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Anchored by History_ Focused on the Future

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					  1905
Anchored by History, Focused on the Future




  2005
                                 Annual Report 2005
                                      Year ended March 31, 2005
Our Evolving Products

                                           Letter paper
 Covers for bookkeeping ledgers            Letter paper was one of the pivotal                                    Flat Files
 The manufacture of covers for Japa-       products in Kokuyo’s history. In                                       In the 1950s, files had binders made
 nese bookkeeping ledgers in the           1932, the Company responded to                                         of tin, but this had many drawbacks,
 1900s was painstaking work. In time,      the demands of customers and                                           including their propensity to snap
 Kokuyo was able to move on from           changed the size of its letter paper                                   off, tear paper holes, and cut fin-
 the manufacture of covers and ex-         from the standard size of the day.                                     gers. In response, Kokuyo carried
 pand the scope of its business to         By including a sheet printed with a                                    out a series of improvements to the
 handle the entire process from paper      painting by a famous artist, Kokuyo                                    file concept, until finally Kokuyo’s
 manufacture to cutting.                   was able to grow its letter paper into                                 Flat File became its flagship sta-
                                           a hugely successful product.                                           tionery 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.
100 Years of KOKUYO
1905          1910              1915       1920              1925             1930          1935              1940              1945          1950

                                                                                             Moved to current head office
                                                                                             location (1936)
                                           Kokuyo brand adopted (1917)                       Completed construction of an integrated
                                           The Japanese characters for “Kokuyo”              production system for ledgers and binders.
 Company founded (1905)                    suggest “being the pride of (one’s)
 The Company started as KURODA             homeland.” Zentaro Kuroda ex-
 HYOSHI-TEN making only a single           pressed his hope of becoming a
 type of product, covers for Japanese-     credit to his native Toyama when he
 style bookkeeping ledgers. Founder,       adopted these characters for the
 Zentaro Kuroda, firmly believed that as   corporate brand.
 long as a company was performing a
                                                                                                          Exclusive Kokuyo sales agents
 role useful to society, its customers                                                                    established (1950)
 would remain loyal. This conviction                                                                      Ito Shoten Co., Ltd. based in Tokyo set up
 was the direct precursor of Kokuyo’s                                                                     a specialist store to exclusively handle
 management philosophy today.                                                                             Kokuyo products. Five years later, 13 agents
                                                                                                          across the country were specializing in
                                                                                                          Kokuyo products.



Our Evolving Company
                       Pritt
                       Through a tie-up with Henkel Consumer
                       Adhesives, Inc. of Germany, Kokuyo
                       brought the first ever stick glue to Ja-
                       pan in the form of Pritt. It now com-
                                                                                                                       Kadokeshi eraser
                       mands higher sales than any other glue
                                                                                                                       This product was developed from the
                       in the Japanese market.
                                                                                                                       winning entry in the first ever Kokuyo
                                                                                                                       Design Awards* held in 2002. Its
                                                                              Development of Universal                 shape, comprising ten small cubes,
                                                                                                                       succeeds in combining usability with
                                                                              Design products
                                                                                                                       completely original design. Since its
                                                                              (Clear Book Wavelet)
                                                                                                                       launch, the Kadokeshi has won ac-
                                                                              A clear-file, featuring so-called
                                                                                                                       claim both in Japan and overseas.
                                                                              “wave-cut” pockets that allow the
                                                                                                                       * A competition in which the general pub-
                                                                              one-handed insertion and removal of      lic are invited to submit ideas for Universal
                                                                              documents. Kokuyo’s first Universal      Design products (products that anybody
The original Campus Notebook                                                                                           can use easily) in the stationery and IT sup-
                                                                              Design product.                          plies categories.
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.




    1960             1965            1970              1975         1980             1985             1990           1995            2000

                                                                  Environment-related
                                                                  activities bolstered                                 Shift to holding company
                                                                  Kokuyo reinforced its environmental protec-          structure (2004)
                                                                  tion-related initiatives by drawing up the           Kokuyo spun off all its businesses
                                                                  Kokuyo Charter and Targets for Environmen-           into independent operating compa-
                                                                  tal Activities, as well as obtaining ISO 14001       nies and adopted a holding com-
                                                                  certification at its main plants.                    pany structure. This was aimed at
              Listed on the first sections of                                                                          encouraging each group company
              the Tokyo Stock Exchange and                                                                             to abandon previous modus oper-
                                                                              Kaunet office supply catalog             andi to act with autonomy and agil-
              the Osaka Securities Exchange (1972)
                                                                              sales business started (2001)            ity in response to the constantly
              Kokuyo shares were listed to facilitate capital
                                                                              Kokuyo launched this business in re-     changing business environment, ul-
              procurement for new business development
                                                                              sponse to the growth of the office       timately leading to the creation of an
              and to clearly position Kokuyo as a company
                                                                              supply catalog sales market. Kokuyo      unrivalled corporate group.
              with responsibilities to society.
                                                                              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.
On the Cover
1905 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.

        The measuring scale shown is the one used in Kokuyo’s Universal
        Design rulers. The graduated markings make it easier to read.




Contents
       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


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.
                                                                                                        Kokuyo Co., Ltd. Annual Report 2005                               1




   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.




       Stationery                     PC Supplies                      Furniture               Store Fixtures




2005
                       A New Start, A New Medium-term Plan
                       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…

                       Net Sales by Business Type ( Billions of yen )               Targets of Medium-term Management Plan                          ( Billions of yen )



                       05                 153.0          126.9 3.6                                              2005          2006        2007              2008
                     (Results)                                                                                  (Results)   (Projected)   (Plans)          ( Plans)

                       06             120.0                173.0   9.0               Net Sales                  ¥283.5      ¥302.0        ¥326.0          ¥360.0
                    (Projected)
                                                                                     Operating Income              12.2         14.0        18.0              25.0
                       08           100.0                      230.0       30.0
                      (Plans)                                                        Net Income                      5.2          5.5       11.0              16.0

                           Mature Businesses   Growth Businesses   New Businesses
                                                                                     ROE (%)                      2.8%        2.8%         5.7%             8.0%
Mature Businesses
Breaking With the Past
                                                                                    Kokuyo Co., Ltd. Annual Report 2005           2     3


Left: AGATA/A (launched in 2004)
Right: 10 Series office chair
(launched in 1977)
For Kokuyo, chairs are more than
just “objects for sitting on.”
We tirelessly seek to enhance
comfort and design so our chairs
are always evolving.




                           Sales of Universal Design Products      Targeted Business Model Structure for
                           (Billions of yen)                       Distribution Affiliates
                                                                    (%)

                                                                                                               Existing Wholesaling
                           03                  3.3                  05                    65     20   15
                                                                  (Results)                                    Business

                           04                        4.3                                                       Direct Business
                                                                                                               Catalog/Internet Sales
                           05                               5.6     09         33         33          33       Business
                                                                   (Plans)




                           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.
Growth Businesses
Driving New Growth
                                                                                               Kokuyo Co., Ltd. Annual Report 2005   4   5


The 9th Kaunet office
supply sales catalog
Kaunet catalog sales
guarantee a wide choice,
reasonable prices and the
best service.




                                                             Net Sales Targets for Kaunet               Share of Municipal Merger
                                                             (Billions of yen)                          Consulting Business in Fiscal 2005


                                                             05                  31.8
                                                           (Results)
                                                             06                     37.0
                                               505        (Projected)
                                                             07                         41.4
                                                 560        (Plans)
                                                             08                                55.0
                                                       700 (Plans)                                                 80.0%




                            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.
New Businesses
Building Future Foundations
                                                                                           Kokuyo Co., Ltd. Annual Report 2005                    6    7


The Secure Unit, offering
simplified storage and retrieval
of important documents
Kokuyo’s Secure Unit enables
monitoring of access to
important documents,
enhancing office security.




                              Easy buy                  Net Sales Targets                       Net Sales Targets
                                                        for Security Business                   for China-based Business
                                                        (Billions of yen)                        (Billions of yen)



                                                        05                                      05                                Furniture Business
                                                      (Results)
                                                                        1.3                   (Results)
                                                                                                            0.5
                                                                                                                                  Office Supply
                                                        06            2.2                       06         1.5 0.3                Catalog Business
                                                     (Projected)                             (Projected)
                                                        07                    5.5               07              3.0   2.5
                                                       (Plans)                                 (Plans)
                                                        08                          10.0        08                          7.0         5.0
                                                       (Plans)                                 (Plans)




                              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.
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 100th anniversary 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
Kokuyo Co., Ltd. Annual Report 2005   8   9
An Interview with the President




                  Structural Reforms for Growth
                  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.



“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.”

                  Net Sales and Operating Income Trends (Billions of yen)

                                                                             Establishment of                      Kaunet service started
                    Kokuyo recorded its                                      —Kokuyo Office System Co., Ltd.       (January 2001) Establishment of
                    highest operating income                                   (July 2000)                         —Kokuyo Kinki Sales Co., Ltd.
                    of ¥28.5 billion.                                        —Kokuyo Tokyo Sales Co., Ltd.         —Kokuyo Chugoku Sales Co., Ltd.
                                                                             —Kokuyo Nishikanto Sales Co., Ltd.    —Kokuyo Kyushu Sales Co., Ltd.
                                          Kokuyo recorded its highest        —Kokuyo Saitama Sales Co., Ltd.       (October 2001)
                                          net sales of ¥333.4 billion.         (December 2000)
                  340                                                                                                                         30
                                          Office Depot, Inc. made
                                          inroads into Japanese market.

                  320
                                                                                                                                              25



                  300

                                                                                                                                              20
                                                                                                                                      283.5
                  280


                                                                  Structural reform started.                                                  15

                  260
                                                                  Establishment of Kokuyo Chubu                                       12.2
                                                                  Sales Co., Ltd. (October 2002)
                                                                                                                                              10
                  240                                                  Kaunet achieved profitability.
                                                                       Consolidation of Arvel Co., Ltd.
                                                                       (October 2003)
                                                                                                                                              5
                  220
                                                                           Shift to holding company structure.
                                                                           (October 2004)
                  200                                                                                                                         0
                           91       92    93      94      95      96       97      98       99       00     01    02   03      04     05 (FY)

                        Net Sales    Operating Income
                                                                                                            Kokuyo Co., Ltd. Annual Report 2005       10   11




                               Question 02
                               After around two-and-a-half years of implementing the structural reform plan,
                               how did you achieve this result?


Cost-cutting Targets and Results    ( Billions of yen)                                                      For the fiscal year ended March 31, 2002,
                                                                                                            we witnessed a sharp deterioration in our
                                March 2003       March 2004          March 2005           Total    Target
                                                                                                            results. This was the impetus for the
  Cost-cutting                    ¥5.8              ¥7.3              ¥8.5                ¥21.6   ¥21.2
                                                                                                            implementation of the structural reform
  Reduction of expenses            8.1                   8.2            5.0                21.3    20.7
                                                                                                            plan in October 2002. It meant decisive
    —Logistics expenses            3.0                   2.0            1.8                 6.8     7.0     action in paring back costs and ex-

    —Other expenses                5.1                   6.2            3.2                14.5    13.7     penses, but we managed to overcome
                                                                                                            challenging hurdles, becoming a leaner
                                                                                                            company as a result. In the end, we
Overseas Procurement Ratio (March 2005)
                                                                                                            exceeded our initial targets in both areas.
  Stationery          31%         Furniture                    13%                Total           21%           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.




                                                                                                                           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
                                                                   Kokuyo Co., Ltd. Annual Report 2005      12    13




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.
                                                                  Kokuyo Co., Ltd. Annual Report 2005        14   15




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.
                                                                                         Kokuyo Co., Ltd. Annual Report 2005   16   17


A Letter From the Chairman




                                               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




Stationery Segment
                 Share of Net Sales                   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
                           50.4%                      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
                 Net Sales                            integrated management of paper and digital documents.
                 (Millions of yen)
                                                          Kaunet Co., Ltd., Kokuyo’s catalog sales subsidiary, suc-
                 03                      138,185
                                                      cessfully expanded its operations by means such as introducing
                 04                      137,691
                                                      With Kaunet services targeting large- and medium-sized
                 05                       142,808
                                                      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.
                 Operating Income
                                                          The performance of Arvel Co., Ltd. also contributed to full-
                 (Millions of yen)

                                                      year results in this segment, as did cost-cutting measures. Overall,
                 03           2,632
                                                      the segment achieved top-and bottom-line growth, posting net
                 04                   5,431
                                                      sales of ¥142.8 billion, an increase of 3.7%, and operating income
                 05                           7,117
                                                      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




                                                      Kadokeshi erasers                  marimekko mouse
                                                      Erasers with 28 corners            Designed in collaboration with
                                                                                         Finnish designers
                                                                                                       Kokuyo Co., Ltd. Annual Report 2005       18   19




usability and eye-catching design. Kokuyo has developed a                   catalog sales, Kaunet has set the goal of raising net sales from
rapid succession of other highly functional design-focused                  ¥31.8 billion in fiscal 2005 to ¥55.0 billion in fiscal 2008. This will
products such as its Universal Design (UD) range. These                     be achieved through promotion of With Kaunet and a business
efforts have been welcomed by consumers, and in a survey                    alliance with Japan Post, among other measures.
conducted by Universal Design Forum, an organization that                       In another development, in June 2005, Kokuyo launched
works to promote understanding of UD products, Kokuyo                       Easy buy, the first office supply catalog sales business operated
was chosen as the company perceived to be most actively                     by a Japanese company in China. With a high rate of growth
engaged in UD.                                                              predicted for this market, Kokuyo will aggressively roll out
                                                                            operations in China.
Security-related Business
We anticipate a continuing high level of demand related to
information security issues such as leaks and loss of data, and                  Campus Notebook marks its
computer hacking. Kokuyo offers a broad range of products for                    30th anniversary with total
both individual and corporate use. For individual users, the UBS
Verification Key provides a simple means of locking a PC, while
                                                                                 shipments of 1.7 billion units
our OA Filter prevents people other than the user from viewing
data on a PC screen. Kokuyo also offers a large lineup for                       As the core product of Kokuyo’s flagship Campus
business users, including networked products using Radio                         stationery brand, Campus Notebook this year cel-
Frequency Identification (RFID) systems.                                         ebrated 30 years since its launch in 1975. The note-
                                                                                 book, originally targeting students, has become a long
Office Supply Catalog Sales                                                      seller. As a high-quality notebook at an affordable price,
Kokuyo’s office supply catalog sales business, Kaunet, has                       Campus Notebook has won the support of a broad
achieved a high rate of growth since its establishment in 2001.                  range of non-student users from children to adults. In
Despite a slight slowdown in growth in fiscal 2005, Kaunet                       addition to this mainstay product, Kokuyo will continue
continued to drive operating results in the stationery business                  to offer a varied lineup of stationery products that
segment. With continued growth in the market for office supply                   respond to customer needs.




