounted to ¥40.6 billion, 27.7% higher year on year. We will leverage the two companies’ respective strengths to develop their brands and marketing strategies, while promoting greater efficiency in distribution, procurement, systems and personnel. As a result, we can anticipate synergies on two fronts: cost reductions and improved customer service, and higher earnings. Furthermore, we are expanding our With Kaunet mail order business targeting large and medium-size enterprises.
Question 04>>
What is the outlook for
Kokuyo’s Mature Businesses?
Broadly speaking, our strategy is twofold: trans- form them into Growth Businesses, and dramati-
cally improve their profitability. Recognizing the elements of growth potential in Mature Busi-
nesses, we are enhancing added value in indi- vidual products to develop “mature products”
into “growth products.” An example is our success in changing the format of regular glue
to develop it into Dotliner tape glue, which has sold over a million units. By such means, we
add value to existing products to generate new demand, and expand earnings by con-
verting the product into a Growth Business. The right side of the photograph
shows a mock-up of an individual office space. Kokuyo offers customers the opportunity to actually view suggested layouts tailored to a room’s function, whether for use as a private office, a meeting room, or any other purpose.
On the left is a workstation manufactured by Austria’s Bene Buromobel KG. A top European brand, Bene furniture combines sleek Italian-style design with the rigorous attention to quality found in Germany.
19
Kokuyo Co., Ltd. Annual Report 2006
Universal Design refers to product design that allows anybody—whether young or old, male or female—to use a product easily. Kokuyo proactively applies this principle in its product design, adopting the user’s perspective when crafting its products. The Kokuyo Tokyo Showroom features an exhibition space displaying various Universal Design products. We are also reforming our distribution channels, moving away from
a “three-tier” distribution model where products pass from manufac- turer, to wholesaler, to retailer, and finally to the customer. Instead, we are strengthening our direct-to-customer marketing initiatives to sim- plify distribution. In these ways, we will thoroughly improve efficiency and reduce costs to achieve constant earnings growth.
To maximize profit, the management plan calls for raising the operating income ratio in Mature Businesses from 6.6% in fiscal 2005 to 10.5 % in fiscal 2008. As of fiscal 2006, our progress is largely on target, having raised the operating income ratio to 8.6%. In fall 2006, we will complete the construction of our Vietnamese factory, which will be our base for exporting products throughout Asia. The factory promises to further reduce stationery manufactur- ing costs and significantly improve profit margins.
Question 05>>
Can Kokuyo achieve a return on
equity (ROE) of 8%?
In fiscal 2006, our ROE was 2.2%, unfortunately falling short of the 2.8% planned, because we booked early extraordinary losses such as impairment losses and losses on disposal of fixed assets to reduce our liabilities as much as possible for future operations.
Nevertheless, we made a commitment to our shareholders, and we intend
to achieve our target. To do so, in addition to increasing earnings, we must reduce shareholders’ equity. The Group currently holds around 7,900,000 shares of repurchased treasury stock. In fiscal 2006, Kokuyo repurchased 2,000,000 shares of its own stock, and intends to continue actively doing so, planning to repurchase 4,000,000 shares in both fiscal 2007 and 2008.
Question 06>>
Finally, a message to shareholders.
As a company that aims to maximize shareholder value in its operations, the most important issue now is to achieve the management plan’s targets. With regard to returning profits to shareholders, Kokuyo will implement a dividend policy based on the goal of achieving a dividend payout ratio of 20% or higher by considering consolidated operating results and our policy of paying a stable dividend. In the final year of the management plan, we hope to pay a higher dividend. Amid a perpetually changing business environment, we will strive to increase earnings in all businesses. In this way, we will do our utmost to continually deliver good news to our shareholders and all other stakeholders.
20
Kokuyo Co., Ltd. Annual Report 2006
A Letter From the Chairman
The Foundations of Kokuyo
How has Kokuyo remained so successful for over a century? In answering this question, I would point to Kokuyo’s products and services that have remained unrivaled ever since its establishment—in other words, our tireless commitment to “Serving All Customer Needs,” which is “difficult,” “awkward,” and hardly lucrative in the eyes of other companies.
Many people think that Kokuyo grew as a manufacturer of office supplies. But that’s not the end of the story. Alongside the expertise we have accumulated in manufacturing, we thrive today because of the teamwork we have developed. In doing business, people are your most crucial resources. By people, I mean not just the employees, but retailers who sell Kokuyo’s products, suppliers who provide materials, banks that finance our businesses, factories that manufacture our merchandise, customers who use our products and services, and sharehold- ers and investors who give us financial support. We cherish all people who are involved in any way in Kokuyo’s operations as part of our team. It is they who, remaining steadfast to Kokuyo’s principles, have devoted themselves to ventures that other companies would either not dare to undertake, or would soon abandon, and transformed those opportunities into the profitable enterprises that are our strengths today.
