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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
Pursuant to Rule 13a-16 or 15d-16 OF
THE SECURITIES EXCHANGE Act of 1934
For the month of July, 2004.
ORIX Corporation
(Translation of Registrant’s Name into English)
3-22-8 Shiba, Minato-Ku, Tokyo, JAPAN
(Address of Principal Executive Offices)
(Indicate by check mark whether the registrant files or will file annual
reports under cover of Form 20-F or Form 40-F.)
Form 20-F x Form 40-F o
(Indicate by check mark whether the registrant by furnishing the information contained in this form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.)
Yes o No x
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Table of Documents Filed
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| ORIX Corporation | ||||
Date: July 9, 2004
|
By | /s/ Shunsuke Takeda | ||
| Shunsuke Takeda Director Deputy President and CFO ORIX Corporation |
||||
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ORIX Corporation (TSE: 8591; NYSE: IX) is an integrated financial services group based in Tokyo, Japan, providing innovative value-added products and services to both corporate and retail customers. With operations in 23 countries worldwide, ORIX’s activities include leasing, corporate and consumer finance, real estate-related finance and development, life insurance, and investment banking.
FORWARD-LOOKING STATEMENTS
This document may contain forward-looking statements about expected future
events and financial results that involve risks and uncertainties. Such
statements are based on our current expectations and are subject to
uncertainties and risks that could cause actual results to differ materially
from those described in the forward-looking statements. Factors that could
cause such a difference include, but are not limited to, those described under
risk factors in the Company’s annual report on Form 20-F filed with the United
States Securities and Exchange Commission. The Company makes available free of
charge on or through its website (www.orix.co.jp) its annual report on Form
20-F and other reports electronically filed with or furnished to the Securities
and Exchange Commission. These reports are also available free of charge on the
SEC’s website (www.sec.gov).
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40 Years
and Beyond
Surviving
and
Thriving in
Changing Times
ORIX Corporation celebrated its 40th anniversary on
April 17, 2004. Since our start in 1964 as a pioneer
in the Japanese leasing market, we have evolved
dynamically as a leading integrated financial services
group that remains on the forefront of innovation
and change. We have faced many challenges along
the way, but our history during the last 40 years has
been one of surviving and thriving in changing times.
While taking a look at the milestones over the last
four decades, this year’s annual report describes
our performance for the year ended March 31, 2004,
and our strategies for the current year and beyond.
In his message from the CEO to shareholders,
Yoshihiko Miyauchi outlines our achievements and
the key points to further success in the future. The
“ORIX Story” looks back on the last 40 years and
highlights why we have evolved as we have. This
section is not just an overview of ORIX’s history and
its dynamic evolution over the years, it also reviews
our corporate culture, with its deep historical roots,
and the unique strengths we have evolved. The feature section then provides details of our strategy for
the year ending March 31, 2005.
While we believe that the results of our efforts
have been impressive, we realize that our diversifi-
cation has made ORIX a complex company for
many outsiders to understand. We have therefore
included a “Guide to ORIX’s Financial Statements”
to help you understand the numbers behind the bot-
tom line. We have also expanded the “Management’s
Discussion and Analysis of Operations” (MD&A) to
include more analysis and information on different
parts of our business. Finally, the “Directory (by
Segment) & Group Network” and “Website Guide &
Corporate Information” provide information on how to
find out more about ORIX.
We hope this year’s annual report helps you
understand how we are trying to survive and thrive
as we take on our next challenges.
C O N T E N T S
To Our Shareholders—
A Message from the CEO |
2 | |
ORIX Story |
8 | |
Guide to ORIX’s
Financial Statements |
16 | |
Management’s Discussion and
Analysis of Operations |
20 | |
Financial Section |
59 | |
Directory (by Segment)
& Group Network |
117 | |
Website Guide
& Corporate Information |
122 |
ORIX Corporation
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| 40 Years and Beyond |
| Surviving and Thriving in Changing Times |
TO OUR SHAREHOLDERS — A MESSAGE FROM THE CEO
During the fiscal year ended March 31, 2004, ORIX Corporation
attained record-high total revenues, income before income
taxes, and net income. We also made steady progress in
strengthening our balance sheet and raising profitability in
line with our goal over the past two fiscal years of growing
profits without increasing assets, as the shareholders’
equity ratio and ROE both rose to over 10%.
In April 2004, we celebrated ORIX’s 40th anniversary.
Despite the passage of time, we have not altered the
fundamental principles of our business strategy, which
emphasize the never-ending pursuit of new business
opportunities as we strive to continue our dynamic evolution.
Our 40th anniversary marks but one point in history. In the
future, we intend to overcome the challenges of a constantly
changing environment by leveraging our accumulated experience
and specialization as well as further enhancing the teamwork
and other distinctive characteristics of our unique corporate
culture to maintain a strong position as a front-runner in
financial services.
FINANCIAL HIGHLIGHTS
Fiscal Years Ended March 31, 2003 and 2004
| Millions of | ||||||||||||||||||||
| Millions of yen | U.S. dollars | |||||||||||||||||||
| 2003 | 2004 | 2004 | ¥ Change | % Change | ||||||||||||||||
Income before discontinued
operations, extraordinary gain,
cumulative effect of a change
in accounting principle and
income taxes |
¥ | 45,179 | ¥ | 102,157 | $ | 967 | ¥ | 56,978 | 126.1 | |||||||||||
Net income |
30,243 | 54,020 | 511 | 23,777 | 78.6 | |||||||||||||||
Operating assets |
5,143,169 | 4,849,194 | 45,881 | (293,975 | ) | (5.7 | ) | |||||||||||||
Total assets |
5,931,067 | 5,624,957 | 53,221 | (306,110 | ) | (5.2 | ) | |||||||||||||
Per share data (in yen and dollars): |
||||||||||||||||||||
Net
income Basic |
¥ | 361.44 | ¥ | 645.52 | $ | 6.11 | 284.08 | 78.6 | ||||||||||||
Diluted |
340.95 | 607.52 | 5.75 | 266.57 | 78.2 | |||||||||||||||
Shareholders’ equity |
6,039.43 | 6,739.64 | 63.77 | 700.21 | 11.6 | |||||||||||||||
Return on equity (%) |
6.00 | 10.10 | ||||||||||||||||||
Return on assets (%) |
0.49 | 0.93 | ||||||||||||||||||
Shareholders’ equity ratio (%) |
8.52 | 10.03 | ||||||||||||||||||
Total debt-to-equity ratio (times) |
8.39 | 6.84 | ||||||||||||||||||
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2
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Yoshihiko Miyauchi, Chairman and Chief Executive Officer
Summary of Financial Results
During the fiscal year ended March 31, 2004 (fiscal 2004),
the majority of ORIX’s business segments in Japan and
overseas made positive contributions to consolidated
earnings. In Japan, revenues from direct financing leases and
interest on loans were down as we continued to carefully
select new assets and focus on the profitability of each
transaction. On the other hand, our automobile leasing
operations and real estate-related finance business for
corporate customers continued to perform strongly. In
addition, the precision measuring equipment rental operations
recovered and sales of office buildings and condominiums made
contributions. Overseas, our operations in the Americas
generated a higher level of profit following several years of
restructuring, and the Asia-Oceania region also added to
consolidated performance thanks to the contributions of the
automobile leasing and corporate lending operations of a
number of companies in the region as well as an increase in
equity in net income of affiliates.
As a result of our careful selection of direct financing
leases and installment loans and a decrease in investment in
securities associated with our life insurance operations,
total assets as of March 31, 2004, were down 5% compared with
the previous fiscal year, to ¥5,625 billion ($53 billion).
Shareholders’ equity increased 12.0%, to ¥564 billion ($5.3
billion), and the shareholders’ equity ratio rose from 8.5%
to 10.0%. Moreover, ROE grew from 6.0% to 10.1% and ROA
advanced from 0.49% to 0.93%. The total debt-to-equity ratio
also declined from 8.4 times to 6.8 times.
Based on the achievements of fiscal 2004, we hope to maintain the stability of
our
financial base as we grow profits and further improve profitability going
forward.
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Future Management Policy
Responding to Japan’s Economic Recovery in Fiscal 2005
Following a protracted period of stagnation, Japan’s economy is
increasingly showing signs of having bottomed out and appears to
have finally entered a period of recovery. Moreover, while I
still do not expect rapid progress in structural reforms at this
point, it does appear that the Japanese economy is slowly but
steadily gaining the characteristics of a true market economy.
In view of this, we have been reevaluating our strategic
positioning and are considering how to shift our focus from a
strategy of growth by taking advantage of opportunities
presented by the harsh economic environment following the end of
the bubble economy in Japan to an emphasis on growth amid a
period of recovery in Japan’s economy. With this transition in
mind, we have begun preparing ourselves for a potential
full-scale upturn in
the Japanese economy. If this recent upturn actually shows
some staying power, we will need to revise our cautious business
outlook and make efforts to accelerate our growth. Through this
transition, I would like to take ORIX into the next period of
expansion and aim to achieve a considerable surge in earnings.
To achieve these goals, I believe that ORIX needs to
implement a two-pronged strategy: 1) expand the franchise value
of our existing successful businesses and 2) create new
franchise value by adding businesses to our core of operations.
Expanding Franchise Value
At times like the current period of transition toward economic
recovery, mega banks and other companies in Japan’s financial
sector are likely to gradually regain their vitality and compete
more directly with us. For example, I believe they will probably
try to develop strategies aimed at providing financial services
to ORIX’s core customer base of mainly small and medium-sized
companies.
At present, however, I am proud to say that I believe ORIX
is the only company in Japan with an established business model
in the field of financial services targeting small and
medium-sized companies. Over many years, we have built up an
extensive customer network centering on approximately 500,000
small and medium-sized companies throughout Japan. Moreover, we
have often begun our relationships with individual customers
based on lease transactions, then used cross-selling to provide
insurance, investment products, and other financial products and
services. Nowadays, we have advanced to the point where we can
offer our customers diverse solutions, such as those related to
helping companies restructure their businesses and strengthen
their financial positions. We have already built a solid
foundation in providing solutions to small and medium-sized
companies and these operations generate a substantial amount of
our consolidated earnings.
To ensure that we can maintain a position that is
consistently a step or more ahead of our competitors, we are
forming a variety of cross-divisional business teams with high
levels of specialized skills. The mission of these teams is to
fully integrate the wealth of knowledge that exists throughout
ORIX, so that these teams can propose solutions that are
tailored to meet the various needs of our customers throughout
our nationwide sales network. By better meeting our customer
needs, we can further strengthen our relationships of trust,
which we believe will allow us to proactively expand this most
important franchise value.
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Furthermore, in the process of developing this business
model based on providing innovative solutions, we have developed
some unique specialized operations that we are also attempting
to expand.
In automobile leasing, for example, ORIX offers direct
financing leases along with a full range of maintenance and
administrative services. As a result, we are able to enjoy
relatively higher returns because we provide considerably more
valuable services than simple direct financing leases and this
has become a very profitable business. Moreover, we are enjoying
economies of scale stemming from the large-volume procurement of
vehicles as well as tires, lubricants, and other maintenance
items. We are striving to leverage these merits to further
upgrade our value-added services for leased vehicles and greatly
increase the number of vehicles that we administer.
In addition to the automobile leasing operations, ORIX is
proactively working to expand operating leases for precision
measuring instruments and other financial businesses
that incorporate a high degree of specialization and
value-added services. In the future, we also expect to further
boost the share of our profitability that stems from such
services as building maintenance, which we are strategically
expanding at this time. In this way, we are attempting to expand
the services that we can provide, even when the services are not
strictly within the scope of financial services, in an effort to
boost growth and improve profitability.
Creating New Franchise Value
The second main part of our strategy relates to the new business
opportunities and customer needs that have emerged as a result
of macroeconomic changes and progress in implementing structural
reforms in Japan. We have developed various businesses in recent
years and we want to create new franchise value as we continue
to add these to our core operations.
The benefits of this strategy are currently emerging in
such financial fields as real estate-related finance, which has
grown strongly in Japan, as well as such investment banking
operations as M&A advisory, private equity, and corporate
rehabilitation services.
In the field of real estate-related finance, we have
successfully developed various new businesses including
non-recourse loans, securitization products, and a real estate
investment trust (REIT) in the past few years. We also have
expanded business associated with non-performing loans as
financial institutions make efforts to move forward in dealing
with their problem assets.
Drawing on our accumulated financial know-how and growing
experience in such areas as real estate development, management,
and maintenance, ORIX is proactively expanding its operations as
a leader in real estate-related finance. In recent years, we
have realized considerable profits in the real estate-related
finance market, and this market is projected to greatly expand
in view of the emergence of new needs. I believe that we are
well prepared and poised to take advantage of opportunities in
the real estate-related finance market. We plan to further
expand and build our operations in this market into an
additional core business capable of generating attractive
returns.
Our small and medium-sized corporate customers present us
with various requests that are no longer limited to needs
associated with financial products and services, but include a
growing number of requests related to such issues as business
restructuring and succession, balance-sheet strengthening, and
stock listings. In December 1999, ORIX established a department
specializing in investment
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banking services. This department has worked in close
cooperation with sales and marketing units throughout Japan to
provide solutions for these kinds of new needs.
We are also emphasizing the expansion of our corporate
rehabilitation business, including equity investments in and
management support for companies in bankruptcy or undergoing
restructuring. In the corporate rehabilitation business, we are
seeking to boost the value of companies in which we invest to
realize capital gains over the medium term upon their sale.
Currently, we are striving to both increase the value of our
existing investments to prepare for profitable exits in the
future, while maintaining strict evaluation standards when
making additional investments. The market for corporate
rehabilitation and other types of investment banking solutions
is projected to keep growing due to the continued bipolarization
of the performance of Japanese companies between winners and
losers.
We expect demand both for proactive measures to help companies
become winners and for the rehabilitation of failed companies.
Our goal is to further strengthen our position in this market
and thereby establish investment banking as another core
business to create new franchise value.
Overcoming the Challenges in Overseas Operations
Performance in ORIX’s business segments in the Americas and the
Asia and Oceania regions has generally improved, and we intend
to take the steps required to ensure that our overseas
operations once again increase their contribution to overall
earnings. In particular, our operations in the Americas have
been weak in recent years, but we feel that the segment is
moving towards recovery as we have finally completed the
restructuring of our leasing subsidiary there. As a result of
the improvement in our overseas operations, we are now in a
position to make serious consideration of opportunities for
expansion.
ORIX’s 40th Anniversary
Surviving and Thriving Tomorrow and Beyond
On April 17, 2004, we celebrated our 40th anniversary. I would
like to express my great appreciation for the support and
cooperation of the shareholders, customers, business partners,
local communities, and other associates that have enabled ORIX
to achieve so much in just four decades.
During its first 40 years, ORIX has proven itself to be a
company able to respond quickly and flexibly to changing times
by adjusting its business model as necessary. While maintaining
a primary focus on financial services, we have steadily grown by
launching an impressive array of new products and services.
Soon after its establishment, the management of ORIX
adopted a policy of seeking to develop independently—without
excessive dependence on the trading companies and banks that
founded the company—by vigorously seeking out new challenges.
This has enabled us to develop an independent and dynamic
corporate culture that has fostered a high degree of flexibility
to adapt to change as well as aggressively take on new business
challenges. Thanks to this dynamic culture, ORIX has developed
various specialized capabilities based on its leasing-related
know-how and extended its sales and marketing network throughout
Japan. We have promoted cooperation among our sales and
marketing and specialized departments with an emphasis on
teamwork and knowledge sharing. This has enabled the creation of
various innovative financial products and services as well as
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6
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the provision of sophisticated solutions. Beginning in the early 1970s,
ORIX began extending its network overseas through the establishment and
acquisition of companies. As a result of this strategy, ORIX now has a
network of bases for providing financial products and services in 22
countries and regions outside of Japan in the Americas, Europe, Asia, and
Oceania. As our operations have become more diverse, we have upgraded our
systems for monitoring and managing an increasingly complex array of risks
as well as a rigorous corporate governance system designed to ensure that
operations are consistently managed in line with shareholders’ interests.
As a result of these initiatives, ORIX has been able to overcome the
challenges presented by such developments as the two international oil
crises and the collapse of Japan’s bubble economy. While profitability was
naturally impacted by those events, our profit-oriented business expansion
strategies and emphasis on thorough risk management policies enabled us to
quickly restore the upward momentum of
our performance, while we accumulated more expertise in the process.
We have thus been able to increase our profits in almost every one of the
40 years of our operations. This long-standing tradition of sustained
increase in corporate value is a precious heritage, and our long-term goal
is to ensure that this tradition is perpetuated. Boosting corporate
performance every year without fail is a daunting proposition, but I
believe that ORIX is more than capable of striving for such a goal.
We can assume that our operating environment will continue to change
relentlessly. The post-bubble stagnation has made it impossible for the
Japanese financial sector to keep abreast of global trends, but I expect
that Japan will ultimately achieve economic recovery, at which point the
country will be able to proceed with structural reforms that will result
in rapid changes. These changes are likely to produce many business
opportunities. In anticipation of this, we will strive to further
reinforce our solid foundation and strengths so that we can create more
franchise value by continuing to provide new types of solutions in our
existing and new businesses. I am confident that the franchise value that
we have established over the last 40 years and continue to create today
will help ORIX maintain its strong position as a front-runner in financial
services as we strive to survive and thrive tomorrow and beyond.
I sincerely thank the shareholders, customers, business partners, and
other associates who have supported and cooperated with us during fiscal
2004. I look forward to your continued support and advice in the future.
June 28, 2004
Yoshihiko Miyauchi
Director, Representative Executive Officer,
Chairman and Chief Executive Officer
ORIX Corporation
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| 40 Years and Beyond Surviving and Thriving in Changing Times ORIX Story ORIX celebrates 40th anniversary on April 17, 2004 Since its establishment in 1964 as a pioneer in the Japanese leasing market, ORIX has dynamically developed and evolved in step with changing times, aptly evaluating customers’ increasingly diverse needs and continually responding to those needs by providing new kinds of financial products and services. In Japan, we have diversified our operations by leveraging our expertise in leasing to enter a number of related business fields. This broad scope of operations has enabled us to cross-sell a variety of financial products and services in response to customer demands. In recent years, we have been able to go one step beyond cross-selling and provide not only financial products, but also total financial solutions that include advisory and other value-added services. ORIX also has a long history overseas. After establishing a Hong Kong-based subsidiary in 1971, we set up many companies outside Japan, particularly in Southeast Asian countries where leasing was not yet common. Currently, there are ORIX Group companies in 22 countries and regions of the Americas, Europe, the Middle East, and other parts of the world. ORIX’s Response 3 With expertise imported from the United States, started operations as one of the first equipment leasing companies in Japan in 1964 3 Expanded portfolio of leasing assets to meet rising demand for equipment leasing 3 Embarked on a process of diversification and specialization in response to changing market environment 3 Established specialized leasing companies in Japan • ORIX Alpha Corporation for store furnishings and fixtures (1972) • ORIX Auto Leasing Corporation for automobile maintenance leases (1973) • ORIX Rentec Corporation for precision measuring equipment rentals (1976) 3 Overseas expansion starting with Hong Kong (1971) and followed by Singapore (1972); Malaysia (1973); Indonesia (1975); The Philippines (1977); Thailand (1978) 3 Began providing real estate-backed loans to corporate customers 3 First steps into retail financial services in the form of consumer credit (1979) and housing loans (1980) Net Income |
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| Over the years, we have grown by focusing on profitable niches in financial and related services where we can utilize our accumulated expertise. The development of profitable niches inevitably invites competitors, but our relentless pioneering of new niche markets has enabled us to dependably provide customers with solutions available nowhere else. During the last four decades, ORIX has had to conduct business in a number of severe economic environments, but in each case we have overcome the associated challenges and resumed a growth course. Profits have declined only four times in our history: in fiscal 1974, following the first oil shock; in fiscal 1979, following the second oil shock; during the three years through fiscal 1995, following the bursting of the bubble economy in Japan; and in fiscal 2003, as a result of real estate asset write-downs. As the graph below indicates, in all other fiscal periods throughout our history we have been able to consistently grow profits. Our story has truly been one of surviving and thriving in changing times. - Foreign demand-led economic recovery — Bursting of economic bubble in Japan — Deceleration of U.S. economy (2001) in Japan (1990) - Polarization of winners and losers amid - Plaza Accord (1985) — Deflation and economic stagnation intensifying competition |
| - Nikkei 225 reaches new high (1989) — Deregulation of financial markets — Rising needs related to business - Greater diversity of customer needs — Asian currency crisis (1997) restructuring and strengthening of corporate balance sheets - Began cross-selling diverse financial products and services to core clientele of small and medium-sized companies - Entered securities industry (1986) and life insurance industry (1991) - Began employee dormitory leasing business (1986) and condominium development business (199-) - Adopted the ORIX name (1989) - Post-bubble emphasis on disposing of ORIX’s own problem assets and upgrading asset quality - Acquisitions of leasing and other assets in Japan in second half of the 1990s - Began U.S. operations in commercial mortgage-backed securities, or CMBS (1997) - Entered trust banking (1998), loan servicing (1999), and building maintenance (2001) - Listed ORIX shares on the New York Stock Exchange (1998) - Reorganized International Headquarters as the Investment Banking Headquarters (1999) to provide investment banking services - Listed real estate investment trust (REIT) on the Tokyo Stock Exchange (2002) *In 1989, the fiscal year was changed from October 1–September 30 to April 1–March 31. The light blue color an annualized figure calculated by doubling the results for the six months ended March 31, 1989. |
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Thriving in Changing Times
In line with our main objective of maximizing shareholder value over the long
run, in recent years ORIX has been striving
to achieve three primary goals: 1) continue to grow profits; 2) strengthen our
balance sheet; and 3) improve profitability.