OA Filter for PCs                 Campus Notebook
                                                                                      1975                               2005
Allows screen to be viewed only   “PARACURUNO”
from directly in front            Page edges are cut diagonally,
                                  making it easy to turn the pages either
                                  from front to back or back to front
Review of Operations




Furniture Segment
                 Share of Net Sales                         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
                            43.2%                           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-
                 Net Sales                                  nities boosted the segment’s results significantly.
                 (Millions of yen)
                                                                In the growing security-related business, Kokuyo entered an
                 03                              134,014*
                                                            alliance with Kumahira Co., Ltd., Japan’s largest total security
                 04                           118,380
                                                            company, and commenced full-scale security-related operations
                 05                           122,452
                                                            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
                 Operating Income
                                                            premises due to municipal mergers, helping it to secure a large
                 (Millions of yen)

                                                            number of orders. Overseas, Kokuyo’s Chinese operations
                 03                  2,366*
                                                            recorded steady growth, benefiting from expansion in the
                 04                      3,024
                                                            solutions business offering office start-up and relocation support
                 05                                4,465
                                                            to Japanese companies moving into China.
                                                                Together with the continued implementation of cost-cutting
                                                            and other measures, the above actions helped the furniture
                 * In the fiscal year ended March 31,
                                                            business segment to post higher sales and earnings. Net sales
                   2005, the store fixtures business
                   separated from the furniture segment,    were ¥122.5 billion, an increase of 3.4%, and operating income
                   resulting in three business segments.
                   (See Note 12 on pages 48 and 49)         was ¥4.5 billion, up 47.7%.




                                                            EAZA chair                               BS+ desk
                                                            The most colorful chair on the           The first desk in the world to
                                                            market featuring 14 colors               offer bolt-free assembly
                                                                                                     Kokuyo Co., Ltd. Annual Report 2005        20   21




Review of Principal Business Activities                                trust of users, helping to support steady business expansion. In
Security-related Business                                              this public sector-related business Kokuyo is aiming to secure a
In the security-related field, the furniture business segment offers   market share of 30% in the future.
services including best-fit security solutions utilizing Compact
                                                                       Overseas Developments
Office, an office layout consulting method developed by Bene
                                                                       The Chinese market is currently the focus of Kokuyo’s overseas
Buromobel KG of Austria. These solutions address needs related
                                                                       activities. With Japanese companies continuing to actively
to secure workspace design, the functional zoning of offices and
                                                                       enter China, Kokuyo is expanding its sales through the provi-
the size of office spaces. In security-related products, Kokuyo’s
                                                                       sion of comprehensive services that go beyond the sale of
Secure Unit has achieved steady sales growth since its launch
                                                                       office furniture to encompass removals and re-wiring services
last fall. A safety box that controls access through an ID card
                                                                       for local office start-ups and relocations. In June 2004, Kokuyo
and personal identification number, the Secure Unit offers
                                                                       established Kokuyo Interior Technologies (Shanghai) Co., Ltd.,
optimum security features and is easy to use inside an existing
                                                                       an interior construction company, boosting the expansion of its
storage unit or, if necessary, to stack vertically.
                                                                       furniture business in China. Going forward, we intend to
Public Sector-related Business                                         develop similar businesses in other areas Japanese companies
Demand in the public sector-related field is not affected as much      are targeting for expansion, including the BRICs economies
by changes in the economic environment as private-sector               (Brazil, Russia, India and China), Thailand and Vietnam.
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              AGATA
across the country. These solutions, which center on consulting
services for relocation of government buildings and the reduction          The AGATA series comprises state-of-the-art high-end office
of administrative costs, are clearly helping to drive sales.               chairs offering support in any posture. The AGATA/S won the
Kokuyo’s powerful sales network underpins this sales growth.               Good Design Gold Prize in the fiscal 2002 Good Design
The Group’s distribution affiliates across Japan take advantage            Awards, and the AGATA/D was Japan’s first office chair to win
of their strong local connections to conduct sales activities that         the Gold award in the fiscal 2005 iF design awards*, reflecting
are highly focused on the user. This enables them to earn the              the series’ widespread popularity at home and abroad.




                                                                           * 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.
2000 Series lobby chair
A lobby chair with outstanding design
features, supplied to Japan’s Haneda
and Narita airports
Review of Operations




Store Fixtures Segment
                 Share of Net Sales                        Results of Operations for Fiscal 2005
                                                           This business segment was successful in implementing aggres-
                                                           sive proposal-based marketing strategies during the year. These
                            6.4%                           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,
                 Net Sales                                 the store fixtures business segment achieved top- and bottom-
                 (Millions of yen)
                                                           line growth, posting net sales of ¥18.3 billion, an increase of
                 04                            17,391      5.0%, and operating income of ¥0.6 billion, up 40.4%.
                 05                              18,259
                                           122,452
                                                           Review of Business Activities
                                                           During fiscal 2005, Kokuyo expanded the product lineup in its
                                                           STORE GOODS catalog sales business. Efforts focused on
                 Operating Income                          expanding the customer base by making the service much more
                 (Millions of yen)
                                                           convenient. This made it more accessible not only to volume
                 04                      411               retailers, but also to small- and medium-sized businesses, a
                 05                                577     market where Kokuyo has a smaller share. Meanwhile, Kokuyo
                                           122,452
                                                           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

                 * In the fiscal year ended March 31,      surfaces to enable the vivid presentation of merchandise.
                   2005, the store fixtures business
                   separated from the furniture segment,
                                                               In addition, Kokuyo launched an outsourcing business, making
                   resulting in three business segments.   full use of its customer database to offer optimal solutions in “back-
                   (See Note 12 on pages 48 and 49)
                                                           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 GOODS                               FLASHELFY
                 Mail order catalog for store-             Display rack featuring luminescent
                 related goods                             surfaces to present merchandise vividly
                                                                                                  Kokuyo Co., Ltd. Annual Report 2005                                                          22   23


Kokuyo’s CSR Initiatives




                                                                                              Toward Sustainable Society
For the Kokuyo Group, corporate social
responsibility (CSR) means being accountable
to and trusted by society. Striving ultimately to                                        Global
                                                                                   Environment
                                                                                                                                                                                Stockholders



help realize a sustainable society, Kokuyo is
aiming to fulfill its social obligations through




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Establishing a Framework to Promote CSR                              appointments), with a term of office of one year, ensuring a
In 2004, Kokuyo drafted the Kokuyo Group CSR Charter                 management structure that can react responsively to changes in
clarifying the Group’s obligations to society. In this charter,      the operating environment. There are four Statutory Auditors
Kokuyo set out specific guidelines for conduct in each of its five   (including two outside auditors) supported by a full-time staff of
areas of focus: customers, local communities, environmental          three. Kokuyo revised its policy on internal auditing in October
protection, business activities and human rights. Then in            2004, introducing a system whereby the holding company and
October 2004, Kokuyo established the CSR Committee as a              Group operating companies collaborate to conduct audits.
framework to promote CSR initiatives and implement the                   In further measures to bolster corporate governance under the
guidelines. Headed by the president of the holding company,          new system, newly-appointed directors and executives at each
Kokuyo Co., Ltd., the committee comprises six sub-committees:        operating company are offered relevant training, and seminars are
Information Management, Markets, Disclosure, Environment,            held for individuals responsible for conducting meetings of the
Employment Standards and Social Contribution. Established to         Board of Directors and the General Meeting of Shareholders.
deal with the variety of issues relating to CSR, the sub-
committees set and promote policies and standards relating to        Risk Management and Compliance
their particular field.                                              Kokuyo promotes compliance-oriented management throughout
                                                                     the Group and has established the Risk Compliance Committee in
Corporate Governance                                                 the Group head office as a specialized consultative body to
The Kokuyo Group implements transparent, speedy and fair             perform risk management. In addition, Kokuyo is reinforcing risk
corporate governance. When it adopted the holding company            management at key operating companies by establishing
structure in October 2004, Kokuyo established a system whereby       separate risk compliance committees to cooperate with the Group
the holding company evaluates and supervises the operating           head office in avoiding risk and mitigating any potential losses.
companies from a shareholder perspective. It also formulated the         When Kokuyo moved to the holding company structure in
new Kokuyo Group Basic Policy on Corporate Governance.               October 2004, it also offered employees from each Group
    Kokuyo operates under the corporate auditor system. The          company online compliance training.
Board of Directors comprises 10 directors (no outside
Customer Relations                                                    Efficiency and Amenity—the Group is aiming to build a unique
The first principle of the Kokuyo Group CSR Charter is “earning       and unrivalled position.
the satisfaction and trust of customers.” In line with this               All Kokuyo Group companies naturally strive to maintain the
principle, the Group has defined dedication to Customer               safety and quality of goods and services, but Kokuyo is also
Satisfaction (CS) as a management ideal, establishing it as the       customer-oriented in other ways. The Group is expanding and
foundation for business activities. Developing in response to the     improving its efforts to develop closer relationships with custom-
evolving needs of its customers, Kokuyo will deliver CS through       ers through measures such as appropriate disclosure of informa-
its products and services. And by continuing to provide the           tion, responding sincerely to customer inquiries, and protecting
values highlighted in its new brand message—Inspiration,              personal and client information.




Local Community Relations                                             centering on the manufacture and sale of paper products,
Since its founding, the Kokuyo Group has worked to help create        Kokuyo is extremely dependent on timber resources. That is why
a sustainable society through its products and business activi-       it is concentrating its efforts particularly on regional replanting
ties. At the same time, Kokuyo contributes to society in a range      and forest preservation activities.
of ways to uphold its position as a responsible and trustworthy
corporate citizen in the local communities where it operates.         Assistance to Areas Damaged by the Earthquake
    In order to ensure the participation of all employees in such     off the Coast of Sumatra
activities, Kokuyo created the Social Contribution Sub-committee to   The large earthquake that occurred in the sea off Sumatra in
act as a Group-wide discussion body within the CSR Committee.         December 2004 brought devastation to surrounding countries.
The sub-committee is charged with promoting activities centering      The Kokuyo Group responded to UNICEF’s call for assistance for
on the three themes of ecology, working with local communities,       the children affected and collected donations from each Group
and education and welfare.                                            company, supplemented by individual donations from employ-
    Having started out as a manufacturer of covers for Japanese       ees. Kokuyo sent these funds to be used for daily necessities,
bookkeeping ledgers, and subsequently developing operations           education and counseling for local children.




Employee Relations                                                    Hammered out during discussions in management meetings
The Kokuyo Group recognizes that its employees are also               and other forums such as the Employment Standards Sub-
important stakeholders. It has therefore implemented a range          committee, the measures address issues including the
of measures to create an environment in which every single            personnel system, the provision of training, the work environ-
employee can use their initiative and abilities to the full.          ment and conditions of service.
                                                                                                            Kokuyo Co., Ltd. Annual Report 2005                        24   25




Working With the Global Environment                                                The Kokuyo Group’s Environmental Vision
The Kokuyo Group contributes to the global environment in a
variety of ways through its business activities and the provision                            The Kokuyo Group’s Environmental Vision

of products and services. In 2002, Kokuyo formulated the
                                                                                                               Kokuyo’s
Kokuyo Group’s Environmental Vision to help it realize its aim of                                         Environmental Policy
environmental management. The vision sets out the basic
                                                                              Legal compliance and                                      Preventing
thinking and ultimate goals to guide the whole Group in dealing                 pollution prevention                                    global warming

with environmental issues. Under the banner of its basic
principles, the vision sets out an environmental policy covering                                                 Basic
                                                                            Disclosure and                                                       Saving and
                                                                           communications                      Philosophy                        recycling resources
six areas: preventing global warming; saving and recycling
resources; sourcing, developing and providing eco-products;
environmental management; disclosure and communications;                             Environmental                                      Sourcing, developing and
                                                                                      management                                        providing eco-products
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-                                           Green Initiative 2010
                                                                                   ( The Kokuyo Group’s medium - to long-term environmental action plan )
mental issues Group-wide in order to achieve the goals of Green
Initiative 2010.




      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         What Others Think of Kokuyo’s CSR Activities
      to take the initiative in enhancing the transparency of their
      activities through regular disclosure of information and communi-          The Kokuyo Group’s proactive approach to CSR has
      cation. The Kokuyo Group depends on a diverse group of                     been well received, evidenced by the inclusion of the
      stakeholders including customers, business clients, employees              Group in the following SRI (Socially Responsible
      and local communities. The Group is proactive in its communi-              Investment) stock indexes:
      cation with society at large, aiming to earn the trust not only of           • Ethibel Sustainability Index (Sweden)
      shareholders and investors, but also of these other stakeholders.
                                                                                   • FTSE4Good (UK)
      Going forward, Kokuyo will augment its provision of information
                                                                                   • MS-SRI (Japan’s Morningstar Socially
      to stakeholders with more opportunities for dialogue, thereby                  Responsible Investment Index)
      promoting a mutually beneficial exchange of opinions.
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.
                                                                                                              Kokuyo Co., Ltd. Annual Report 2005             26      27


Management’s Discussion and Analysis




Overview                                                                            management plan commencing from fiscal 2006. The new plan
During fiscal 2005, the fiscal year ended March 31, 2005,                           calls for new growth, as well as ongoing improvements in
improved corporate earnings helped spur a moderate recovery                         efficiency and speed.
in the Japanese economy. However, instability continued due to                           To mark its 100th anniversary, the Group also redefined its
surging prices for crude oil and steel and other factors.                           corporate vision with the formulation of a new brand message
     Within this environment, the Kokuyo Group has, since                           highlighting “Inspiration, Efficiency and Amenity” as the types of
October 2004, conducted its three main businesses—stationery,                       added value that Kokuyo will continue to deliver.
furniture and store fixtures—under a holding company structure.
At the same time, it is reinforcing its activities in logistics,                    Results of Operations for Fiscal 2005 and
research and other services supporting these businesses. The                        Comparisons With Fiscal 2004
holding company structure allows the Group to monitor the                           Net Sales
profitability of each business, while allowing the businesses                       Consolidated net sales increased 3.7% to ¥283.5 billion. The
themselves to take advantage of their independence and                              stationery segment accounted for 50.4% of this total and the
autonomy to conduct their operations adroitly. The goal of this                     furniture segment contributed 43.2%. The store fixtures seg-
approach is enhanced corporate value for the Group as a whole.                      ment, which became a separate business segment for the first
     As of March 31, 2005, the Kokuyo Group consisted of the                        time in fiscal 2005, accounted for 6.4%, resulting in an overall
holding company (Kokuyo Co., Ltd.), 55 subsidiaries and 20                          distribution similar to fiscal 2004.
affiliates. Of these, 23 companies were consolidated subsidiaries                        We are confident that we have now established a stable
and 1 was an affiliate accounted for by the equity method.                          foundation for the growth of the Kokuyo Group with all three
     The past fiscal year was the final year of the structural reform               segments having posted higher earnings in fiscal 2005. Going
plan initiated in fiscal 2003. During the plan, the Group pared                     forward, we will continue to optimize the balance of busi-
back costs and expenses, achieving its initial reduction targets.                   nesses and earnings across the Group as we foster new and
This established the foundation for a new medium-term                               growth businesses.