Last year, the Kokuyo Group commemorated its 100th anniversary. We are now taking the next step forward to embark on a new chapter of our history. No matter how times change, Kokuyo knows that “difficult” and “awkward” tasks offer a challenge and the potential for growth. For this reason, Kokuyo’s stance on teamwork will remain unchanged. Guided by this thinking, we will build a new footing for the coming century as we strive to meet the expecta- tions of all shareholders and investors.
Shounosuke Kuroda, Chairman
21
Kokuyo Co., Ltd. Annual Report 2006
For the Kokuyo Group, corporate social responsibility (CSR)
means being accountable to and trusted by society. Striving
ultimately to help realize a sustainable society, Kokuyo is
aiming to fulfill its social obligations through its business
activities and by contributing to society. In this way, Kokuyo
aims to retain the trust placed in it by the public.
Establishing a Framework to
Promote CSR
In 2004, Kokuyo drafted the Kokuyo Group CSR Charter clarifying the Group’s obligations to society. In this charter, Kokuyo set out specific guidelines for conduct in each of its five areas of focus: customers, local communities, envi- ronmental protection, business activities, and human rights. Then, in April 2006, Kokuyo reformed its existing system and established a new framework in which the CSR Committee,
Kokuyo’s CSR Initiatives
headed by the president of the holding com- pany, Kokuyo Co., Ltd., functions as the leading entity. This new framework aims to promote CSR initiatives with even greater force. In addi- tion, the Group established specialized commit- tees to formulate new measures on risk compliance, the environment, workplace safety and hygiene standards, and work/life balance. Similar committees are also being established in each Group company to enable a speedy response to each issue and clarify responsibilities.
>>New Organization and Roles (From April 2006)
Social contribution Customer satisfaction/ Quality
CSR publicity Communication (CSR education) Group CSR Promotion Conference
CSR Planning CSR Promoters
Provision and sharing of information Support of activities Requests for cooperation Internal education
Risk and Compliance Committee General Affairs
Customer Satisfaction and Quality CSR Promoting
Division
Group operating companies
Information Security WG (director in charge)
Status checking
Training and education (guidance) Sharing of information
Compliance WG (director in charge)
Training and education/auditing
Risk Management WG (director in charge)
Prevention and sharing of risk Risk response support Risk and Compliance Committee
(chairman: senior managing director)
Workplace Safety and Hygiene Committee Central Workplace Safety and Hygiene Committee
(chairman: director in charge)
Environmental Committee
ISO Promotion Auditing
Promotion and support Requests for cooperation, sharing of information Compilation of results Environmental Policy WG
Survey of current conditions Status checking
Implementation support Environmental Committee
(responsible director: senior managing director)
Work/Life Balance Promotion Committee (chairman: president)
CSR Committee
(chairman: president)
Keeping all employees thoroughly informed Holding
company
22
Kokuyo Co., Ltd. Annual Report 2006
The Kokuyo Group implements transparent, speedy, and fair corporate governance. When it adopted the holding company structure in October 2004, Kokuyo formulated the new Kokuyo Group Basic Policy on Corporate Gover- nance. This policy outlines basic guidelines for Group operations to implement a number of measures more efficiently. These include con- ducting speedier business operations, focusing on frontline operations, enhancing skills of employees, and reforming the corporate envi- ronment—all of which are now possible through company spin-offs and under the holding company structure. In this way, Kokuyo strives to renew its strengths.
Kokuyo operates under the corporate auditor system. The Board of Directors comprises 10 directors (no outside appointments), with a term of office of one year, ensuring a management
structure that can react responsively to changes in the operating environment. There are four Statutory Auditors (including two outside audi- tors) supported by a full-time staff of two.
Kokuyo has also signed a legal counsel contract with four lawyers, who provide advice whenever necessary. In addition, Kokuyo has reinforced its framework allowing the holding company and each Group company to collabo- rate in conducting internal audits.
In terms of internal control, Kokuyo has established basic policies on a number of issues, including a system that stores and manages information related to business execution of directors; rules applicable to management of risks related to financial losses; and a framework that ensures directors and employees execute business in a manner compliant with laws, regu- lations, and Kokuyo’s Articles of Incorporation.