Our financial results over the past 10 years demonstrate that we have been
able to grow profits, while we have also improved a number of financial ratios
as we raised profitability. For example, diluted earnings per share have grown
at a compounded annual rate of 10.1% in the last 10 years, but we achieved this
growth while growing total assets only 2.6% over the same period. Our
shareholders’ equity ratio has gone from 5.4% at March 31, 1995, to 10.0% at
March 31, 2004, while our ROE has risen from 7.3% to 10.1% and ROA from 0.39%
to 0.93% during the same period.
ORIX has overcome diverse challenges during the past 40 years. Our aim is
to use the solid foundation we have built in the past to continue to increase
shareholder value over the long run. Our strong foundation reflects the
characteristics of our corporate culture, which has helped create unique
business capabilities as well as effective systems for monitoring our
operations and for corporate governance.
CULTURE
Independence, Flexibility, and Innovation
ORIX began in 1964 as a joint venture of
three trading companies and five banks,
but soon adopted a strategy emphasizing
autonomous corporate development and
independence from the parent companies.
For personnel, we began hiring our
own staff in the second year after our
founding, and the number of staff seconded
from the parent companies was reduced to
zero in the sixth year of operations. In
marketing, we created a business
development section in our third year that
undertook office equipment leasing
involving customers and suppliers
unassociated with the founding investors.
Six years after ORIX’s establishment,
in 1970, its shares were listed on the
Second Section of the Osaka Securities
Exchange. (The shares were listed on the
Second Section of the Tokyo Stock Exchange
in 1971, the Second Section of the Nagoya
Stock Exchange in 1972, and the first
sections of all three
exchanges in 1973.) At that time, it was the fastest listing by a new company in post-World War II Japan.
By the early 1970s, many banks and
trading companies had set up leasing
subsidiaries, and the leasing market in
Japan became intensely competitive. In
view of this, ORIX began diversifying into
areas of finance related to its leasing
activities and was able to develop new
niches in financial services one after the
other. We simultaneously expanded our
presence overseas, primarily in Southeast
Asia, where we founded the first leasing
companies in a number of countries at a
rate of about one company per year. These
initiatives reflected our emphasis on
quickly adapting to changing conditions
and proactively taking on new challenges.
Adopted soon after our founding, the
corporate themes of independent and
autonomous business strategies, rapid and
flexible responses to change, and the
desire to be innovative and to pursue new
challenges became integral parts of the
corporate DNA that continues to shape
ORIX’s dynamic corporate culture to this
day.
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| ” Industries now face mounting problems...It is inevitable that we will be asked to involve ourselves in the search to solutions to these problems. We are prepared and willing to meet these challenges. “ Tsuneo Inui, “Letter from the President,” Annual Report 1970 (This quote is taken from the first annual report published by the then Orient Leasing Co., Ltd., and 1970 was the year we went public with our listing on the Osaka Securities Exchange). The market for financial services today constantly demands new products and innovations that cut across the existing categories of financial activi-ties...Only those players who are contributing new value-added products and services are able to create new markets and expand their operations. “ Yoshihiko Miyauchi, “To Our Shareholders,” Annual Report 1988 |
CORE STRENGTHS
Expertise in Evaluation
Established as a leasing company, ORIX has
for 40 years provided direct financing
leases, which we view as a form of
unsecured financing because we do not base
our credit evaluation on the assumption
that we can repossess and sell the leased
assets. In addition, the small and
medium-sized companies that are our
principal customers usually do not have
third-party credit ratings, so
sophisticated expertise is required to
evaluate them properly. To gain an
accurate understanding of a customer’s
basic ability to make payments throughout
the term of a contract, we employ
interviews by marketing staff, the
analysis of financial statements, market
research, and other measures to carefully
evaluate each customer’s cash flows,
profitability, management, and business
prospects to determine the customer’s
creditworthiness. Having developed
capabilities for determining corporate
customers’ real creditworthiness over many
years, we can now make use of this
expertise in our leasing and financing
business as well as when acquiring
corporate assets, arranging M&A
transactions, and making selected equity
investments as part of our corporate
rehabilitation business.
Sales and Marketing Network in Japan
Another strength of ORIX is the customer
base of approximately 500,000 companies
and the nationwide network that it has
developed in Japan over many years. The
development of many of our financial
products and services starts with
individual sales and marketing staff who
find out the various financial needs of
their customers and then confer repeatedly
with ORIX’s specialized business sections
about how best to meet those needs. The
products and services developed to meet a
certain customer’s needs are then made
available through all units in our
nationwide marketing network.
| Hokkaido 70 127 Tohoku 66 Kinki Kanto 166 Chugoku 54 Tokyo 153 26 Chubu 131 Shikoku Kyushu (incl. Okinawa) 144 Note: The figures indicate the number of offices in each region as of March 31, 2004. |
This network has been the key to the
success of cross-selling, which is one of
our principal marketing strategies.
Cross-selling involves approaching clients
with whom we have already built
relationships through leasing and other
such transactions and offering them a
diverse range of such products and
services as life and non-life insurance,
investment products, and building
maintenance services. We believe our
cross-selling has succeeded because it has
been the direct result of our attempt to
meet the various needs of our core
customer base of primarily small and
medium-sized companies throughout Japan.
As this cross-selling strategy has evolved
in recent years, we have begun to provide
such investment-banking solutions as those
for helping companies restructure or sell
off their operations, improve their
balance sheets, or go public.
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Knowledge Sharing and Teamwork
To enable the provision of value-added
products and services that meet the
diverse needs of customers throughout
Japan, ORIX has created a number of
specialized teams that have sophisticated
know-how. The most distinctive aspect of
our marketing operations is the way the
information and expertise accumulated in
specialized fields by each individual
employee is shared among many different
organizational units, so that we can
synergistically combine our broad-ranging
knowledge resources when making business
proposals to our customers. By encouraging
marketing offices throughout Japan to make
full use of specialized sections, we have
considerably upgraded our overall
capabilities.
For example, in recent years there
have been a number of business
opportunities involving the establishment
of corporate rehabilitation funds with
financial institutions that are trying to
clean up their bad debt problems. Our
Investment Banking Headquarters, Real
Estate Finance Headquarters, and such
Group companies as ORIX Asset Management &
Loan Services Corporation have jointly
established project teams of outstanding
specialists. These teams have worked on
corporate rehabilitation projects in all
regions of Japan and have already compiled
a strong record of success in such
projects. This kind of team-work that
facilitates synergistic combinations of
expertise is one of ORIX’s biggest
strengths. We are trying to further
strengthen this knowledge sharing and
create numerous specialized teams that can
win against any competition.
| Sharing Information to Create Innovative Solutions External Specialists Recommend Solutions Lawyers Internal Specialists Consultants Investment Internal Specialists Risk Bankers Investment Management Customers Banking HQ Groups Solutions Real Estate Sales & Finance HQ Marketing Staff Group Companies Needs Provision of Information on Market Needs |
MONITORING
Risk Management and Monthly Strategy Meetings
Risk management is one of the key bonding
agents that holds ORIX’s foundation
solidly together. In general, our risk
management system is made up of four major
components.
| • | The first component encompasses our
sales and marketing departments. Each
member of our sales and marketing
departments is responsible for conducting
an initial evaluation of all transactions
and is granted a limit for credit
provision approval depending on his or
her rank. |
| • | Any transaction over such limits is
referred to the second component, which
is specialized groups, including the Risk
Management Headquarters. Besides
evaluating customers’ creditworthiness
and appraising investment projects, the
Risk Management Headquarters performs
checks regarding legal, tax, and
reputational risks as well as diverse
other types of risks associated with a
given transaction. |
| • | Still-larger transactions are evaluated
by the Investment and Credit Committee,
which is made up of top
management—including the CEO, COO, CFO,
and the executive officer in charge of
risk management—and meets three times a
month. |
In addition to these three components
of our risk management system, ORIX holds
monthly strategy meetings that play
| ORIX’s Risk Management System Sales and Marketing Risk Management Headquarters Departments Evaluation, approval, and monitoring of Initial analysis and evaluation, monitoring credit applications, dealing with market of unpaid accounts, issuance of requests risk, liquidity risk, operational risk, and for payment, and collection other forms of risk Investment and Credit Monthly Strategy Committee Meetings Review of larger credit transactions and Monitoring and strategic decision making investments, decision making, and for individual business units monitoring |
an important role in monitoring and
controlling operations in all business
fields. The managements of each parent
company division and subsidiary attend
these meetings monthly and discuss their
respective businesses with top management.
The meetings begin with quantitative
reports of the financial targets and
results of the division or company in
question. Reports are then presented on
individual projects, market trends, and
other current and future issues that could
potentially affect the particular business
unit’s profitability.
For further discussion of risk
management, see “Management’s Discussion
and Analysis of Operations”—6. Risk
Management, p. 47.
Corporate Governance and Compliance
We believe that ORIX has been one of the
leading companies in Japan in terms of the
evolution of its corporate governance. In
June 2003, our shareholders passed a
resolution to take advantage of new
Japanese legislation that allowed ORIX to
move to a “Company with Committees” board
model. Under the new system, audit,
nominating, and compensation committees
made up of a majority of outside directors
have been established within the Board of
Directors. After the Annual General
Meeting of Shareholders in June 2004, the
number of outside directors was increased
by one, to five, while internal directors
account for the other seven seats on the
12-person board. We plan to take
additional measures to further strengthen
our corporate governance systems in the
future.
In addition, ORIX believes that
rigorous compliance is key to strong
corporate governance and continues to
proactively strengthen its compliance
systems in line with EC21, which aims to
ensure that ORIX will continue to be an
“Excellent Company” in the 21st Century.
For more information about compliance
and corporate governance, see
“Management’s Discussion and Analysis of
Operations”—7. Corporate Governance, p.
54.
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T o m o r r o w. . .
Strategies for Fiscal 2005
While many Japanese companies in the finance industry have not been able to
stay abreast of global trends since the bursting of the bubble economy in the
early 1990s, Japan’s anticipated economic recovery and progress in
macroeconomic structural reforms are likely to bring about major changes in the
finance industry. ORIX expects that these changes will present many business
opportunities. We intend to strive for continued growth by further
strengthening the solid corporate base that we have built to date and by
accurately monitoring and projecting changes in the business environment. In
line with this goal, we have drafted five main strategies for fiscal 2005.
Real Estate-Related Finance
Having extended real estate-backed loans
since the 1970s and housing loans since
the 1980s, ORIX has accumulated real
estate-related finance experience for over
three decades. Moreover, ORIX Capital
Markets, LLC, or OCM, has become one of
the United States’ leading loan servicing
companies while also making steady
progress in the commercial mortgage-backed
securities, or CMBS, business. ORIX has
brought OCM’s sophisticated expertise to
Japan and used it to develop loan
servicing and business involving the
arrangement of non-recourse loans and
CMBS.
| CMBS Issued by ORIX in Japan — Collateral — Date for Number of Total amount Type of issue Number payment assets pledged of issue of loans as collateral (Billions of yen) —— — |
| Oct. 2000 Domestic private placements 6 41 27.2 —— —— —— —— — Sep. 2002 Domestic private placements 11 40 19.9 —— —— —— —— — Mar. 2003 Beneficial interests in trusts 1 1 7.4 —— —— —— —— — Aug. 2003 Beneficial interests in trusts 1,109 177 7.6 —— —— —— —— — Sep. 2003 Beneficial interests in trusts 5 10 9.3 —— —— —— —— — Mar. 2004 Domestic private placements 17 21 21.5 |
Besides such real estate-related
finance know-how, ORIX began the
development and management of corporate
dormitories in 1986 and has since
accumulated specialization in various
businesses involving the development,
rental, management, and administration of
real estate. Following the end of the
bubble economy, we acquired various land
assets by exercising our rights to real
estate collateral, developed the land by
building profit-generating structures
appropriate for each site, and used the
related profit to cover losses on the
problem loans that led to our acquisition
of the land. In this process, we have
obtained diverse additional real
estate-related expertise.
We believe that in Japan very few
companies have ORIX’s combination of
expertise in real estate-related finance
and other real estate business fields. We
are making full use of our broad range of
real estate know-how as we steadily expand
our operations in the field of real
estate-related finance.
Since the end of the bubble economy,
the appraisal methods used in real
estate-related finance have changed
considerably, with a shift to placing
emphasis on cash flow analysis, and new
laws and regulations have enabled rapid
growth in the use of
such new products and services as
non-recourse loans, asset securitization,
and real estate investment trusts (REITs).
Demand for innovative products and
services is expected to sustain the
expansion of the market for real
estate-related finance in Japan, and ORIX
is placing strategic emphasis on using its
solid capabilities in this field to
steadily expand its operations.
Distressed Asset-Related Business
Drawing on its broad range of expertise in
both real estate-related finance and other
real estate businesses, ORIX has worked to
maintain a strong position as a
front-runner in the distressed
asset-related business market, which has
expanded in recent years along with the
efforts of many financial institutions to
accelerate the disposal of their problem
assets. The hub of our business in this
field is ORIX Asset Management & Loan
Services, which was established in 1999.
The cumulative face value of distressed
loans that we have purchased since that
time was ¥3.3 trillion as of March 31,
2004, and the contribution of distressed
asset recovery activities to consolidated
earnings has been increasing over the last
few years.
To better respond to the recent rise
in the volume of distressed assets that
financial institutions are disposing of,
ORIX established its Solution Project Team
in November 2003. This team is helping
promote the integration of related
know-how from various units as we work to
capture distressed asset-related
opportunities throughout Japan. These
efforts have led to numerous noteworthy
initiatives, such as the establishment of
a rehabilitation fund to meet the needs of
numerous local financial institutions in
Kyushu in southern Japan.
We believe that we should place even
more emphasis on the distressed asset
business in fiscal 2005, and we plan to
combine the knowledge of various
specialized units to take advantage of
opportunities in this area.
| Cumulative Total of Nonperforming Loans Purchased (Billions of yen) Face Value |
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| Building Maintenance (Millions of yen) Revenues |
Real Estate Development and Management
ORIX is also active in the development of
condominiums, office buildings, and other
real estate properties. Using know-how
gained in corporate dormitory leasing
operations, we began our condominium
development business in 1993, and we have
been able to conduct this business with a
highly streamlined organization by
outsourcing all work from design through
construction and marketing. Our job rests
in making sure that all the related
parties are the best ones for a particular
project and that they are doing what they
are contracted to do. To ensure that
development projects make full use of the
special characteristics of individual
sites, the same staff from ORIX assigned
to each project work in close cooperation
with construction and marketing companies
from the initial site acquisition through
to the completion of the final marketing
of the condominiums.
We already have more than 10 years of
experience and solid performance in the
condominium development business, and our
ranking in the industry has risen over the
years. In fiscal 2004, we sold
approximately 2,000 family-type
condominium units and 1,000
investment-purpose studio condominium
units, primarily in the greater Tokyo
region, and we aim to sustain stable
profitability by maintaining this business
volume.
ORIX has also engaged in the
development, acquisition, and sale of
commercial buildings since 1996. In this
field, besides drawing on our diverse real
estate business experience, we have made
good use of our powerful nationwide
marketing network to leverage the efficacy
of our tenant placement expertise. The
number of REITs and real estate funds
active in this field has been increasing
in recent years, and the scope of the
market has rapidly broadened to include
both office buildings and commercial
facilities as well as such diverse
properties as hotels, warehouses, and
rental apartment buildings. While
continuing to upgrade our risk management
systems, we intend to further expand our
business that involves the purchase or
development and the sale of these kinds of
real estate properties.
ORIX has also developed substantial
operations in building maintenance.
Acquired in 2001, ORIX Facilities
Corporation (previously named Kansai
Maintenance Co., Ltd., and merged with
Building Maintenance Services Corporation
in April 2003) has effectively marketed
its building maintenance expertise through
ORIX’s nationwide marketing network,
enabling it to increase its revenues at
annual rates exceeding 60% during the past
three fiscal years and thereby boosting
its revenues 2.6 times. We are intent on
further expanding our business in this
field, which is a prime example of a
business that can grow earnings without
entailing a commensurate rise in assets.
Corporate Rehabilitation Business
Making good use of the corporate support
capabilities accumulated over many years,
ORIX has made a number of principal
investments in bankrupt or troubled
companies and is providing management
resources to increase the companies’ value
over the medium term in an attempt to sell
the companies off for a capital gain. To
date, we have invested in such companies
as Aozora Bank, Korea Life Insurance,
Minami Sports, Suginoi Hotel, FoodsNet,
and Footwork Express. We are striving to
augment these companies’ value while
concurrently seeking additional investment
targets based on rigorous selection
criteria. We also established ORIX M&A
Solutions Corporation in February 2003,
and this company has been active in
providing advice on corporate
restructuring and mergers and acquisitions
for our clients.
While signs of economic recovery in
Japan are encouraging and should help in
the rehabilitation process, we require
great skill to successfully rehabilitate
bankrupt or troubled companies. However,
we are confident of our capabilities in
the corporate rehabilitation business and
intend to search for more opportunities as
financial institutions accelerate the
disposal of problem assets. We are seeking
to combine the information and expertise
that exists throughout ORIX and
effectively leverage those resources as we
continue to develop these businesses.
Expanding Services
In line with its overall strategy to
increase profitability, ORIX is vigorously
working to expand its operations that
incorporate more of the “service”
component of financial services. One
representative example of such fields is
automobile maintenance leasing, in which
we comprehensively handle the maintenance
and administration of corporate customers’
vehicle fleets.
| Automobiles under Management in Japan (Thousands) Number of Vehicles |
Demand for automobile maintenance
leasing is rising amid a general increase
in the popularity of outsourcing. While
the provision of simple direct financing
leases often tends to eventuate in a
competition to offer the lowest leasing
rates because such financing has become
very commoditized, automobile maintenance
leasing enables us to compete on the basis
of the value-added services we can provide
and is therefore more profitable than
simple financing. Moreover, by using
economies of scale in the procurement of
vehicles and such maintenance items as
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14
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tires, replacement components, and
lubricants, and then passing the savings
on to our customers, we can increase the
competitive advantages of our automobile
maintenance leases.
