1905
2005
Anchored by History, Focused on the Future
Annual Report 2005
Year ended March 31, 2005
100 Years of KOKUYO
1905 1910 1915 1920 1925 1930 1935 1940 1945 1950
Our Evolving Products
Company founded (1905)
The Company started as KURODA HYOSHI-TEN making only a single type of product, covers for Japanese- style bookkeeping ledgers. Founder, Zentaro Kuroda, firmly believed that as long as a company was performing a role useful to society, its customers would remain loyal. This conviction was the direct precursor of Kokuyo’s management philosophy today.
Kokuyo brand adopted (1917)
The Japanese characters for “Kokuyo” suggest “being the pride of (one’s) homeland.” Zentaro Kuroda ex- pressed his hope of becoming a credit to his native Toyama when he adopted these characters for the corporate brand.
Moved to current head office location (1936)
Completed construction of an integrated production system for ledgers and binders.
Exclusive Kokuyo sales agents established (1950)
Ito Shoten Co., Ltd. based in Tokyo set up a specialist store to exclusively handle Kokuyo products. Five years later, 13 agents across the country were specializing in Kokuyo products.
Letter paper
Letter paper was one of the pivotal products in Kokuyo’s history. In 1932, the Company responded to the demands of customers and changed the size of its letter paper from the standard size of the day. By including a sheet printed with a painting by a famous artist, Kokuyo was able to grow its letter paper into a hugely successful product.
Letter writing pads with picture sheets
Kokuyo was the first company to include pic- ture sheets (showing masterpieces of Japa- nese art, etc.) in letter writing pads, and the huge success of this product helped to en- hance the reputation of Kokuyo’s letter pa- per in the market.
Flat Files
In the 1950s, files had binders made of tin, but this had many drawbacks, including their propensity to snap off, tear paper holes, and cut fin- gers. In response, Kokuyo carried out a series of improvements to the file concept, until finally Kokuyo’s Flat File became its flagship sta- tionery product.
Covers for bookkeeping ledgers
The manufacture of covers for Japa- nese bookkeeping ledgers in the 1900s was painstaking work. In time, Kokuyo was able to move on from the manufacture of covers and ex- pand the scope of its business to handle the entire process from paper manufacture to cutting.
Our Evolving Company
1960 1965 1970 1975 1980 1985 1990 1995 2000
Listed on the first sections of the Tokyo Stock Exchange and the Osaka Securities Exchange (1972)
Kokuyo shares were listed to facilitate capital procurement for new business development and to clearly position Kokuyo as a company with responsibilities to society.
Environment-related activities bolstered
Kokuyo reinforced its environmental protec- tion-related initiatives by drawing up the Kokuyo Charter and Targets for Environmen- tal Activities, as well as obtaining ISO 14001 certification at its main plants.
Kaunet office supply catalog sales business started (2001)
Kokuyo launched this business in re- sponse to the growth of the office supply catalog sales market. Kokuyo is now actively upgrading its lineup through the introduction of new ser- vices such as With Kaunet, targeting medium- and large-sized busi- nesses, and My Kaunet, tar- geting individuals.
Shift to holding company structure (2004)
Kokuyo spun off all its businesses into independent operating compa- nies and adopted a holding com- pany structure. This was aimed at encouraging each group company to abandon previous modus oper- andi to act with autonomy and agil- ity in response to the constantly changing business environment, ul- timately leading to the creation of an unrivalled corporate group.
The original Campus Notebook
As a high-quality notebook at a reasonable price, Campus Notebook has won the sup- port of a wide range of customers and is one of Kokuyo’s long-selling products. Campus Notebook now boasts an annual production volume of 100 million.
Development of Universal Design products
(Clear Book Wavelet)
A clear-file, featuring so-called
“wave-cut” pockets that allow the one-handed insertion and removal of documents. Kokuyo’s first Universal Design product.
shape, comprising ten small cubes, succeeds in combining usability with completely original design. Since its launch, the Kadokeshi has won ac- claim both in Japan and overseas.
* A competition in which the general pub- lic are invited to submit ideas for Universal Design products (products that anybody can use easily) in the stationery and IT sup- plies categories.
10 0 Years of KOKUYO 1 KOKUYO Today
8 Message to Stakeholders 10 An Interview with the President 17 A Letter From the Chairman 18 Review of Operations 23 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 Auditor’s 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
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.
On the Cover
1905
The measuring scale shown is the one used in Kokuyo’s Universal Design rulers. The graduated markings make it easier to read.
The upper photograph shows a traditional Japanese bookkeeping ledger, the product that launched Kokuyo’s 100-year history…
2005 …during which Kokuyo expanded its product lineup to encompass stationery, furniture and store fixtures, establishing a presence both domestically and overseas. The lower photographs show the AGATA/A office chair and Campus Notebook
“PARACURUNO.” Campus Notebook celebrates its 30th anniversary this year.
2005
Stationery PC Supplies Furniture Store Fixtures
KOKUYO Today
The Kokuyo Group started out as a manufacturer of covers for
Japanese bookkeeping ledgers. In the 100 years since its founding,
Kokuyo has expanded the reach of its operations beyond stationery
to include furniture and store fixtures, growing to become the largest
supplier of office products in Japan today.