Corporate Governance
Independent auditor
Group operating companies Internal auditing units Board of Directors
President
Management Committee
CSR Committee
Accounting audit
Internal audit Recommendations
and advice
Collaboration
Control
Appointment Appointment
Appointment
Board of Auditors
Management Audit Department General Meeting of Shareholders
Holding company
Work/Life Balance Promotion Committee
Central Workplace Safety and Hygiene Committee Risk and
Compliance Committee
Environmental Committee
>>Corporate Governance Framework
23
Kokuyo Co., Ltd. Annual Report 2006
Kokuyo endeavors to remain a company always trusted by society. Therefore, adherence to corporate ethics and compliance underlies Kokuyo’s business activities. By this, we mean striving to ensure thorough compliance so that each employee can demonstrate integrity in his actions as an individual member of society and the representative of an organization.
Kokuyo promotes compliance-oriented management throughout the Group. To this end, Kokuyo has established the Risk and Compliance Committee chaired by a senior managing director in the Group head office and at key operating companies. Through these com- mittees, it has created a framework that manages serious risks attached to corporate activities, ensures thorough compliance, and enables the Group to respond appropriately to problems.
Kokuyo also offers employees from each Group company online compliance training. During the year under review, the program included a mock press conference, which allowed employees to experience how the Group would handle media relations in times of emergencies. A study session on the new Company Law enacted in 2006 was also held.
As for information security, Kokuyo has created a Personal Information Protection Act to ensure that all employees protect and man- age personal information in an appropriate manner. In addition, each floor is now equipped with an IC card reader to monitor movements in and out of the office. These steps represent Kokuyo’s drive to reinforce its management framework so that it can ensure strict protection of personal and confidential information. Other measures include proactive efforts to acquire the Privacy Mark, Information Security Management System (ISMS), and other third-party certifications.
Risk Management and Compliance
>>Privacy Mark certification (acquired by two companies in the Kokuyo Group in fiscal 2005)
>>CSR discussion between Kokuyo’s president and young employees
24
Kokuyo Co., Ltd. Annual Report 2006
Guided by its emphasis on CSR, the Kokuyo Group discloses information to customers and a variety of other stakeholders for better commu- nication. To fulfill its obligation to disclose infor- mation to stakeholders and enhance
transparency, Kokuyo has established Informa- tion Disclosure Guidelines. In these and other ways, Kokuyo aims to ensure that its communi- cations are part of a two-way dialog in addition to being appropriate and timely.
Inclusion in SRI Indices in
Japan and Overseas
Today, greater attention is given to Socially Responsible Investment (SRI), or investments in companies taking active steps to protect the environment, realize better employment prac- tices, and make a social contribution. The Kokuyo Group’s proactive approach to CSR has been well received, and is evidenced by the inclusion of the Group in the following SRI stock indices:
Ethibel Sustainability Index (Sweden) FTSE4Good (UK)
MS-SRI (Japan’s Morningstar Socially Responsible Investment Index)
Introduction of a Solar Power
Generator System at
the Kokuyo Tokyo Showroom
In March 2006, the Kokuyo Group installed a solar power generator system, featuring zero CO2 emissions, on the rooftop of the Kokuyo Tokyo Showroom. This is an unprecedented step taken for an existing building that is not newly built. The system makes it possible to reduce CO2 emissions by 5 tons annually. Looking ahead, Kokuyo aims to promote environment-friendly business practices, including efforts to address global warming.
Local Community Relations
>>A Solar Power Generator System
>>Ethibel
Sustainability Index (Sweden)
>>FTSE4Good (UK)
>>MS-SRI
(Japan’s Morningstar Socially Responsible Investment Index)
25
Kokuyo Co., Ltd. Annual Report 2006
The first principle of the Kokuyo Group CSR Charter is “earning the satisfaction and trust of customers.” In line with this principle, the Group has defined “dedication to customer satisfaction” as a management slogan. In addi- tion, by continuing to provide the values high- lighted in its new brand message—“Inspiration, Efficiency, and Amenity”—the Group is aiming to build a unique and unrivalled position.
Reflecting 160,000 Customer
Requests a Year in Products
and Services
The Customer Service Center receives inquiries, requests, and complaints from customers nationwide regarding Kokuyo products and services. The center’s goal is to respond in an accurate, speedy, friendly, and polite manner. In fiscal 2006, Kokuyo heard from approxi- mately 160,000 customers, mostly via a toll- free phone number for customer service. Customers can also contact Kokuyo by e-mail and fax. All customer requests are registered in a database and disclosed to all Group compa- nies, excluding personal information. The data can be sorted by date, product category, and product number, supporting Kokuyo’s product development and service improvement efforts. In parallel, customer complaints on Kokuyo products are processed in accordance with the Product Complaint Guidelines applicable to the entire Group so that concerted efforts can be made to prevent reoccurrence.