Net Sales                                          Ratio of Gross Profit to Net Sales                           Operating Income and
(Millions of yen)                                  and SG&A Expenses to Net Sales                               Ratio of Operating Income to
                                                   (%)                                                          Net Sales
                                                                                                                (Millions of yen, %)
300,000                                 283,519    40                                                           25,000                                            6

                                                                                         34.0
                                                                                                                                                                  5
240,000                                                                                                         20,000
                                                   30                                                                                                 4.3
                                                                                         29.8
                                                                                                                                                                  4
180,000                                                                                                         15,000
                                                                                                                                                     12,159
                                                   20                                                                                                             3

120,000                                                                                                         10,000
                                                                                                                                                                  2
                                                   10
 60,000                                                                                                          5,000
                                                                                                                                                                  1


      0                                             0                                                                0                                            0
             00 01 02 03 04 05                              00 01 02 03 04 05                                              00 01 02 03 04 05
          Stationery Segment                             Ratio of Gross Profit to Net Sales                              Operating Income
          Furniture Segment                              Ratio of SG&A Expenses to Net Sales                             Ratio of Operating Income to Net Sales
         Store Fixtures Segment
    * In fiscal 2005, Kokuyo reclassified
      its business segments.
Stationery Segment                                                        Japan’s PC supplies market is valued at around ¥100 billion.
Japan’s stationery market comprises two main types of product:        Linked to the value of PC and digital camera shipments, its value
stationery goods and PC supplies. The value of the stationery         appears to have been increasing marginally in recent years. We
goods market in fiscal 2005 was only marginally less than the         believe that the Kokuyo Group is number three in this market
previous year with estimated annual sales of approximately ¥1.0-1.1   with a 13% share3. Arvel Co., Ltd., a consolidated subsidiary
trillion and around ¥300-400 billion in the B2B and B2C markets,      since October 2003, again made a significant contribution to
respectively. The stationery goods market is being shaped by          Kokuyo’s consolidated results.
increasing diversification of distribution channels with fewer            As a result of market conditions and the measures imple-
stationery stores and more sales through new channels including       mented by the Kokuyo Group, the stationery segment posted
mail order catalogs, volume retailers and discount stores.            net sales for fiscal 2005 of ¥142.8 billion, up 3.7% year on year.
    While unit prices had been falling due to deflation, recently
                                                                      Notes: 1. Kokuyo’s own estimates based on industrial and commercial data, and
there have been some signs of stabilization. Meanwhile, new                     Kokuyo Group research.
                                                                             2. Kokuyo’s own estimates based on data from the Response Media
demand is being generated by the enforcement of legislation                     Research Center.
                                                                             3. Kokuyo’s own estimates based on published financial results of major
protecting personal information in Japan. As the only compre-                   companies in the market.

hensive manufacturer of stationery goods in Japan, we believe
that we lead the market with a 10% share1. In fiscal 2005, we
                                                                      Furniture Segment
continued to channel resources into developing a design-              Worth around ¥300 billion annually, the Japanese office furniture
focused lineup of distinctive, high-value-added products.             market is thought to reflect economic conditions with a 6-month
    In response to the new demand created by the Personal             to 1-year time lag. In recent years, the market has grown slightly,
Information Protection Law, we grew our lineup of security-           benefiting from improved real estate market conditions stemming
related products such as shredders. And, in the solutions field,      from redevelopment projects in the greater Tokyo region and
we started the Information Management Solutions Service,              recovery in the Japanese economy. Kokuyo is estimated to hold
which enables customers to integrate the management of paper          the number-one position, having captured 28% of the market by
and digital documents.                                                leveraging its nationwide sales network.
    The catalog sales market for office supplies in Japan is worth        Within this environment, net sales for the furniture segment in
approximately ¥300 billion a year, and is growing at an annual        fiscal 2005 were ¥122.5 billion, a 3.4% increase over the
rate of over 10%. Until four years ago, the market was largely        previous fiscal year. This result reflected a concerted sales drive
dominated by ASKUL Corporation, but now a host of other               that targeted demand generated by office relocations due to
players have entered the market. Kokuyo subsidiary Kaunet Co.,        redevelopment around Tokyo, and refurbishment of existing
Ltd. is estimated to occupy the number three position with a          buildings. In the public sector-related business, Kokuyo won a
10% market share2. In fiscal 2005, Kaunet’s net sales increased       large number of consulting contracts connected with the
steadily to ¥31.8 billion, up 10.8% year on year. This increase       relocation of government buildings accompanying the merger of
was driven by service expansion, including the introduction of        municipalities. And overseas, Kokuyo expanded sales in office
credit card payment for individual employees of corporate             start-up and relocation support for Japanese companies moving
customers, the launch of With Kaunet services targeting large-        into China.
and medium-sized companies, and Kaunet Annex, a supple-                   In security services, the Kokuyo Group continued to develop
mentary catalog.                                                      best-fit security solutions along functional and work-style lines to
                                                                                                                Kokuyo Co., Ltd. Annual Report 2005                28   29




 meet growing demand in this sector. In a related move, Kokuyo                      Cost of Sales and Cost of Sales Ratio,
 forged an alliance with Kumahira Co., Ltd., Japan’s largest total                  Gross Profit and Gross Profit Ratio
 security company, positioning itself for further business expansion.               Cost of sales amounted to ¥187.0 billion, with a cost of sales
                                                                                    ratio of 66.0%, constituting a 0.3 percentage point improvement
 Store Fixtures Segment                                                             over the previous fiscal year. This was a result of cost-saving
 The ¥200-billion Japanese store fixtures market is growing                         measures as part of structural reforms. Such measures as
 marginally on the back of economic recovery and new retail                         reorganization of domestic factories, shifting to overseas
 store openings. The Kokuyo Group is estimated to have a 9%                         production, greater overseas procurement, rationalization of
                                                               4
 share of this market, putting it in second position .                              manufacturing processes, and Group-wide procurement
         Net sales for the store fixtures segment in fiscal 2005 were               absorbed the impact of higher raw materials costs resulting from
 ¥18.3 billion, up 5.0% compared with the previous fiscal year.                     crude oil and steel price rises. Cost savings during the three-year
 This was the result of aggressive proposal-based marketing                         structural reform plan amounted to ¥21.6 billion, exceeding the
 strategies targeting demand generated by new store openings                        initial target by ¥0.4 billion.
 as well as renovations by volume retailers and convenience store                       Gross profit was up ¥4.3 billion, or 4.7%, year on year at
 operators. Specifically, Kokuyo upgraded and expanded its                          ¥96.5 billion. The gross profit ratio was 34.0%. All three business
 STORE GOODS catalog sales business, through which                                  segments benefited from the Company’s cost-cutting efforts,
 storeowners can easily purchase items for in-store use such as                     with gross profit and gross profit ratios by segment as follows:
 fixtures and display units. Kokuyo also launched FLASHELFY,                        the stationery segment recorded a gross profit ratio of 35.7% (up
 Japan’s first illuminated display rack featuring luminescent                       0.5 point) on gross profit of ¥51.0 billion (up ¥2.5 billion); the
 surfaces enabling the vivid presentation of merchandise, among                     furniture segment recorded a gross profit ratio of 33.9% (up 0.1
 other initiatives.                                                                 point) on gross profit of ¥41.6 billion (up ¥1.6 billion); and the

 Note: 4. Kokuyo’s own estimate.                                                    store fixtures segment recorded a gross profit ratio of 21.4% (up
 * In the fiscal year ended March 31, 2005, the store fixtures business separated
   from the furniture segment, resulting in three business segments.
                                                                                    1.0 point) on gross profit of ¥3.9 billion (up ¥0.4 billion).
   (See Note 12 on pages 48 and 49)




 Net Income (Loss) and                                          ROE                                               Capital Expenditure and
 Basic Net Income (Loss) per Share                              (%)                                               Depreciation and Amortization
 (Millions of yen, Yen )                                                                                          (Millions of yen)


 8,000                                          60              4                                                 10,000


                                        41.88
 6,000                               5,207      45              3                           2.8                       8,000
                                                                                                                                                        6,431
                                                                                                                                                           6,220
 4,000                                          30              2                                                     6,000



 2,000                                          15              1                                                     4,000



     0                                            0             0                                                     2,000



–2,000                                          –15            –1                                                        0
            00 01 02 03 04 05                                         00 01 02 03 04 05                                        00 01 02 03 04 05
    Net Income (Loss)                                                                                                   Capital Expenditure
    Basic Net Income (Loss) per Share                                                                                   Depreciation and Amortization
SG&A Expenses and SG&A Expenses Ratio                                  continue to pursue diversification of our earnings streams to
Selling, general and administrative (SG&A) expenses amounted           ensure that our three core businesses can all yield stable profits.
to ¥84.4 billion, giving an SG&A expenses ratio of 29.8%. This
was a 0.7 percentage point improvement over the previous fiscal        Other Income (Expenses)
year, and the first time in four years that the figure has dropped     Other expenses amounted to ¥0.4 billion, a significant improve-
below 30%. The improvement was attributable primarily to               ment over the ¥4.5 billion net expense recorded for the previous
enhancements to business processes, such as the introduction           fiscal year. This was due to a significant reduction in write-down
of online ordering, improved efficiency in logistics operations,       of investment securities, and the absence of additional benefits
and workforce reductions through voluntary early retirement            on early retirement and loss related to dissolution of affiliates
schemes and other means. During the three years of the                 related to structural reforms, neither of which was incurred
structural reform plan, expenses were reduced by ¥21.3 billion,        during the fiscal year under review.
exceeding the initial target by ¥0.6 billion.
    SG&A expenses by segment were as follows: in the statio-           Income Before Income Taxes and
nery segment ¥43.9 billion, up ¥0.8 billion, or 1.8%; in the           Minority Interests, Net Income, Return on
furniture segment ¥37.1 billion, an increase of ¥0.1 billion, or       Sales and ROE
0.2%; and in the store fixtures segment ¥3.3 billion, up ¥0.2          Income before income taxes and minority interests was ¥12.1
billion, or 5.9%.                                                      billion, an increase of ¥7.7 billion, or 174.8%. Deferred income
    The rate of increase in SG&A expenses for the stationery and       taxes were ¥2.2 billion, ¥2.9 billion more than the previous fiscal
furniture segments is tolerable, being less than the increase in       year because of the reversal of deferred tax assets related to
net sales. In the store fixtures segment, while the rate of increase   Kaunet. As a result of the foregoing, net income was ¥5.2 billion,
in SG&A expenses was greater than the increase in net sales,           a year-on-year increase of ¥3.3 billion, or 167.2%.
this can be accounted for principally by Kokuyo’s proactive                Return on sales came to 1.8%, 1.1 percentage points higher
recruitment of mid-career personnel to reinforce sales.                than the previous year. Return on equity (ROE) was up 1.7
                                                                       percentage points at 2.8%. Improvements in asset efficiency led
Operating Income and Operating                                         to a slight year-on-year rise in total assets turnover from 0.95 to
Income Ratio                                                           0.98 times, contributing to the improvement in ROE.
Kokuyo posted operating income of ¥12.2 billion, a year-on-year
rise of ¥3.3 billion, or 37.1%. The operating income ratio was         Capital Expenditure
4.3%, up 1.1 percentage points year on year.                           Capital expenditure was ¥6.4 billion. This consisted primarily of
    Operating income and operating income ratio by segment             ¥1.9 billion for investment in buildings, ¥2.4 billion for information
were as follows: the stationery segment recorded operating             systems for Kaunet and due to the spin-off of companies, and
income of ¥7.1 billion (up ¥1.7 billion) and an operating income       ¥0.6 billion for machinery and equipment.
ratio of 5.0% (up 1.1 points); the furniture segment recorded
operating income of ¥4.5 billion (up ¥1.4 billion) with an operat-     Research and Development
ing income ratio of 3.6% (up 1.0 point); and the store fixtures        R&D expenses were ¥2.1 billion, and the breakdown by segment
segment recorded operating income of ¥0.6 billion (up ¥0.2             is as follows: stationery segment ¥1.1 billion; furniture segment
billion) and an operating income ratio of 3.2% (up 0.8 point). We      ¥1.0 billion; store fixtures segment ¥50 million.
                                                                                                          Kokuyo Co., Ltd. Annual Report 2005            30   31




 Liquidity and Capital Resources                                                     Investments and other assets, property, plant and equipment,
 Fund Procurement Policy and Liquidity Management                            at cost and intangible assets were largely unchanged at ¥161.2
 Kokuyo’s capital structure policy centers on the use of retained            billion, although property, plant and equipment, net decreased by
 earnings but calls for the use of direct and indirect financing as          ¥2.4 billion year on year to ¥94.8 billion due to depreciation.
 necessary. Kokuyo has been assigned a long-term credit rating               Meanwhile, investments in securities increased by ¥8.1 billion to
 of A and short-term credit rating of a-1 by Rating and Investment           ¥38.1 billion. Deferred tax assets were down ¥3.3 billion to ¥5.2
 Information, Inc. of Japan. In fiscal 2005, Kokuyo issued ¥12.0             billion, the main reason being a reversal of deferred tax assets
 billion in euro-yen bonds with stock acquisition rights and                 related to Kaunet.
 contingent conversion features to provide for the establishment                     Liabilities remained at approximately the same level as the
 of an employee pension trust. However, Kokuyo intends to fund               previous fiscal year at ¥104.3 billion. Current liabilities were ¥1.1
 future business expansion from internal resources.                          billion up at ¥72.0 billion, the result mainly of increases in other
                                                                             current liabilities and income taxes payable, offset by decreases in
 Assets, Liabilities and Shareholders’ Equity                                trade notes and accounts payable, and short-term loans, includ-
 Total assets as of March 31, 2005 amounted to ¥291.7 billion,               ing long-term debt due within one year. Long-term liabilities were
 an increase of ¥2.5 billion, or 0.9%. Of the total, current assets          largely unchanged at ¥32.3 billion, however, ¥12.0 billion of zero-
 were ¥130.5 billion, a year-on-year increase of ¥1.8 billion, or            coupon bonds with stock acquisition rights were issued to provide
 1.4%. A major reason for this was a ¥4.7 billion increase in                for employees’ severance and retirement benefits. Total interest-
 inventories due to increased pre-purchasing of raw materials and            bearing debt was ¥26.8 billion, up ¥9.0 billion compared with the
 other items to minimize the effects of anticipated price rises.             previous fiscal year.
 Consequently, cash and cash equivalents declined ¥1.7 billion to                    Shareholders’ equity increased by ¥1.9 billion, or 1.0%, to
 ¥9.4 billion. However, management believes this to be adequate              ¥187.0 billion compared to the previous fiscal year. This increase
 to support efficient business operations.                                   was due to an increase in net unrealized gains on securities and
                                                                             thus had no impact on capital structure. Kokuyo holds ¥7.0
                                                                             billion in treasury stock, at cost.