In April 2005, the Kokuyo Group formulated a new three-year medium-term
management plan with the slogan “The Next 100—Creating an Alliance of
the Best.” Kokuyo will target net sales of ¥360 billion, operating income of
¥25 billion and ROE of 8% for fiscal 2008, the final year of the plan. Due to
start in fiscal 2006, the plan is focused firmly on the next 100 years, and
takes as its main theme the restructuring of Kokuyo’s portfolio of Mature,
Growth and New Businesses. Read on to find out more…
A New Start, A New Medium-term Plan
Targets of Medium-term Management Plan ( Billions of yen )
Net Sales by Business Type ( Billions of yen )
05 153.0
120.0
100.0 230.0 30.0
126.9 173.0
3.6
06 9.0
(Projected) (Results)
08
(Plans)
Mature Businesses Growth Businesses New Businesses
2005 2006 2007 2008
(Results) ( Projected) (Plans) ( Plans)
Net Sales ¥283.5 ¥302.0 ¥326.0 ¥360.0
Operating Income 12.2 14.0 18.0 25.0
Net Income 5.2 5.5 11.0 16.0
ROE (%) 2.8% 2.8% 5.7% 8.0%
Mature Businesses
Breaking With the Past
Sales of Universal Design Products
(Billions of yen)
The Kokuyo Group has drawn up a strategy that will enable Mature
Businesses to continue contributing to operating results. This will include
wholesaling and office supplies, Kokuyo’s traditional strengths. By
actioning drastic reforms to minimize costs and expenses across these
operations, Kokuyo aims to constantly maximize earnings. The cash
generated in Mature Businesses will be allocated to Growth and New
Businesses, while some personnel will also be reassigned to new and
growth areas. At the same time, the emphasis of the distribution affiliates’
business model on the existing wholesaling business will reduce, with a
corresponding increase in the ratio of direct and catalog/internet sales
business. The Kokuyo Group’s Mature Businesses have gradually built up
unique identities and strengths over the course of the past 100 years.
However, building the Group’s foundation for the next century will
necessitate reforms that break with the formulas for success, the corpo-
rate DNA and the business norms of the past. The effects of such reforms
are already becoming apparent in Kokuyo’s products and services.
Targeted Business Model Structure for Distribution Affiliates
(%)
03 3.3
4.3 5.6 04
05
05 65 20 15
33 33
09 33
(Plans) (Results)
Existing Wholesaling Business Direct Business Catalog/Internet Sales Business comfort and design so our chairs
are always evolving.
Growth Businesses
Driving New Growth
Share of Municipal Merger Consulting Business in Fiscal 2005
Domestic office supply catalog sales are steadily expanding and Kokuyo
has positioned this as a Growth Business, alongside public sector-related
and other businesses. In these operations, the Group will increase earn-
ings by carefully managing customer accounts and offering best-fit prod-
ucts and services. Kokuyo will also reinforce its furniture sales operations
launched in China in 2004. In office supply catalog sales, Kaunet Co., Ltd.
is accelerating earnings expansion with the launch of With Kaunet and
other initiatives. Moving beyond the company’s existing client base of
small offices, the new service targets large and medium-sized enterprises.
Kaunet is aiming for net sales of ¥55 billion in the year ending March 31,
2008. In the market for public sector-related business, continuing munici-
pal mergers have driven growth. During fiscal 2005, Kokuyo leveraged its
nationwide sales network, enabling it to seize a large share of the market,
worth an estimated ¥120 billion. Making the most of this foundation,
Kokuyo will redouble its efforts in the period up to fiscal 2008.
505 560 700
Net Sales Targets for Kaunet
(Billions of yen)
05
( Projected )06
( Results )
07
( Plans)
08
( Plans)
31.8 37.0
41.4
55.0 80.0%
Building Future Foundations
New Businesses
Building Future Foundations
New Businesses include business process outsourcing (BPO), security
and Chinese office supply catalog sales. Kokuyo will develop these
businesses into pillars of future growth. In the growing BPO market,
the Group will apply know-how cultivated in its traditional businesses.
Supplementing standard staffing and accounting BPO services, Kokuyo
will offer its proprietary services including facility management and
knowledge work support. In the burgeoning security-related business,
Kokuyo is aiming for net sales of ¥10 billion for fiscal 2008. The Group is
taking a proactive and flexible approach through actions such as its
collaboration with Japan’s largest total security company, Kumahira Co.,
Ltd. In China-based catalog sales, Easy buy commenced operations in
June 2005. The first office supply catalog sales service by a Japanese
company in China, it is expected to achieve a similar rate of penetration
as Kokuyo’s domestic catalog sales. The Group will work to expedite
development of the client base and operational area, targeting net sales
of ¥5 billion for fiscal 2008.
Net Sales Targets for China-based Business
(Billions of yen)
05
( Projected )06
( Results )
07
( Plans)
08
( Plans)
0.5 1.5 0.3
3.0 2.5
7.0 5.0
Net Sales Targets for Security Business
(Billions of yen)
05
( Projected )06
( Results )
07
( Plans)
08
( Plans)
1.3 2.2
5.5
10.0
Easy buy
Furniture Business Office Supply Catalog Business
Message to Stakeholders
“Going forward, Kokuyo will concentrate
all its efforts on creating new sources of strength to
ensure the Group remains a force to be reckoned with
over the next 100 years.”
The Road Ahead for KOKUYO
The Kokuyo Group has built up a powerful position over the last century. However,
we are well aware that one foot wrong could open us up to weakness. Going
forward, Kokuyo will concentrate all its efforts on creating new sources of strength
to ensure the Group remains a force to be reckoned with over the next 100 years.
The Kokuyo Group is celebrating its 100
thanniversary in 2005. The Company
was founded by Zentaro Kuroda, who established KURODA HYOSHI-TEN in
Osaka to manufacture covers for Japanese bookkeeping ledgers. This milestone
prompted me to review the past century and look forward to the one ahead.
With our new three-year medium-term management plan, we have already
taken the first steps to ensure the Kokuyo Group continues to flourish. Under this
plan, which is guided by the slogan “The Next 100—Creating an Alliance of the
Best,” each operating company within the holding company structure will strive to
perfect its own strengths and achieve the leading position in its markets and
industries. In this way, each company will play its part in maximizing Group value.
August 2005
Akihiro Kuroda, President
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 (FY)
200 0
5 10 15 20 25 30
220 240 260 280 300 320 340
283.5
12.2
“Kokuyo had achieved two consecutive years of top- and
bottom-line growth. With both sales and earnings largely on target,
we were satisfied with the results.”
Question 01
Could you summarize the Kokuyo Group’s operating results for
the year ended March 31, 2005?