While the specialization and
infrastructure required for truck
maintenance leasing is somewhat different
than that for automobile maintenance
leasing, we have also gradually expanded
the scale of our operations in truck
maintenance leasing in recent years. We
are now attempting to increase our
capabilities to provide even more
value-added services as we endeavor to
increase the number of vehicles we lease.
While the single largest of our
automobile leasing operations is in Japan,
we also have automobile leasing companies
overseas in 16 countries, including a
Korea-based company that was established
in February 2004. Efforts to expand these
operations overseas are part of our
overall strategy in automobile leasing.
ORIX is also a leader in the field of
operating leases for precision measuring
instruments and IT-related equipment
(e.g., personal computers and servers) in
Japan, which is another financial business
with a high service component. In this
field, we meet the requirements of major
electronics companies, railroad companies,
and other companies that have R&D or
production facilities that wish to rent
precisely calibrated measuring instruments
or IT-related and other equipment for
specified time periods. In Japan, ORIX
keeps roughly 400,000 units of
approximately 25,000 kinds of measuring
instruments and IT-related equipment in
automated warehouses, making it among the
top companies in terms of the scale of its
operations.
We are striving to further increase
the quality of the services that we can
provide in this field by upgrading our
technologies for the reliable maintenance
and calibration of highly specialized
equipment as well as our capabilities for
the dependable and speedy delivery of such
equipment. We also plan to augment our
capabilities outside of Japan for meeting
the needs of the growing number of
customers who have established overseas
facilities.
By proactively expanding its
operations in financial business fields
with a high proportion of services, ORIX
is effectively increasing its
profitability. Accordingly, we plan to
strategically target automobile
maintenance leasing and precision
measuring and IT-related equipment rental
services. Even when such services as
building maintenance are not strictly
within the scope of financial services, we
plan to expand the services that we can
provide in an effort to boost growth and
improve profitability.
... and Beyond
The financial services industry is inherently dynamic and we expect to see
great changes in the years ahead. ORIX’s biggest challenge will be, as it has
been for the last 40 years, how to adapt to and benefit from these changes.
We need to further strengthen the solid foundation that we have built up
over the years in the provision of financial services to small and medium-sized
companies. This means increasing the franchise value of our long-standing
businesses by combining and integrating our experience and expertise so that we
can provide solutions tailored to the sophisticated needs of our customers
throughout Japan. We are also seeking to create new franchise value in such
fields as real estate-related finance and investment banking that we have begun
developing in recent years.
Our enduring goal is to anticipate coming changes and capitalize on the
associated opportunities. Only by constantly supplying new types of financial
products, services, and solutions can we sustain our dynamic evolution tomorrow
and beyond as we strive to survive and thrive in changing times.
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GUIDE TO ORIX’S FINANCIAL STATEMENTS
Revenues/Operating Assets & Segment Information
Since our establishment in 1964, we have
used accounting principles generally
accepted in the United States (U.S. GAAP),
and, since our listing on the New York
Stock Exchange (NYSE) in September 1998,
we have filed financial reports under U.S.
GAAP with the United States Securities and
Exchange Commission (SEC) and the NYSE.
Financial information used internally by
management and information provided to
shareholders is based on U.S. GAAP.
Under U.S. GAAP, we are required to
disclose information based upon the
individual items for revenues and
operating assets in our consolidated
statements of income and consolidated
balance sheets. In the notes to our
consolidated financial statements, we are
also required to disclose segment
information.
The consolidated financial statements
contain information on operating revenues
generated by operating assets, as shown in
the table below, by type of operating
transaction conducted by ORIX. The types
of revenue include principally direct
financing
leases, operating leases, interest on
loans and investment securities, and life
insurance premiums and related investment
income. Revenues from residential
condominium sales are generated from
assets held under inventories (which are
not included in the operating assets
classification) in the consolidated
financial statements. Brokerage
commissions and other fee income are also
not linked directly with operating assets.
For discussion of the individual line
items in our consolidated statements of
income, please refer to “Management’s
Discussion and Analysis of Operations”
starting on page 20.
Segment information is disclosed on
the basis that is regularly used by
management for evaluating the performance
of business segments and deciding how to
allocate resources to them and is based on
the nature of the services provided by
operations in Japan or by geographic area
for overseas operations.
Domestic operations are also
classified into a number of segments by
region for administrative purposes and by
type of product or service handled.
However, when the nature of the
| Corporate Rental Financial Services Operations General equipment Rental of precision and automobile measuring equip- leasing installment ment and personal loans to corporate computers, customers, fee automobile rentals business Direct financing Operating leases leases, interest on loans and invest- ment securities, other operating revenues Revenues ¥ Billion % ¥ Billion % ¥ Billion % 16% Direct Financing Leases 112 100% 86 76% 1 1% 18% Operating Leases 130 100% 14 11% 70 54% 16% Interest on Loans and Investment Securities 117 100% 18 16% — - 4% Brokerage Commissions and Net Gains on Investment Securities 26 100% 2 8% — - 19% Life Insurance Premiums and Related Investment Income 134 100% — — — - 14% Residential Condominium Sales 98 100% — — — - 1% Gains on Sales of Real Estate under Operating Leases 9 100% — — — - 13% Interest Income on Deposits and Other Operating Revenues 94 100% 7 8% 3 3% ¥ Billion % ¥ Billion % ¥ Billion % 30% Investment in Direct Financing Leases 1,454 100% 1,030 71% 41 3% 11% Investment in Operating Leases 537 100% 81 15% 105 20% 46% Installment Loans 2,235 100% 658 29% — - 11% Investment in Securities 552 100% 34 6% 1 - 1% Other Operating Assets 72 100% 2 3% — - |
| Note 1: | The figures in the above table are in billions and may not add up to
the totals due to rounding. |
| Note 2: | The names of the segments “Corporate Financial Services” and “Rental
Operations” were changed from their previous names of “Corporate Finance” and
“Equipment Operating Leases,” respectively. The composition of the segments has
not changed. |
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transactions, the types of customers, and
the operating environment are similar,
certain such items are included in one
segment. Segment information is classified
according to businesses defined by
management for performance evaluation
purposes, rather than by type of
transaction.
Each segment conducts a range of
transactions in response to customer
needs. For example, in the Corporate
Financial Services segment, our strategy
is to provide small and medium-sized
corporate customers with not only direct
financing leases but also loans, life
insurance policies, investment products,
and other products and services. Revenues
from this segment recorded in the
consolidated statements of income are
generated by transactions that yield
direct financing lease revenues, interest
on loans, and other forms of operating
revenues. From an accounting perspective,
these are different types of transactions
and must be recorded as different items in
our consolidated statements of income.
However, from a management perspective,
each is a tool for satisfying customer
needs. When
evaluating the performance of a segment,
different transactions may belong to the
same set of tools for meeting customer
needs and therefore are included in the
same segment.
On the other hand, a single item on
our consolidated statements of income
often appears in more than one segment.
For example, interest on loans from all
sources is accounted for in one category
as “interest on loans and investment
securities” on our consolidated statements
of income, but the types of loans,
borrowers, and other attributes may
differ. Therefore, even though all loan
interest is combined into a single
category for accounting purposes, interest
on loans and investment securities often
appears in more than one segment category.
The table below shows a breakdown by
segment of operating revenues as disclosed
in the consolidated financial statements
and operating assets as disclosed in the
consolidated balance sheets to help
understand how the two types of disclosure
are linked. For more details on segment
information, please see “Management’s
Discussion and Analysis of
Operations” —Segment Information, p. 34.
| Real Estate- Real Estate Life Insurance Other The Americas Asia and Europe Related Finance Oceania Real estate-related Real estate Life insurance Consumer card Corporate leasing General equipment nbsp; Aircraft leasing, finance, housing development and loans, securities and lending, secu- and automobile general equipment loans, loan servicing leasing, building brokerage, venture rities investment, leasing, ship leasing, corporate maintenance capital, corporate loan servicing, real finance, corporate lending rehabilitation estate development lending Interest on loans Residential condo- Life insurance Interest on loans and Direct financing Direct financing Operating leases, and investment minium sales, premiums and investment securities, leases, interest on leases, operating direct financing securities, other other operating related investment brokerage commissions, loans and invest- leases, interest on leases operating revenues revenues, operat- income net gains on investment ment securities, loans and invest- ing leases securities, other other operating ment securities operating revenues revenues ¥ Billion % ¥ Billion % ¥ Billion % ¥ Billion % ¥ Billion % ¥ Billion % ¥ Billion % — — — — — — — — 12 11% 12 11% 1 1% 3 2% 5 4% — — — — 2 2% 28 22% 7 5% 32 27% — — — — 39 33% 18 15% 8 7% 1 1% 2 8% — — — — 10 38% 5 19% 1 4% 1 4% — — — — 134 100% — — — — — — — - 1 1% 97 99% — — — — — — — — — - 1 11% 8 89% — — — — — — — — — - 14 15% 33 35% — — 25 27% 7 7% 4 4% 1 1% ¥ Billion % ¥ Billion % ¥ Billion % ¥ Billion % ¥ Billion % ¥ Billion % ¥ Billion % — — 2 — 105 7% 3 — 123 9% 143 10% 7 - 45 8% 131 24% 22 4% — — 46 9% 75 14% 32 6% 794 36% 9 — 207 9% 307 14% 125 6% 124 6% 9 - 37 7% 1 — 232 42% 47 9% 138 25% 10 2% 4 1% 24 33% 36 50% 3 4% 1 1% 4 6% 2 3% — - |
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GUIDE TO ORIX’S FINANCIAL STATEMENTS (CONTINUED)
Our revenues are broken down based on how they are accounted for under U.S. GAAP. Since we are engaged in a diverse range of businesses, operating revenues are classified into nine accounting items. There are 31 items on the consolidated statements of income, including 25 accounting items. (For individual items, please refer to “Management’s Discussion and Analysis of Operations” on page 20 and the “Notes to Consolidated Financial Statements” starting on page 67.) We provide detailed consolidated statements of income for investors as required under U.S. GAAP, but, because the items are numerous, the analysis of our consolidated statements of income can become quite complex. One approach to analyzing the consolidated financial statements is to look first at the three major items of our statements of income and then further break these down into ten items as described below and on the opposite page. Of course, this is not intended to be a substitute for the consolidated statements of income under U.S. GAAP, but it may provide an aid in analyzing ORIX’s earnings.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS
1. Performance Summary
Revenues
Total revenues for the fiscal year ended March 31, 2004 (fiscal
2004), increased 6%, to ¥720,773 million ($6,820 million), compared
with the fiscal year ended March 31, 2003 (fiscal 2003). Declines
were recorded in interest on loans and investment securities and in
direct financing leases due to our continued careful selection of
assets and the resulting decline in the balance of assets, in
addition to fewer gains from the securitization of lease and loan
assets. In addition, life insurance premiums and related investment
income declined. However, residential condominium sales, brokerage
commissions and net gains on investment securities, and other
operating revenues all increased during fiscal 2004.
Expenses
Total expenses in fiscal 2004 declined 1%, to ¥635,998 million
($6,018 million). While selling, general and administrative expenses
increased primarily due to the increase in the number of consolidated
companies, we recorded substantially fewer write-downs of long-lived
assets, a lower interest expense, and fewer write-downs of
securities.
Operating Income, Income before Discontinued Operations, Extraordinary Gain, Cumulative Effect of a Change in Accounting Principle and Income Taxes, and Net Income
Operating income for fiscal 2004 increased 129%, to ¥84,775 million
($802 million), primarily due to fewer write-downs of long-lived
assets, which were ¥12,345 million ($117 million) in fiscal 2004
compared to ¥50,682 million in fiscal 2003. Income before
discontinued operations, extraordinary gain, cumulative effect of a
change in accounting principle and income taxes rose 126%, to
¥102,157 million ($967 million), and included ¥17,924 million ($170
million) for equity in net income of affiliates. As a result of
write-downs of deferred tax assets, income taxes increased, and net
income grew 79%, to ¥54,020 million ($511 million).
New Business Volumes
New business volumes for direct financing leases (new equipment
acquisitions) and installment loans declined 20% and 11%,
respectively, mainly because of a careful selection of assets as we
focused on profitability over asset growth and due to fewer
acquisitions than in the previous fiscal year. On the other
hand, the volume of new operating leases increased 9%, primarily due
to the purchase of rental real estate and increases in automobile
operating leases. New securities added declined 47% primarily due to
a shift in the portfolio of ORIX Life Insurance Corporation from
securities to loans and other assets, while the new assets added of
other operating transactions increased 60% compared with the previous
fiscal year due to an increase in assets associated with our
condominium development business.
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Operating Assets
Operating assets declined 6% compared to the previous fiscal year, to
¥4,849,194 million ($45,881 million). In addition to lower new
business volumes, investment in securities declined as ORIX Life
Insurance sold off some of its investment securities as part of its
portfolio management. Assets overseas also declined in yen terms
because the yen appreciated from ¥120.20 to the U.S. dollar to
¥105.69.
| Earnings Summary | (Millions of yen) |
| 2003 | 2004 | ¥ Change | % Change | |||||||||||||
Total revenues |
¥ | 681,820 | ¥ | 720,773 | ¥ | 38,953 | 5.7 | |||||||||
Total expenses |
644,846 | 635,998 | (8,848 | ) | (1.4 | ) | ||||||||||
Operating income |
36,974 | 84,775 | 47,801 | 129.3 | ||||||||||||
Income before discontinued operations,
extraordinary gain, cumulative effect of a change
in accounting principle and income taxes |
45,179 | 102,157 | 56,978 | 126.1 | ||||||||||||
Net income |
30,243 | 54,020 | 23,777 | 78.6 | ||||||||||||
| New Business Volumes | (Millions of yen) |
| 2003 | 2004 | ¥ Change | % Change | |||||||||||||
Direct financing leases |
||||||||||||||||
(new receivables added) |
¥ | 1,000,896 | ¥ | 801,787 | ¥ | (199,109 | ) | (19.9 | ) | |||||||
Direct financing leases |
||||||||||||||||
(new equipment acquisitions) |
895,848 | 713,240 | (182,608 | ) | (20.4 | ) | ||||||||||
Installment loans |
1,268,170 | 1,124,276 | (143,894 | ) | (11.3 | ) | ||||||||||
Operating leases |
173,567 | 189,737 | 16,170 | 9.3 | ||||||||||||
Investment in securities |
231,294 | 122,066 | (109,228 | ) | (47.2 | ) | ||||||||||
Other operating transactions |
116,736 | 186,265 | 69,529 | 59.6 | ||||||||||||
| Assets | (Millions of yen) |
| 2003 | 2004 | ¥ Change | % Change | |||||||||||||
Investment in direct financing leases |
¥ | 1,572,308 | ¥ | 1,453,575 | ¥ | (118,733 | ) | (7.6 | ) | |||||||
Installment loans |
2,288,039 | 2,234,940 | (53,099 | ) | (2.3 | ) | ||||||||||
Investment in operating leases |
529,044 | 536,702 | 7,658 | 1.4 | ||||||||||||
Investment in securities |
677,435 | 551,928 | (125,507 | ) | (18.5 | ) | ||||||||||
Other operating assets |
76,343 | 72,049 | (4,294 | ) | (5.6 | ) | ||||||||||
Total operating assets |
5,143,169 | 4,849,194 | (293,975 | ) | (5.7 | ) | ||||||||||
Other |
787,898 | 775,763 | (12,135 | ) | (1.5 | ) | ||||||||||
Total assets |
¥ | 5,931,067 | ¥ | 5,624,957 | ¥ | (306,110 | ) | (5.2 | ) | |||||||
ORIX Corporation
21
Table of Contents
2. Operating Results
(1) Total Revenues, New Business Volumes, and Operating Assets
ΠDirect Financing Leases1
Revenues from direct financing leases declined 9%, to ¥112,372 million ($1,063 million), in fiscal 2004. Revenues from Japanese operations decreased 5%, due largely to fewer gains from securitization compared with fiscal 2003. Revenues from overseas fell 19%, due primarily to fewer assets and lower interest rates in the United States.
The volumes for new equipment acquisitions in Japan and overseas decreased 20% in fiscal 2004, to ¥713,240 million ($6,748 million). New equipment acquisitions from Japanese operations declined 20%, due primarily to the cautious selection of new business and the absence of major acquisitions compared with the previous fiscal year. New equipment acquisitions from overseas operations decreased 22%, due primarily to a decline in the volume of new lease contracts in the United States.
Investment in direct financing leases as of March 31, 2004, decreased 8% compared to March 31, 2003, to ¥1,453,575 million ($13,753 million). Assets in Japan were down 4%, due primarily to the cautious selection of new business and the securitization of operating assets, which has reduced assets. Overseas assets were down 19%, due primarily to the appreciation of the yen against the dollar and a decline in leasing assets in the United States.
During fiscal 2004, we securitized ¥26,284 million ($249 million) of direct financing lease assets (¥16,672 million in Japan; ¥9,612 million overseas) that were treated as off-balance-sheet assets and ¥150,956 million (¥134,416 million in Japan; ¥16,540 million overseas) during fiscal 2003. Gains from the securitization of these assets of ¥170 million ($2 million) were included in direct financing lease revenues for fiscal 2004 and ¥3,205 million for fiscal 2003. The balance of direct financing lease assets treated as off-balance-sheet assets amounted to ¥200,434 million ($1,896 million) as of March 31, 2004, and ¥325,083 million as of March 31, 2003.
| Direct Financing Leases | (Millions of yen) |
| 2003 | 2004 | ¥ Change | % Change | |||||||||||||
Direct financing lease revenues |
¥ | 122,928 | ¥ | 112,372 | ¥ | (10,556 | ) | (8.6 | ) | |||||||
Japan |
91,443 | 86,928 | (4,515 | ) | (4.9 | ) | ||||||||||
Overseas |
31,485 | 25,444 | (6,041 | ) | (19.2 | ) | ||||||||||
New receivables added |
¥ | 1,000,896 | ¥ | 801,787 | ¥ | (199,109 | ) | (19.9 | ) | |||||||
Japan |
758,786 | 618,452 | (140,334 | ) | (18.5 | ) | ||||||||||
Overseas |
242,110 | 183,335 | (58,775 | ) | (24.3 | ) | ||||||||||
New equipment acquisitions |
¥ | 895,848 | ¥ | 713,240 | ¥ | (182,608 | ) | (20.4 | ) | |||||||
Japan |
675,563 | 541,917 | (133,646 | ) | (19.8 | ) | ||||||||||
Overseas |
220,285 | 171,323 | (48,962 | ) | (22.2 | ) | ||||||||||
Investment in direct financing leases |
¥ | 1,572,308 | ¥ | 1,453,575 | ¥ | (118,733 | ) | (7.6 | ) | |||||||
Japan |
1,237,141 | 1,183,187 | (53,954 | ) | (4.4 | ) | ||||||||||
Overseas |
335,167 | 270,388 | (64,779 | ) | (19.3 | ) | ||||||||||
| 1 | Direct financing leases consist of full-payout leases.
For information on the recognition of revenues for direct
financing leases, see Note 1 (e) on page 67. For further details
on investment in direct financing leases, see Note 4 on page 76.
For information on the securitization of direct financing
leases, see Note 9 on page 82. |
ORIX Corporation
22
Table of Contents
| Investment in Direct Financing Leases by Category | (Millions of yen) |
| 2003 | 2004 | ¥ Change | % Change | |||||||||||||
Information-related and office equipment |
¥ | 239,853 | ¥ | 210,713 | ¥ | (29,140 | ) | (12.1 | ) | |||||||
Industrial equipment |
271,471 | 214,682 | (56,789 | ) | (20.9 | ) | ||||||||||
Commercial services equipment |
181,741 | 175,607 | (6,134 | ) | (3.4 | ) | ||||||||||
Transportation equipment |
516,646 | 479,605 | (37,041 | ) | (7.2 | ) | ||||||||||
Other |
362,597 | 372,968 | 10,371 | 2.9 | ||||||||||||
Total |
¥ | 1,572,308 | ¥ | 1,453,575 | ¥ | (118,733 | ) | (7.6 | ) | |||||||
Operating Leases2
Revenues from operating leases increased 7%, to ¥130,488 million ($1,235 million), primarily due to an increase of 9% in Japan mainly as a result of an improvement in the precision measuring and other equipment rental operations and an increase in revenues from automobile operating leases.