 Total Assets and ROA                              Total Shareholders’ Equity                                Cash Flows
 (Millions of yen, %)                              and Equity Ratio                                          (Millions of yen)

                                                   (Millions of yen, %)


 500,000                                   2.5      250,000                                         75       30,000
                                                                                            64.1
 400,000                          1.8      2.0
                                                    200,000                               187,043   60       24,000

                                291,651
 300,000                                   1.5
                                                    150,000                                         45       18,000

200,000                                    1.0

                                                    100,000                                         30       12,000
 100,000                                   0.5

                                                     50,000                                         15        6,000
       0                                   0


–100,000                                  –0.5           0                                           0            0
              00 01 02 03 04 05                                 00 01 02 03 04 05                                        00 01 02 03 04 05
     Total Assets                                       Total Shareholders’ Equity                              Net Cash and Cash Equivalents Provided
    ROA                                                 Equity Ratio                                            by Operating Activities
                                                                                                                Net Cash and Cash Equivalents Used
                                                                                                                in Investing Activities
                                                                                                                Net Cash and Cash Equivalents Provided
                                                                                                                by (Used in) Financing Activities
    The current ratio was 181.2%, a 0.3 percentage point                  ¥3.5 per share to mark the 100th anniversary of the Company.
decrease. The ratio of interest-bearing debt to shareholders’             For the parent company, the dividend payout ratio was 822.2%,
equity was 14.3%, up 4.7 percentage points compared to the                while dividends on equity amounted to 1.2%.
previous fiscal year.
    Management therefore believes that Kokuyo has a robust                Outlook
financial foundation and adequate liquidity.                              In the year ending March 31, 2006, the self-sustaining recovery in
                                                                          capital investment, strong exports and other factors are expected
Cash Flow Analysis                                                        to provide impetus for growth in Japan’s economy. However, fears
Net cash and cash equivalents provided by operating activities            of an economic slowdown in the U.S. and China, escalating raw
increased ¥2.7 billion to ¥10.2 billion, primarily reflecting the         material prices and other concerns warrant caution.
increase in net income, which more than offset an increase in                Against this backdrop, the Kokuyo Group will commemorate
inventories and a decrease in payables.                                   its 100th anniversary in October this year. As the Group embarks
    Net cash and cash equivalents used in investing activities            upon its second century, each operating company will determine
was ¥20.8 billion, up ¥13.7 billion from the previous fiscal year.        its own growth strategy and drive further progress by maintain-
Cash was used chiefly for the purchase of investment securities           ing the pace of reform. Kokuyo will also extend the reach of its
totaling ¥18.6 billion for the establishment of an employee               businesses and create new products, services and businesses
pension trust.                                                            outside existing domains.
    Net cash and cash equivalents provided by financing                      In order to achieve these goals, Kokuyo has drawn up a
activities was ¥7.1 billion, a substantial increase over the ¥4.6         three-year medium-term management plan lasting until fiscal
billion in cash used during the previous fiscal year. The cash            2008. Under the slogan “The Next 100—Creating an Alliance of
provided was derived primarily from the issue of ¥12.0 billion            the Best,” we will promote further enhancement of shareholder
in convertible bonds with subscription rights to provide for              value. We have set targets for the year ending March 31, 2008
employees’ severance and retirement benefits.                             of ¥360 billion in net sales, ¥25 billion in operating income and
    As a result, cash and cash equivalents at end of year                 ROE of 8%. In addition, we will promote structural reform of our
amounted to ¥12.8 billion, down ¥3.5 billion from the previous            businesses by investing ¥36 billion over the next three years to
fiscal year-end.                                                          foster New and Growth Businesses and to restructure Mature
                                                                          Businesses. Meanwhile, we plan to purchase treasury stock as a
Dividends                                                                 means of implementing a flexible capital structure policy.
Maintaining a shareholder-centric perspective, Kokuyo has                    For the year ending March 31, 2006, Kokuyo forecasts net
sustained cash dividends of at least ¥15 per share since 1973.            sales of ¥302.0 billion (up 6.5% year on year), operating income
In addition, Kokuyo has paid commemorative dividends to mark              of ¥14.0 billion (up 14.8% year on year) and net income of ¥5.5
milestones in the Group’s corporate history as well as excep-             billion (up 5.8% year on year). Regarding dividends, we will
tional financial results. In line with this policy, for the fiscal year   implement a dividend policy based on the goal of achieving a
ended March 31, 2005, we intend to pay a total of ¥2.3 billion in         dividend payout ratio of 20% or higher, taking into consideration
dividends, exceeding the previous year’s payout by ¥0.4 billion.          consolidated operating results as well as our policy of paying a
The dividend per share will comprise the usual cash dividend of           stable dividend.
¥15 per share, augmented by a commemorative dividend of
                                                                                                  Kokuyo Co., Ltd. Annual Report 2005       32   33




Business Risks                                                            In addition, there is a risk that Kokuyo’s internal computer
Economic situation and business climate in Japan                      system could be infiltrated by unauthorized means, and informa-
Almost all Kokuyo Group’s revenues are derived from markets           tion on the website altered or important data fraudulently
within Japan. Consequently, changes in the Japanese business          obtained. Infection by computer virus may also lead to the loss
climate may have an impact on operating results.                      of important data. If such a situation occurs, there is a risk of a
                                                                      negative impact on operating results.
Increases in raw material prices
Kokuyo purchases its raw materials from manufacturers in Japan        Natural disasters
and overseas. It anticipates changes in the relevant markets to       In the event of a natural disaster such as an earthquake or
maintain appropriate inventory levels. However, there is a risk       typhoon, there is a risk that the Kokuyo Group’s production,
that sharp increases in crude oil prices, rapidly increasing          retail and logistics bases could sustain heavy damage.
demand in China and other factors may result in increased
procurement costs.                                                    Product liability
                                                                      There is a risk that defects could occur in the products or
Development of new products                                           services provided by the Kokuyo Group. In the event of product
In its development of products and services the Kokuyo Group          liability compensation, product recalls or other similar situations
aims to create new products, services and businesses outside          arising, a decline in the Group’s brand equity and significant
established business domains. However, it is not always possible      financial liability could result.
to accurately predict which new products and technologies will
win support in their markets. If sales of such products are           Significant changes in overseas economies
unsuccessful, there is a possibility that future growth and profit-   The Kokuyo Group sells, manufactures and procures products
ability may decline, with a negative impact on operating results.     throughout the world, particularly in Asia. There is a risk that
                                                                      changes in the political, economic or social situation in any of
Protection of personal information                                    these regions or changes in local regulations could have a
Kokuyo takes all possible measures in the management of               detrimental impact on operating results.
personal information, but there is a risk that information could
leak due to unforeseen circumstances. If such a situation occurs      Exchange rate fluctuations
it could result in a decline in the Group’s brand equity and give     The Kokuyo Group conducts some business transactions related
rise to significant financial liability.                              to the import and export of products and the import of raw
                                                                      materials in foreign currencies, and also holds foreign currency-
Information systems                                                   denominated assets. Consequently, a significant shift in foreign
Businesses such as the Kokuyo Group’s office supply catalog           exchange rates could impact the Group’s operating results.
sales business depend on communications networks linking
computer systems. However, there is a risk that a natural disaster    Fluctuations in the value of marketable securities
or other unforeseen event could cause the networks to cease           The Kokuyo Group holds securities for investment purposes.
functioning, making it impossible to process product orders.          However, there is a risk that a downturn in securities markets could
                                                                      result in revaluation losses being incurred for such securities.
Consolidated Balance Sheets
KOKUYO CO., LTD. AND CONSOLIDATED SUBSIDIARIES
Years ended March 31, 2005 and 2004




                                                                                                           Thousands of
                                                                                                            U.S. dollars
                                                                               Millions of yen               (Note 1)

ASSETS                                                                      2005                 2004           2005

Current assets:
     Cash and cash equivalents (Note 6)                                ¥      9,440      ¥ 11,085          $     87,978
     Marketable securities (Note 3)                                           4,539              5,176           42,302

                                                                            13,979           16,261             130,280
  Notes and accounts receivable:
     Trade notes and accounts:
        Unconsolidated subsidiaries and affiliates                          12,466           11,033             116,179
        Other                                                               67,668           68,958             630,643
     Other receivables                                                        6,240              5,913           58,155
     Allowance for doubtful receivables                                        (941)               (348)          (8,770)

                                                                            85,433           85,556             796,207
  Inventories (Note 5)                                                      27,444           22,748             255,769
  Deferred tax assets (Note 13)                                               2,457              3,005           22,898
  Other current assets                                                        1,170              1,086           10,904

        Total current assets                                               130,483         128,656             1,216,058


Investments and other assets:
  Investments in unconsolidated subsidiaries and affiliates                   5,635              9,734           52,516
  Investments in securities (Note 3)                                        38,104           29,998             355,117
  Long-term loans receivables                                                 1,179              1,919           10,988
  Deferred tax assets (Note 13)                                               5,160              8,445           48,089
  Other non-current assets                                                    8,385              6,262           78,145
  Allowance for doubtful receivables                                           (818)             (1,592)          (7,623)

        Total investments and other assets                                  57,645           54,766             537,232


Property, plant and equipment, at cost (Note 6):
  Land                                                                      47,615           48,307             443,756
  Buildings and structures                                                  94,479           94,320             880,512
  Machinery and equipment                                                   33,634           34,101             313,458
  Other                                                                     20,788           21,064             193,737
  Construction in progress                                                    3,662              2,298           34,129

                                                                           200,178         200,090             1,865,592
  Less accumulated depreciation                                            (105,400)      (102,956)             (982,293)

        Property, plant and equipment, net                                  94,778           97,134             883,299


Intangible assets                                                             8,745              8,638           81,500

                                                                       ¥ 291,651         ¥ 289,194         $2,718,089
See the accompanying notes to the consolidated financial statements.
                                                                                  Kokuyo Co., Ltd. Annual Report 2005     34   35




                                                                                                             Thousands of
                                                                                                              U.S. dollars
                                                                                   Millions of yen             (Note 1)

LIABILITIES AND SHAREHOLDERS’ EQUITY                                            2005                 2004          2005

Current liabilities:
 Short-term loans, including long-term debt due within one year (Note 6)   ¥     4,270       ¥       6,526   $      39,795
 Trade notes and accounts payable:
    Unconsolidated subsidiaries and affiliates                                   2,630             4,826           24,511
    Other                                                                       47,652            46,795          444,100
 Accrued employees’ bonuses                                                      2,183             2,194           20,345
 Income taxes payable                                                            4,376             1,951           40,783
 Other current liabilities                                                      10,886             8,574          101,454

        Total current liabilities                                               71,997            70,866          670,988




Long-term liabilities:
  Long-term debt due after one year (Note 6)                                    22,500            11,251          209,692
  Employees’ severance and retirement benefits (Note 7)                          1,955            17,057           18,220
  Directors’ and statutory auditors’ retirement benefits                         1,078             1,090           10,047
  Deferred tax liabilities (Note 13)                                               215                 2            2,004
  Guarantee deposits                                                             3,909             3,427           36,430
  Other long-term liabilities                                                    2,614                —            24,362

        Total long-term liabilities                                             32,271            32,827          300,755




Minority interests                                                                 340                 360           3,168




Contingent liabilities (Note 9)




Shareholders’ equity (Note 10):
  Common stock:
    Authorized—398,000,000 shares
    Issued—128,742,463 shares                                                   15,847            15,847           147,689
  Capital surplus                                                               19,068            19,067           177,707
  Retained earnings                                                            153,828           154,697         1,433,625
  Net unrealized gains (losses) on securities                                    5,895              3,042           54,939
  Foreign currency translation adjustments                                        (577)              (502)           (5,377)
  Treasury stock, at cost, 5,907,304 shares in 2005                             (7,018)            (7,010)         (65,405)
                           (5,914,406 shares in 2004)

Total shareholders’ equity                                                     187,043           185,141         1,743,178

                                                                           ¥291,651          ¥289,194        $2,718,089
See the accompanying notes to the consolidated financial statements.
Consolidated Statements of Income
KOKUYO CO., LTD. AND CONSOLIDATED SUBSIDIARIES
Years ended March 31, 2005 and 2004




                                                                                                             Thousands of
                                                                                                              U.S. dollars
                                                                                   Millions of yen             (Note 1)

                                                                            2005                  2004             2005

Net sales                                                              ¥283,519              ¥273,462        $2,642,302
Cost of sales                                                              187,008               181,279         1,742,852