From October 2002 the Kokuyo Group implemented its structural reform plan. By March 31, 2005, when the plan ended, Kokuyo had achieved two consecutive years of top- and bottom-line growth. With both sales and earnings largely on target, we were satisfied with the results. As president, I would like to thank our employees for their hard work in achieving the high targets set for them under the most challenging of circumstances. Meanwhile, it gives me great pleasure to inform shareholders that our structural reforms have reached a successful conclusion.
Structural Reforms for Growth
An Interview with the President
Kaunet achieved profitability. Consolidation of Arvel Co., Ltd. (October 2003)
Shift to holding company structure. (October 2004)
Structural reform started. Establishment of Kokuyo Chubu Sales Co., Ltd. (October 2002) Kokuyo recorded its
highest operating income of ¥28.5 billion.
Kaunet service started (January 2001) Establishment of
—Kokuyo Kinki Sales Co., Ltd.
—Kokuyo Chugoku Sales Co., Ltd.
—Kokuyo Kyushu Sales Co., Ltd. (October 2001)
Establishment of
—Kokuyo Office System Co., Ltd. (July 2000)
—Kokuyo Tokyo Sales Co., Ltd.
—Kokuyo Nishikanto Sales Co., Ltd.
—Kokuyo Saitama Sales Co., Ltd. (December 2000)
Net Sales Operating Income
Net Sales and Operating Income Trends(Billions of yen)
Kokuyo recorded its highest net sales of ¥333.4 billion. Office Depot, Inc. made inroads into Japanese market.
Question 02
After around two-and-a-half years of implementing the structural reform plan,
how did you achieve this result?
For the fiscal year ended March 31, 2002, we witnessed a sharp deterioration in our results. This was the impetus for the implementation of the structural reform plan in October 2002. It meant decisive action in paring back costs and ex- penses, but we managed to overcome challenging hurdles, becoming a leaner company as a result. In the end, we exceeded our initial targets in both areas.
In October 2004, partway through the structural reform plan, we also made the move to a holding company structure. While this put even more pressure on our employees, it also spurred them on to achieve the high targets set for them. I believe this helped them to gain in confidence and change their mind-set—a fortunate side effect of our structural reforms.
Through a combination of the structural reform plan and the change in employee mind-set, we have realized just what we are capable of as a company. We have either already achieved, or are within reach of achieving, a range of targets: the lowest production cost base in Japan, world-beating product development capabilities, the establishment of a new logistics system, a presence in China, and the launch of new businesses. This new self-belief had a significant impact on the way we approached the drafting of our new medium-term management plan.
Cost-cutting Targets and Results ( Billions of yen)
March 2003 March 2004 March 2005 Total Target
Cost-cutting ¥5.8 ¥7.3 ¥8.5 ¥21.6 ¥21.2
Reduction of expenses 8.1 8.2 5.0 21.3 20.7
—Logistics expenses 3.0 2.0 1.8 6.8 7.0
—Other expenses 5.1 6.2 3.2 14.5 13.7
Overseas Procurement Ratio (March 2005)
Stationery 31% Furniture 13% Total 21%
Akihiro Kuroda, President
Question 03
What is the background to the establishment of the holding company structure,
and what have the benefits been for the Group?
I habitually spend time thinking about the best management structure for the Kokuyo Group, but our 100th anniversary spurred me to focus particularly on the next 100 years and the kind of management framework we would need to enhance our corporate value going forward. I came to the conclusion that the best way to increase corporate value was to develop as an alliance of market-leading compa- nies. To achieve this, we spun off our business divisions into separate operating companies in October 2004 and adopted the holding company structure. This decision was also based on my belief that our employees had become too complacent, believing that the Kokuyo Group was unsinkable simply because it was so big.
“I came to the conclusion that the best way to increase corporate value
was to develop as an alliance of market-leading companies.”
It is still rather early to draw any conclusions regarding the benefits of this move, since only six months have passed. But I can already see positives emerging that surpass my expectations. In particu- lar, the fact that our results for the year ended March 31, 2005 were largely on target was proof that the structural reform plan had achieved its aims. The final stages of the structural reform plan and the start of the new holding company structure overlapped. This meant our people lost the safety net they had relied on in the past, and they were asked to do far more in terms of speed and results. Consequently, our employees were forced to take their performance to a new level, which led to the creation of new products and services as well as successful cost-cutting. But in addition, I have noted an increasing forward momentum, a will to stand in the customer’s shoes to create different types of strength for the Kokuyo Group, rather than just relying on the historic Kokuyo brand and way of doing things. And that, to me, is worth even more than strong financial results.
Question 04
What about the new medium-term management plan, and the thinking behind its
slogan, “The Next 100—Creating an Alliance of the Best” ?
When Kokuyo reached its 100th anniversary, I decided to take a fresh look at our corporate history. I thought that revisiting the past might provide some clues for the future. And what I found was that the company had faced hardship for three years immediately after its establishment. This confirmed me in
my belief that Kokuyo is where it is today precisely because of past adversity.
With Kokuyo reborn under a holding company structure, 2005 could be described as the year of our “second founding.” From this new departure point, we decided to spend the coming three years building the foundation for our next 100 years as a company. This was the background to our new three-year medium-term management plan and its slogan, “The Next 100—Creating an Alliance of the Best.” The expression “creating an alliance of the best” encapsulates our future direction—each separate operating company will aim to be the best in its target markets and industries, so that in combination, they will maximize the value of the Group as a whole.
Under the new medium-term management plan, the Kokuyo Group is aiming to achieve ¥360 billion in net sales, ¥25 billion in operating income and ROE of 8% for the year ending March 31, 2008. In aiming to achieve these targets, we will continue with ongoing structural reforms, as well as work to convert Mature Businesses into Growth Businesses and drive forward the creation of New Businesses.
Question 05
What does the new medium-term management plan say
about business restructuring?