New equipment acquisitions increased 9%, to ¥189,737 million ($1,795 million). While there were increases in automobile related operations, the acquisition of KDDI Development Corporation in the previous fiscal year added approximately ¥33,000 million in real estate-related assets. As a result, new equipment acquisitions were flat in Japan while overseas acquisitions rose 49% due to growth in real estate and automobile operating leases.
Investment in operating leases grew 1%, to ¥536,702 million ($5,078 million). Investments in Japan rose 5% due mainly to the acquisition of an automobile rental company called JAPAREN, while assets declined 7% overseas due primarily to the appreciation of the yen against the dollar.
| Operating Leases | (Millions of yen) |
| 2003 | 2004 | ¥ Change | % Change | |||||||||||||
Operating lease revenues |
¥ | 122,526 | ¥ | 130,488 | ¥ | 7,962 | 6.5 | |||||||||
Japan |
85,665 | 92,989 | 7,324 | 8.5 | ||||||||||||
Overseas |
36,861 | 37,499 | 638 | 1.7 | ||||||||||||
New equipment acquisitions |
¥ | 173,567 | ¥ | 189,737 | ¥ | 16,170 | 9.3 | |||||||||
Japan |
143,000 | 144,340 | 1,340 | 0.9 | ||||||||||||
Overseas |
30,567 | 45,397 | 14,830 | 48.5 | ||||||||||||
Investment in operating leases |
¥ | 529,044 | ¥ | 536,702 | ¥ | 7,658 | 1.4 | |||||||||
Japan |
369,489 | 388,452 | 18,963 | 5.1 | ||||||||||||
Overseas |
159,555 | 148,250 | (11,305 | ) | (7.1 | ) | ||||||||||
| Investment in Operating Leases by Category | (Millions of yen) |
| 2003 | 2004 | ¥ Change | % Change | |||||||||||||
Transportation equipment |
¥ | 174,893 | ¥ | 202,514 | ¥ | 27,621 | 15.8 | |||||||||
Measuring equipment and
personal computers |
70,988 | 75,232 | 4,244 | 6.0 | ||||||||||||
Real estate and other |
283,163 | 258,956 | (24,207 | ) | (8.5 | ) | ||||||||||
Total |
¥ | 529,044 | ¥ | 536,702 | ¥ | 7,658 | 1.4 | |||||||||
| 2 | Revenues from operating leases are recorded on a
straight-line basis over the contract terms. Operating lease
assets are recorded at cost and are depreciated over their
estimated useful lives mainly on a straight-line basis. For
information on recognition of revenues for operating leases, see
Note 1 (e) on page 67. For details on the acquisition cost and
accumulated depreciation of operating lease assets, see Note 5
on page 77. |
ORIX Corporation
23
Table of Contents
Ž Interest on Installment Loans and Investment Securities3
Installment Loans
Interest on installment loans declined 7% in fiscal 2004, to ¥107,490
million ($1,017 million). Interest on installment loans in Japan was
flat even though the average balance of assets was higher due
primarily to a decrease in gains from securitization (¥276 million in
fiscal 2004 compared to ¥6,444 million in fiscal 2003). Interest on
overseas installment loans decreased 31%, primarily as a result of a
lower average balance of loans and lower interest rates in the United
States.
New loans added decreased 11%, to ¥1,124,276 million ($10,637 million) in fiscal 2004. New loans added in Japan declined 13% due to an effort to hold down growth of new consumer card loans and the careful selection of new loans to corporate customers, while they remained flat overseas as we remained cautious about expanding assets, primarily in the United States.
The balance of installment loans decreased 2%, to ¥2,234,940 million ($21,146 million). Assets in Japan rose 2%. Installment loans overseas, however, declined 25% due mainly to the repayment of loans and the appreciation of the yen against the dollar.
In fiscal 2004, we securitized ¥9,250 million ($88 million) of installment loans, which were treated as off-balance assets, and ¥78,674 million in fiscal 2003. Gains from the securitization of loans of ¥276 million ($3 million) in fiscal 2004 and ¥6,444 million in fiscal 2003 were included in interest on installment loans. The balance of installment loans treated as off-balance-sheet assets amounted to ¥139,509 million ($1,320 million) as of March 31, 2004, and ¥137,867 million as of March 31, 2003.
| Installment Loans | (Millions of yen) |
| 2003 | 2004 | ¥ Change | % Change | |||||||||||||
Interest on installment loans |
¥ | 115,610 | ¥ | 107,490 | ¥ | (8,120 | ) | (7.0 | ) | |||||||
Japan |
89,068 | 89,295 | 227 | 0.3 | ||||||||||||
Overseas |
26,542 | 18,195 | (8,347 | ) | (31.4 | ) | ||||||||||
New loans added |
¥ | 1,268,170 | ¥ | 1,124,276 | ¥ | (143,894 | ) | (11.3 | ) | |||||||
Japan |
1,100,887 | 957,646 | (143,241 | ) | (13.0 | ) | ||||||||||
Overseas |
167,283 | 166,630 | (653 | ) | (0.4 | ) | ||||||||||
Installment loans |
¥ | 2,288,039 | ¥ | 2,234,940 | ¥ | (53,099 | ) | (2.3 | ) | |||||||
Japan |
1,954,640 | 1,984,416 | 29,776 | 1.5 | ||||||||||||
Overseas |
333,399 | 250,524 | (82,875 | ) | (24.9 | ) | ||||||||||
| 3 | For recognition of interest on installment loans, see
Note 1 (e) on page 67, for other information on installment
loans, see Note 6 on page 78, and for securitization, see Note 9
on page 82. For information on investment securities, including
the fair value of investments, see Note 1 (i) on page 69 and
Note 8 on page 79. |
ORIX Corporation
24
Table of Contents
| Installment Loans by Region and Loan Type | (Millions of yen) |
| 2003 | 2004 | ¥ Change | % Change | |||||||||||||||
| Borrowers in Japan: | ||||||||||||||||||
Consumer: |
Housing loans |
¥ | 531,904 | ¥ | 504,386 | ¥ | (27,518 | ) | (5.2 | ) | ||||||||
Card loans |
271,636 | 247,598 | (24,038 | ) | (8.8 | ) | ||||||||||||
Other |
32,668 | 54,634 | 21,966 | 67.2 | ||||||||||||||
Subtotal |
836,208 | 806,618 | (29,590 | ) | (3.5 | ) | ||||||||||||
Corporate: |
Real estate-related
companies |
276,332 | 310,847 | 34,515 | 12.5 | |||||||||||||
Commercial and
industrial companies |
821,992 | 850,539 | 28,547 | 3.5 | ||||||||||||||
Subtotal |
1,098,324 | 1,161,386 | 63,062 | 5.7 | ||||||||||||||
Total (Japan) |
1,934,532 | 1,968,004 | 33,472 | 1.7 | ||||||||||||||
| Overseas corporate, industrial, and other borrowers | 333,313 | 250,460 | (82,853 | ) | (24.9 | ) | ||||||||||||
| Loan origination costs, net | 20,194 | 16,476 | (3,718 | ) | (18.4 | ) | ||||||||||||
| Total | ¥ | 2,288,039 | ¥ | 2,234,940 | ¥ | (53,099 | ) | (2.3 | ) | |||||||||
Investment Securities
Interest on investment securities decreased 42%, to ¥9,254 million ($88
million), in fiscal 2004,
due mainly to a decrease in the balance of investment in securities and lower
interest rates overseas.
New securities added decreased 47%, to ¥122,066 million ($1,155 million). New securities added in Japan decreased 53%, due mainly to fewer new securities added by ORIX Life Insurance Corporation, while new securities added overseas increased 26%, due primarily to an increase in new investment in securities in the United States.
The balance of our investment in securities decreased 19%, to ¥551,928 million ($5,222 million), compared to March 31, 2003. The balance in Japan declined due primarily to a reduction in the amount of securities held by ORIX Life Insurance, and the balance overseas decreased due primarily to the appreciation of the yen against the dollar.
| Investment Securities | (Millions of yen) |
| 2003 | 2004 | ¥ Change | % Change | |||||||||||||
Interest on investment securities |
¥ | 15,980 | ¥ | 9,254 | ¥ | (6,726 | ) | (42.1 | ) | |||||||
Japan |
866 | 885 | 19 | 2.2 | ||||||||||||
Overseas |
15,114 | 8,369 | (6,745 | ) | (44.6 | ) | ||||||||||
New securities added |
¥ | 231,294 | ¥ | 122,066 | ¥ | (109,228 | ) | (47.2 | ) | |||||||
Japan |
214,477 | 100,912 | (113,565 | ) | (52.9 | ) | ||||||||||
Overseas |
16,817 | 21,154 | 4,337 | 25.8 | ||||||||||||
Investment in securities |
¥ | 677,435 | ¥ | 551,928 | ¥ | (125,507 | ) | (18.5 | ) | |||||||
Japan |
497,829 | 399,463 | (98,366 | ) | (19.8 | ) | ||||||||||
Overseas |
179,606 | 152,465 | (27,141 | ) | (15.1 | ) | ||||||||||
ORIX Corporation
25
Table of Contents
| Investment in Securities by Security Type | (Millions of yen) |
| 2003 | 2004 | ¥ Change | % Change | |||||||||||||
Trading securities |
¥ | 12,154 | ¥ | 26,354 | ¥ | 14,200 | 116.8 | |||||||||
Available-for-sale securities |
537,888 | 386,797 | (151,091 | ) | (28.1 | ) | ||||||||||
Held-to-maturity securities |
10,638 | — | (10,638 | ) | (100.0 | ) | ||||||||||
Other securities |
116,755 | 138,777 | 22,022 | 18.9 | ||||||||||||
Total |
¥ | 677,435 | ¥ | 551,928 | ¥ | (125,507 | ) | (18.5 | ) | |||||||
Brokerage Commissions and Net Gains on Investment Securities
Brokerage commissions and net gains on investment securities increased 140%, to
¥26,025
million ($246 million), reflecting the recovery of the stock and bond markets
in Japan and overseas.
| Brokerage Commissions and Net Gains on Investment Securities | (Millions of yen) |
| 2003 | 2004 | ¥ Change | % Change | |||||||||||||
Brokerage commissions |
¥ | 2,400 | ¥ | 3,967 | ¥ | 1,567 | 65.3 | |||||||||
Net gains on investment securities |
8,457 | 22,058 | 13,601 | 160.8 | ||||||||||||
Total |
¥ | 10,857 | ¥ | 26,025 | ¥ | 15,168 | 139.7 | |||||||||
Life Insurance Premiums and Related Investment Income4
Life insurance premiums decreased 3%, due to a continued shift to lower revenue
but more profitable insurance products.
Life insurance related investment income decreased 5% due to the lower gains from the sale of securities.
| Life Insurance Premiums and Related Investment Income | (Millions of yen) |
| 2003 | 2004 | ¥ Change | % Change | |||||||||||||
Life insurance premiums |
¥ | 122,963 | ¥ | 119,458 | ¥ | (3,505 | ) | (2.9 | ) | |||||||
Life insurance related investment income |
15,548 | 14,754 | (794 | ) | (5.1 | ) | ||||||||||
Total |
¥ | 138,511 | ¥ | 134,212 | ¥ | (4,299 | ) | (3.1 | ) | |||||||
| 4 | Assets related to life insurance operations include
assets that are recorded on our consolidated balance sheets as
investment in direct financing leases, installment loans, and
investment in securities. Revenues from these assets are
included in life insurance related investment income. For
information on life insurance costs, see Note 21 on page 103. |
ORIX Corporation
26
Table of Contents
| Balance of Investments by ORIX Life Insurance | (Millions of yen) |
| 2003 | 2004 | ¥ Change | % Change | |||||||||||||
Fixed income securities |
¥ | 314,465 | ¥ | 193,384 | ¥ | (121,081 | ) | (38.5 | ) | |||||||
Marketable equity securities |
550 | 238 | (312 | ) | (56.7 | ) | ||||||||||
Other securities |
26,885 | 38,187 | 11,302 | 42.0 | ||||||||||||
Total investment in securities |
341,900 | 231,809 | (110,091 | ) | (32.2 | ) | ||||||||||
Installment loans and other investments |
237,905 | 350,664 | 112,759 | 47.4 | ||||||||||||
Total |
¥ | 579,805 | ¥ | 582,473 | ¥ | 2,668 | 0.5 | |||||||||
| Breakdown of Life Insurance Related Investment Income | (Millions of yen) |
| 2003 | 2004 | ¥ Change | % Change | |||||||||||||
Life insurance related investment income |
¥ | 15,548 | ¥ | 14,754 | ¥ | (794 | ) | (5.1 | ) | |||||||
Net gains (losses) on investment securities |
3,448 | (589 | ) | (4,037 | ) | (117.1 | ) | |||||||||
Interest on loans and investment securities,
and others |
12,100 | 15,343 | 3,243 | 26.8 | ||||||||||||
‘ Residential Condominium Sales
Residential condominium sales increased 38%, due to a rise in the number of
condominiums sold to buyers.
| Residential Condominium Sales | (Millions of yen) |
| 2003 | 2004 | ¥ Change | % Change | |||||||||||||
Residential condominium sales |
¥ | 71,165 | ¥ | 98,034 | ¥ | 26,869 | 37.8 | |||||||||
’ Gains on Sales of Real Estate under Operating Leases5
Gains on sales of real estate under operating leases increased 180%,
to ¥9,116 million ($86 million). The sale of office buildings and
other properties in Japan resulted in a substantial increase in
sales, while they declined overseas due to fewer sales in the United
States.
| Gains on Sales of Real Estate under Operating Leases | (Millions of yen) |
| 2003 | 2004 | ¥ Change | % Change | |||||||||||||
Gains on sales of real estate
under operating leases |
¥ | 3,257 | ¥ | 9,116 | ¥ | 5,859 | 179.9 | |||||||||
Japan |
581 | 8,871 | 8,290 | 1,426.9 | ||||||||||||
Overseas |
2,676 | 245 | (2,431 | ) | (90.8 | ) | ||||||||||
| 5 | This line item was included in our consolidated
statements of income for the fiscal year under review due to its
increase in importance. Any contribution from transactions in
which ORIX continues to provide services, such as building
maintenance, involving real estate that has been sold is
included in gains on sales of real estate under operating
leases. Gains and other related income associated with real
estate under operating leases that has been sold and in which
ORIX no longer has any involvement are recorded in discontinued
operations in our consolidated statements of income. |
ORIX Corporation
27
Table of Contents
“ Other Operations 6
Other operating revenues increased 16%, to ¥92,898 million ($879
million). Revenues in Japan were up 18%, due primarily to increases
in revenues from certain companies in which we have invested as part
of our corporate rehabilitation business and revenues from our
building maintenance operations. The revenues from our corporate
rehabilitation business are mainly those associated with hotel
operations and the sale of sporting goods. The companies that we have
invested in as a principal investment with the intention to
rehabilitate and resell for a gain in the future are consolidated
entities; therefore, their revenues are included in our consolidated
financial statements.
New assets added increased 60%, to ¥186,265 million ($1,762 million), due
primarily to an increase in new transactions associated with our condominium development business.
The balance of other operating assets as of March 31, 2004, decreased
6%, to ¥72,049 million ($682 million), primarily as a result of a
decline in assets overseas due to the appreciation of the yen against
the dollar.
| Other Operations | (Millions of yen) | |||||||||||||||
| 2003 | 2004 | ¥ Change | % Change | |||||||||||||
Other operating revenues |
¥ | 80,460 | ¥ | 92,898 | ¥ | 12,438 | 15.5 | |||||||||
Japan |
70,545 | 83,042 | 12,497 | 17.7 | ||||||||||||
Overseas |
9,915 | 9,856 | (59 | ) | (0.6 | ) | ||||||||||
New assets added |
¥ | 116,736 | ¥ | 186,265 | ¥ | 69,529 | 59.6 | |||||||||
Japan |
99,330 | 186,203 | 86,873 | 87.5 | ||||||||||||
Overseas |
17,406 | 62 | (17,344 | ) | (99.6 | ) | ||||||||||
Other operating assets |
¥ | 76,343 | ¥ | 72,049 | ¥ | (4,294 | ) | (5.6 | ) | |||||||
Japan |
66,713 | 64,993 | (1,720 | ) | (2.6 | ) | ||||||||||
Overseas |
9,630 | 7,056 | (2,574 | ) | (26.7 | ) | ||||||||||
| 6 | For details of other operations, see Note 22 on page 103. |
ORIX Corporation
28
Table of Contents
(2) Expenses
ΠInterest Expense
Interest expense amounted to ¥60,597 million ($573 million) in fiscal
2004, a decrease of 16% compared to the previous fiscal year,
primarily as a result of the lower level of debt following the
decrease in assets in Japan and overseas.
Depreciation—Operating Leases
Depreciation—operating leases increased 5%, to ¥83,919 million ($794
million) in fiscal 2004 compared to the previous fiscal year, due
primarily to an increase in the average balance of operating leases
for fiscal 2004.
Ž Life Insurance Costs
In line with a decrease in life insurance premiums, life insurance costs
decreased 5%, to ¥119,653
million ($1,132 million), compared with the fiscal year ended March 31, 2003.
Costs of Residential Condominium Sales
Costs of residential condominium sales rose 46%, to ¥88,679 million
($839 million), compared to the previous fiscal year, corresponding to increased revenues from
residential condominium sales during the same period. In contrast to
the previous fiscal year, when sales of high-margin condominium units
contributed to performance, the rate of increase in costs of sales
exceeded the rate of growth in sales.
Other Operating Expenses
Other operating expenses increased 27%, to ¥52,561 million ($497 million), in
fiscal 2004, reflecting increased other operating revenues.
‘ SG&A Expenses
Selling, general and administrative expenses in fiscal 2004 were
¥161,835 million ($1,532 million), an increase of 12% from a year
earlier, due primarily to an increase in the number of consolidated
companies.
| Selling, General and Administrative Expenses | (Millions of yen) | |||||||||||||||
| 2003 | 2004 | ¥ Change | % Change | |||||||||||||
Personnel expenses |
¥ | 66,155 | ¥ | 79,083 | ¥ | 12,928 | 19.5 | |||||||||
Selling expenses |
24,131 | 25,268 | 1,137 | 4.7 | ||||||||||||
Administrative expenses |
50,913 | 53,692 | 2,779 | 5.5 | ||||||||||||
Depreciation |
3,072 | 3,792 | 720 | 23.4 | ||||||||||||
Total |
¥ | 144,271 | ¥ | 161,835 | ¥ | 17,564 | 12.2 | |||||||||
ORIX Corporation
29
Table of Contents
| ’ | Provision for Doubtful Receivables on Direct
Financing Leases and Probable Loan Losses |
Provision for doubtful receivables on direct financing leases and
probable loan losses in fiscal 2004 was ¥49,592 million ($469
million), a decrease of 9% from fiscal 2003 primarily as a result of
lower levels of operating assets and efforts to improve asset
quality.
Provisions charged to income for doubtful receivables on direct
financing leases totaled ¥13,397 million ($127 million), a decline of
21%, reflecting the lower level of 90+ days past-due direct financing
leases. Although the allowance for doubtful receivables was down 4%,
to ¥41,008 million ($388 million), the ratio of the allowance to the
balance of operating assets was 2.8% at the fiscal year-end,
virtually the same as for the previous year.
Provisions charged to income for probable loan losses on 90+
days past-due installment loans not covered by FASB Statement No. 114
fell 14%, to ¥20,118 million ($190 million), as a result of a decline
in the balance of 90+ days past-due loans. The ratio of the provision
to the outstanding loan balance fell to 2.2%, versus 2.5% at the end
of the previous fiscal year, reflecting continuing efforts to improve
asset quality.