        Gross profit                                                        96,511                92,183          899,450
Selling, general and administrative expenses (Note 14)                      84,352                83,317          786,132

        Operating income                                                    12,159                 8,866          113,318
Other income (expenses):
  Interest and dividend income                                                615                    655             5,732
  Interest expense                                                            (462)                  (524)          (4,306)
  Rent and warehousing income                                                1,420                 1,638            13,234
  Rent and warehousing expense                                                (460)                  (423)          (4,287)
  Write-down of investment securities                                          (69)               (1,026)              (643)
  Gain on sales of investment securities, net                                 122                    557             1,137
  Gain (loss) on sales of property, plant and equipment, net                  (385)                  121            (3,588)
  Loss on sales and disposal of property, plant and equipment                 (182)                  (776)          (1,696)
  Equity in earnings of unconsolidated subsidiaries and affiliates            154                    157             1,435
  Additional benefits on early retirement                                          —              (1,526)                 —
  Loss on disposal of software                                                     —                 (339)                —
  Loss related to dissolution of affiliates                                        —              (2,121)                 —
  Other, net                                                                  (790)                  (847)          (7,363)

                                                                               (37)               (4,454)              (345)

        Income before income taxes and minority interests                   12,122                 4,412          112,973
Income taxes (Note 13):
  Current                                                                    4,730                 2,986            44,082
  Deferred                                                                   2,174                   (727)          20,261

                                                                             6,904                 2,259            64,343


Minority interests in net income of consolidated subsidiaries                  (11)                  (204)             (103)

        Net income                                                     ¥     5,207           ¥     1,949     $      48,527


                                                                                       Yen                       U.S. dollars

Basic net income per share                                                  ¥41.88                ¥15.38             $0.39
Diluted net income per share                                                 41.88                 15.38               0.39
See the accompanying notes to the consolidated financial statements.
                                                                                                                   Kokuyo Co., Ltd. Annual Report 2005              36   37


Consolidated Statements of Shareholders’ Equity
KOKUYO CO., LTD. AND CONSOLIDATED SUBSIDIARIES
Years ended March 31, 2005 and 2004




                                                                                                            Millions of yen
                                                                                                                             Net
                                                      Number of                                                          unrealized         Foreign
                                                       shares of                                                            gains          currency      Treasury
                                                    common stock        Common      Capital             Retained           (losses)       translation     stock,
                                                     (thousands)         stock      surplus             earnings        on securities    adjustments      at cost

Balance at March 31, 2003                            128,742            ¥15,847    ¥19,089            ¥154,543          ¥ (124)           ¥(331)         ¥(7,594)
  Net income                                                                                               1,949
  Cash dividends paid                                                                                     (1,839)
  Translation adjustments                                                                                                                   (171)
  Directors’ and statutory
   auditors’ bonuses                                                                                          (46)
  Unrealized gains on
   available-for-sale securities                                                                                           3,166
  Adjustment for increase
   in consolidated subsidiaries                                                                              219
  Purchase of treasury stock                                                                                                                                  (10)
  Sale of treasury stocks                                                               (22)                                                                 606
  Other                                                                                                     (129)                                             (12)
Balance at March 31, 2004                            128,742            ¥15,847    ¥19,067            ¥154,697           ¥3,042           ¥(502)         ¥(7,010)
  Net income                                                                                               5,207
  Cash dividends paid                                                                                     (1,843)
  Translation adjustments                                                                                                                    (75)
  Directors’ and statutory
   auditors’ bonuses                                                                                          (64)
  Unrealized gains on
   available-for-sale securities                                                                                           2,853
  Change in number of
   consolidated subsidiaries                                                                                (890)
  Change in number of affiliates
   accounted for by the equity method                                                                     (3,279)
  Purchase of treasury stock                                                                                                                                 (18)
  Sale of treasury stocks                                                                     1                                                               12
  Other                                                                                                                                                       (2)
Balance at March 31, 2005                            128,742            ¥15,847    ¥19,068            ¥153,828           ¥5,895           ¥(577)         ¥(7,018)

                                                                                                  Thousands of U.S. dollars (Note 1)
                                                                                                                           Net
                                                                                                                       unrealized          Foreign
                                                                                                                          gains           currency      Treasury
                                                                       Common      Capital            Retained           (losses)        translation     stock,
                                                                        stock      surplus            earnings        on securities     adjustments      at cost

Balance at March 31, 2004                                              $147,689   $177,698          $1,441,724         $28,350          $(4,678)        $(65,331)
  Net income                                                                                            48,527
  Cash dividends paid                                                                                  (17,176)
  Translation adjustments                                                                                                                   (699)
  Directors’ and statutory
   auditors’ bonuses                                                                                        (596)
  Unrealized gains on
   available-for-sale securities                                                                                         26,589
  Change in number of
   consolidated subsidiaries                                                                              (8,295)
  Change in number of affiliates
   accounted for by the equity method                                                                   (30,559)
  Purchase of treasury stock                                                                                                                                (168)
  Sale on disposal of treasury stocks                                                         9                                                              112
  Other                                                                                                                                                       (18)
Balance at March 31, 2005                                              $147,689   $177,707          $1,433,625         $54,939          $(5,377)        $(65,405)
See the accompanying notes to the consolidated financial statements.
Consolidated Statements of Cash Flows
KOKUYO CO., LTD. AND CONSOLIDATED SUBSIDIARIES
Years ended March 31, 2005 and 2004




                                                                                                                                  Thousands of
                                                                                                                                   U.S. dollars
                                                                                                      Millions of yen               (Note 1)
                                                                                                   2005                 2004          2005
Cash flows from operating activities:
 Income before income taxes and minority interests                                               ¥12,122          ¥ 4,412          $ 112,973
 Depreciation and amortization                                                                      6,220            6,197             57,968
 Amortization of consolidation difference                                                             158              136              1,472
 Increase (decrease) in allowance for doubtful receivables                                           (181)             423             (1,687)
 Increase (decrease) in employees’ severance and retirement benefits                             (15,101)               35          (140,736)
 Transfer of securities to retirement benefit trust                                               12,000                —            111,836
 Interest and dividend income                                                                        (615)            (655)            (5,732)
 Interest expense                                                                                     462              524              4,306
 Equity in earnings of unconsolidated subsidiaries and affiliates                                    (154)            (157)            (1,435)
 Loss (gain) on sales of property, plant and equipment, net                                           385             (121)             3,588
 Loss on disposal of property, plant and equipment                                                    182            1,115              1,696
 Gain on sales of investment securities, net                                                         (122)            (557)            (1,137)
 Write-down of investment securities                                                                   69            1,026                643
 Increase in receivables                                                                              (72)          (6,728)              (671)
 Decrease (increase) in inventories                                                                (4,693)           2,150            (43,737)
 Increase (decrease) in payables                                                                   (1,337)           1,157            (12,460)
 Other, net                                                                                         3,363              448             31,342
      Sub-total                                                                                   12,686             9,405           118,229
 Interest and dividends received                                                                      578              656              5,387
 Interest paid                                                                                       (451)            (530)            (4,203)
 Income taxes paid                                                                                 (2,645)          (2,074)           (24,651)
      Net cash and cash equivalents provided by operating activities                              10,168             7,457             94,762
Cash flows from investing activities:
 Purchase of property, plant and equipment                                                        (3,845)               (7,330)      (35,834)
 Proceeds from sales of property, plant and equipment                                              1,417                 2,153        13,206
 Purchase of intangible assets                                                                    (2,586)               (2,318)      (24,101)
 Purchase of investment securities                                                               (18,569)               (3,738)     (173,057)
 Proceeds from sales of investment securities                                                      2,712                 5,365        25,275
 Decrease (increase) in short-term loans receivable, net                                             188                (1,858)        1,752
 Disbursements for long-term loans receivable                                                       (450)                 (155)       (4,194)
 Proceeds from long-term loans receivable                                                            918                   727         8,556
 Other, net                                                                                         (563)                   42        (5,247)
      Net cash and cash equivalents used in investing activities                                 (20,778)               (7,112)     (193,644)
Cash flows from financing activities:
  Decrease in short-term loans, net                                                                (1,870)          (1,208)           (17,428)
  Repayment of long-term debt                                                                      (1,215)          (1,529)           (11,323)
  New issue of convertible bonds                                                                  12,000                 —           111,836
  Purchase of treasury stock, net                                                                      (5)              (10)               (47)
  Cash dividends paid                                                                              (1,835)          (1,839)           (17,101)
       Net cash and cash equivalents provided by (used in) financing activities                     7,075           (4,586)            65,937
Effect of exchange rate changes on cash and cash equivalents                                           (3)              (10)               (28)
Net decrease in cash and cash equivalents                                                          (3,538)          (4,251)           (32,973)
Cash and cash equivalents at beginning of year                                                    16,261           20,024            151,547
Increase in cash and cash equivalents due to change of consolidation scope                             84              488                783
Cash and cash equivalents at end of year                                                        ¥ 12,807          ¥16,261          $ 119,357

The reconciliations of cash and cash equivalents in the consolidated balance sheets and cash and cash equivalents in the consolidated state-
ments of cash flows as of March 31, 2005 and 2004 are as follows:
                                                                                                                                  Thousands of
                                                                                                                                   U.S. dollars
                                                                                                     Millions of yen                (Note 1)
                                                                                                  2005                  2004          2005
Cash and cash equivalents in the consolidated balance sheets                                     ¥ 9,440          ¥11,085           $ 87,978
Marketable securities in the consolidated balance sheets                                            4,539           5,176              42,302
                                                                                                  13,979           16,261            130,280
Short-term highly liquid investments with maturities exceeding three months                        (1,172)             —              (10,923)
Cash and cash equivalents in the consolidated statements of cash flows                           ¥12,807          ¥16,261           $119,357
See the accompanying notes to the consolidated financial statements.
                                                                                                            Kokuyo Co., Ltd. Annual Report 2005           38   39


Notes to Consolidated Financial Statements
KOKUYO CO., LTD. AND CONSOLIDATED SUBSIDIARIES
Years ended March 31, 2005 and 2004




Note 01           Basis of presenting consolidated financial statements
The accompanying consolidated financial statements have been prepared          with Japanese GAAP and filed with the appropriate Local Finance
in accordance with the provisions set forth in the Japanese Securities and     Bureau of the Ministry of Finance as required by the Securities and
Exchange Law and its related accounting regulations, and in conformity         Exchange Law. Some supplementary information included in the statu-
with accounting principles generally accepted in Japan (“Japanese              tory Japanese language consolidated financial statements, but not
GAAP”), which are different in certain respects as to application and          required for fair presentation, is not presented in the accompanying
disclosure requirements of International Financial Reporting Standards.        consolidated financial statements.
  The accounts of overseas subsidiary are based on its accounting                The translations of the Japanese yen amounts into U.S. dollars are
records maintained in conformity with generally accepted accounting            included solely for the convenience of readers outside Japan, using the
principles prevailing in the respective countries of domicile. The accom-      prevailing exchange rate at March 31, 2005, which was ¥107.3 to U.S.
panying consolidated financial statements have been restructured and           $1. The convenience translations should not be construed as represen-
translated into English (with some expanded descriptions and the inclu-        tations that the Japanese yen amounts have been, could have been, or
sion of consolidated statements of shareholders’ equity) from the con-         could in the future be, converted into U.S. dollars at this or any other
solidated financial statements of the Company prepared in accordance           rate of exchange.




Note 02           Significant accounting policies
Principles of consolidation                                                    Translation of foreign currencies
The accompanying consolidated financial statements include the ac-             Financial statements of consolidated overseas subsidiaries are trans-
counts of Kokuyo Co., Ltd. (the “Company”) and significant companies,          lated into Japanese yen at the year-end rate, except that shareholders’
over which the Company has power of control through majority voting            equity accounts are translated at the historical rates. The resulting
rights or existence of certain conditions evidencing control by the Com-       translation adjustments are shown as “Foreign currency translation
pany. Inter-company transactions and accounts have been eliminated in          adjustments”, a separate component of shareholders’ equity.
the consolidation.
  The consolidated financial statements include the accounts of the            Statements of cash flows
Company and its 23 (19 in 2004) significant subsidiaries. Consolidation        In preparing the consolidated statements of cash flows, cash on hand,
of the remaining subsidiaries would have no material effect on the ac-         readily-available deposits and short-term highly liquid investments with
companying consolidated financial statements. Kokuyo (Malaysia) Sdn.           maturities not exceeding three months at the time of purchase are
Bhd. and Kokuyo Trading (Shanghai) Co., Ltd. are consolidated using a          considered to be cash and cash equivalents.
fiscal period ending December 31 which differs from that of the Com-
pany. By the same token, Arvel Co., Ltd. uses a fiscal period ending           Securities
February 28. Any significant effects occurring during the periods from         The Company classifies securities as (a) securities held for trading pur-
January 1 to March 31 and March 1 to March 31 are adjusted in these            poses (hereafter, “trading securities”), (b) debt securities intended to be
consolidated financial statements.                                             held to maturity (hereafter, “held-to-maturity debt securities”), (c) equity
  Investments in affiliates, over which the Company has the ability to         securities issued by subsidiaries and affiliated companies, and (d) all
exercise significant influence over operating and financial policies of the    other securities that are not classified in any of the above categories
investees, are accounted for using the equity method.                          (hereafter, “available-for-sale securities”).
  In the elimination of investments in subsidiaries, the assets and liabili-     The Company and its consolidated domestic subsidiaries do not hold
ties of the subsidiaries, including the portion attributable to minority       trading securities. Held-to-maturity debt securities are stated at amor-
shareholders, are evaluated using the fair value at the time the Company       tized cost. Equity securities issued by subsidiaries and affiliated compa-
acquired control of the respective subsidiaries.                               nies which are not consolidated or accounted for using the equity
                                                                               method are stated at moving-average cost.
Amortization of consolidation difference                                         Available-for-sale securities with available fair market values are stated
The difference between the cost of investments and equity in their net         at fair market value. Unrealized gains and unrealized losses on these
assets at date of acquisition is amortized within five years.                  securities are reported, net of applicable income taxes, as a separate
                                                                               component of shareholders’ equity. Realized gains and losses on sale of
                                                                               such securities are computed using moving-average cost.
  Debt securities with no available fair market value are stated at amor-      depreciated using the straight-line method. With respect to leased
tized cost, net of the amount considered not collectible. Other securities     property and equipment, depreciation is provided using the straight-line
with no available fair market value are stated at moving-average cost.         method over lease periods.
  If the market value of held-to-maturity debt securities, equity securities     The overseas subsidiaries depreciates its property, plant and equip-
issued by unconsolidated subsidiaries and affiliated companies, and            ment using the straight-line method.
available-for-sale securities, declines significantly, such securities are       The principal estimated useful lives are as follows:
stated at fair market value and the difference between fair market value            Buildings and structures        7 to 50 years
and the carrying amount is recognized as loss in the period of the                  Machinery and equipment         4 to 13 years
decline. If the fair market value of equity securities issued by unconsoli-      In the year ended March 31, 2005, the Company did not adopt early
dated subsidiaries and affiliated companies not on the equity method is        the new accounting standard for impairment of fixed assets (“Opinion
not readily available, such securities should be written down to net asset     Concerning Establishment of Accounting Standard for Impairment of
value with a corresponding charge in the statement of income in the            Fixed Assets” issued by the Business Accounting Deliberation Council
event net asset value declines significantly. In these cases, such fair        on August 9, 2002) and the implementation guidance for the accounting
market value or the net asset value will be the carrying amount of the         standard for impairment of fixed assets (the Financial Accounting Stan-
securities at the beginning of the next year.                                  dard Implementation Guidance No. 6 issued by the Accounting Stan-
  Through the previous year, the amount of invested in invested limited        dards Board of Japan on October 31, 2003). The new accounting
partnerships was included in the “Other non-current assets” portion of the     standard is required to be adopted effective April 1, 2005.
“investments and other asset section of the consolidated balance sheets
(¥721 million at March 2004). In accordance with the “Practical Guidelines     Intangible assets
Concerning Accounting for Financial Instruments” (Accounting Committee         Amortization of intangible assets is computed using the straight-line
Report No. 14 ) that accompanied the coming into effect of a revision of       method over the estimated useful lives.
Japan’s Securities Transaction Law (Law No. 97, June 9, 2004), from the          The Company and its consolidated subsidiaries include software in
fiscal year ended March 31, 2005, this amount is included in the “invest-      intangible assets and depreciates internal use software using the
ments in securities” portion of the “ investments and other assets” section    straight-line method over the estimated useful lives (primarily five years).
of the balance sheets. The relevant amount included in “investments in         Amortization of software developed for external sale is computed over
securities” at March 2005 is ¥939 million ($8,751).                            the total estimated sales period (three-years).