In essence, the plan calls for Kokuyo to increase corporate value by growing its operations through business portfolio reform. For Mature Businesses, this will mean either increasing earnings with radical measures to improve efficiency, or reforming business models to convert Mature Businesses into Growth Businesses. Meanwhile, we will expedite creation and incubation of New and Growth Busi- nesses to grow operations Group-wide.
In Mature Businesses such as our wholesale and office supply operations, we want to avoid perpetu- ating the same old formulas. We intend to take drastic steps to take these businesses in an entirely new direction. To give some extreme examples, we may look at moving all production overseas, or dealing directly with the customer every time by completely replacing retail store visits with Internet and call center order processing. In the mature filing products market, the goal will be to reform sales methods. Files will be equipped with electronic tags and two-dimensional barcodes, while intensified marketing initiatives will focus on these innovative security features to boost sales. We are also aiming to increase the ratio of direct customer sales as opposed to traditional wholesaling through close relationships with retail outlets built up by our distribution affiliates. In Growth Businesses such as Kaunet, we will bolster our provision of products and services with customer-focused designs. In addition, we will expand the scope of operations by rolling out overseas sales of stationery and PC supplies. In New Businesses such as security, business process outsourcing (BPO) and office supply catalog sales in China, we are striving to rapidly establish and expand operations to make them growth pillars going forward.
Realizing these restructuring initiatives in the above three business areas will be crucial to attaining our overall targets.
Question 06
Will medium-term management plan targets be achieved if you continue to imple-
ment business restructuring and ongoing structural reforms?
“From now on, however, supported by our determination to
‘outpace rivals and dominate the field,’ we aim to
derive our growth from direct relationships with customers.”
Our net sales target for fiscal 2008 is 27% higher than the net sales achieved in the year under review. That means a desire to “outpace rivals and dominate the field” will be essential in addition to the reforms we are implementing. Naturally, it is important that each operating company beats the compe- tition to become the leader in their respective existing markets, but there is a limit to how fast they can do this. Alternatively, our operating companies will have to use their innovative products and services to create new markets from scratch, giving them commanding leads in these new fields. At the same time, total commitment to putting the customer first will enable them to secure customer loyalty across the board. That’s essentially what I mean by the will to “outpace rivals and dominate the field.” A prime example is our consulting business targeting municipal mergers. In this new market we undertook
concerted nationwide marketing offering unique total solutions. This helped us to earn trust from customers and support for our products, giving us a dominant presence in the market
in terms of orders won.
Until now, the Kokuyo Group has relied on a value chain based on retail outlets for its growth. From now on, however, supported by our determination to “outpace rivals and
dominate the field,” we aim to derive our growth from direct relationships with customers. The Group will not simply rely on the tried and trusted methods
that delivered success over the past century. Instead, we will create new business models for the next 100 years to ensure that we achieve the
goals of our medium-term management plan.
Question 07
The medium-term management plan calls for the creation of new corporate cul-
tures and ways of thinking. Could you explain further?
Before the change to the holding company structure, we fostered a corporate culture, a brand and a business style for the Group as a whole. We were successful in establishing a brand image that was approachable and reflected our long tradition. Now, at the start of our next century as a company, we resolved to make a break with the past.
We decided, therefore, to highlight our dedication to the continued provision of certain values to customers in their knowledge work. The result was the creation of a new brand message: Inspiration, Efficiency and Amenity. This new brand message will serve as the focus for each operating company to develop its own culture, brand and business style. With our companies creating individual brands that eventually surpass the Kokuyo brand, we hope to succeed in “Creating an Alliance of the Best.”
We are fortunate that Kokuyo’s original products such as the Kadokeshi eraser are gaining more public recognition, as are our eco-products, Universal Design products and CSR activities. As a result, Kokuyo is building a new image associated with excellence, innovation and foresight. Each operating company is working to establish similar new brand values.
Question 08
How are Kokuyo’s Chinese operations developing?
Two pillars support our Chinese operations. One is office supply catalog sales, conducted by our stationery business segment, and the other is office planning services, carried out by our furniture business segment.
In catalog sales, Kokuyo Commercial (Shanghai) Co., Ltd. launched the Easy buy service in June. Since its establishment in March 2005, the company has been focusing on rapidly building up its base of client companies. This company’s business model relies on direct sales to circumvent sales agents, and it is aiming to conduct business with Japanese companies and local Chinese companies as a supplier, rather than a manufacturer. The plan is to start in Shanghai and, in one or two years, establish bases in Beijing and Guangzhou. Eventually, the company will roll out operations to Dalian and else- where, concentrating on areas with well-established delivery services. The company is targeting net sales of ¥5.0 billion in the year ending March 2008.
Kokuyo’s office planning services target the provision of comprehensive support to enable speedy office start-ups for Japanese and other foreign firms moving into China. The Kokuyo Group’s unrivalled advantage in this area is its capacity to offer an all-in-one service including finding suitable premises, installing electricity and communications connections, and internal fittings, as well as providing office
furniture. Until now, Kokuyo has primarily targeted Japanese companies in China. Going forward, however, we intend to also target U.S. and European companies, as well as local Chinese companies.
Question 09
Does Kokuyo have its own distinctive approach to CSR?
“Kokuyo has to fulfill its responsibilities to society to
ensure it continues thriving for another century.”
I believe that Corporate Social Responsibility (CSR) is essential for a company to sustain its develop- ment. Put another way, Kokuyo has to fulfill its responsibilities to society to ensure it continues thriving for another century.
In recent years, CSR has attracted increasing attention, but it is something that Kokuyo has been addressing as a matter of course for some time. The Group’s innovative policies regarding the environment and Universal Design, as well as its CSR-focused internal structure are common knowledge. This is a source of pride to us, as is the fact that Kokuyo has been included in the leading Socially Responsible Investment (SRI) indexes.
With the adoption of the holding company structure, I have high hopes that every employee in each operating company will motivate themselves to address CSR issues at an individual level, without overly relying on formulas laid down by head office. It is only natural that employees should expect their company and their work to be sustainable. That being the case, they should be expected to take the initiative in creating the necessary systems and environment. This is the framework for Kokuyo’s future CSR activities and, I believe, the foundation that will support us over the next century.