Customer Feedback Gives
Birth to Popular Products
At Kokuyo, regular meetings are held with the Development Division to discuss product infor- mation and data collected by the Customer Service Center. This process enables Kokuyo to make improvements and proposals for develop- ment of new products.
Hakoden, a miniature train made of card- board, is one example. This product, which has received favorable reviews, is modeled after existing popular trains and was developed under the supervision of Japan Railways companies.
Customer Relations
>>Hakoden
26
Kokuyo Co., Ltd. Annual Report 2006
Six-year Summary
KOKUYO CO., LTD. AND CONSOLIDATED SUBSIDIARIES Years ended March 31
Thousands of
Millions of yen U.S. dollars
2006 2005 2004 2003 2002 2001 2006
For the year:
Net sales ¥303,959 ¥ 283,519 ¥273,462 ¥272,199 ¥276,584 ¥295,310 $2,587,326
Cost of sales 202,879 187,008 181,279 184,800 192,894 206,322 1,726,924
Selling, general and administrative expenses 86,975 84,352 83,317 82,401 82,911 77,132 740,339
Operating income 14,105 12,159 8,866 4,998 779 11,856 120,063
Net income (loss) 4,145 5,207 1,949 231 (1,422) 7,192 35,283
Capital expenditure 6,042 6,431 9,369 8,186 5,725 7,932 51,430
Depreciation and amortization 6,082 6,220 6,197 6,722 6,871 7,292 51,771
Net cash and cash equivalents provided
by operating activities 11,488 10,168 7,457 18,148 11,293 8,777 97,787
Net cash and cash equivalents used
in investing activities (17,217) (20,778) (7,112) (9,789) (9,159) (6,012) (146,553) Net cash and cash equivalents provided by
(used in) financing activities 2,059 7,075 (4,586) (10,353) (12,613) (4,149) 17,526 At year-end:
Total assets 314,573 291,651 289,194 285,789 307,010 329,505 2,677,673
Working capital 50,733 58,486 57,790 54,242 70,860 82,803 431,844
Property, plant and equipment, net 89,733 94,778 97,134 98,482 98,522 102,207 763,815
Total liabilities 121,063 104,268 103,693 103,913 115,925 128,570 1,030,499
Interest-bearing debt 36,491 26,770* 17,777 20,188 20,554 21,861 310,614
Total shareholders’ equity 191,832 187,043 185,141 181,430 190,274 200,442 1,632,891
Yen U.S. dollars
Per share data:
Basic net income (loss) ¥ 33.82 ¥ 41.88 ¥ 15.38 ¥ 1.51 ¥ (11.05) ¥ 55.44 $ 0.29
Diluted net income 31.80 41.88 15.38 – – 55.39 0.27
Cash dividends applicable to the year 15.00 18.50 15.00 15.00 15.00 17.50 0.13
Shareholders’ equity 1,490.04 1,452.80 1,438.07 1,483.73 1,498.49 1,544.92 12.68
%
Ratios:
Ratio of operating income to net sales 4.6% 4.3% 3.2% 1.8% 0.3% 4.0%
Return on sales 1.4 1.8 0.7 0.1 (0.5) 2.4
Return on equity 2.2 2.8 1.1 0.1 (0.7) 3.6
Return on assets 1.4 1.8 0.7 0.1 (0.4) 2.2
Equity ratio 61.0 64.1 64.0 63.5 62.0 60.8
Debt-to-equity ratio 19.0 14.3 9.6 11.1 10.8 10.9
Thousands of shares
Common stock:
Number of shares issued 128,742 128,742 128,742 128,742 129,742 129,742
Note: The U.S. dollar amounts are translated from yen, for convenience only, at the rate of ¥117.48=U.S.$1, the approximate exchange rate prevailing at March 31, 2006.
* In August 2004, Kokuyo issued ¥12 billion in bonds with stock acquisition rights, but as their coupon was zero, no interest liability arose.
27
Kokuyo Co., Ltd. Annual Report 2006
Management’s Discussion and Analysis
>>Net Sales
( Millions of yen)
Stationery Segment Furniture Segment Store Fixtures Segment Former Furniture Segment (Office Furniture + Store Fixtures)
* In fiscal 2005, Kokuyo reclassified its business segments.
Overview
During fiscal 2006, the fiscal year ended March 31, 2006, improved corporate earnings and employment, as well as signs of recovery in personal spending, helped spur a moderate recovery in the Japanese economy. These factors helped to alleviate con- cerns over soaring crude oil and steel prices.