The balance of loans considered impaired under the definition of
FASB Statement No. 114 7 at March 31, 2004, was ¥93,542
million ($885 million), a decrease of 4% compared with March 31,
2003, reflecting charge-offs and collection of loans. We made
provisions of ¥16,077 million ($152 million) for these loans, an
increase of 13%, due to an increase in impaired loans requiring a
valuation allowance. The allowance was ¥39,187 million ($371 million)
at March 31, 2004.
| 90+ Days Past-Due Direct Financing Leases and Loans Not Covered | ||||||||||||||||
| by FASB Statement No. 114 | (Millions of yen) | |||||||||||||||
| 2003 | 2004 | ¥ Change | % Change | |||||||||||||
90+ days past-due direct financing leases |
¥ | 47,825 | ¥ | 36,568 | ¥ | (11,257 | ) | (23.5 | ) | |||||||
90+ days past-due loans not covered
by FASB Statement No. 114 |
60,587 | 43,176 | (17,411 | ) | (28.7 | ) | ||||||||||
| Loans Considered Impaired under FASB Statement No. 114 | (Millions of yen) | |||||||||||||||
| 2003 | 2004 | ¥ Change | % Change | |||||||||||||
Impaired loans |
¥ | 97,278 | ¥ | 93,542 | ¥ | (3,736 | ) | (3.8 | ) | |||||||
Impaired loans requiring a valuation allowance |
63,975 | 72,033 | 8,058 | 12.6 | ||||||||||||
Valuation allowance |
36,073 | 39,187 | 3,114 | 8.6 | ||||||||||||
| 7 | For further information on FASB Statement No. 114, see Note 7 on page 78. |
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Allowance for Doubtful
Receivables on Direct Financing Leases and Probable Loan Losses 8
| (Millions of yen) | ||||||||||||||||
| 2003 | 2004 | ¥ Change | % Change | |||||||||||||
Beginning balance |
¥ | 152,887 | ¥ | 133,146 | ¥ | (19,741 | ) | (12.9 | ) | |||||||
Direct financing leases |
50,837 | 42,588 | (8,249 | ) | (16.2 | ) | ||||||||||
Loans not covered by FASB 114 |
56,188 | 54,485 | (1,703 | ) | (3.0 | ) | ||||||||||
FASB 114 impaired loans |
45,862 | 36,073 | (9,789 | ) | (21.3 | ) | ||||||||||
Provisions charged to income |
¥ | 54,706 | ¥ | 49,592 | ¥ | (5,114 | ) | (9.3 | ) | |||||||
Direct financing leases |
16,978 | 13,397 | (3,581 | ) | (21.1 | ) | ||||||||||
Loans not covered by FASB 114 |
23,497 | 20,118 | (3,379 | ) | (14.4 | ) | ||||||||||
FASB 114 impaired loans |
14,231 | 16,077 | 1,846 | 13.0 | ||||||||||||
Charge-offs, net of recoveries |
¥ | (76,564 | ) | ¥ | (52,579 | ) | ¥ | 23,985 | (31.3 | ) | ||||||
Direct financing leases |
(25,445 | ) | (13,921 | ) | 11,524 | (45.3 | ) | |||||||||
Loans not covered by FASB 114 |
(27,443 | ) | (25,970 | ) | 1,473 | (5.4 | ) | |||||||||
FASB 114 impaired loans |
(23,676 | ) | (12,688 | ) | 10,988 | (46.4 | ) | |||||||||
Other* |
¥ | 2,117 | ¥ | (2,139 | ) | ¥ | (4,256 | ) | (201.0 | ) | ||||||
Direct financing leases |
218 | (1,056 | ) | (1,274 | ) | (584.4 | ) | |||||||||
Loans not covered by FASB 114 |
2,243 | (808 | ) | (3,051 | ) | (136.0 | ) | |||||||||
FASB 114 impaired loans |
(344 | ) | (275 | ) | 69 | (20.1 | ) | |||||||||
Ending balance |
¥ | 133,146 | ¥ | 128,020 | ¥ | (5,126 | ) | (3.8 | ) | |||||||
Direct financing leases |
42,588 | 41,008 | (1,580 | ) | (3.7 | ) | ||||||||||
Loans not covered by FASB 114 |
54,485 | 47,825 | (6,660 | ) | (12.2 | ) | ||||||||||
FASB 114 impaired loans |
36,073 | 39,187 | 3,114 | 8.6 | ||||||||||||
* Other includes foreign currency translation adjustments and the effect of acquisitions.
| Operating Assets | (Millions of yen) | |||||||||||||||
| 2003 | 2004 | ¥ Change | % Change | |||||||||||||
Investment in direct financing leases |
¥ | 1,572,308 | ¥ | 1,453,575 | ¥ | (118,733 | ) | (7.6 | ) | |||||||
Installment loans |
||||||||||||||||
Loans not covered by FASB 114 |
¥ | 2,190,761 | ¥ | 2,141,398 | ¥ | (49,363 | ) | (2.3 | ) | |||||||
FASB 114 impaired loans |
97,278 | 93,542 | (3,736 | ) | (3.8 | ) | ||||||||||
Subtotal |
¥ | 2,288,039 | ¥ | 2,234,940 | ¥ | (53,099 | ) | (2.3 | ) | |||||||
’ Write-downs of Long-Lived Assets9
We made estimates for future cash flows for certain long-lived assets
in Japan and overseas—including golf courses, hotels, rental
condominiums, corporate dormitories, and office buildings—based on
FASB Statement No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets” (SFAS 144). As a result of these estimates, we
recorded write-downs of long-lived assets totaling ¥12,345 million
($117 million), ¥9,326 million in Japan and ¥3,019 million overseas,
in fiscal 2004. This compares to a total of ¥50,682 million for the
previous year.
” Write-downs of Securities10
In fiscal 2004, we recorded ¥5,240 million ($50 million) in
write-downs of securities, down from ¥14,325 million in fiscal 2003
due primarily to an improvement in stock and bond markets in Japan
and overseas.
| 8 | For segment information on the allowance for doubtful receivables and probable loan losses, see Note 30 on page 112. |
|
| 9 | For further information on write-downs of long-lived assets, see Note 1 (h) on page 69 and Note 23 on page 103. |
|
| 10 | For further information on write-downs of securities, see Note 1 (i) on page 69. |
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(3) Equity in Net Income (Loss) of Affiliates and Gain (Loss) on Sales of Affiliates 11
Equity in net income of affiliates rose to ¥17,924 million ($170
million) compared to ¥6,203 million in the previous fiscal year,
primarily due to the contribution from Korea Life Insurance Co., Ltd.
(KLI), which added ¥10,047 million ($95 million). The loss on sales
of affiliates in fiscal 2004 was ¥542 million ($5 million) compared
to a gain of ¥2,002 million in the previous fiscal year. The loss in
fiscal 2004 was due primarily to a dilution of our holdings in
certain equity method affiliates owing to the issuance of additional
shares by these affiliates.
(4) Provision for Income Taxes
Provision for income taxes in fiscal 2004 was ¥51,538 million ($488
million), compared to a provision of ¥20,746 million in fiscal 2003.
This amount includes write-downs of deferred tax assets, recognized
for investments in subsidiaries, based on the judgment that these
assets will not be realized in the foreseeable future.
(5) Discontinued Operations 12
Income from discontinued operations, net of applicable tax effect,
was ¥2,792 million ($26 million) in fiscal 2004 due to sales of real
estate under operating leases without continuing involvements. As a
result of the application of FASB Statement No. 144, income received
from rental real estate properties that have been classified as
discontinued operations that were sold or are intended to be sold has
been reported separately from continuing operations.
(6) Net Income
Operating income for the fiscal year ended March 31, 2004, increased
129%, to ¥84,775 million ($802 million), and income before
discontinued operations, extraordinary gain, cumulative effect of a
change in accounting principle and income taxes increased 126%, to
¥102,157 million ($967 million). Net income rose 79%, to ¥54,020
million ($511 million), and diluted earnings per share rose 78%, to
¥607.52 ($5.75).
| 11 | For more information on equity in net income (loss) of affiliates and gain (loss) on sales of affiliates, see Note 11 on page 85. |
|
| 12 | For discussion of discontinued operations, see Note 24 on page 105. |
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(7) Shareholders’ Equity, Return on Equity, and Return on Assets
Shareholders’ equity grew 12% from the previous year-end, to ¥564,047
million ($5,337 million), due primarily to an increase in retained
earnings to ¥481,091 million ($4,552 million), from ¥429,163 million,
and a decrease in accumulated other comprehensive loss from ¥39,747
million to ¥33,141 million ($313 million).
A decline in assets and an increase in shareholders’ equity
resulted in an increase in the shareholders’ equity ratio, from 8.52%
to 10.03%, while the increase in net income resulted in improved ROE
and ROA, which rose from 6.00% to 10.10%, and from 0.49% to 0.93%,
respectively.
| Shareholders' Equity, ROA, and ROE | (Millions of yen) | |||||||
| 2003 | 2004 | |||||||
Shareholders’ equity ratio |
8.52 | % | 10.03 | % | ||||
Return on assets |
0.49 | % | 0.93 | % | ||||
Return on equity |
6.00 | % | 10.10 | % | ||||
Net income |
¥ | 30,243 | ¥ | 54,020 | ||||
Shareholders’ equity |
505,458 | 564,047 | ||||||
Total assets |
5,931,067 | 5,624,957 | ||||||
Notes: 1. The shareholders’ equity ratio equals shareholders’ equity at fiscal year-end divided by total assets at fiscal year-end.
| 2. | Return on assets equals net income for the fiscal year divided
by the average level of total assets during the fiscal year. |
|||
| 3. | Return on equity equals net income for the fiscal year
divided by the average level of shareholders’ equity during the
fiscal year. |
|||
| Per Share Data | (Yen) | |||||||||||||||
| 2003 | 2004 | ¥ Change | % Change | |||||||||||||
Net income (basic earnings per share) |
¥ | 361.44 | ¥ | 645.52 | ¥ | 284.08 | 78.6 | |||||||||
Net income (diluted earnings per share) |
340.95 | 607.52 | 266.57 | 78.2 | ||||||||||||
Cash dividends |
15.00 | 25.00 | 10.00 | 66.7 | ||||||||||||
Shareholders’ equity |
6,039.43 | 6,739.64 | 700.21 | 11.6 | ||||||||||||
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33
Table of Contents
3. Cash Flows
Cash and cash equivalents in fiscal 2004 decreased by 26%,
or ¥52,442 million, to ¥152,235 million ($1,440 million)
from fiscal 2003, due primarily to a lower level of net
proceeds from securitization of lease and loan receivables
compared with fiscal 2003 and a continuing repayment of
debts due to the decrease of operating assets.
Net cash provided by operating activities declined by
¥57,338 million, to ¥152,812 million ($1,446 million), in
fiscal 2004 compared to ¥210,150 million in fiscal 2003.
While net income increased by ¥23,777 million, to ¥54,020
million ($511 million) in fiscal 2004, compared with ¥30,243
million, the decrease in net cash provided by operating
activities is mainly due to a decrease in write-downs of
long-lived assets and write-downs of securities, which are
expenses not associated with cash payments, and a decrease
of equity in net (income) loss of affiliates contributed
from investment in KLI. In addition, a decrease of ¥15,771
million in policy liabilities in fiscal 2004, compared with
an increase of ¥5,889 million in fiscal 2003, is another
reason.
Net cash provided by investing activities decreased by
¥58,972 million, to ¥123,978 million ($1,173 million), in
fiscal 2004, compared to ¥182,950 million in fiscal 2003.
While cash outflows for the purchase of lease equipment,
installment loans made to customers, and the purchase of
available-for-sale securities all declined as a result of
lower business volumes in comparison with fiscal 2003,
inflows also declined due primarily to a decrease in net
proceeds from securitization of lease and loan receivables
and a reduction in proceeds from sales of available-for-sale
securities.
Net cash used in financing activities in fiscal 2004
was ¥328,284 million ($3,106 million), compared to ¥542,040
million in fiscal 2003, due primarily to a lower level debt
repayment resulting from the reduced level of operating
assets.
4. Segment Information13
The following discussion presents segment financial
information on the basis that is regularly used by
management for evaluating the performance of business
segments and deciding how to allocate resources to them. The
reporting segments are identified based
on the nature of services for operations in Japan and based
on geographic areas for overseas operations.
Segments in Japan accounted for 79% of total segment
profit in fiscal 2004 compared to 80% in the previous fiscal
year. As of March 31, 2004, ¥4,167,472 million ($39,431
million), or approximately 82%, of total segment assets were
in Japan.
Segments overseas accounted for 21% of total segment
profits in fiscal 2004 compared to 20% in the previous
fiscal year. As of March 31, 2004, ¥472,595 million ($4,472
million), or 9%, of total segment assets were in the
Americas, ¥413,041 million ($3,908 million), or 8%, in Asia
and Oceania, and ¥56,634 million ($535 million), or 1%, in
Europe.
| 13 | For more details on segment information, see Note 30 on
page 112. For more information on the major business divisions
and subsidiaries in each segment, refer to the “Directory (by
Segment)” on page 117. |
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| Segment Profits (Losses) | (Millions of yen) | |||||||||||||||
| 2003 | 2004 | ¥ Change | % Change | |||||||||||||
Business Segments in Japan |
||||||||||||||||
Corporate financial services |
¥ | 44,158 | ¥ | 43,787 | ¥ | (371 | ) | (0.8 | ) | |||||||
Rental operations |
4,402 | 9,342 | 4,940 | 112.2 | ||||||||||||
Real estate-related finance |
19,572 | 18,102 | (1,470 | ) | (7.5 | ) | ||||||||||
Real estate |
(39,441 | ) | 6,244 | 45,685 | (115.8 | ) | ||||||||||
Life insurance |
4,791 | 5,382 | 591 | 12.3 | ||||||||||||
Other |
8,452 | 10,079 | 1,627 | 19.2 | ||||||||||||
Subtotal |
41,934 | 92,936 | 51,002 | 121.6 | ||||||||||||
Overseas Business Segments |
||||||||||||||||
The Americas |
1,332 | 7,601 | 6,269 | 470.6 | ||||||||||||
Asia and Oceania |
9,765 | 17,848 | 8,083 | 82.8 | ||||||||||||
Europe |
(736 | ) | (1,252 | ) | (516 | ) | 70.1 | |||||||||
Subtotal |
10,361 | 24,197 | 13,836 | 133.5 | ||||||||||||
Total segment profits (losses) |
52,295 | 117,133 | 64,838 | 124.0 | ||||||||||||
Reconciliation of segment totals
to consolidated amounts |
(7,116 | ) | (14,976 | ) | (7,860 | ) | 110.5 | |||||||||
Total consolidated income before
discontinued operations, extraordinary gain
and cumulative effect of a change
in accounting principle and income taxes |
¥ | 45,179 | ¥ | 102,157 | ¥ | 56,978 | 126.1 | |||||||||
| Segment Assets | (Millions of yen) | |||||||||||||||
| 2003 | 2004 | ¥ Change | % Change | |||||||||||||
Business Segments in Japan |
||||||||||||||||
Corporate financial services |
¥ | 1,893,422 | ¥ | 1,806,686 | ¥ | (86,736 | ) | (4.6 | ) | |||||||
Rental operations |
144,397 | 147,231 | 2,834 | 2.0 | ||||||||||||
Real estate-related finance |
931,513 | 909,019 | (22,494 | ) | (2.4 | ) | ||||||||||
Real estate |
303,838 | 309,558 | 5,720 | 1.9 | ||||||||||||
Life insurance |
579,805 | 582,473 | 2,668 | 0.5 | ||||||||||||
Other |
387,978 | 412,505 | 24,527 | 6.3 | ||||||||||||
Subtotal |
4,240,953 | 4,167,472 | (73,481 | ) | (1.7 | ) | ||||||||||
Overseas Business Segments |
||||||||||||||||
The Americas |
618,148 | 472,595 | (145,553 | ) | (23.5 | ) | ||||||||||
Asia and Oceania |
437,874 | 413,041 | (24,833 | ) | (5.7 | ) | ||||||||||
Europe |
75,207 | 56,634 | (18,573 | ) | (24.7 | ) | ||||||||||
Subtotal |
1,131,229 | 942,270 | (188,959 | ) | (16.7 | ) | ||||||||||
Total segment assets |
5,372,182 | 5,109,742 | (262,440 | ) | (4.9 | ) | ||||||||||
Reconciliation of segment totals
to consolidated amounts |
(229,013 | ) | (260,548 | ) | (31,535 | ) | 13.8 | |||||||||
Total consolidated operating assets |
¥ | 5,143,169 | ¥ | 4,849,194 | ¥ | (293,975 | ) | (5.7 | ) | |||||||
ORIX Corporation
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Table of Contents
(1) Business Segments in Japan
ΠCorporate Financial Services
| Segment Outline ORIX’s corporate financial services segment includes direct financing leases and installment loans to corporate customers as well as the sale of a variety of financial products and other fee businesses. We changed the name of this segment from “corporate finance” to “corporate financial services” to present the components of this segment more clearly. The composition of the segment has not been changed. |
| Segment Performance (Millions of yen, %) ‘00 ‘01 ‘02 ‘03 ‘04 Segment Revenues ¥121,415 ¥ 113,113 ¥ 118,794 ¥ 125,560 ¥ 128,355 % of Total Revenues 19.8% 19.3% 18.2% 18.6% 17.8% Segment Profits (Losses) ¥ 40,918 ¥ 44,427 ¥ 48,066 ¥ 44,158 ¥ 43,787 % of Total Profits 64.0% 62.8% 55.2% 84.4% 37.4% Segment Assets ¥1,968,590 ¥1,889,538 ¥1,960,380 ¥1,893,422 ¥1,806,686 % of Total Assets 40.6% 36.8% 34.5% 35.2% 35.4% |
Fiscal 2004 Results
Automobile leasing operations continued
to perform well during the fiscal year,
however, profits were down 1%, to ¥43,787
million ($414 million), compared to
¥44,158 million in the previous fiscal
year, as a result of fewer gains from
securitization. Assets were down 5% as we
continued to focus on increasing
profitability rather than asset growth.
In addition, some direct financing leases
and installment loans were transferred to
the life insurance segment.
Historical Trends
Profits in this segment have remained
stable in recent years after the
exclusion of income from securitization.
The balance of direct financing leases
has generally been on a declining trend,
excluding the impact of any major
acquisitions, due to continued emphasis
on profitability over asset growth. No
major acquisitions were made in fiscal
2004.
In contrast to this decline in
direct financing leases, we have seen
growth in automobile maintenance leases.
Because our automobile maintenance leases
offer customers a cost-effective way of
outsourcing their vehicle maintenance
needs, we have seen an increase in such
outsourcing needs in recent years. In
corporate lending, we are responding to a
greater range of business funding needs,
including helping customers in
streamlining their balance sheets through
the securitization of accounts receivable
and other means as well as by providing
funding for capital investment.
Strategy and Topics
Automobile leasing operations now make up
approximately 40% of segment profits and
we expect automobile leases to remain a
strategic focus in the coming fiscal
years.
The number of automobiles under
lease has expanded at a compounded annual
growth rate of 14% over the past five
years and, at the end of the fiscal year
under review, amounted to approximately
470,000 vehicles. We remain focused on
offering competitive, high-quality
services by drawing on economies of scale
in these activities.
In addition to our attempts to grow
automobile leasing operations, we have
begun two projects aimed at reducing
costs and improving the services offered
in this segment. The first project, which
we began in November 2002, is an attempt
to integrate the so-called “backyard”
function of the automobile leasing
business. Under this project, we are
combining the vehicle procurement,
maintenance, and other administrative
operations of automobile-related
companies in the ORIX Group and are
aiming for greater standardization and
efficiency in operations.