Question 10
Finally, do you have a message for shareholders?
As a company that is committed to enhancing value for shareholders in its operations, the most important thing for Kokuyo at the moment is to go all-out to achieve the targets of the new medium- term management plan. In a move to increase shareholder return, we have also revised our policy for returning profits to shareholders. From fiscal 2006, we will supplement existing stable dividend payments with a policy of achieving a dividend payout of at least 20% after taking into account operating results. As we move into our next century, we will continue to strive to increase earnings and improve capital efficiency to fulfill the expectations of our shareholders.
Our “Second Founding”
— the Further Development of
the Kokuyo Group
Since its establishment in 1905, Kokuyo Co., Ltd. has become the leading office supplies manufacturer in Japan. When it was established, the Company was just a small workshop making covers for bookkeeping ledgers. Kokuyo gradually increased its range of products, adding office furniture to its stationery opera- tions, and eventually became the only company in the world capable of providing office supply solutions covering the full range of office requirements.
In October this year, Kokuyo will celebrate its 100th anniversary. Over the years, it has changed its business structure to respond to the needs of the times, but has always adhered to the same principles:
“contribute to society through the provision of superior products” and “provide products and services that are unique.” Kokuyo has thrived for the last 100 years by staying true to these ideals.
In October last year, Kokuyo adopted a holding company structure. This was such a far-reaching change that 2005, the first year under the new system, could be called Kokuyo’s “second founding.” We have also started implementing a new medium-term management plan this year. Our immediate goal is to achieve the targets of this plan as the first step on the road to another 100 years of growth.
We hope we can rely on your continued understanding and support as we embark upon our next century as a company.
Shounosuke Kuroda, Chairman
Review of Operations
Results of Operations for Fiscal 2005
In a maturing stationery market, the enforcement of the Personal Information Protection Law on April 1, 2005 boosted information security-related businesses. The Kokuyo Group was no exception and benefited from higher sales of equipment such as shredders. Meanwhile, in the solutions field, Kokuyo launched its Information Management Solutions Service in the Tokyo area, enabling the integrated management of paper and digital documents.
Kaunet Co., Ltd., Kokuyo’s catalog sales subsidiary, suc- cessfully expanded its operations by means such as introducing With Kaunet services targeting large- and medium-sized enterprises. Kaunet achieved growth in both sales and earnings, recording an increase in net sales of 10.8%, to ¥31.8 billion, and a jump in operating income of 59.9%, to ¥0.5 billion.
The performance of Arvel Co., Ltd. also contributed to full- year results in this segment, as did cost-cutting measures. Overall, the segment achieved top-and bottom-line growth, posting net sales of ¥142.8 billion, an increase of 3.7%, and operating income of ¥7.1 billion, up 31.0% over the previous year.
Review of Principal Business Activities
Product Development
Kokuyo is channeling its resources into customer-centric product development. For example, this segment has sold a total of over three million units of its Kadokeshi eraser, which was very well received both in Japan and overseas for its
Stationery Segment
Share of Net Sales
Operating Income
(Millions of yen)
Net Sales
(Millions of yen)
Kadokeshi erasers Erasers with 28 corners
marimekko mouse Designed in collaboration with Finnish designers
03 138,185
137,691 142,808 04
05
03 04 05
2,632
5,431 7,117 50.4%
As the core product of Kokuyo’s flagship Campus stationery brand, Campus Notebook this year cel- ebrated 30 years since its launch in 1975. The note- book, originally targeting students, has become a long seller. As a high-quality notebook at an affordable price, Campus Notebook has won the support of a broad range of non-student users from children to adults. In addition to this mainstay product, Kokuyo will continue to offer a varied lineup of stationery products that respond to customer needs.
OA Filter for PCs
Allows screen to be viewed only from directly in front
usability and eye-catching design. Kokuyo has developed a rapid succession of other highly functional design-focused products such as its Universal Design (UD) range. These efforts have been welcomed by consumers, and in a survey conducted by Universal Design Forum, an organization that works to promote understanding of UD products, Kokuyo was chosen as the company perceived to be most actively engaged in UD.
Security-related Business
We anticipate a continuing high level of demand related to information security issues such as leaks and loss of data, and computer hacking. Kokuyo offers a broad range of products for both individual and corporate use. For individual users, the UBS Verification Key provides a simple means of locking a PC, while our OA Filter prevents people other than the user from viewing data on a PC screen. Kokuyo also offers a large lineup for business users, including networked products using Radio Frequency Identification (RFID) systems.
Office Supply Catalog Sales
Kokuyo’s office supply catalog sales business, Kaunet, has achieved a high rate of growth since its establishment in 2001. Despite a slight slowdown in growth in fiscal 2005, Kaunet continued to drive operating results in the stationery business segment. With continued growth in the market for office supply
Campus Notebook marks its
30
thanniversary with total
shipments of 1.7 billion units
catalog sales, Kaunet has set the goal of raising net sales from
¥31.8 billion in fiscal 2005 to ¥55.0 billion in fiscal 2008. This will be achieved through promotion of With Kaunet and a business alliance with Japan Post, among other measures.
In another development, in June 2005, Kokuyo launched Easy buy, the first office supply catalog sales business operated by a Japanese company in China. With a high rate of growth predicted for this market, Kokuyo will aggressively roll out operations in China.
Campus Notebook
“PARACURUNO” Page edges are cut diagonally, making it easy to turn the pages either from front to back or back to front
1975 2005
Review of Operations
Results of Operations for Fiscal 2005
In fiscal 2005, Kokuyo’s furniture business segment implemented sales initiatives on a number of fronts to create an operating base capable of withstanding economic fluctuations. In the Tokyo area, Kokuyo focused on demand generated by secondary office relocations after redevelopment projects, and refurbishment of existing buildings. Aggressive marketing targeting these opportu- nities boosted the segment’s results significantly.