Derivatives and hedge accounting                                               Research and development expenses
Derivative financial instruments are stated at fair value and changes in       The Company charges research and development expenses to income
fair value are recognized as gains or losses unless derivative financial       as incurred. Research and development expenses amounted to ¥2,084
instruments are used for hedging purposes.                                     million ($19,422 thousand) and ¥1,892 million for the years ended March
  If derivative financial instruments are used as hedges and meet certain      31, 2005 and 2004, respectively.
hedging criteria, the Company and its consolidated subsidiaries defer
recognition of gains or losses resulting from changes in fair value of         Income taxes
derivative financial instruments until the related losses or gains on the      Income taxes are comprised of the corporation tax, prefectural and
hedged items are recognized.                                                   municipal inhabitants taxes and the enterprise tax. The provision for
                                                                               income taxes is based on income for financial statement purposes.
Allowance for doubtful receivables                                             Deferred income taxes are recognized to reflect tax effects of net oper-
The Company and its consolidated subsidiaries provided the allowance           ating losses and temporary differences between the carrying amounts of
for doubtful accounts in the following manner. For receivables from            assets and liabilities for tax and financial reporting.
insolvent customers, who are undergoing bankruptcy or other collection           The asset and liability approach is used to recognize deferred tax assets
proceedings or in similar financial condition, the allowance for doubtful      and liabilities for the expected future tax consequences of temporary differ-
accounts is provided based on the evaluation of each customer’s finan-         ences between the carrying amounts of assets and liabilities for financial
cial condition and the estimated recoverable amounts due to the exist-         reporting purposes and the amounts used for income tax purposes.
ence of security interests or guarantees. For other receivables, the
allowance for doubtful accounts is provided based on the Company’s             Bonuses
actual rate of collection losses in the past.                                  The Company follows the general Japanese practice of paying bonuses
                                                                               to employees in July and December. Accrued employees’ bonuses at
Inventories                                                                    the balance sheet date are calculated based upon management’s esti-
Inventories are principally stated at cost. Cost is determined using the       mate of annual amounts.
first-in, first-out method.                                                      Directors’ and statutory auditors’ bonuses, which are subject to
                                                                               approval at the general meeting of shareholders, are accounted for as
Property, plant and equipment                                                  an appropriation of retained earnings.
Property, plant and equipment are stated at cost. Depreciation is princi-
pally computed using the declining-balance method over the estimated
useful lives, except that buildings acquired after March 31, 1998 are
                                                                                                                       Kokuyo Co., Ltd. Annual Report 2005         40   41


Severance and retirement benefits                                                        Accounting for leases
(a) Employees                                                                            Finance leases which do not transfer ownership and do not have bar-
The liabilities and expenses for severance and retirement benefits are deter-            gain purchase provisions are accounted for in the same manner as
mined based on the amounts actuarially calculated using certain assumptions.             operating leases under Japanese GAAP.
   The Company and domestic consolidated subsidiaries provide allow-
ance for employees’ severance and retirement benefits based on the                       Reclassifications
estimated amounts of projected benefit obligation and the fair value of                  Certain prior year amounts have been reclassified to conform to the
the plan assets.                                                                         2005 presentation. These changes had no impact on previously re-
(b) Directors and statutory auditors                                                     ported results of income or shareholders’ equity.
Directors and statutory auditors are not covered by these plans. How-
ever, the liability for directors’ and statutory auditors’ retirement benefits           Net income per share
of the Company and certain of its domestic subsidiaries is provided in                   The computations of net income per share of common stock are based
the amount which would be required, according to the Company’s                           on the weighted-average number of shares outstanding during each
regulations, if they voluntarily terminated their employment as of the                   period. The Company did not have securities that could potentially dilute
balance sheet date.                                                                      net income per common share.




Note 03            Securities
A. The following tables summarize acquisition costs and book values (fair values) of securities with available fair values as of March 31, 2005 and 2004:
                                                                                                               March 31, 2005
                                                                                          Millions of yen                        Thousands of U.S. dollars
                                                                           Acquisition         Book                       Acquisition      Book
                                                                             cost              value        Difference      cost           value         Difference
Securities with book values exceeding acquisition costs
  Equity securities                                                         ¥ 9,649          ¥20,659        ¥11,010        $ 89,925      $192,535       $102,610
  Bonds                                                                          2,039          2,094             55         19,003          19,515             512
  Others                                                                          387             403             16          3,607           3,756             149
     Total                                                                      12,075        23,156         11,081         112,535       215,806            103,271
Securities with book values not exceeding acquisition costs
  Equity securities                                                              2,602          1,814           (788)        24,250          16,906           (7,344)
  Bonds                                                                          5,026          4,897           (129)        46,841          45,638           (1,203)
  Others                                                                         1,815          1,675           (140)        16,915          15,611           (1,304)
     Total                                                                       9,443          8,386         (1,057)        88,006          78,155           (9,851)
Total                                                                       ¥21,518          ¥31,542        ¥10,024        $200,541      $293,961       $ 93,420


                                                                                         March 31, 2004
                                                                                          Millions of yen
                                                                           Acquisition         Book
                                                                             cost              value        Difference
Securities with book values exceeding acquisition costs
  Equity securities                                                         ¥ 7,955          ¥14,568         ¥ 6,613
  Bonds                                                                             —               —              —
  Others                                                                          457             478             21
     Total                                                                       8,412        15,046           6,634
Securities with book values not exceeding acquisition costs
  Equity securities                                                              3,123          2,315           (808)
  Bonds                                                                          7,065          6,786           (279)
  Others                                                                         1,344          1,205           (139)
     Total                                                                      11,532        10,306          (1,226)
Total                                                                       ¥19,944          ¥25,352         ¥ 5,408
B. The following table summarizes book values of securities with no available fair values as of March 31, 2005 and 2004:


                                                                                                                                               Thousands of
                                                                                                                        Millions of yen         U.S. dollars
                                                                                                                      2005          2004           2005
Held-to-maturity debt securities:
  Non-listed foreign securities                                                                                      ¥ 5,932       ¥3,615        $ 55,284
Available-for-sale securities:
  Non-listed equity securities                                                                                           513             309         4,781
  Money management fund                                                                                                2,217        3,156           20,662
  Free financial fund                                                                                                  1,500        2,021           13,979
  Other                                                                                                                  939             721         8,752
    Total                                                                                                              5,169        6,207           48,174
Total                                                                                                                ¥11,101       ¥9,822        $103,458


C. Available-for-sale securities with maturities and held-to-maturity debt securities mature as follows:
                                                                                                             March 31, 2005
                                                                                                             Millions of yen
                                                                                               Over one year             Over five years
                                                                         Within one year     but within five years     but within ten years    Over ten years
Held-to-maturity debt securities:
  Bonds                                                                       ¥821                 ¥ 200                        ¥ 314             ¥4,596
    Total                                                                      821                     200                        314               4,596
Available-for-sale securities:
  Bonds                                                                          —                   2,094                       4,897                 —
  Other                                                                          —                     199                        582                 844
    Total                                                                        —                   2,293                       5,479                844
Total                                                                         ¥821                 ¥2,493                       ¥5,793            ¥5,440


                                                                                                      Thousands of U.S. dollars

Held-to-maturity debt securities:
  Bonds                                                                     $7,651                $ 1,864                      $ 2,926           $42,833
    Total                                                                    7,651                   1,864                       2,926            42,833
Available-for-sale securities:
  Bonds                                                                          —                 19,515                       45,639                 —
  Other                                                                          —                   1,855                       5,424              7,866
    Total                                                                        —                 21,370                       51,063              7,866
Total                                                                       $7,651                $23,234                      $53,989           $50,699


                                                                                                             March 31, 2004
                                                                                                             Millions of yen
                                                                                               Over one year             Over five years
                                                                         Within one year     but within five years     but within ten years    Over ten years
Held-to-maturity debt securities:
  Bonds                                                                         ¥—                 ¥1,220                       ¥ 100             ¥2,295
    Total                                                                        —                   1,220                        100               2,295
Available-for-sale securities:
  Bonds                                                                          —                   2,020                       4,766                 —
  Other                                                                          —                     475                        352                 128
    Total                                                                        —                   2,495                       5,118                128
Total                                                                           ¥—                 ¥3,715                       ¥5,218            ¥2,423


D. Total sales of available-for-sale securities in the years ended March 31, 2005 and 2004 are as follows:
                                                                                                                                               Thousands of
                                                                                                                        Millions of yen         U.S. dollars
                                                                                                                      2005          2004           2005
Total sales of available-for-sale securities                                                                          ¥1,402       ¥2,130        $13,066
Related gains and losses:
  Gains                                                                                                                  145             805        1,351
  Losses                                                                                                                  15               4          140
                                                                                                               Kokuyo Co., Ltd. Annual Report 2005                      42   43



Note 04             Derivative transactions
The Companies use forward foreign currency contracts and interest rate              Hedged items:
swaps as derivative financial instruments for the purpose of mitigating                  Interest on bonds and governmental bonds
future risks of foreign exchange rate changes and interest rate changes             The Companies evaluate hedge effectiveness semi-annually by com-
and obtaining higher yields from investments. The derivative transactions         paring the cumulative changes in cash flows from or the changes in fair
are executed in accordance with the established policies and within the           value of hedged items and the corresponding changes in the hedging
specified limits on the amounts of derivative transactions allowed.               derivative instruments.
  The following summarizes hedging derivative financial instruments                 The following tables summarize market value information as of March
used by the Companies and items hedged:                                           31, 2005 and 2004 of derivative transactions for which hedge account-
  Hedging instruments:                                                            ing has not been applied:
     Interest rate swap contracts
     Currency swaps
     Credit default option

(1) At March 31, 2005 the Company and its consolidated subsidiaries had the following outstanding contracts:
                                                                                                                                                        Thousands of
                                                                                                       Millions of yen                                   U.S. dollars
                                                                                                  Portion
                                                                                                 maturing                              Recognized       Recognized
                                                                          Contract amount      over one year     Market value             gain             gain

Interest related:
Interest rate swaps
  Receive fixed rate and pay floating rate                                   ¥ 7,000             ¥ 6,000            ¥ 41                 ¥ 41             $     382
  Receive floating rate pay fixed rate                                          5,000              5,000                 119                  119             1,109
Currency related:
Currency swaps
  Receive U.S. dollars and pay yen                                              4,433              3,828             (322)                   (322)            (3,001)
Others:
Credit default option                                                           1,000              1,000                 45                    45               419
Total                                                                        ¥17,433             ¥15,828            ¥(117)               ¥(117)           $(1,091)


(2) At March 31, 2004 the Company and its consolidated subsidiaries had the following outstanding contracts:
                                                                                                               Millions of yen
                                                                              Contract           Portion maturing
                                                                              amount              over one year                 Market value         Recognized gain
Interest related:
Interest rate swaps
  Receive fixed rate and pay floating rate                                  ¥ 7,000                 ¥ 6,000                          ¥ 25                 ¥ 25
  Receive floating rate pay fixed rate                                         5,000                   5,000                          233                      233
Currency related:
Currency swaps
  Receive U.S. dollars and pay yen                                             5,037                   4,433                          (285)                   (285)
Others:
Credit default option                                                          1,000                   1,000                             8                       8
Total                                                                       ¥18,037                 ¥16,433                          ¥ (19)               ¥ (19)




Note 05             Inventories

Inventories at March 31, 2005 and 2004, consisted of the following:
                                                                                                                                                      Thousands of
                                                                                                                           Millions of yen             U.S. dollars
                                                                                                                         2005          2004               2005
Merchandise and finished goods                                                                                       ¥25,105          ¥20,614           $233,970
Work in progress                                                                                                               726           474               6,766
Raw materials and supplies                                                                                                1,613         1,660              15,033
Total                                                                                                                ¥27,444          ¥22,748           $255,769
Note 06           Short-term loans and long-term debt