The second project involves the
concentration and integration of back
office activities formerly conducted by
our sales and marketing units in charge
of direct finance leases and corporate
lending. For this purpose, we established
a centralized administration facility in
Osaka for the domestic market with the
aims of standardizing our operational
procedures and enhancing the productivity
of back office operations.
ORIX Corporation
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Table of Contents
Rental Operations
| Segment Outline Rental operations include the rental of precision measuring equipment and PCs to corporate customers as well as automobile rental operations. We changed the name of this segment from “equipment operating leases” to “rental operations” to present the components of this segment more clearly. The composition of the segment has not been changed. |
| Segment Performance (Millions of yen, %) ‘00 ‘01 ‘02 ‘03 ‘04 Segment Revenues ¥ 53,000 ¥ 61,677 ¥ 67,319 ¥ 67,655 ¥ 74,370 % of Total Revenues 8.6% 10.5% 10.3% 10.0% 10.3% Segment Profits (Losses) ¥ 7,823 ¥ 11,165 ¥ 9,906 ¥ 4,402 ¥ 9,342 % of Total Profits 12.2% 15.8% 11.4% 8.4% 8.0% Segment Assets ¥113,389 ¥134,270 ¥147,444 ¥144,397 ¥147,231 % of Total Assets 2.3% 2.6% 2.6% 2.7% 2.9% |
Fiscal 2004 Results
Segment profits more than doubled to
¥9,342 million ($88 million), compared to
¥4,402 million in the previous fiscal
year, due to improved profitability of
the precision measuring and other
equipment rental operations. The balance
of segment assets increased 2%, to
¥147,231 million ($1,393 million), from
March 31, 2003, due primarily to the
acquisition of JAPAREN Co., Ltd., a car
rental company.
Historical Trends
The dominant contributors to earnings in
this segment are precision measuring
equipment and PC rentals. The principal
customers for these rental services are
the R&D and production divisions of large
electronics manufacturers, railway
companies, and other companies.
These operations benefited
substantially from the increased capital
spending in information technology (IT)
in the late 1990s, and a substantial
increase in profits was recorded for the
year ended March 31, 2001, but demand
weakened for two consecutive years in
fiscal 2002 and fiscal 2003. As a result
of a lower rate of utilization of assets
available for rental and other factors,
profits declined. Segment profits for
fiscal 2003 also included a provision for
doubtful receivables and probable loan
losses of ¥2,431 million for certain
investments in aircraft leasing that were
booked in this segment. Capital
expenditures by the customers of this
segment improved in fiscal 2004, and an
increase in utilization rates of rental
equipment resulted in growth in profits.
Strategy and Topics
The precision measuring equipment rentals
business is a highly specialized niche
business. In the past, most of our
efforts have been concentrated on Japan,
but as customers have shifted their R&D
and production
centers overseas, the segment has
established offices outside Japan. Our
first overseas operations began in
Singapore in 1995, followed by Malaysia
in 1996, and South Korea and the United
Kingdom in 2001.
In addition to ORIX Rentec
Corporation, this segment includes the
automobile rental operations of ORIX
Rent-A-Car Corporation. In October 2003,
we also acquired the automobile rental
company JAPAREN, and have strengthened
our position as the second largest
automobile rental company in Japan, with
approximately 43,000 vehicles. Automobile
rental operations are gradually being
integrated into automobile leasing
operations to create a seamless product
mix that can meet the needs of customers
for both long-term leases and short-term
rentals.
ORIX Corporation
37
Table of Contents
Ž Real Estate-Related Finance
| Segment Outline ORIX’s real estate-related finance business encompasses real estate loans to corporate customers and housing loans. ORIX is also expanding its business involving loan servicing, commercial mortgage-backed securities (CMBSs), and real estate investment trusts (REITs). |
| Segment Performance (Millions of yen, %) ‘00 ‘01 ‘02 ‘03 ‘04 Segment Revenues ¥ 17,294 ¥ 24,262 ¥ 31,582 ¥ 51,589 ¥ 54,792 % of Total Revenues 2.8% 4.2% 4.8% 7.6% 7.6% Segment Profits (Losses) ¥ (3,415) ¥ 1,944 ¥ 5,654 ¥ 19,572 ¥ 18,102 % of Total Profits (5.3%) 2.7% 6.5% 37.4% 15.5% Segment Assets ¥597,274 ¥606,801 ¥1,012,896 ¥931,513 ¥909,019 % of Total Assets 12.3% 11.8% 17.8% 17.3% 17.8% |
Fiscal 2004 Results
The segment saw a continued strong
contribution from consumer housing loans
and corporate loans, including
non-recourse loans, while the loan
servicing operations also made
contributions. However, ¥3,174 million of
gains from the listing and sale of shares
in a REIT were recorded in the previous
fiscal year and profits decreased by 8%,
to ¥18,102 million ($171 million),
compared to ¥19,572 million in the
previous fiscal year. Segment assets
declined 2%, to ¥909,019 million ($8,601
billion).
Historical Trends
Earnings in this segment have improved substantially over the last few years
due mainly to two simultaneous trends. The first is an improvement in asset
quality as we worked out the problem assets during the period after the
bursting of the economic bubble in Japan in the early 1990s, and the
deflationary period that has continued to this day. For example, provisions for
doubtful receivables and probable loan losses reached ¥29,014 million in 1998,
but we recorded only ¥6,870 million ($65 million) in fiscal 2004.
The second
trend has been the contribution from new businesses. The market for real
estate-related finance in Japan has undergone substantial changes since the
latter part of the 1990s as a result of structural changes in the economy and
deregulation, which has allowed a number of new forms of real estate-related
financial transactions, including loan servicing of both performing and
non-performing assets, non-recourse loans, and REITs. We
have been able to combine our expertise
in both the financing and the developing,
managing, and operating of real estate to
become a front-runner in these new areas.
Strategy and Topics
While segment profits declined slightly
in fiscal 2004, we believe this segment
offers continued opportunities for
growth. In particular, such areas as
corporate finance, including non-recourse
loans, the loan servicing business, and
housing loan operations are expected to
offer business opportunities.
Competition in the non-recourse loan
market has intensified, but the market
for such loans has expanded beyond just
office buildings, to include commercial
buildings, retail shops, hotels,
warehouses, and rental condominiums. The
requests for such loans are numerous and
we believe we can leverage our expertise
to select profitable transactions within
this growing market. We are also focusing
more on securitization and fee businesses
to further expand these operations.
In the loan servicing business, we
participated in the establishment of a
corporate rehabilitation fund for the
Kyushu region in March 2004 and plan to
play an active role in finding business
solutions for nonperforming loan problems
in regional areas throughout Japan.
ORIX Corporation
38
Table of Contents
Real Estate
| Segment Outline ORIX’s real estate business consists principally of residential condominium and commercial development and rental activities; the operation of hotels, golf courses, corporate dormitories, and a training facility; and building maintenance. |
| Segment Performance (Millions of yen, %) ‘00 ‘01 ‘02 ‘03 ‘04 Segment Revenues ¥ 44,873 ¥ 48,438 ¥ 85,516 ¥104,454 ¥143,451 % of Total Revenues 7.3% 8.3% 13.1% 15.5% 19.9% Segment Profits (Losses) ¥ (8,241) ¥ (4,604) ¥ 5,842 ¥(39,441) ¥ 6,244 % of Total Profits (12.9%) (6.5%) 6.7% (75.4%) 5.3% Segment Assets ¥276,494 ¥310,340 ¥326,473 ¥303,838 ¥309,558 % of Total Assets 5.7% 6.0% 5.7% 5.7% 6.1% |
Fiscal 2004 Results
Steady performance from condominium
development and building maintenance, in
addition to gains from the sale of office
buildings under operating leases
contributed to earnings. In the fiscal
year ended March 31, 2003, we also
recorded ¥50,682 million in write-downs
of certain real estate assets, whereas
only ¥8,052 million ($76 million) of such
write-downs were recorded in fiscal 2004.
As a result, profits in the fiscal year
ended March 31, 2004, were ¥6,244 million
($59 million), compared to a loss of
¥39,441 million in the previous fiscal
year. The balance of real estate assets
as of March 31, 2004, increased 2%, to
¥309,558 million ($2,929 million), due
primarily to the increase in assets
associated with new condominium
developments.
Historical Trends
In recent years, some parts of the
business, for instance the development of
residential condominiums and more
recently building maintenance, have made
positive contributions to earnings in the
real estate segment. In addition, we made
substantial gains on the sale of office
buildings and other real estate that we
have acquired, added value to through
renovation and tenant placement, and
resold. However, a risk factor in this
segment has been the asset deflation in
Japan that has continued for over ten
years.
We decided to write down to fair
value those assets that were tested for
impairment and for which the
non-discounted cash flows were less than
the carrying amount of the assets.
Strategy and Topics
In our condominium business, we sold
approximately 2,000 family-type units and
about 1,000 studio-type units, mainly in
the Tokyo region in fiscal 2004. For the
time being, our objective is to generate
stable earnings by carefully selecting
the units we handle and maintaining the
current volume.
The real estate resale business is
growing as a result of the entry of new
investors—including syndicates and
investors in REITs, real estate funds,
and other investment vehicles—and
expansion in the scope of real estate
investment. Going forward, we would like
to direct our attention to this business
while taking due steps to control risk.
We entered the building maintenance
business in 2001, and revenues have
expanded from ¥6,673 million for the year
ended March 31, 2002, to ¥17,705 million
($168 million) in the year ended March
31, 2004. We are planning to further
increase the scale of these activities,
working closely with the sales and
marketing staff in the corporate
financial services and other segments.
To deal with the risk of declining
value of property holdings in our real
estate rental and operations businesses,
we are constantly reviewing and
realigning our portfolio to increase
profitability and working to reduce
downside risk to a minimum.
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Life Insurance
| Segment Outline The life insurance segment consists of direct and agency life insurance sales and related activities. |
| Segment Performance (Millions of yen, %) |
| ‘00 ‘01 ‘02 ‘03 ‘04 Segment Revenues ¥204,746 ¥157,636 ¥154,296 ¥138,511 ¥133,391 % of Total Revenues 33.3% 27.0% 23.6% 20.5% 18.5% Segment Profits (Losses) ¥ 5,455 ¥ 5,982 ¥ 5,764 ¥ 4,791 ¥ 5,382 % of Total Profits 8.5% 8.5% 6.6% 9.2% 4.6% Segment Assets ¥425,335 ¥543,886 ¥543,738 ¥579,805 ¥582,473 % of Total Assets 8.8% 10.6% 9.6% 10.8% 11.4% |
Fiscal 2004 Results
Life insurance premiums from our
insurance business declined because of
our continuing emphasis on selling
high-margin insurance products.
Investment income also declined due to a
decline in net gains on the sale of
securities. Along with the decline in
revenues, life insurance costs for policy
reserves and related expenses also
declined, resulting in an increase in
profits to ¥5,382 million ($51 million),
from ¥4,791 million in the previous
fiscal year. The balance of segment
assets as of March 31, 2004, was flat at
¥582,473 million ($5,511 million),
compared to March 31, 2003.
Historical Trends
We have made major changes in our sales
and asset management policies in this
segment over the last few years. First,
our sales strategy has focused on selling
term life, cancer, and medical insurance
products, which are more profitable than
some of the products we sold in the past.
Second, our asset management has focused
on reducing the amount of fixed income
securities in the investment portfolio
and on increasing loans and other assets
in order to prevent losses in the event
of a rise in interest rates. We have made
progress in this area as well, with fixed
income securities making up 96% of
investments in the life insurance segment
at March 31, 2001, but only 33% at March
31, 2004. These securities have been
replaced by installment loans and other
assets that offer higher returns than
fixed income securities and greater
flexibility in the event of a rise in
interest rates.
Strategy and Topics
The two main strategies in the life
insurance segment are: 1) continue to
improve profitability through product and
operating asset mix and 2) strengthen our
marketing efforts.
With regard to the second strategy,
we are trying to develop new channels to
expand sales of life insurance. Most of
our life insurance products at present
are sold through agents, including sales
and marketing staff in the corporate
financial services segment, to corporate
customers. In addition to these agency
sales, ORIX Direct, which was Japan’s
first life insurance offered through
direct channels, uses such media as
newspaper advertisements, the Internet,
and other direct channels to keep
administration expenses such as agent
fees and marketing expenses lower than
for agency-based businesses.
In an attempt to increase both
direct and agency sales, we have been
broadcasting television commercials in
the Kansai region (around Osaka) over the
last few years, which were quite
successful in attracting new customers.
We began the commercials in the Kanto
region (around Tokyo) in May 2004 to
further expand these sales promotions.
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‘ Other
| Segment Outline The other segment encompasses consumer card loan operations, securities brokerage, venture capital operations, corporate rehabilitation, and other new businesses. |
| Segment Performance (Millions of yen, %) ‘00 ‘01 ‘02 ‘03 ‘04 Segment Revenues ¥ 30,882 ¥ 36,215 ¥ 49,139 ¥ 61,238 ¥ 73,986 % of Total Revenues 5.0% 6.2% 7.5% 9.1% 10.3% Segment Profits (Losses) ¥ (1,036) ¥ 1,035 ¥ 4,941 ¥ 8,452 ¥ 10,079 % of Total Profits (1.6%) 1.5% 5.7% 16.2% 8.6% Segment Assets ¥242,280 ¥284,835 ¥352,433 ¥387,978 ¥412,505 % of Total Assets 5.0% 5.5% 6.2% 7.2% 8.1% |
Fiscal 2004 Results
Our consumer card loan operations
continued to contribute to earnings,
while our securities brokerage business
also expanded, benefiting from
improvements in the Japanese stock
markets. Additionally, both venture
capital operations and equity method
affiliates contributed to earnings. As a
result, profits rose to ¥10,079 million
($96 million), compared to ¥8,452
million in the previous fiscal year.
Historical Trends
Due to the varied nature of the
businesses in this segment, the trends
are dependent on a variety of factors. In
the last few years, the increased
contribution from the consumer card loan
operations, venture capital and other
investments have contributed to earnings.
This segment also includes such
investments as Fuji Fire and Marine
Insurance, an equity method affiliate, in
which we made an investment in March
2002.
Strategy and Topics
As a result of the deterioration of
credit quality in the consumer finance
industry over the past two fiscal years
against the background of increased
personal bankruptcies, we have been
cautious about expanding assets and we
have tightened credit approval standards.
With these restraints on new lending, the
balance of consumer card loans fell from
¥271,636 million at the end of the
previous fiscal year to ¥247,598 million
($2,343 million) as of March 31, 2004. We
plan to continue to focus on the quality
of assets in these operations by
carefully monitoring loans and moving
forward cautiously.
Venture capital and other
investments benefited from a strong stock
market in the fiscal year ended March 31,
2004, and their contribution is heavily
correlated to the overall market
environment.
In the corporate rehabilitation
business, we plan to continue to make
equity investments in businesses in
bankruptcy or undergoing restructuring.
By working to revitalize their operations
and enhance their corporate value, we
hope to generate earnings through the
eventual sale of our equity interest. The
investments we have made so far include
Minami Sports, a sports goods
distributor, Footwork Express, a
logistics company, and FoodsNet, a sushi
chain operator.
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(2) Overseas Business Segments
ΠThe Americas
| Segment Outline ORIX’s principal businesses in the Americas segment are leasing, corporate loans, securities investment, real estate-related finance, including commercial mortgage-backed securities (CMBS), and real estate development. |
| Segment Performance (Millions of yen, %) ‘00 ‘01 ‘02 ‘03 ‘04 Segment Revenues ¥ 74,525 ¥ 79,397 ¥ 75,195 ¥ 57,909 ¥ 47,294 % of Total Revenues 12.1% 13.6% 11.5% 8.6% 6.6% Segment Profits (Losses) ¥ 18,775 ¥ 8,896 ¥ 810 ¥ 1,332 ¥ 7,601 % of Total Profits 29.4% 12.6% 0.9% 2.5% 6.5% Segment Assets ¥691,403 ¥804,118 ¥794,330 ¥618,148 ¥472,595 % of Total Assets 14.3% 15.7% 14.0% 11.5% 9.2% |
Fiscal 2004 Results
Segment profits improved to ¥7,601
million ($72 million), compared to ¥1,332
million in the previous fiscal year, due
largely to fewer write-downs of
securities and lower provisions for
doubtful receivables and probable loan
losses.
Historical Trends
As shown in the above graph, the
contribution of the Americas segment to
consolidated performance bottomed out
during the year ended March 31, 2002, and
is now on a recovery trend. The reasons
for weakness in performance in fiscal
2002 and fiscal 2003 were provisions for
probable loan losses in our leasing
business and valuation losses on
high-yield bond investments. The
improvement in the fiscal year under
review was due to declines in these
provisions and write-downs compared to
the previous fiscal year.
Strategy and Topics
This segment is important for the
development of ORIX’s global operations.
The majority of ORIX’s overseas assets
are allocated to the Americas segment and
the United States is one of the most
advanced financial markets in the world.
We have realigned our existing operations
in the Americas market under our holding
company ORIX USA Corporation into three
principal divisions, namely corporate
finance, leasing, and real estate.
Our Corporate Finance Division is
engaged in responding to our customers’
funding needs for corporate borrowings,
big-ticket lease financing, and other
services. This division also invests in
marketable bonds and loan assets. The
Leasing Division provides mainly
equipment financing. The Real Estate
Division
provides loans secured by commercial
real estate and servicing for CMBS and
other financial instruments while
investing in CMBS and other real estate
linked securities. Its operations also
include the development and management of
commercial real estate.
In addition to the consolidated
subsidiaries listed, Stockton Holdings
Limited, in which ORIX has a 29% equity
interest, is accounted for by the equity
method.
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Asia and Oceania
| Segment Outline Principal businesses in Asia and Oceania involve direct financing leases, operating leases for transportation equipment, corporate loans, and securities investments. |
| Segment Performance (Millions of yen, %) ‘00 ‘01 ‘02 ‘03 ‘04 Segment Revenues ¥ 49,739 ¥ 48,735 ¥ 56,677 ¥ 55,425 ¥ 53,694 % of Total Revenues 8.1% 8.3% 8.7% 8.2% 7.5% Segment Profits (Losses) ¥ 3,371 ¥ 1,203 ¥ 5,433 ¥ 9,765 ¥ 17,848 % of Total Profits 5.3% 1.7% 6.2% 18.7% 15.2% Segment Assets ¥369,540 ¥402,707 ¥435,093 ¥437,874 ¥413,041 % of Total Assets 7.6% 7.8% 7.7% 8.2% 8.1% |
Fiscal 2004 Results
Contributions from automobile leasing and
corporate lending of a number of
companies in the region, in addition to
an increase in equity in net income of
affiliates from Korea Life Insurance Co.,
Ltd. (see Note 11 on page 85), resulted
in a rise in segment profits to ¥17,848
million ($169 million), compared to
¥9,765 million in the same period of the
previous fiscal year.
Historical Trends
Starting with the establishment of our
first overseas office in Hong Kong in
1971, we have expanded throughout Asia
and Oceania mainly by forming joint
ventures to establish leasing companies
together with local companies in each
respective country. Our operations in the
region were adversely affected in the
wake of the Asian currency crisis in 1997
and we recorded losses in the segment in
the fiscal years ended March 31, 1998 and
1999. Since that time, however, we have
seen a gradual recovery of operations
throughout the region. In recent years,
automobile leasing and corporate loans
have become major contributors to
earnings. In addition, with the
investment in KLI we have seen a
substantial increase in profits over the
last two fiscal years.
Strategy and Topics
Our business activities in Asia and
Oceania are spread over 17 countries.
Most of our local subsidiaries in the
region are showing recovery in
performance, and we plan to move forward
with the development of these operations.
One area of strategic focus is
automobile leasing and we are attempting
to leverage the very successful business
model for automobile maintenance leasing
that we have developed in Japan. We now
have automobile leasing operations in 16
countries outside of Japan, many of which
are in the Asia and Oceania segment. The
most recent development in this regard
was the establishment of ORIX Auto
Leasing Korea Corporation, in South Korea
in February 2004.