In the growing security-related business, Kokuyo entered an alliance with Kumahira Co., Ltd., Japan’s largest total security company, and commenced full-scale security-related operations incorporating Kokuyo’s know-how in office planning. In public sector-related business, Kokuyo earned a strong reputation for its consulting expertise among local governments changing premises due to municipal mergers, helping it to secure a large number of orders. Overseas, Kokuyo’s Chinese operations recorded steady growth, benefiting from expansion in the solutions business offering office start-up and relocation support to Japanese companies moving into China.
Together with the continued implementation of cost-cutting and other measures, the above actions helped the furniture business segment to post higher sales and earnings. Net sales were ¥122.5 billion, an increase of 3.4%, and operating income was ¥4.5 billion, up 47.7%.
Furniture Segment
Operating Income
(Millions of yen)
Net Sales
(Millions of yen)
EAZA chair
The most colorful chair on the market featuring 14 colors
BS+ desk
The first desk in the world to offer bolt-free assembly
03 134,014*
118,380 122,452 04
05
03 2,366*
3,024 4,465 04
05
43.2%
Share of Net Sales
* In the fiscal year ended March 31, 2005, the store fixtures business separated from the furniture segment, resulting in three business segments. (See Note 12 on pages 48 and 49)
The AGATA series comprises state-of-the-art high-end office chairs offering support in any posture. The AGATA/S won the Good Design Gold Prize in the fiscal 2002 Good Design Awards, and the AGATA/D was Japan’s first office chair to win the Gold award in the fiscal 2005 iF design awards*, reflecting the series’ widespread popularity at home and abroad.
AGATA
2000 Series lobby chair A lobby chair with outstanding design features, supplied to Japan’s Haneda and Narita airports
Review of Principal Business Activities
Security-related Business
In the security-related field, the furniture business segment offers services including best-fit security solutions utilizing Compact Office, an office layout consulting method developed by Bene Buromobel KG of Austria. These solutions address needs related to secure workspace design, the functional zoning of offices and the size of office spaces. In security-related products, Kokuyo’s Secure Unit has achieved steady sales growth since its launch last fall. A safety box that controls access through an ID card and personal identification number, the Secure Unit offers optimum security features and is easy to use inside an existing storage unit or, if necessary, to stack vertically.
Public Sector-related Business
Demand in the public sector-related field is not affected as much by changes in the economic environment as private-sector demand. It is therefore an important field for Kokuyo. As Japan undertakes ongoing municipal mergers under the Municipal Merger Law, Kokuyo is offering solutions to local governments across the country. These solutions, which center on consulting services for relocation of government buildings and the reduction of administrative costs, are clearly helping to drive sales. Kokuyo’s powerful sales network underpins this sales growth. The Group’s distribution affiliates across Japan take advantage of their strong local connections to conduct sales activities that are highly focused on the user. This enables them to earn the
trust of users, helping to support steady business expansion. In this public sector-related business Kokuyo is aiming to secure a market share of 30% in the future.
Overseas Developments
The Chinese market is currently the focus of Kokuyo’s overseas activities. With Japanese companies continuing to actively enter China, Kokuyo is expanding its sales through the provi- sion of comprehensive services that go beyond the sale of office furniture to encompass removals and re-wiring services for local office start-ups and relocations. In June 2004, Kokuyo established Kokuyo Interior Technologies (Shanghai) Co., Ltd., an interior construction company, boosting the expansion of its furniture business in China. Going forward, we intend to develop similar businesses in other areas Japanese companies are targeting for expansion, including the BRICs economies (Brazil, Russia, India and China), Thailand and Vietnam.
* One of the world’s leading design competitions. Boasting a his- tory of more than half a century, the competition attracts a large number of entries every year from all over the world.
Review of Operations
Results of Operations for Fiscal 2005
This business segment was successful in implementing aggres- sive proposal-based marketing strategies during the year. These strategies targeted demand generated by new store openings as well as renovations by volume retailers and convenience store operators. In parallel with these initiatives, the segment also worked to diversify its earnings base and cut costs. As a result, the store fixtures business segment achieved top- and bottom- line growth, posting net sales of ¥18.3 billion, an increase of 5.0%, and operating income of ¥0.6 billion, up 40.4%.
Review of Business Activities
During fiscal 2005, Kokuyo expanded the product lineup in its STORE GOODS catalog sales business. Efforts focused on expanding the customer base by making the service much more convenient. This made it more accessible not only to volume retailers, but also to small- and medium-sized businesses, a market where Kokuyo has a smaller share. Meanwhile, Kokuyo bolstered its lineup of other store fixture products, one initiative being the launch of the FLASHELFY illuminated display rack. The first of its kind in Japan, FLASHELFY features luminescent surfaces to enable the vivid presentation of merchandise.
In addition, Kokuyo launched an outsourcing business, making full use of its customer database to offer optimal solutions in “back- yard services” such as cleaning and facility maintenance. By offering a one-stop-shop for both products and services, Kokuyo plans to raise customer satisfaction levels and thereby increase sales.
Store Fixtures Segment
STORE GOODS Mail order catalog for store- related goods
FLASHELFY
Display rack featuring luminescent surfaces to present merchandise vividly 6.4%
Share of Net Sales
Operating Income
(Millions of yen)
Net Sales
(Millions of yen)
04 17,391
18,259 122,452 05
04 411
577 122,452 05
* In the fiscal year ended March 31, 2005, the store fixtures business separated from the furniture segment, resulting in three business segments. (See Note 12 on pages 48 and 49)
Toward Sustainable Society
Con tributing to
Societythrough Kokuyo's Main Busin
ess
Protecting
Glob alE
nviro nment
and Human Rights, En hanc
ing Wor
kin gE
nvironment
Stren gth
ening
its GovernanceandCo mp
lian
ce
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, environmental protection, business activities and human rights. Then in October 2004, Kokuyo established the CSR Committee as a framework to promote CSR initiatives and implement the guidelines. Headed by the president of the holding company, Kokuyo Co., Ltd., the committee comprises six sub-committees: Information Management, Markets, Disclosure, Environment, Employment Standards and Social Contribution. Established to deal with the variety of issues relating to CSR, the sub- committees set and promote policies and standards relating to their particular field.