Short-term loans are represented by bank loans with average interest rates of 1.4% and 1.5% at March 31, 2005 and 2004, respectively.
  Short-term loans, including the current portion of long-term debt, at March 31, 2005 and 2004, consisted of the following:
                                                                                                                                                       Thousands of
                                                                                                                           Millions of yen              U.S. dollars
                                                                                                                      2005                  2004                2005
Bank loans                                                                                                            ¥3,772               ¥5,565           $35,154
Long-term debt due within one year                                                                                         498                 961               4,641
Total                                                                                                                 ¥4,270               ¥6,526           $39,795


  Long-term debt at March 31, 2005 and 2004 consisted of the following:
                                                                                                                                                       Thousands of
                                                                                                                           Millions of yen              U.S. dollars
                                                                                                                      2005                 2004                 2005
0.95% to 6.00% loans from banks, due through 2008
  Secured                                                                                                         ¥        341         ¥       889      $        3,178
  Unsecured                                                                                                                654              1,319                6,095
4.32% to 6.00% loans from the Pension Welfare Service Public Corporation due through 2009                                     3                   4                28
2.625% bonds, due 2008                                                                                                10,000               10,000               93,197
Zero coupon convertible bonds, due 2024                                                                               12,000                     —          111,836
                                                                                                                      22,998               12,212           214,334
Less-current maturities included in current liabilities                                                                    (498)               (961)            (4,641)
Total                                                                                                             ¥22,500              ¥11,251          $209,692


  The conversion price of the unsecured convertible bonds is ¥1,557.00 ($14.51) as of March 31, 2005, subject to adjustment to reflect stock splits and
certain other events. Convertible bonds outstanding at March 31, 2005 were convertible into 7,707,129 shares of common stock of the Company at the
above conversion price.
  At March 31, 2005, assets, net of accumulated depreciation, pledged as collateral for secured short-term loans and long-term debt were as follows:
                                                                                                                                                       Thousands of
                                                                                                                           Millions of yen              U.S. dollars
                                                                                                                          2005              2004                2005
Cash and cash equivalents                                                                                             ¥      50            ¥     —          $     466
Land                                                                                                                       524              3,129                4,884
Buildings and structures                                                                                                   430              1,085                4,007
Investments in securities                                                                                                    —                   16                    —
Total                                                                                                                 ¥1,004               ¥4,230           $ 9,357
Secured short-term loans and long-term debt                                                                           ¥1,261               ¥2,069           $11,752


  The aggregate annual maturities of long-term debt at March 31, 2005 were as follows:
                                                                                                                                                       Thousands of
Year ended March 31,                                                                                                         Millions of yen            U.S. dollars

2006                                                                                                                              ¥        498          $        4,641
2007                                                                                                                                       223                   2,078
2008                                                                                                                                       156                   1,454
2009                                                                                                                                  10,115                    94,269
2010 and thereafter                                                                                                                   12,006                111,892
Total                                                                                                                             ¥22,998               $214,334
                                                                                                             Kokuyo Co., Ltd. Annual Report 2005                44   45


Note 07            Retirement benefits

The Company and domestic consolidated subsidiaries has been providing           retirement or termination, length of service and certain other factors.
three kinds of post-employment benefit plans, unfunded lump-sum pay-              Effective from April 1, 2004, the Company amended its retirement
ment plans, a governmental welfare contributory pension plan (which             benefit system to new types of plans, mainly, a cash balance plan, a
would otherwise be provided by the Japanese government), and a funded           defined contribution pension plan, and an unfunded lump-sum payment
non-contributory pension plan, under which all eligible employees are           plan. The effect on income of the adoption of the new retirement benefit
entitled to benefits based on the level of wages and salaries at the time of    plans was not significant.


  The liabilities for severance and retirement benefits included in the liabilities section of the consolidated balance sheets as of March 31, 2005 and
2004 consist of the following:
                                                                                                                                              Thousands of
                                                                                                                     Millions of yen           U.S. dollars
                                                                                                                   2005         2004                 2005
Retirement benefit obligation at end of year                                                                     ¥ 20,768     ¥26,170             $ 193,551
Fair value of plan assets at end of year                                                                            (3,628)     (2,711)              (33,812)
Retirement benefit trust                                                                                           (12,160)             —          (113,327)
Benefit obligation in excess of plan assets                                                                         4,980      23,459                46,412
Unrecognized actuarial difference                                                                                   (8,572)     (7,820)              (79,888)
Unrecognized prior service costs                                                                                    3,083        1,418               28,732
Prepaid retirement and severance benefit expenses                                                                   2,464               —            22,964
Severance and retirement benefits in the consolidated balance sheet                                              ¥ 1,955      ¥17,057             $ 18,220
Note: Some consolidated subsidiaries have adopted the allowed alternative treatment of the accounting standard for retirement benefits for small
      business entities.

  Severance and pension costs of the Company and its consolidated subsidiaries included the following components for the years ended March 31,
2005 and 2004.
                                                                                                                                               Thousands of
                                                                                                                      Millions of yen           U.S. dollars
                                                                                                                    2005         2004                2005
Service cost                                                                                                       ¥ 992       ¥1,355              $ 9,245
Interest cost                                                                                                           366        630                3,411
Expected return on plan assets                                                                                        (254)            (64)           (2,367)
Amortization of actuarial differences                                                                                   581        652                5,415
Amortization of prior service costs (credits)                                                                         (236)       (109)               (2,200)
Other (including early retirement benefits)                                                                             398      1,833                3,709
Net benefit cost                                                                                                   ¥1,847      ¥4,297              $17,213
Note: Contributions of employees to the governmental welfare contributory pension plan are not included in service cost.


  Assumptions used in accounting for the defined benefit plans for the years ended March 31, 2005 and 2004, were as follows:
                                                                                                      2005                                    2004

Method of attributing benefit to periods of service:                                       Straight-line method                  Straight-line method
Discount rate:                                                                             Primarily 1.5%                        2.0%
Long-term rate of return on fund assets:                                                   2.4%~3.2%                             3.0%
Amortization period for actuarial losses:                                                  Primarily 10-15 years                 Primarily 15 years
                                                                                           (within the average of the            (within the average of the
                                                                                           estimated remaining                   estimated remaining
                                                                                           service lives)                        service lives)
Amortization of prior service costs                                                        15 years                              15 years
                                                                                           (within the average of the            (within the average of the
                                                                                           estimated remaining                   estimated remaining
                                                                                           service lives)                        service lives)
Note 08          Information for certain leases
(1) As lessee:
Information on non-capitalized finance leases at March 31, 2005 and 2004 are as follows:
                                                                                                       March 31, 2005
                                                                                  Millions of yen                       Thousands of U.S. dollars
                                                                 Original lease     Payments        Payments    Original lease     Payments         Payments
                                                                  obligation         to date        remaining    obligation         to date         remaining
Machinery and equipment                                             ¥3,946           ¥1,330         ¥2,616        $36,775           $12,395          $24,380
Transportation equipment                                                 12               11              1             112               102                9
Furniture and fixtures                                               1,115               794            321         10,392               7,400          2,992
Total                                                               ¥5,073           ¥2,135         ¥2,938        $47,279           $19,897          $27,381


                                                                                  March 31, 2004
                                                                                  Millions of yen
                                                                 Original lease     Payments        Payments
                                                                  obligation         to date        remaining
Machinery and equipment                                             ¥3,735           ¥ 909          ¥2,826
Transportation equipment                                                 42               32             10
Furniture and fixtures                                               1,210               658            552
Total                                                               ¥4,987           ¥1,599         ¥3,388


                                                                                                                                                 Thousands of
                                                                                                                     Millions of yen              U.S. dollars
                                                                                                                    2005          2004               2005
Future minimum lease payments inclusive of interest:
  Current                                                                                                         ¥ 686          ¥ 693            $ 6,393
  Non-current                                                                                                       2,252         2,695             20,988
Total                                                                                                             ¥2,938         ¥3,388           $27,381
  Lease payments for finance leases which do not transfer ownership were ¥707 million ($6,589 thousand) and ¥629 million for the years ended March
31, 2005 and 2004, respectively.
  Operating leases at March 31, 2005 and 2004 were as follows:
                                                                                                                                                 Thousands of
                                                                                                                     Millions of yen              U.S. dollars
                                                                                                                    2005          2004               2005
Future minimum lease payments:
  Current                                                                                                           ¥ 9           ¥43               $ 84
  Non-current                                                                                                           2          35                  19
Total                                                                                                               ¥11           ¥78               $103


(2) As lessor:
Other assets (included in property, plant and equipment) include the following leased assets at March 31, 2005 and 2004:
                                                                                                       March 31, 2005
                                                                                  Millions of yen                       Thousands of U.S. dollars
                                                                Acquisition       Accumulated       Net book    Acquisition      Accumulated        Net book
                                                                  Cost            depreciation       value        Cost           depreciation        value
Other (furniture and equipment)                                   ¥1,505             ¥763             ¥741      $14,026            $7,111             $6,906


                                                                                  March 31, 2004
                                                                                  Millions of yen
                                                                Acquisition       Accumulated       Net book
                                                                  Cost            depreciation       value
Other (furniture and equipment)                                   ¥2,005             ¥927           ¥1,078
                                                                                                           Kokuyo Co., Ltd. Annual Report 2005            46   47


                                                                                                                                            Thousands of
                                                                                                                     Millions of yen         U.S. dollars
                                                                                                                     2005       2004            2005
Future minimum lease receipts inclusive of interest:
Current                                                                                                             ¥230      ¥ 297             $2,144
Non-current                                                                                                           511         781            4,762
                                                                                                                    ¥741      ¥1,078            $6,906
   Lease receipts under finance leases were ¥239 million ($2,227 thousand) and ¥295 million for the years ended March 31, 2005 and 2004, respectively.




Note 09           Contingent liabilities

Contingent liabilities at March 31, 2005 and 2004 consisted of the following:
                                                                                                                                            Thousands of
                                                                                                                     Millions of yen         U.S. dollars
                                                                                                                     2005       2004            2005
Notes receivable discounted                                                                                         ¥ —       ¥ 223             $     —
Guarantees of bank loans and other indebtedness of unconsolidated subsidiaries and
 affiliates, employees and others                                                                                     886       1,029            8,257
Total                                                                                                               ¥886      ¥1,252            $8,257




Note 10           Shareholders’ equity
(a) Common stock and additional paid-in capital                                 meeting or may be capitalized by resolution of the Board of Directors.
Under the Commercial Code of Japan, the entire amount of the issue              On condition that the total amount of legal earnings reserve and addi-
price of shares is required to be accounted for as capital, although a          tional paid-in capital remains being equal to or exceeding 25% of com-
company may, by resolution of its Board of Directors, account for an            mon stock, they are available for distribution by the resolution of
amount not exceeding one-half of the issue price of the new shares as           shareholders’ meeting. Legal earnings reserve is included in retained
additional paid-in capital, which is included in capital surplus.               earnings in the accompanying financial statements.
(b) Retained earnings                                                           (c) Special reserves
The Commercial Code provides that an amount equal to at least 10% of            Retained earnings includes special reserves. To obtain tax benefits,
cash dividends and other cash appropriations shall be appropriated and          special reserves may be appropriated in accordance with the Special
set aside as a legal earnings reserve until the total amount of legal           Taxation Measures Law of Japan. Included in special reserves at March
earnings reserve and additional paid-in capital equals 25% of common            31, 2005 and 2004 were the reserves for deferred capital gains of
stock. The total amount of legal earnings reserve and additional paid-in        ¥2,050 million ($19,105 thousand) and ¥2,060 million, respectively.
capital of the Company has reached 25% of common stock, and there-              (d) The maximum amount that the Company can distribute as dividends
fore the Company is not required to provide any more legal earnings             is calculated based on the non-consolidated financial statements of the
reserve. The legal earnings reserve and additional paid-in capital may be       Company in accordance with the Commercial Code.
used to eliminate or reduce a deficit by resolution of the shareholders’




Note 11           Related party transactions

Lease payments to a director of the Company for the years ended March 31, 2005 and 2004 were ¥27 million ($252 thousand) and ¥47 million, re-
spectively. Purchase of the land and building from a director of the Company for the year ended March 31, 2005 was ¥650 million ($6,058 thousand).
  Sales to and purchases from major related parties for the years ended March 31, 2005 and 2004 were as follows:
                                                                                                                                            Thousands of
                                                                                                                     Millions of yen         U.S. dollars
                                                                                                                    2005        2004            2005
Purchases                                                                                                         ¥8,351      ¥8,664          $77,829
Note 12          Segment information
For 2005, the Companies’ operations are classified into three industry                 Furniture segment:
segments as follows:                                                                   — Desks, tables, chairs, cabinets, lockers and other
  Stationery segment:                                                                  Store fixtures segment:
  — Notes, albums, binders, forms, pencils and other                                   — Shop display shelves, shop counters, glass showcases,
                                                                                           shopping carts and wagons

  A summary of business segment information for the years ended March 31, 2005 and 2004, is as follows:
                                                                                                                   March 31, 2005
                                                                                                                   Millions of yen
                                                                             Stationery             Furniture        Store fixtures                   Consolidated
                                                                             segment                segment            segment            Corporate      total

Net sales                                                                    ¥142,808              ¥122,452               ¥18,259              ¥—       ¥283,519
Cost and expenses                                                                135,691               117,987                17,682            —          271,360
Operating income                                                             ¥     7,117           ¥     4,465            ¥     577            ¥—       ¥ 12,159


                                                                                                                   March 31, 2005
                                                                                                                   Millions of yen
                                                                             Stationery             Furniture        Store fixtures                   Consolidated
                                                                             segment                segment            segment            Corporate      total

Assets                                                                       ¥108,966                  ¥99,645            ¥4,983           ¥78,057      ¥291,651
Depreciation and amortization                                                      3,176                 2,531                  16             497           6,220
Capital expenditure                                                                3,662                 2,707                  13              49           6,431


                                                                                                                   March 31, 2005
                                                                                                              Thousands of U.S. dollars
                                                                             Stationery            Furniture         Store fixtures                   Consolidated
                                                                             segment               segment             segment            Corporate      total

Net sales                                                                $1,330,923            $1,141,211             $170,168               $—       $2,642,302
Cost and expenses                                                            1,264,595             1,099,599              164,790             —        2,528,984
Operating income                                                         $        66,328       $        41,612        $        5,378         $—       $ 113,318