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Ž Europe
| Segment Outline ORIX’s principal businesses in Europe center on aircraft operating leases, direct financing leases, corporate loans, and securities investments. |
| Segment Performance (Millions of yen, %) ‘00 ‘01 ‘02 ‘03 ‘04 Segment Revenues ¥ 18,260 ¥ 15,151 ¥ 14,716 ¥ 13,311 ¥ 10,708 % of Total Revenues 3.0% 2.6% 2.3% 2.0% 1.5% Segment Profits (Losses) ¥ 278 ¥ 716 ¥ 600 ¥ (736) ¥ (1,252) % of Total Profits 0.4% 1.0% 0.7% (1.4%) (1.1%) Segment Assets ¥159,608 ¥158,646 ¥113,844 ¥ 75,207 ¥ 56,634 % of Total Assets 3.3% 3.1% 2.0% 1.4% 1.1% |
Fiscal 2004 Results
A segment loss of ¥1,252 million ($12
million) was recorded, compared to a loss
of ¥736 million in the previous fiscal
year, due largely to the recording of
losses on certain equity method
investments.
Historical Trends
As indicated in the graphs above, Europe
has become a smaller portion of our
overseas activities as we have reduced
our exposure to the region against the
backdrop of fewer business opportunities.
About 60% of the assets of this segment
are operating leases for aircraft, but
since we are not undertaking new
investments in this area, the balance of
assets is declining along with the
depreciation of these aircraft.
Strategy and Topics
In the previous fiscal year, we
restructured a company that had equity
investments in small and medium-sized
companies in the United Kingdom and are
now seeking new opportunities. The
present strategy calls for improving the
profitability of existing operations
while looking for selective opportunities
as they arise, but at this time we do not
anticipate a rapid expansion.
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5. Funding and Liquidity
(1) Funding Strategy
ORIX has continued to diversify its
funding methods and sources over the
years in order to maintain stable access
to funding and reduce its interest
expense. We also flexibly adjust our
funding structure to adapt to changing
market environments and strive to
consistently monitor risks associated
with fluctuations in interest rates and
liquidity levels to promptly respond to
changes in the financial environment.
(2) Balance of Borrowings from Financial Institutions and the Capital Markets
ORIX’s funding includes borrowings from
financial institutions and direct fund
procurement from the capital markets.
Among our diverse borrowing sources are
city banks, trust banks, regional banks,
agriculture-related financial
institutions, life insurance companies,
casualty insurance companies, and foreign
banks. ORIX had borrowings from
approximately 200 such institutions as of
March 31, 2004. We procure funds directly
from the capital markets through the
issuance of corporate bonds, commercial
paper (CP), and medium-term notes (MTNs)
as well as the securitization of leasing
and other assets.
To facilitate funding operations, we
have obtained credit ratings for our
notes and bonds from two Japanese rating
agencies. As of May 31, 2004, ORIX’s
domestically issued straight bonds and a
euro MTN program have been assigned A+
ratings by both Rating and Investment
Information Inc. (R&I) and Japan Credit
Rating Agency, Ltd. (JCR). ORIX’s
domestic CP is rated a-1 by R&I and J-1
by JCR. Standard & Poor’s has assigned
ORIX a rating of BBB+ and Moody’s
Investors Service, a rating of Baa3.
The share of funds raised directly
from the capital markets (excluding
off-balance-sheet sources) at March 31,
2004, was 48%, the same as for the
previous fiscal year-end. We adjust the
ratios of borrowings from financial
institutions and capital markets
depending on the market environment and
aim to consistently maintain an optimal
funding structure.
(3) Diversification of Funding Methods
As deregulation gains momentum in Japan,
we are diversifying our funding by
continually seeking out and developing
new procurement methods. Moreover,
because our funding
from the capital markets targets a wide range of investors, we have been able to make our funding operations increasingly diverse and stable.
The prohibition on the issuance of
CP by finance companies was eliminated in
June 1993 in Japan. In April 1998, the
sale of CP directly to investors without
going through brokers was
made possible by additional
deregulation. ORIX has energetically
worked to increase the number of
investors to whom it directly sells CP,
which include such entities as asset
management companies, life and casualty
insurance companies, regional banks, and
other types of companies.
ORIX’s outstanding balance of CP, as
of March 31, 2004, was ¥420,280 million,
versus ¥527,263 million at the end of the
previous fiscal year. Also, at the end of
the fiscal year under review, the number
of companies that had invested directly
in ORIX’s CP was 455, and the balance of
CP issued directly to such investors in
Japan accounted for 91% of ORIX’s
domestic CP outstanding. In addition,
beginning March 31, 2003, paperless
(electronic) CP transactions were
introduced into Japan, and ORIX made the
first domestic issue of electronic CP on
the same day. Moreover, in February 2004,
ORIX made the first public offering in
Japan of electronic CP to small and
medium-sized enterprises, with the
objectives of diversifying its funding
sources and enlarging its base of
investors. While attempting to control
the risks associated with settlement and
clearance, we plan to continue to issue
electronic CP to broaden our investor
base and promote the creation of more
efficient and broad-based primary and
secondary CP markets. At the end of
fiscal 2004, electronic CP accounted for
61% of ORIX’s balance of CP outstanding
in Japan.
In step with the expansion of
the bond market in Japan, we have
actively issued yen-denominated straight
bonds in the Japanese market. In order to
further diversify funding methods and
investors, ORIX separately issues bonds
that are primarily for institutional
investors and those that are primarily
for individual investors.
The balance of straight bonds issued
by ORIX (including private placements)
held by domestic institutional investors
was ¥378,000 million ($3,576 million) at
March 31, 2004, versus ¥388,000 million
held at the end of the previous
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fiscal year. Individual investors owned ¥365,000 million ($3,453 million) of ORIX’s straight bonds at March 31, 2004, and ¥370,000 million at the previous fiscal year-end.
In January 1992, ORIX became the
first company in Japan to securitize
leasing assets. Since that time, we have
actively used asset securitization in
Japan and overseas. As of March 31, 2004,
the outstanding balance of securitized
assets, including such assets as leasing
and loan assets, stood at ¥437,650
million ($4,140 million) on a
consolidated basis. Of this figure, the
portion accounted for as off-balance
sheet assets was ¥339,943 million ($3,216
million).
Regarding overseas funding
operations, in addition to borrowing from
local markets, efforts have been made to
increase the diversity of funding methods
through such measures as MTN issuance.
ORIX and five overseas subsidiaries are
participants in a Multi-Issuer Euro MTN
program with a maximum issuance limit of
$5 billion. This arrangement enables ORIX
to have a highly flexible funding
program. Euro MTN issuance is determined
based on the funding needs of overseas
companies under the supervision of
ORIX’s Treasury Department in Tokyo.
As of March 31, 2004, the outstanding
balance of ORIX’s MTNs was ¥159,332
million ($1,508 million).
In September 1998, ORIX listed its
shares on the New York Stock Exchange
(NYSE), a move that has facilitated
raising funds through the issuance of
stock outside Japan since that date. In
October 1999, ORIX became the first
Japan-based company to make a global
offering involving the simultaneous issue
of new shares and convertible notes
registered with the Securities & Exchange
Commission (SEC) and listed on the NYSE,
issuing 3.3 million new shares and ¥40
billion (principal amount) in convertible
bonds due 2005. In December 2001, ORIX
made another dual offering of new shares
and convertible bonds, issuing 1.8
million new shares and ¥28 billion
(principal amount) in convertible bonds
due 2007.
As part of our continued efforts to
diversify funding sources, in June 2002
we issued Liquid Yield Option Notes TM
with stock acquisition rights, due
June 14, 2022 (par value of $1,022
million), and procured $400 million.
Because these notes included a contingent
conversion provision that effectively
makes conversion more difficult, the
securities are not required to be
included in the calculation of diluted
earnings per share if ORIX’s share price
does
not reach a certain trigger price. The issuance was the first of its kind by a Japanese company.
In October 2003, we filed a
universal shelf registration statement
with the SEC on Form F-3, permitting
offerings in the United States of up to
an aggregate maximum offering price of
$500 million or the equivalent in foreign
denominated currency or currency units of
senior debt securities, subordinated debt
securities, warrants, common stock,
preferred stock, and American Depository
Shares (ADSs). These securities may be
offered separately or together with other
offered securities.
(4) Liquidity
ORIX manages its liquidity by monitoring
the schedule for maturities of assets and
liabilities and raises funds as needed
from financial institutions and capital
markets in Japan and overseas. Funds
raised are used efficiently to acquire
new assets or to meet obligations for
repayment of liabilities. ORIX raises the
funds it requires while monitoring both
operating cash needs and the inflow and
outflow of funds.
To sustain a high level of
liquidity, ORIX has secured committed
credit lines with a number of financial
institutions. Total committed credit
lines for ORIX and its subsidiaries were
¥862,147 million and ¥875,797 million
($8,286 million) at March 31, 2003 and
2004, respectively. Of these lines,
¥797,449 million and ¥765,608 million
($7,244 million) were available at March
31, 2003 and 2004, respectively. Included
in these commitment lines are global
commitment lines for major overseas
subsidiaries totaling ¥97,926 million
($927 million),
with ¥94,657 million ($896 million)
available at March 31, 2004.
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6. Risk Management
Overview
We consider the management of risk such
as credit risk, market risk, and other
risks essential to conducting our
businesses and to increasing our
corporate value. Accordingly, we have
designed our risk management system to
identify, analyze, evaluate, and measure
our risks, and to set appropriate
policies and limits to manage and hedge
such risks. Our risk management system
has been established through the
development of what we consider to be
reliable administrative and information
systems and other policies and programs.
We attempt to control or hedge these
risks by utilizing a risk management
system that manages both overall risk as
well as specific risks associated with
individual transactions, businesses, and
overseas geographical regions.
(1) Four Components of Risk Management
Our risk management system is made up of
four principal components. The first
component consists of the sales and
marketing departments. For example, our
sales and marketing staff are responsible
for important credit risk management
functions, including carrying out initial
credit analyses and evaluations with
respect to potential transactions. These
staff are also required to monitor risks
and manage and collect problem assets
with respect to originated transactions.
The second component involves
specialized groups responsible for risk
management. These include:
| • | The Risk
Management Headquarters, which is
primarily responsible for risks
associated with asset quality and
comprises four groups—the Credit
Evaluation and Due Diligence Group, the
Risk Monitoring Group, the Risk
Management Group, and the Real Estate
Appraisal Group. |
|||
| • | The Treasury Department, which is
responsible for domestic and overseas
funding strategy as well as
funding-related risks, including
interest-rate risk, liquidity risk,
exchange rate risk, and derivative risk. |
|||
| • | The Compliance Coordination Office,
which creates and operates systems for
ensuring rigorous compliance with laws
and regulations as well as ORIX’s own
internal rules. |
|||
The third component of our risk management system is
our Investment and Credit Committee which comprises top
management, including the CEO, COO, CFO, and the executive officer in charge of risk management. The Investment and Credit Committee meets on average three times a month to review and approve or reject individual credit transactions and investments that exceed certain specified credit or investment amounts.
In addition to the detailed risk
management that is carried out for each
transaction with regard to the
aforementioned three components, our
monthly strategy meetings add a fourth
component to our risk management system.
These meetings perform a particularly
important role in the monitoring and
control of the various businesses in
which we are involved. Top management,
including ordinarily the CEO, COO, and
CFO, attend these meetings. The meetings
are held separately once a month for each
of our divisions and for each of our
major subsidiaries, including our
overseas subsidiaries. In the meetings,
the management directly responsible for
the division or subsidiary in question
discusses its respective businesses with
top management. The meetings begin with
quantitative reports of financial targets
and results of the division or subsidiary
in question. Discussions are then
conducted on current and future projects,
market trends, and other issues that
could potentially affect the particular
division or subsidiary’s profitability.
Matters considered vitally important to
our operations are decided on by the
Investment and Credit Committee and
reported to the Board of Directors as
appropriate.
(2) Controlling a Variety of Risks
Our business activities involve various
elements of risk. We consider the
principal risks of our business to be
credit risk and market risk, although our
business is also subject to other risks
such as liquidity risk, operational risk,
legal risk, and investment risk. We
attempt to control these risks as
described below.
(a) Credit Risk Management
Our credit risk management system consists
of three basic steps: Πinitial
evaluations of each potential transaction;
corrective action implementation for the
management of defaults and other problem
transactions; and Ž portfolio management
of originated transactions.
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ΠInitial Evaluation
Based on criteria that include the total
exposure to a customer, staff members in
ORIX’s sales and marketing departments
are authorized to approve individual
credit transactions within specific
limits according to the seniority of the
relevant staff member. If a proposed
transaction exceeds such limits, it must
be referred to the Risk Management
Headquarters for approval. If the
transaction value exceeds the approval
limit of the Risk Management
Headquarters, the matter is referred to
the Investment and Credit Committee for
approval.
In connection with each potential
credit transaction, the relevant sales
and marketing department and the Risk
Management Headquarters each perform a
comprehensive customer credit analysis
and evaluation based on the relevant
customer’s financial position, past
transactional performance, and potential
cash flow, and on the quality of the
relevant collateral. The credit risk
analysis and evaluation also cover the
proposed contractual structure, terms and
conditions, and potential profitability
of the transaction.
To ensure that the credit evaluation
process is efficiently executed, we have
created a database of rules and manuals
on credit limits, procedures, credit
evaluations, collateral, and collection.
These rules define credit evaluation
standards, including fundamental credit
limits based on each customer’s aggregate
credit balance as well as other standards
that enable flexible and rapid decision
making, with clear guidelines for
determining which transactions should be
handled speedily and which should be
afforded more prudent attention in line
with such factors as the nature of the
proposed transaction as well as the
proposed collateral, the existence of
guarantees, the term of the credit, and
the use of proceeds. We regularly review
these manuals and improve and revise them
as we deem necessary or desirable.
Limits on investments and on the
provision of credit by our subsidiaries
in Japan and overseas are set in a
similar manner. Each subsidiary is
authorized to approve credit transactions
up to a specific limit and any amounts
above that limit are referred to our Risk
Management Headquarters or the Investment
and Credit Committee, as appropriate, for
ultimate determination. Our subsidiaries
in Japan and overseas observe systems and
procedure manuals that are similar to
those used by ORIX. These systems and
procedure manuals contain appropriate
modifications, however, to take into
account: (i) in the case of our
subsidiaries in Japan, the particular
nature of each such subsidiary’s business
and (ii) in the case of our overseas
subsidiaries, the particular local
business practices and economic
conditions present and the nature of the
transactions being undertaken by each
such subsidiary. For some of these
subsidiaries, the Risk Management
Headquarters regularly conducts
by-country, by-region, and by-industry
evaluations to minimize exposure to
potentially high-risk markets.
Corrective Action
Our Risk Management Headquarters obtains
information on bankruptcies, dishonored
bills, and corporate performance from a
number of credit data banks on a daily
basis. This information is entered into a
central database, which is used to
prepare industry analysis reports and
warning reports that are provided to
relevant sales and marketing departments
to keep them current on the condition of
important customers. In cases where
concerns associated with certain
industries or customers arise, we take
measures that may include freezing the
extension of new credit, or reducing our
existing exposure, to the industry or
customer in question.
In October 2003, ORIX consolidated
the collection sections formerly
operating in each sales and marketing
department and the credit analysis
department into a single Receivables
Administration Office with the aim of
taking speedy and
efficient action for problem assets
and improving capabilities for recovering
such assets. The objectives of this unit
include concentrating the knowledge and
knowhow regarding debt collection, and,
when problem assets emerge, working with
the sales and marketing departments from
an early stage to adopt effective
collection methods and thereby contribute
to improving collection results.
Preliminary reports on problem
assets are prepared and delivered to the
appropriate responsible person in
accordance with internal procedures as
soon as the problems occur, and all
pertinent data on such problem assets are
entered into our proprietary database.
Our sales and marketing departments work
together with our Receivables
Administration Office to maintain
accurate records of delinquencies and to
collect on individual problem assets.
Collection progress is reported to
different levels of management depending
on the size of the assets at stake.
Furthermore, our sales and marketing
departments make regular reports to top
management on the amount and
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expected recovery of individual nonperforming assets exceeding specified amounts. In addition, our Receivables Administration Office carries out a detailed analysis of all new problem assets reported each month and on the conditions of those assets. This analysis is reported to top management monthly.
In making collections, an early
response is extremely important. When
information is received regarding the
emergence of nonperforming assets, the
Receivables Administration Office goes
into action immediately in cooperation
with the relevant sales and marketing
departments to take steps to secure the
exposure and make collections. The
Receivables Administration Office plays a
highly effective role in recovering
problem exposure by drawing on its
accumulated experience in collections
and, working closely with the sales and
marketing departments, provides them with
appropriate direction, beginning with
early surveillance and extending to
compulsory legal measures including
seizure of collateral pledged against the
exposure and other assets.
Ž Portfolio Management
Just as we must manage the risks inherent
in each individual credit extension and
transaction, in the Risk Management
Headquarters we separately manage the
credit risks associated with the
individual and overall asset portfolios
themselves. Both in Japan and overseas,
we regularly evaluate our asset
portfolios involving major borrowers by
each transactional category as well as by
industry and type of collateral guarantee
in an attempt to prevent undue levels of
exposure to specific customers or
industries.
In our operations in Japan, we
perform the analysis of asset portfolios
from different perspectives to focus on
trends in certain industries or
particular transactions, such as
non-recourse loan transactions. The
results of these analyses are
reported regularly to top
management. We further classify and
manage overseas asset portfolios by
region, country, transactional currency,
and other characteristics. Assessments of
each of our subsidiary’s asset quality
and internal credit procedures are
reported regularly to top management.
Using a default probability model
developed by ORIX, the Risk Management
Headquarters performs a value-at-risk
analysis on certain operating assets in
Japan and measures risks by credit
rating, industry, and business segment.
(b) Market Risk Management
We believe the market risk of our
business comprises six primary
components: Πinterest rate risk;
exchange rate risk; Ž derivatives risk;
asset deflation risk; residual value
risk; and ‘ risk associated with the
market values of equity and debt
securities.
ΠInterest Rate Risk Management
We attempt to manage interest rate risk
through our asset-liability management,
or ALM, systems. Our ALM systems are
designed to provide quantitative
indicators of interest rate risk by
incorporating information on our
interest-earning assets and
interest-bearing liabilities as well as
market interest rates. In fiscal 2003,
IFCO Inc. became one of the five group
companies covered by our combined ALM
system, which also covers ORIX, ORIX
Alpha Corporation, ORIX Auto Leasing
Corporation, and ORIX Credit Corporation.
Including the independent ALM systems of
ORIX Trust and Banking Corporation and
ORIX Life Insurance Corporation, seven
companies in Japan are now covered by an
ALM system and we plan to expand the
systems to cover more of our subsidiaries
in the future.
The ALM report is updated monthly
and reported at our monthly strategy
meetings to enable rapid decision making
with regard to interest rate risk. The
analysis in these reports help us
identify and manage the mismatch in the
duration of assets and liabilities. We
measure our liquidity risk with cash flow
maps that are provided in the reports.
The reports help us monitor and manage
the effects of duration and basis point
value, or BPV, on interest rate
fluctuations. In this way, we attempt to
implement risk control procedures that
keep the impact of interest rate
fluctuations on our operations within a
specified target range based on our
expectations.
Our principal overseas subsidiaries
regularly submit reports on their
respective asset-liability situations to
the Treasury Department in Tokyo
permitting us to manage interest rate
risk and risks relating to the relevant
local currency on an individual basis. We
also use interest-rate swaps, caps,
floors, and collars to hedge against
changes in interest rates.