In this environment, the Kokuyo Group has, since October 2004, conducted its three main businesses—stationery, furniture, and store fixtures—under a holding company structure. The holding company structure allows the Group to monitor the profit- ability of each business, while allowing the businesses themselves to take advantage of their independence and autonomy to con- duct their operations adroitly. As of March 31, 2006, the Kokuyo Group consisted of the holding company (Kokuyo Co., Ltd.), 60 subsidiaries, and 20 affiliates. Of these, 27 companies were con- solidated subsidiaries and 1 was an affiliate accounted for by the equity method.
In October 2005, the Group celebrated its centennial anniver- sary. To grow still further, during the period under review it imple- mented a new medium-term management plan “The Next 100—Creating an Alliance of the Best” and took steps to make a variety of structural reforms.
In running its operations, the Kokuyo Group remained stead- fast to the basic management principle of “contributing to society through the provision of superior products.” The Group also for- mulated a new brand message highlighting “Inspiration, Effi- ciency, and Amenity” as the type of added value that Kokuyo will continue to deliver.
Looking ahead, each Kokuyo company will strive to become No. 1 in its respective market and industry by building new strengths so that the Group can maximize shareholder value.
Results of Operations for Fiscal 2006 and
Comparisons With Fiscal 2005
Net Sales
Consolidated net sales increased 7.2% to ¥304.0 billion. The breakdown by segment is as follows: stationery, 52.5%; furniture, 40.6%; and store fixtures, 6.9%. These figures remained similar to those reported for fiscal 2005.
>>Ratio of Gross Profit to Net Sales and SG&A Expenses to Net Sales
(%)
Ratio of Gross Profit to Net Sales Ratio of SG&A Expenses to Net Sales
>>Operating Income and Ratio of Operating Income to Net Sales
(Millions of yen, %)
Operating Income
Ratio of Operating Income to Net Sales 01 02 03 04 05 06
0 100,000 200,000 300,000 400,000
303,959
01 02 03 04 05 06 33.2
28.6
0 10 20 30 40
01 02 03 04 05 06 14,105
4.6
0 5,000 10,000 15,000 20,000 25,000
0 1 2 3 4 5 6
28
Kokuyo Co., Ltd. Annual Report 2006
Cost of Sales and Cost of Sales Ratio,
Gross Profit, and Gross Profit Ratio
Cost of sales amounted to ¥202.9 billion, with a cost of sales ratio of 66.8%, constituting an increase of 0.8 of a percentage point over the previous fiscal year. This was largely due to higher raw materials prices resulting from soaring crude oil and steel prices.
However, gross profit was up ¥4.6 billion, or 4.7%, year on year at ¥101.1 billion. The gross profit ratio was 33.2%
SG&A Expenses and SG&A Expenses Ratio
Selling, general and administrative (SG&A) expenses amounted to
¥87.0 billion, giving an SG&A expenses ratio of 28.6%, an improvement of 1.1 percentage points over the previous fiscal year. This was attributable to sustained cost-reduction efforts that offset a ¥2.6 billion increase resulting from the inclusion of newly consolidated subsidiaries. Going forward, the Kokuyo Group will continue reducing its expenses.
Operating Income and Operating Income
Ratio
Kokuyo posted an operating income of ¥14.1 billion, a year-on- year rise of ¥1.9 billion, or 16.0%. The operating income ratio was 4.6%, up 0.4 of a percentage point year on year.
Other Income (Expenses)
Other expenses amounted to ¥3.9 billion, a 106.8 times increase year on year. This was due to the posting of losses including loss on disposal of property, plant and equipment; loss on impairment of fixed assets; lump-sum payment for transfer of employees; and expense for 100th anniversary. The losses outweighed the gains recorded due to an increase in interest and dividend income from unconsolidated subsidiaries and affiliates and gain on sales of prop- erty, plant and equipment, net.
Income Before Income Taxes and Minority
Interests, Net Income, Return on Sales
and ROE
Income before income taxes and minority interests was ¥10.2 billion, a decrease of ¥2.0 billion, or 16.2%. Because of the fore- going, net income was ¥4.1 billion, a year-on-year decline of ¥1.1 billion, or 20.4%
Return on sales came to 1.4%, 0.4 of a percentage point lower than the previous year. The return on equity (ROE) was down 0.6 of a percentage point at 2.2%. Although efforts were made to boost asset efficiency, the drop in net income and a ¥4.8 billion rise in shareholders’ equity caused the ROE to drop. The shareholders’ equity grew due to rising market value of shares owned resulting in a ¥6.1 billion increase in net unrealized gains on securities.