Corporate Governance
The Kokuyo Group implements transparent, speedy and fair corporate governance. When it adopted the holding company structure in October 2004, Kokuyo established a system whereby the holding company evaluates and supervises the operating companies from a shareholder perspective. It also formulated the new Kokuyo Group Basic Policy on Corporate Governance.
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 auditors) supported by a full-time staff of three. Kokuyo revised its policy on internal auditing in October 2004, introducing a system whereby the holding company and Group operating companies collaborate to conduct audits.
In further measures to bolster corporate governance under the new system, newly-appointed directors and executives at each operating company are offered relevant training, and seminars are held for individuals responsible for conducting meetings of the Board of Directors and the General Meeting of Shareholders.
Risk Management and Compliance
Kokuyo promotes compliance-oriented management throughout the Group and has established the Risk Compliance Committee in the Group head office as a specialized consultative body to perform risk management. In addition, Kokuyo is reinforcing risk management at key operating companies by establishing separate risk compliance committees to cooperate with the Group head office in avoiding risk and mitigating any potential losses.
When Kokuyo moved to the holding company structure in October 2004, it also offered employees from each Group company online compliance training.
Global Environment
Employees Customers
Stockholders
Local Communities
Business Partners
Local Community Relations
Since its founding, the Kokuyo Group has worked to help create a sustainable society through its products and business activi- ties. At the same time, Kokuyo contributes to society in a range of ways to uphold its position as a responsible and trustworthy corporate citizen in the local communities where it operates.
In order to ensure the participation of all employees in such activities, Kokuyo created the Social Contribution Sub-committee to act as a Group-wide discussion body within the CSR Committee. The sub-committee is charged with promoting activities centering on the three themes of ecology, working with local communities, and education and welfare.
Having started out as a manufacturer of covers for Japanese bookkeeping ledgers, and subsequently developing operations
centering on the manufacture and sale of paper products, Kokuyo is extremely dependent on timber resources. That is why it is concentrating its efforts particularly on regional replanting and forest preservation activities.
Assistance to Areas Damaged by the Earthquake off the Coast of Sumatra
The large earthquake that occurred in the sea off Sumatra in December 2004 brought devastation to surrounding countries. The Kokuyo Group responded to UNICEF’s call for assistance for the children affected and collected donations from each Group company, supplemented by individual donations from employ- ees. Kokuyo sent these funds to be used for daily necessities, education and counseling for local children.
Employee Relations
The Kokuyo Group recognizes that its employees are also important stakeholders. It has therefore implemented a range of measures to create an environment in which every single employee can use their initiative and abilities to the full.
Hammered out during discussions in management meetings and other forums such as the Employment Standards Sub- committee, the measures address issues including the personnel system, the provision of training, the work environ- ment and conditions of service.
Efficiency and Amenity—the Group is aiming to build a unique and unrivalled position.
All Kokuyo Group companies naturally strive to maintain the safety and quality of goods and services, but Kokuyo is also customer-oriented in other ways. The Group is expanding and improving its efforts to develop closer relationships with custom- ers through measures such as appropriate disclosure of informa- tion, responding sincerely to customer inquiries, and protecting personal and client information.
Customer Relations
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 (CS) as a management ideal, establishing it as the foundation for business activities. Developing in response to the evolving needs of its customers, Kokuyo will deliver CS through its products and services. And by continuing to provide the values highlighted in its new brand message—Inspiration,
Communication With Stakeholders
In an age when all kinds of information is sent around the globe in an instant, it is becoming increasingly important for companies to take the initiative in enhancing the transparency of their activities through regular disclosure of information and communi- cation. The Kokuyo Group depends on a diverse group of stakeholders including customers, business clients, employees and local communities. The Group is proactive in its communi- cation with society at large, aiming to earn the trust not only of shareholders and investors, but also of these other stakeholders. Going forward, Kokuyo will augment its provision of information to stakeholders with more opportunities for dialogue, thereby promoting a mutually beneficial exchange of opinions.
What Others Think of Kokuyo’s CSR Activities
The Kokuyo Group’s proactive approach to CSR has been well received, evidenced by the inclusion of the Group in the following SRI (Socially Responsible Investment) stock indexes:
• Ethibel Sustainability Index (Sweden)
• FTSE4Good (UK)
• MS-SRI (Japan’s Morningstar Socially Responsible Investment Index)
Working With the Global Environment
The Kokuyo Group contributes to the global environment in a variety of ways through its business activities and the provision of products and services. In 2002, Kokuyo formulated the Kokuyo Group’s Environmental Vision to help it realize its aim of environmental management. The vision sets out the basic thinking and ultimate goals to guide the whole Group in dealing with environmental issues. Under the banner of its basic principles, the vision sets out an environmental policy covering six areas: preventing global warming; saving and recycling resources; sourcing, developing and providing eco-products; environmental management; disclosure and communications; and legal compliance and pollution prevention. In addition, Kokuyo has drawn up Green Initiative 2010, stipulating specific medium- and long-term measures and quantitative targets in line with its environmental policy. Kokuyo is now tackling environ- mental issues Group-wide in order to achieve the goals of Green Initiative 2010.