                                                                                                                   March 31, 2005
                                                                                                              Thousands of U.S. dollars
                                                                             Stationery            Furniture         Store fixtures                   Consolidated
                                                                             segment               segment             segment            Corporate      total

Assets                                                                   $1,015,526                $928,658               $46,440         $727,465    $2,718,089
Depreciation and amortization                                                     29,599                23,588                  149          4,632          57,968
Capital expenditure                                                               34,129                25,228                  121            457          59,935


                                                                                                                   March 31, 2004
                                                                                                                   Millions of yen
                                                                              Stationery               Furniture     Store fixtures                   Consolidated
                                                                              segment                  segment         segment            Corporate      total

Net sales                                                                    ¥137,691              ¥118,380           ¥17,391                ¥—        ¥273,462
Cost and expenses                                                                132,260               115,356         16,980                 —            264,596
Operating income                                                             ¥     5,431           ¥     3,024        ¥        411           ¥—        ¥     8,866


                                                                                                                   March 31, 2004
                                                                                                                   Millions of yen
                                                                              Stationery               Furniture     Store fixtures                   Consolidated
                                                                              segment                  segment         segment         Corporate         total

Assets                                                                       ¥110,949                  ¥99,720         ¥5,248          ¥73,277         ¥289,194
Depreciation and amortization                                                      2,977                 2,723                  14           483             6,197
Capital expenditure                                                                4,720                 4,595                  23            31             9,369
                                                                                                          Kokuyo Co., Ltd. Annual Report 2005                48   49


On October 1, 2004, the parent company changed to a holding com-               The ratios of domestic net sales and assets to consolidated net sales and
pany with three constituent corporations. For accounting purposes,           assets for the years ended March 31, 2005 and 2004 were over 90%.
effective from April 1, 2004, the Company has rearranged its industry          The international sales of the Company and its consolidated subsidiar-
segments with the parent company’s transformation.                           ies for the years ended March 31, 2005 and 2004 were less than 10%
  The former “furniture segment” has been divided into two segments,         of consolidated net sales.
“furniture segment”, “store fixtures segment”. The prior year segment          “Assets” in the “Corporate” column of the above schedule mainly
information has been restated.                                               consists of cash and cash equivalents, marketable securities and invest-
                                                                             ments in securities and assets of administrative divisions of the Company.




Note 13              Income taxes

Effective for years commencing on April 1, 2004 or later, according to       and consolidated domestic subsidiaries used the aggregate statutory
the revised local tax law, income tax rates for enterprise taxes will be     income tax rates of 40.6% for the year ended March 31, 2005.
reduced as a result of introducing the assessment by estimation on the         The following table summarizes the significant differences between
basis of the size of business. Based on the change of income tax rates,      the statutory tax rate and the Company’s effective tax rate for financial
for calculation of deferred income tax assets and liabilities, the Company   statement purposes for the years ended March 31, 2005 and 2004.


                                                                                              March 31, 2005                               March 31, 2004

Statutory tax rate                                                                                  40.6%                                       42.0%
Non-deductible expenses                                                                               3.3                                        5.5
Non-taxable dividend income                                                                          (1.6)                                       (2.9)
Per capita inhabitant tax                                                                             0.8                                        1.5
Temporary differences expected to be unutilized                                                     13.7                                         6.2
Effect of change in tax rates on deferred tax assets                                                   —                                         3.2
Tax credits                                                                                            —                                         (6.5)
Other                                                                                                 0.2                                        2.2
Effective tax rate                                                                                  57.0%                                       51.2%


  Significant components of the Company’s deferred tax assets and liabilities as of March 31, 2005 and 2004 are as follows:
                                                                                                                                                Thousands of
                                                                                                                    Millions of yen              U.S. dollars
                                                                                                                   2005          2004               2005
Current deferred tax assets:
  Excess bonuses accrued                                                                                       ¥     779     ¥     789           $ 7,260
  Accrued enterprise tax                                                                                             371           237              3,458
  Accrued incentives                                                                                                   —           109                   —
  Allowance for doubtful receivables                                                                                 182            21              1,696
  Net operating loss                                                                                                 671          1,423             6,253
  Other                                                                                                              454           427              4,231
Total current deferred tax assets                                                                                  2,457          3,005            22,898

Non-current deferred tax assets:
  Write-down of investment securities                                                                              1,385          1,207            12,908
  Retirement benefits                                                                                              5,703          6,536            53,150
  Allowance for doubtful receivables                                                                                 279           385              2,600
  Net operating loss                                                                                               7,370          6,377            68,686
  Other                                                                                                              274           361              2,553
                                                                                                               15,011            14,866          139,897
Valuation allowance                                                                                                (4,599)       (2,794)          (42,861)
Total non-current deferred tax assets                                                                          10,412            12,072            97,036

Non-current deferred tax liabilities:
  Net unrealized gains and losses on securities                                                                    (4,066)       (2,212)          (37,894)
  Adjustments to fixed assets based on corporate tax law                                                           (1,401)       (1,417)          (13,057)
Total non-current deferred tax liabilities                                                                         (5,467)       (3,629)          (50,951)
        Net long-term deferred tax assets                                                                      ¥ 4,945       ¥ 8,443             $ 46,085
                                                                                                                                              Thousands of
                                                                                                                     Millions of yen           U.S. dollars
                                                                                                                    2005         2004             2005
Deferred tax assets in the consolidated balance sheet:
  Current                                                                                                         ¥2,457         ¥3,005        $22,898
  Non-current                                                                                                       5,160         8,445          48,089
Deferred tax liabilities in the consolidated balance sheet:
  Non-current                                                                                                        (215)              (2)      (2,004)
Purchases                                                                                                         ¥4,945         ¥8,443        $46,085




Note 14           Selling, general and administrative expenses

Selling, general and administrative expenses principally consisted of the following:
                                                                                                                                              Thousands of
                                                                                                                     Millions of yen           U.S. dollars
                                                                                                                   2005          2004             2005
Packing and delivery expenses                                                                                    ¥22,582     ¥21,783           $210,456
Salaries and bonuses                                                                                              21,482         20,668          200,205
Depreciation                                                                                                        3,622         3,651           33,756
Net retirement benefit cost                                                                                         1,743         2,656           16,244
Provision for accrued bonuses                                                                                       1,135         1,968           10,578
Other                                                                                                             33,788         32,591          314,893
                                                                                                                 ¥84,352     ¥83,317           $ 786,132




Note 15           Subsequent events
Appropriations of retained earnings:
The following appropriations of retained earnings of the Company for the year ended March 31, 2005 were approved at the general meeting of share-
holders held on June 29, 2005.
                                                                                                                                              Thousands of
                                                                                                                     Millions of yen           U.S. dollars

Cash dividends (¥11.0 per share)                                                                                          ¥1,351                $12,591
Directors’ and statutory auditors’ bonuses                                                                                    62                    578


  The Company has decided to acquire treasury stock as a result                    Number of shares to be acquired was 2,006 thousand shares.
resolution by the directors meeting.                                               Total acquisition price was ¥2,798 million.
  The Company planned to acquire treasury stock as follows:                        Length of time was between April 12, 2005 and June 28, 2005.
  Class of stock was common stock.
                               Kokuyo Co., Ltd. Annual Report 2005   50   51


Independent Auditor’s Report
Overview of 16 Main Operating Companies




Kokuyo S&T Co., Ltd.                                                   Kokuyo Office System Co., Ltd.

Manufactures and purchases a variety of products including             Provides a full range of workplace design consultation services
paper products, stationery and PC-related products, and sells          covering corporate offices, public facilities, educational institu-
to volume retailers and convenience stores. Also works to              tions, welfare facilities and research facilities. Also offers
promote and extend the penetration of the @office office supply        planning, project management, construction, procurement and
purchasing system for businesses.                                      facility management services.



Kokuyo Furniture Co., Ltd.                                             Kokuyo Engineering and Technology Co., Ltd.

Manufactures and purchases and sells desks, chairs, office             Handles the full range of needs arising from office moves and
equipment-related floor fittings, partitions, furniture for schools    building renovations on behalf of office occupants or building
and for seniors and SOHO furniture.                                    owners. Offers a one-stop source of comprehensive engineer-
                                                                       ing services, including removals work and interior construction.

Kokuyo Store Creation Co., Ltd.
                                                                       Kaunet Co., Ltd.
Manufactures and purchases and sells store fixtures.
                                                                       Conducts office supply catalog sales targeting businesses. Also
                                                                       undertakes conventional sales of office supplies, etc., as well as
Kokuyo International Co., Ltd.
                                                                       offering a range of office-related services.
Manufactures and purchases and sells Kokuyo products overseas.


                                                                       Distribution affiliates:
Kokuyo Business Service Co., Ltd.
                                                                       Kokuyo Tokyo Sales Co., Ltd.
Supports enhanced efficiency and productivity in office administra-    Kokuyo Saitama Sales Co., Ltd.
tion through provision of solutions covering HR, general administra-   Kokuyo Nishikanto Sales Co., Ltd.
tion, accounts, IT, office environments and public relations.          Kokuyo Chubu Sales Co., Ltd.
                                                                       Kokuyo Kinki Sales Co., Ltd.
Kokuyo Logitem Co., Ltd.                                               Kokuyo Chugoku Sales Co., Ltd.
Provides a full range of logistics and office relocation services to   Kokuyo Kyushu Sales Co., Ltd.
companies inside and outside the Kokuyo Group.                         Comprehensive suppliers that handle the full range of office-
                                                                       related needs.
                                                                                                                      Kokuyo Co., Ltd. Annual Report 2005      52     53


Board of Directors                                      Corporate Data                                           Consolidated Subsidiaries
(As of June 29, 2005)                                   (As of March 31, 2005)                                   (As of March 31, 2005)


Chairman                                                Head Office
                                                                                                                 Kokuyo S&T Co., Ltd.
                                                                                                                 Kokuyo Furniture Co., Ltd.
Shounosuke Kuroda                                       1-1, Oimazato-minami 6-chome,
                                                                                                                 Kokuyo Store Creation Co., Ltd.
                                                        Higashinari-ku, Osaka 537-8686, Japan
President                                                                                                        Kokuyo Product Shiga Co., Ltd.
                                                        Telephone: +81-06-6976-1221                              Kokuyo Stationery Industry Co., Ltd.
Akihiro Kuroda
                                                                                                                 Kokuyo (Malaysia) Sdn. Bhd.
                                                        Established
Senior Managing Directors                                                                                        Kokuyo Office System Co., Ltd.
                                                        October 1905
Kingo Kuroda                                                                                                     Kokuyo Saitama Sales Co., Ltd.
                                                        Paid-in Capital                                          Kokuyo Tokyo Sales Co., Ltd.
Yasuhiro Kuroda
                                                                                                                 Kokuyo Nishikanto Sales Co., Ltd.
                                                        ¥15,847 million
Directors                                                                                                        Kokuyo Chubu Sales Co., Ltd.
Reizo Okamura                                           Number of Employees                                      Kokuyo Kinki Sales Co., Ltd.
Youichi Kotani                                          182 (parent company only)                                Kokuyo Chugoku Sales Co., Ltd.
                                                                                                                 Kokuyo Kyushu Sales Co., Ltd.
Toshifumi Ookubo                                        4,026 (on a consolidated basis)
                                                                                                                 Net Kokuyo Co., Ltd.
Yoshikazu Ueda
                                                        Total Number of Shares Authorized                        Kaunet Co., Ltd.
Tsukasa Ozaki
                                                        398,000,000                                              Kokuyo International Co., Ltd.
Takuya Morikawa
                                                                                                                 Kokuyo Logitem Co., Ltd.
                                                        Total Number of Shares Issued                            Kokuyo Engineering and Technology Co., Ltd.
Statutory Auditors
                                                        128,742,463                                              Kokuyo Business Service Co., Ltd.
Fumio Kawata
                                                                                                                 Kokuyo Finance Co., Ltd.
Youzo Sekiguchi                                         Number of Shareholders                                   Arvel Co., Ltd.
Yasuma Matsumoto                                                                                                 Kokuyo Trading (Shanghai) Co., Ltd.
                                                        13,321
Yukio Harima
                                                        Stock Exchange Listings
                                                        Tokyo, Osaka, Nagoya
                                                                                                                 Overseas Network
                                                                                                                 (As of March 31, 2005)
                                                        Transfer Agent
                                                                                                                 Kokuyo U.S.A. INC.
                                                        The Sumitomo Trust & Banking Co., Ltd.
                                                                                                                 Kokuyo Europe GmbH
                                                        5-33, Kitahama 4-chome,
                                                                                                                 Kokuyo International Asia Co., Ltd.
                                                        Chuo-ku, Osaka 541-0041, Japan
                                                                                                                 Kokuyo Co., Ltd. Shenzhen Representative Office
                                                                                                                 Kokuyo Trading (Shanghai) Co., Ltd.
                                                                                                                 Kokuyo Trading (Shanghai) Co., Ltd. Beijing Office
                                                                                                                 Kokuyo Trading (Shanghai) Co., Ltd. Suzhou Office
                                                                                                                 Kokuyo (Malaysia) Sdn. Bhd.
                                                                                                                 Kokuyo International (Thailand) Co., Ltd.

Stock Price Movement and Total Trading Volume
(Stock price: yen)
1,500
                                                                                                                      Please feel free to email or telephone
1,200
                                                                                                                      our Investor Relations department:
  900

  600                                                                                                                 Kokuyo Co., Ltd.
  300                                                                                                                 Investor Division, General Finance
                                                                                                                        & Accounting Dept.
     0
                                                                                                                      1-1, Oimazato-minami 6-chome,
                                                                                    (Trading volume: millions)
                                                                                                          10          Higashinari-ku, Osaka 537-8686, Japan
                                                                                                                      Telephone: +81-6-6973-9333
                                                                                                            8
                                                                                                                      Facsimile: +81-6-6973-9363
                                                                                                            6
                                                                                                                      e-mail: ir@kokuyo.co.jp
                                                                                                            4
                                                                                                                      URL: http://www.kokuyo.co.jp/english/
                                                                                                            2
                                                                                                            0
          Apr.       May   Jun..   Jul.   Aug.   Sep.    Oct.    Nov.     Dec.   Jan.    Feb.      Mar.
          2004                                                                   2005
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Printed in Japan                                                                       200508A02KB
                                                                                       2005-304

				
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