Capital Expenditure
Capital expenditure was ¥6.0 billion. This consisted primarily of ¥3.8 billion for buildings (including ¥2.6 billion in buildings for rent), ¥1.3 billion for investment in information systems (including ¥0.4 billion for Kaunet), and ¥0.6 billion for machinery and equipment.
Research and Development
¥2.0 billion was posted for research and development expenses, comprising ¥1.0 billion for the stationery segment,
¥0.9 billion for the furniture segment, and ¥0.1 billion for the store fixtures segment.
By Segment
Stationery
The value of the stationery goods market in fiscal 2006 was only marginally less than the previous year with estimated annual sales of approximately ¥1.0–1.1 trillion and around ¥300–400 billion in the B2B and B2C markets, respectively. The stationery goods
29
Kokuyo Co., Ltd. Annual Report 2006
market is being shaped by increasing diversification of distribution channels with fewer stationery stores and more sales through new channels including mail order catalogs, volume retailers, and discount stores. While unit prices had been falling due to defla- tion, recently there have been some signs of stabilization. Mean- while, new demand is being generated by the enforcement of legislation protecting personal information in Japan. As the only comprehensive manufacturer of stationery goods in Japan, we believe that we lead the market with an 11% share1. In fiscal 2006, we continued to channel resources into developing a design-focused lineup of distinctive, high-value-added products. Proactive development efforts gave birth to such products as Dotliner tape glue, a tape glue that recorded sales of one million units in the first eight months of its launch, as well as Slim B5 Notebook, which can be held with one hand.
The mail order market for office supplies in Japan is worth approximately ¥30.0 billion a year, and is growing at an annual rate of over 10%. ASKUL Corporation and a host of other players have entered the market. Against this backdrop, during the sec- ond half of the year, the Kokuyo Group consolidated Forest Co., Ltd. which holds the fourth place in the industry, as a subsidiary. Kaunet Co., Ltd. and Forest Co., Ltd. combined are estimated to
occupy the No. 2 position with a 17% market share2. Efforts to enhance businesses, including reinforcing procurement capabili- ties and rationalizing distribution in mail order of office supplies, yielded strong results, with net sales of ¥40.6 billion2, up 21.6% from the previous year.
Given these market conditions and the measures implemented by the Kokuyo Group, the stationery segment posted net sales of
¥159.5 billion, up 11.7% year on year.
Despite taking cost reduction efforts, gross profit and gross profit ratio dropped ¥3.2 billion and 1.7 percentage points, to
¥54.2 billion and 34%, respectively. This was largely due to soar- ing raw materials prices and changes in the composition of the product lineup. Meanwhile, the ratio of selling, general and admin- istrative expenses to net sales declined 2.1 percentage points to 28.7%, reflecting the positive impact of the Group’s measures to cut costs.
As a result of the above, the stationery segment posted operat- ing income that was ¥1.4 billion higher at ¥8.5 billion, while the operating income ratio increased 0.4 of a percentage point to 5.3%.
Notes: 1. Kokuyo’s own estimates based on industrial and commercial data, and Kokuyo Group research.
2. Kokuyo’s own estimates based on data from the Response Media Research Center.
>>Net Income (Loss) and Basic Net Income (Loss) per Share
(Millions of yen, Yen)
Net Income (Loss)
Basic Net Income (Loss) per Share
>>ROE
(%)
>>Capital Expenditure and Depreciation and Amortization
(Millions of yen)
Capital Expenditure Depreciation and Amortization 01 02 03 04 05 06
4,14533.82
–2,000 0 2,000 4,000 6,000 8,000
–15 0 15 30 45 60
01 02 03 04 05 06 2.2
–1 0 1 2 3 4
01 02 03 04 05 06 6,042 6,082
0 2,000 4,000 6,000 8,000 10,000
30
Kokuyo Co., Ltd. Annual Report 2006
Furniture Segment
Worth around ¥300 billion annually, the Japanese office furniture market is thought to reflect economic conditions with a six-month to one-year time lag. Kokuyo is estimated to hold the No. 1 posi- tion, having captured 28% of the market by leveraging its nation- wide sales network3.
In this environment, net sales for the furniture segment in fiscal 2006 were ¥123.4 billion, a 0.8% increase over the previous year. This result reflected the successful launch of new products that feature innovative technologies and solutions services, which offset a slowdown in the supply of large buildings in the Tokyo area, as well as the impact of price competition and performance in regional economies, which continued to show little signs of an upturn. In addition, Kokuyo worked to expand the security-related business, which is seeing growing demand, by offering optimal security solutions that are tailored to each type of function and work environment.