The Kokuyo Group’s Environmental Vision
The Kokuyo Group’s Environmental Vision
Kokuyo’s Environmental Policy
Preventing global warming
Saving and recycling resources
Sourcing, developing and providing eco-products Environmental
management Disclosure and communications
Legal compliance and pollution prevention
Basic Philosophy
Green Initiative 2010
( The Kokuyo Group’s medium - to long-term environmental action plan )
Six-year Summary
KOKUYO CO., LTD. AND CONSOLIDATED SUBSIDIARIES Years ended March 31
Thousands of
Millions of yen U.S. dollars
2005 2004 2003 2002 2001 2000 2005
For the year:
Net sales ¥283,519 ¥273,462 ¥272,199 ¥276,584 ¥295,310 ¥280,335 $2,642,302
Cost of sales 187,008 181,279 184,800 192,894 206,322 198,190 1,742,852
Selling, general and administrative expenses 84,352 83,317 82,401 82,911 77,132 67,823 786,132
Operating income 12,159 8,866 4,998 779 11,856 14,322 113,318
Net income (loss) 5,207 1,949 231 (1,422) 7,192 1,192 48,527
Capital expenditure 6,431 9,369 8,186 5,725 7,932 6,368 59,935
Depreciation and amortization 6,220 6,197 6,722 6,871 7,292 7,809 57,968
Net cash and cash equivalents provided
by operating activities 10,168 7,457 18,148 11,293 8,777 14,302 94,762
Net cash and cash equivalents used
in investing activities (20,778) (7,112) (9,789) (9,159) (6,012) (14,879) (193,644) Net cash and cash equivalents provided by
(used in) financing activities 7,075 (4,586) (10,353) (12,613) (4,149) (3,334) 65,937
At year-end:
Total assets 291,651 289,194 285,789 307,010 329,505 314,039 2,718,089
Working capital 58,486 57,790 54,242 70,860 82,803 89,688 545,070
Property, plant and equipment, net 94,778 97,134 98,482 98,522 102,207 103,342 883,299
Total liabilities 104,268 103,693 103,913 115,925 128,570 120,321 971,743
Interest-bearing debt 26,770* 17,777 20,188 20,554 21,861 21,120 24,949
Total shareholders’ equity 187,043 185,141 181,430 190,274 200,442 193,380 1,743,178
Yen U.S. dollars
Per share data:
Basic net income (loss) ¥ 41.88 ¥ 15.38 ¥ 1.51 ¥ (11.05) ¥ 55.44 ¥ 9.13 $ 0.39
Diluted net income 41.88 15.38 – – 55.39 9.16 0.39
Cash dividends applicable to the year 18.50 15.00 15.00 15.00 17.50 17.50 0.17
Shareholders’ equity 1,452.8 1,438.07 1,483.73 1,498.49 1,544.92 1,490.49 13.54
% Ratios:
Ratio of operating income to net sales 4.3% 3.2% 1.8% 0.3% 4.0% 5.1%
Return on sales 1.8 0.7 0.1 (0.5) 2.4 0.4
Return on equity 2.8 1.1 0.1 (0.7) 3.6 0.6
Return on assets 1.8 0.7 0.1 (0.4) 2.2 0.4
Equity ratio 64.1 64.0 63.5 62.0 60.8 61.6
Debt-to-equity ratio 14.3 9.6 11.1 10.8 10.9 10.9
Thousands of shares Common stock:
Number of shares issued 128,742 128,742 128,742 129,742 129,742 130,742
Note: The U.S. dollar amounts are translated from yen, for convenience only, at the rate of ¥107.3=U.S.$1, the approximate exchange rate prevailing at March 31, 2005.
* In August 2004, Kokuyo issued ¥12 billion in bonds with stock acquisition rights, but as their coupon was zero, no interest liability arose.
Overview
During fiscal 2005, the fiscal year ended March 31, 2005, improved corporate earnings helped spur a moderate recovery in the Japanese economy. However, instability continued due to surging prices for crude oil and steel and other factors.
Within this environment, the Kokuyo Group has, since October 2004, conducted its three main businesses—stationery, furniture and store fixtures—under a holding company structure. At the same time, it is reinforcing its activities in logistics, research and other services supporting these businesses. The holding company structure allows the Group to monitor the profitability of each business, while allowing the businesses themselves to take advantage of their independence and autonomy to conduct their operations adroitly. The goal of this approach is enhanced corporate value for the Group as a whole.
As of March 31, 2005, the Kokuyo Group consisted of the holding company (Kokuyo Co., Ltd.), 55 subsidiaries and 20 affiliates. Of these, 23 companies were consolidated subsidiaries and 1 was an affiliate accounted for by the equity method.
The past fiscal year was the final year of the structural reform plan initiated in fiscal 2003. During the plan, the Group pared back costs and expenses, achieving its initial reduction targets. This established the foundation for a new medium-term
Net Sales
(Millions of yen)
Operating Income and Ratio of Operating Income to Net Sales
(Millions of yen, %)
Ratio of Gross Profit to Net Sales and SG&A Expenses to Net Sales
(%)
management plan commencing from fiscal 2006. The new plan calls for new growth, as well as ongoing improvements in efficiency and speed.
To mark its 100th anniversary, the Group also redefined its corporate vision with the formulation of a new brand message highlighting “Inspiration, Efficiency and Amenity” as the types of added value that Kokuyo will continue to deliver.
Results of Operations for Fiscal 2005 and
Comparisons With Fiscal 2004
Net Sales
Consolidated net sales increased 3.7% to ¥283.5 billion. The stationery segment accounted for 50.4% of this total and the furniture segment contributed 43.2%. The store fixtures seg- ment, which became a separate business segment for the first time in fiscal 2005, accounted for 6.4%, resulting in an overall distribution similar to fiscal 2004.
We are confident that we have now established a stable foundation for the growth of the Kokuyo Group with all three segments having posted higher earnings in fiscal 2005. Going forward, we will continue to optimize the balance of busi- nesses and earnings across the Group as we foster new and growth businesses.
00 01 02 03 04 05
60,000 120,000 180,000 300,000
240,000
0
283,519
Stationery Segment Furniture Segment Store Fixtures Segment
00 01 02 03 04 05
10 20 40
30
0
29.8 34.0
Operating Income
Ratio of Operating Income to Net Sales
00 01 02 03 04 05
5,000 10,000 15,000 25,000
20,000
0 0
1 2 3 4 5 6
12,159 4.3
* In fiscal 2005, Kokuyo reclassified its business segments.
Ratio of Gross Profit to Net Sales Ratio of SG&A Expenses to Net Sales