In the public sector-related business, as in the previous year, Kokuyo pushed ahead to offer consulting contracts for relocation of government buildings accompanying the merger of municipalities.
Finally, to bolster its B2C furniture business, Kokuyo acquired a 56.3% stake in Actus Co., Ltd., which procures and sells imported furniture, primarily from Scandinavia, and other household products.
As a result, the furniture segment reported ¥42.2 billion in gross profit, an increase of ¥0.7 billion, and a gross profit ratio of 34.3%, up 0.4 of a percentage point to 34.3%. This reflected the success of Kokuyo Group’s cost reduction measures, which offset the rising cost of sales triggered by higher steel prices. SG&A expenses amounted to ¥36.8 billion, down ¥0.2 billion, or 0.7%, owing to cost-cutting efforts. Operating income grew ¥1.0 billion to
¥5.4 billion, while the operating income ratio increased 0.8 of a percentage point to 4.4%.
Store Fixtures Segment
The ¥200-billion Japanese store fixtures market is strongly affected by the number of new retail store openings. The Kokuyo Group is estimated to have an 11% share of this market, putting it in second position4.
Net sales for the store fixtures segment in fiscal 2006 were
¥21.1 billion, up 15.7% compared with the previous year. Despite demand from volume retailers related to new store openings and renovations, the overall pace of store openings was slow, with disparity in store opening plans between sectors. In this climate, the Kokuyo Group pursued aggressive proposal-based marketing of its store fixtures, which resulted in higher sales. Meanwhile, Kokuyo worked to expand sales in the STORE GOODS mail order business and the solutions business that offers total assistance from planning store openings to retail operations immediately after store opening.
As a result, the store fixtures segment posted ¥4.5 billion in gross profit, an increase of ¥0.6 billion, and a gross profit ratio of 21.4%, the same as the previous year, reflecting fierce competi- tion. SG&A expenses amounted to ¥4.3 billion, up ¥1.0 billion, or 30.8%, thanks to active recruiting efforts focusing on mid-career professionals to reinforce sales capabilities. Operating income dropped ¥0.4 billion to ¥0.2 billion, while the operating income ratio declined 2.4 percentage points to 0.8%.
Notes: 3. Kokuyo’s own estimates based on data from the Response Media Research Center.
4. Kokuyo’s own estimates
31
Kokuyo Co., Ltd. Annual Report 2006
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 use of direct and indirect financing as necessary. Kokuyo has been assigned a long-term credit rating of A and 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 Shareholders’ Equity
Total assets as of March 31, 2006 amounted to ¥314.6 billion, an increase of ¥22.9 billion, or 7.9%. Of the total, current assets were
¥134.3 billion, a year-on-year increase of ¥3.8 billion, or 3.0%. The major factors were an increase of ¥5.5 billion in notes and accounts receivable due to increased sales, and a ¥2.7 billion increase in inventories. These figures reflect inventory assets of newly consoli- dated Forest Co., Ltd. and Actus Co., Ltd. Consequently, cash and cash equivalents decreased to ¥9.3 billion.
Investments and other assets, property, plant and equipment, net, and intangible assets rose ¥19.1 billion to ¥180.2 billion. During the year, Kokuyo took steps to reduce assets, including the sale of factories and warehouses. As a result, buildings and struc-
tures dropped ¥2.6 billion to ¥91.9 billion. On the other hand, investments in securities grew ¥16.2 billion to ¥54.3 billion. Deferred tax assets dropped ¥3.5 billion to ¥1.6 billion due to greater net unrealized gains on securities and lower deferred tax assets due to a decline in their fair values.
Meanwhile, liabilities increased ¥16.8 billion, or 16.1% year on year, to ¥121.1 billion. Current liabilities rose ¥11.6 billion to ¥83.6 billion, the result mainly of an increase of ¥7.6 billion in trade notes and accounts payable and ¥4.0 billion in short-term loans (includ- ing long-term debt due within one year). Long-term liabilities also increased ¥5.2 billion to ¥37.5 billion, due to a higher amount of long-term loans obtained to finance the implementation of the medium-term management plan. Finally, interest-bearing debt totaled ¥36.5 billion, up ¥9.7 billion.
Shareholders’ equity increased by ¥4.8 billion, or 2.6%, to
¥191.8 billion compared to the previous fiscal year. This increase was due to an increase in net unrealized gains on securities and thus had no impact on capital structure. Kokuyo holds ¥9.8 billion in treasury stock, at cost.
The current ratio was 160.7%, and the ratio of interest-bearing debt to shareholders’ equity was 19.0%. Management therefore believes that Kokuyo has a robust financial foundation and adequate liquidity.
>>Total Assets and ROA
(Millions of yen, %)
Total Assets ROA
>>Total Shareholders’ Equity and Equity Ratio
(Millions of yen, %)
Total Shareholders’ Equity Equity Ratio
>>Cash Flows
(Millions of yen)
Net Cash and Cash Equivalents Provided by Operating Activities
Net Cash and Cash Equivalents Used in Investing Activities
Net Cash and Cash Equivalents Provided by (Used in) Financing Activities 01 02 03 04 05 06
314,573 1.4
–100,000 0 100,000 200,000 300,000 400,000 500,000
–0.5 0 0.5 1.0 1.5 2.0 2.5
01 02 03 04 05 06 191,832
61.0
0 50,000 100,000 150,000 200,000 250,000
0 15 30 45 60 75
01 02 03 04 05 06 11,488
2,059 (17,217)
0 6,000 12,000 18,000 24,000 30,000
32
Kokuyo Co., Ltd. Annual Report 2006
3. Cash Flow Analysis
Net cash and cash equivalents provided by operating activities increased ¥1.3 billion to ¥11.5 billion, primarily reflecting an early collection of receivables.
Net cash and cash equivalents used in investing activities was
¥17.2 billion, down ¥3.6 billion from the previous fiscal year. Cash was used chiefly for the acquisition of Actus Co., Ltd. and others as newly consolidated subsidiaries for ¥8.3 billion. This was offset by the absence of the previous year’s ¥12 billion purchase of investment securities for the establishment of an employee pension trust.
Net cash and cash equivalents provided by financing activities was ¥2.1 billion, down ¥5.0 billion compared to the ¥7.1 billion posted in fiscal 2005. Although Kokuyo took out more loans to finance the implementation of the medium-term management plan, in fiscal 2006, Kokuyo acquired treasury stock, but did not issue convertible bonds with subscription rights as in the previous year. As a result, cash and cash equivalents at end of year posted a decline of ¥3.5 billion compared to ¥12.8 billion recorded at the previous fiscal year-end.
4. Dividends
Aiming to realize management that is further focused on the shareholders, Kokuyo will implement a dividend policy based on the goal of achieving a dividend payout ratio of 20% or higher, taking into consideration consolidated operating results as well as our policy of paying a stable dividend.
Maintaining a shareholder-centric perspective, Kokuyo has sustained stable cash dividends. In parallel, the Company has paid commemorative dividends to mark milestones in the Group’s corporate history, as well as exceptional financial results. In line with this policy, for the fiscal year ended March 31, 2006, we paid a total of ¥2.2 billion in dividends. The dividend per share com- prised the usual cash dividend of ¥15 per share. Since Kokuyo paid a commemorative dividend of ¥3.5 per share to mark the 100th anniversary of the Company the previous fiscal year, the total dividend payment dropped ¥0.4 billion year on year. The dividend payout ratio was 44.4%, while dividends on equity amounted to 0.9%.
Outlook
Looking ahead, there is cause for concern with crude oil prices remaining high and uncertainties in the global economy. Nonethe- less, the Japanese economy is expected to post solid growth, supported by strong capital investments and personal spending.
Against this backdrop, in fiscal 2007, the Kokuyo Group will enter the second year of its medium-term management plan, “The Next 100—Creating an Alliance of the Best.” To achieve the goals of the plan, each Kokuyo company will make concerted efforts to create unique corporate value through offering services and prod- ucts that more than satisfy customers. To this end, Kokuyo will strive to accomplish the goals of the medium-term management plan by upholding the spirit of “Serving All Customer Needs,” a motto in existence since Kokuyo’s founding that describes each Kokuyo operating company’s resolve to offer the best services in undertaking “difficult” and “awkward” work on behalf of customers.
We have set targets for the year ending March 31, 2007 of
¥345.0 billion in net sales (up 13.5% year on year), ¥18.0 billion in operating income (up 27.6%), and net income of ¥8.0 billion (up 93.1%), all on a consolidated basis. Meanwhile, we plan to achieve 20% or more in dividend payout ratio, paying dividends in line with consolidated results in addition to the usual stable dividends.
Business Risks
Economic Situation and Business Climate
in Japan
Almost all Kokuyo Group’s revenues are derived from markets within Japan. Consequently, changes in the Japanese business climate may have an impact on operating results.
Increases in Raw Material Prices
The main raw materials used by the Kokuyo Group include base paper, plastics, and steel. Kokuyo purchases its raw materials from manufacturers in Japan and overseas. Therefore, there is a risk that higher raw materials prices resulting from sharp increases in crude oil prices, rapidly increasing demand in China, and other factors may affect the Group’s operating results.