Exchange Rate Risk Management
We employ foreign currency borrowings, foreign exchange
forward contracts, and foreign currency swap agreements
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to hedge risks associated with certain transactions and investments denominated in foreign currencies. Similarly, each of our overseas subsidiaries structures its liabilities to match the currency denomination of assets in its respective region. We manage certain positions involving foreign currency risk individually.
Ž Derivatives Risk Management
We use currency and interest-rate swaps,
caps, floors, and collars for hedging
purposes. The Investment and Credit
Committee has established comprehensive
market risk management rules which set
specific market risk management
parameters for each of our consolidated
companies that engages in derivatives
transactions. These parameters clarify
the types of risks to be managed and the
types of hedging methods to be employed.
An internal control system ensures that
responsibility for execution, evaluation,
and certain administrative tasks relating
to these derivatives transactions is
allocated to separate departments.
Departments responsible for
executing derivatives transactions
monitor the notional principal and market
value of these transactions by
counterparty, rating, and hedging method.
They also maintain management systems
designed to respond rapidly to sharp
market changes and other unanticipated
developments. Departments responsible for
evaluation perform checks to ensure that
the types of hedging methods employed are
appropriate and, periodically, or as
necessary, evaluate the effectiveness of
the hedging methods. Working in
cooperation with banks and other outside
entities, departments responsible for
administrative tasks undertake
administrative checks on all derivatives
transactions. In addition, they prepare
quarterly reports on each company’s
transactions that include the notional
principal, fair market value, hedging
method, and hedging efficacy associated
with each type of transaction and each
counterparty. These reports are then
presented to our Treasury Department and
Compliance Coordination Office. The
Treasury Department uses these reports to
manage our Companywide derivatives, while
the Compliance Coordination Office
inspects derivatives-related accounts and
performs checks to ensure that relevant
internal regulations are observed.
Asset Deflation Risk Management—Real Estate
Asset deflation has continued in Japan
for more than 10 years since the bursting
of the inflationary bubble in the early
1990s. Asset deflation risk, in
particular its effect on real property
prices, is therefore an important risk
that we believe must be managed. The
activities of our real estate-related
operations consist principally of the
provision of non-recourse loans, the
development of residential condominiums,
the leasing, purchase and sale of real
estate, and the private finance
initiative, or PFI, business as well as
the operation of hotels, golf courses,
and a training facility. In line with the
expansion of real estate-related finance
and investments in real estate, we
have attempted to create a comprehensive
system in our Risk Management
Headquarters to analyze and evaluate
various real estate-related transactions.
We attempt to control or mitigate
risks associated with our real
estate-related businesses by drawing on
what we believe are our strengths in the
following areas
| • | Experience in Real Estate
Operations. We have many years
experience in real estate
operations. We believe we have
accumulated expertise in evaluating
the cash flows of office buildings,
commercial buildings, and other
types of real estate. |
|||
| • | Real Estate Evaluation
Specialists. The Real Estate
Appraisal Group of our Risk
Management Headquarters has a total
of 19 certified real estate
appraisers and assistant real
estate appraisers, while the
construction management section of
ORIX Real Estate includes 12
certified architects. We are able
to quickly obtain real estate
appraisals and engineering reports
from these internal real estate
specialists. |
|||
| • | Credit Evaluation Experience. We
believe that we have accumulated
substantial know-how in evaluating
the credit of prospective tenants,
general contractors, and other
related parties. |
|||
| • | Access to Information. We have
the ability to obtain detailed
information relating to various
aspects of real estate thanks to
the know-how of subsidiaries that
specialize in property management,
due diligence, and appraisal who
have first-hand access to such
information. |
|||
| • | Specialist Cooperation. We
believe that we can make swift real
estate-related investment decisions
because our management structure
facilitates close cooperation
amongst a number of our specialist
groups, including |
|||
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50
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those responsible for legal, accounting, tax, and compliance issues. |
We believe our accumulated
experience in evaluating real estate cash
flows when we consider a particular
transaction allows us to mitigate risks.
We also believe we are able to mitigate
asset price deflation risk by adding
value through our development expertise
to real estate we have purchased.
Based on a number of indices for
measuring profitability, real estate
investment decisions are made by the
Investment and Credit Committee using
reports that analyze a variety of risks,
including reputation risk. Considering
securitizations of loan receivables and
purchases of real estate, such as
buildings, that we intend to resell, the
liquidity of real estate investments has
become an important issue that we believe
we must evaluate in order to manage asset
deflation risk.
All transactions involving our real
estate business are reported regularly to
top management at the monthly strategy
meetings and to the Investment and Credit
Committee. This system allows us to
monitor the progress of each project and
the total balance of assets and revenues,
to control delays in the receipt, and
volatility, of revenues, and to reduce
asset deflation risk. As a result of our
monitoring activities, real estate in
which we have invested is sold if we
judge that there will be no recovery in
the revenue stream.
Residual Value Risk Management
We provide both direct financing leases
and operating leases, which are subject
to residual value risk. We record a loss
at the end of a leasing period if we are
unable to recover the residual value of
the lease (the amount remaining after
depreciation charges have been subtracted
from the original cost). We believe the
residual value risk for direct financing
leases is relatively small, from our
perspective as lessor, since the
non-cancelable nature of these
transactions means that the residual
value risk associated with holding an
asset essentially lies primarily with the
lessee. The residual value risk for
operating leases, however, is usually
higher because the contracts may be
renewed a number of times during the life
of an asset and we bear this residual
value risk. Accordingly, the setting and
monitoring of the estimated residual
value of operating leases is very
important. We calculate residual value
based on secondary market values of the
assets at the time of the origination of
the lease and assumptions about the obsolescence of a
particular piece of equipment.
Some operating lease items such as
ships or aircraft have long lives but may
only be leased out for a few years, and
the secondary market values of these
types of equipment are volatile. We
primarily limit our ship operating leases
to general-purpose ships that are
relatively easy to repossess and
re-lease. We finance larger ships that
may have specific uses, but we do not own
them, as we do in the case of operating
leases, in order to reduce residual value
risk. For aircraft, we have limited our
inventory primarily to narrow-bodied
aircraft, which are relatively versatile
and relatively easy to lease. We monitor
the market values of these ships and
aircraft and sell off assets as necessary
or desirable to reduce our exposure to
downward trends in the market.
We regularly monitor secondary
market values for equipment such as PCs
and automobiles and set and adjust
residual value assumptions depending on
our assessment of past and future trends
in the market values for such equipment.
‘ Equity and Debt Securities Risk Management
Our subsidiaries in Japan and overseas
that make investments in the equity or
debt securities of other companies, along
with our Risk Management Headquarters in
Tokyo, monitor market
trends and the condition of those
companies in order to respond quickly and
mitigate market risks associated with
those investments. A substantial portion
of the marketable equity securities we
hold consists of those held to maintain
our business relationships in Japan. As
with general credit risk management, our
sales and marketing departments monitor
the market environments, operating
results, and financial conditions of the
companies in which we invest, and our
Risk Management Headquarters provides
credit information and industry analysis
reports to our sales and marketing
departments. Based on information on the
unrealized gains or losses of the
securities and the probability of
companies defaulting on their
commitments, our Risk Management
Headquarters makes recommendations each
month, including to sell securities or
conduct more detailed analyses of
particular companies.
A substantial portion of our total
bond investments are made by ORIX Life
Insurance in Japan and ORIX Capital
Markets LLC, or OCM, in the United
States. In connection
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with such investments, the investment departments of ORIX Life and OCM regularly monitor interest rate policies, economic conditions, and securities and financial market trends. They also analyze price movements of securities, the financial conditions of companies in which they invest, and other factors daily. The investment departments take action based on our approved guidelines for conducting sales of securities to recognize gains, to cut losses, or to reduce positions. The risk management departments and bond trading departments of each company review and compare daily reports with these internal guidelines and macro- and microeconomic conditions, while the risk management departments verify that the guidelines are being followed properly.
(c) Managing Other Risks
ΠLiquidity Risk Management
Liquidity risk arises from the risk that
we will have insufficient funds, or be
unable to access sufficient funding, to
meet our business commitments or to pay
back our obligations as they become due,
which could result in a payment default
on our borrowings. We manage liquidity
risk by diversifying our funding sources,
establishing committed credit lines with
financial institutions, and adjusting
levels of short- and long-term funding in
consideration of market conditions. As
part of our ALM system, we also use cash
flow maps to measure and monitor
liquidity risk.
Legal Risk Management
Transactional legal risk is a major type
of legal risk that we face in our
business. Transactional legal risk
includes the risk that the contracts into
which we enter contain unintended
conditions, are not legally effective, or
cannot be carried out as stipulated in
the contract, or that the transactions in
which we
participate involve activities that are
against, or not in strict compliance
with, applicable laws. When we consider a
new transaction, new product development,
or other new business activity, our risk
management system requires an examination
of these types of legal risks.
In an attempt to avoid, prevent, and
mitigate such legal risks, we require
that our Risk Management Headquarters be
involved in transactions from the early
stages when a transaction is first
considered through the documentation
process in which transaction-related
contracts are
prepared for internal review and final approval. Contracts may not be approved internally unless they follow our prescribed rules and guidelines. Our Risk Management Headquarters is also involved in the approval of such contracts. Depending on the size and importance of a given transaction, we may also utilize the expertise of outside lawyers.
We monitor possible changes in the
law by collecting information on proposed
legal reforms, as such information
becomes available. As necessary or
appropriate, we may also initiate
preparatory measures to address the
requirements of new laws that are
expected to take effect in the future and
implement steps to ensure that we are,
and continue to be, in compliance with
new laws as they take effect.
To ensure that proper legal
procedures are followed in connection
with legal disputes and litigation, we
require that our Risk Management
Headquarters and other related sections
be involved in such disputes and
litigation, including lawsuits that have
been, or are expected to be, brought
against us and lawsuits that we bring, or
expect to bring, against third parties.
Ž Operational Risk Management
As our business has expanded in recent
years, we view operational risk
management as a significant component of
overall risk management. Operational risk
refers generally to the risk arising in
connection with the computer networks
that we use, the administrative
procedures and day-to-day operational
procedures that we have established, and
any breakdown in these networks or
procedures, or the systems that support
them, as well as the risk of reputational
damage arising from such a breakdown. In
order to mitigate operational risks, our
Risk Management Headquarters and
Compliance Coordination Office monitor
compliance with administrative procedures
and ORIX Computer Systems Corporation
upgrades our computer systems as we deem
necessary or desirable.
As part of operational risk
management, we have attempted to further
strengthen the functions of internal
control and compliance in recent years.
The Compliance Coordination Office is
responsible for internal controls. Based
on annual internal audit plans, the
office regularly monitors company-wide
compliance with internal rules and
regulations and the accuracy of
self-assessment reports prepared by
branch offices concerning internal
controls. Based on this monitoring,
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the office evaluates the effectiveness of
existing internal controls and revises
such controls as it deems necessary or
desirable.
We created a compliance manual in
2002 that is distributed to all employees
in Japan and the senior management of
significant overseas subsidiaries. Since
fiscal 2003, we have conducted a number
of companywide training sessions in Japan
to educate employees and to increase
their awareness of compliance issues.
Based on the analysis of these sessions,
we are continuing our efforts to achieve
a more effective compliance system.
Ž Dealing with New Risks in Changing Times
In an attempt to increase profitability,
we have developed new businesses in real
estate-related finance and investment
banking that are different from our
traditional businesses focusing primarily
on the provision of debt finance in the
form of leases and loans. We believe that
we must continue to evolve our risk
management systems in order to manage
such risks.
In response to the recent expansion
of real estate-related finance and
investment banking operations, ORIX has
determined that it must create additional
new risk management capabilities,
including those involving the unified
management of financing and investment
risks, the analysis of risks associated
with such new financial schemes developed
overseas as CMBS, methods for appraising
assets in connection with M&A
transactions and new business
investments, and portfolio management
systems with higher levels of
sophistication, comprehensiveness, and
multidimensionality.
In order for us to have effective
checks and balances on our operations we
are also examining new business
transactions from perspectives different
from those traditionally employed by our
Risk Management Headquarters in credit
evaluations. For example, we may consider
the viability of a particular business
along with its investment and financing
scheme.
In order to examine new business
transactions from different perspectives,
we make use of our accounting, tax, and
legal specialists in our risk management
groups. For novel, complicated, or large
new business transactions, we require
these specialists to be involved from the
initial stages through the signing and
execution of the transaction. We believe
this minimizes risks and permits
appropriate
advice to be disseminated to our sales
and marketing departments. Our risk
management group specialists work
together with outside specialists to
assess target companies or assets before
an acquisition is made and to analyze the
progress of management plans after
acquisition.
We have also tried to strengthen our
monitoring system for real estate-related
investments, asset acquisitions, and
private equity investments. We require
monthly or quarterly reports to be made
to top management that describe the
progress of
particular investments and provide
comparative analyses of projected and
actual results.
In order to further improve our ROE,
we believe we must effectively use our
management resources. We believe this
will entail making capital investments in
areas of high profitability and growth
potential. We believe that we will be
able to maximize our corporate value by
allocating capital into these areas,
thereby balancing the risks that we
estimate may be involved against our
commitment to maintaining the soundness
of our operations.
Although our risk management has
focused on traditional areas that provide
a stable source of earnings derived from
our customer base, we believe that it is
necessary to further strengthen our risk
monitoring functions as we become more
involved in real estate-related finance
and investment banking activities that we
expect to become important sources of
profitability and growth over the
medium-to-long term.
We feel that the growth of a company
that focuses on profitability, soundness,
and growth potential is further promoted
by the management of risk capital under a
sound governance infrastructure.
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7. Corporate Governance
(1) Strengthening Corporate Governance
Since the June 1997 establishment of an
Advisory Board, which included
experienced and resourceful individuals
from outside the Company, ORIX has
strengthened its corporate governance
framework with the aim of objectively
determining whether its business
activities are emphasizing the interests
of its shareholders. In June 1998, we
introduced a Corporate Executive Officer
system to help separate strategic
decision-making functions from day-to-day
administrative operations. In June 1999,
ORIX reduced the number of members of the
Board of Directors, arranged for three
Advisory Board members to fill two
positions as independent directors and
one position as an advisor to the Board,
and phased out the Advisory Board. In
addition, the Nominating Committee and
the Compensation Committee were
established to operate as support units
for the Board of Directors.
In order to make a more effective
separation of roles and responsibilities
between the decision-making and
monitoring functions of the Board of
Directors and the executive function of
management, ORIX decided to adopt a
“Company with Committees” board model,
which became possible in April 2003 as a
result of a revision to the Commercial
Code of Japan.
The establishment of audit,
nominating, and compensation committees
under the Board of Directors is required
under this new structure. In addition,
ORIX has set up a Compliance Coordination
Office as an internal control system to
support the Audit Committee, which is
responsible for supervising ORIX’s
operations.
In compliance with the Commercial
Code, ORIX’s Audit Committee includes
three directors. Two of these directors
are considered outside directors under
the Commercial Code. The Audit Committee
receives quarterly performance reports
from the executive officer responsible
for the Accounting Department, reports
from the independent public auditor
concerning audits, and business summary
reports from the COO. It also receives
internal audit report results and other
reports related to internal control
systems from the executive officer
responsible for the Compliance
Coordination Office, which is a unit that
supports the committee. Moreover, the
Audit Committee nominates and empowers
its inside director member to conduct
operational
studies and report on the studies to the committee, and the committee also may instruct executive officers to present reports on the units for which they are responsible. The committee discusses the various reports and evaluates the performance of executive officers and the internal control system.
As stipulated in the Commercial
Code, the Nominating Committee is
authorized to nominate director
candidates as well as to participate in
the selection of executive officers.
As stipulated in the Commercial
Code, the Compensation Committee is
authorized to determine policies
regarding the remuneration of directors
and executive officers as well as the
monetary remuneration of each individual
director and executive officer.
At the meeting of the Board of
Directors following the Annual General
Meeting of Shareholders in June 2004,
ORIX added another outside director to
its Board, thus bringing the total number
of outside directors to five. With the
inclusion of the seven internal
directors, the Board has a total of 12
members.
ORIX is working to improve its
disclosure of information to investors
and the function of its investor
relations. In order to further improve
this function, we established a
Disclosure Committee that oversees the
management and dissemination of
information to the public.
(2) Compliance
We feel that compliance is a crucial
foundation for sound corporate governance
and we proactively implement rigorous
compliance programs.
In April 1989, when we changed our
name from Orient Leasing Co., Ltd., to
ORIX Corporation, we introduced an ORIX
Group Corporate Identity program that
specified Group Ideals, Group Management
Goals, and Group Action Principles. This
is the conceptual root of our compliance
programs.
As we neared the 21st century, we
articulated three concepts
in April 1998 that would
characterize our identity and operations
in the new century—pride, trust, and
respect—thereby extending the conceptual
scope of the ideals, management goals,
and action principles of the corporate
identity program. To foster pride, trust,
and respect throughout our operations, we
drafted our Corporate
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Action Principles and Employee Action Principles. These concepts and principles together form the basis of EC21, which is a program designed to ensure that ORIX strives to be an “Excellent Company” in the 21st century.
EC21 is the base of ORIX’s
compliance system. To effectively instill
the ideals articulated in EC21 throughout
its operations, ORIX established units
specializing in compliance promotion and,
in February 2002, prepared a compliance
manual. This manual includes action
guidelines that explain the spirit of
EC21 in concrete and specific terms. At
the same time, ORIX organized training
and other programs
to promote greater awareness of, and more attention to,
compliance among all the ORIX Group’s employees.
In fiscal 2003, ORIX began a
Compliance Program containing specific
compliance performance measures that
continues to be implemented throughout
the Company.
To quickly discover compliance
violations and prevent scandals before
they occur, we have established a
“Compliance Help Line,” to which
individuals can call anonymously, and
prepared a manual entitled Rules Related
to the Compliance Help Line to help
ensure the service is effective.
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DIRECTORS, EXECUTIVE OFFICERS, AND GROUP EXECUTIVES
DIRECTORS
From left to right: Yasuhiko Fujiki, Shunsuke Takeda, Yoshihiko Miyauchi
|
|
|
|
|||||
Hiroaki Nishina
|
Kenji Kajiwara | Takeshi Sato | Masaaki Yamamoto | |||||
|
|
|
|
 |
||||
Tatsuya Tamura
|
Akira Miyahara | Yoshinori Yokoyama | Paul Sheard | Hirotaka Takeuchi | ||||
Outside Director,
|
Outside Director, | Outside Director, | Outside Director, | Outside Director, | ||||
President,
|
Executive Advisor | Auditor, Industrial Revitalization | Managing Director & | Dean, Hitotsubashi University | ||||
Global Management
|
to the Board, Fuji | Corporation of Japan | Chief Economist Asia, | Graduate School of International | ||||
Institute Inc.
|
Xerox Co., Ltd. | Visiting Professor, | Lehman Brothers | Corporate Strategy | ||||
| Hitotsubashi University | ||||||||
| Graduate School of International | ||||||||
| Corporate Strategy |
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COMMITTEES
| EXECUTIVE OFFICERS | GROUP EXECUTIVES | |||||
Representative Executive Officer,
Chairman and
Chief Executive Officer Yoshihiko Miyauchi Representative Executive Officer, President and Chief Operating Officer Yasuhiko Fujiki Deputy President, Chief Financial Officer Shunsuke Takeda Corporate Planning Office, Treasury Department Corporate Executive Vice Presidents Hiroaki Nishina Real Estate Business Headquarters, President, ORIX Real Estate Corporation Kenji Kajiwara Tokyo Sales Headquarters, Asset Administration Department Hiroshi Nakajima Risk Management Headquarters, Receivables Administration Office |
Masaaki Tashiro Real Estate Finance Headquarters Yukio Yanase Responsible for Overseas Activities, Office of the President Corporate Senior Vice Presidents Takeshi Sato Chairman, ORIX USA Corporation Masahiro Matono OQL Headquarters Masaru Hattori Accounting Department, Corporate Planning Office Koichiro Muta Investment Banking Headquarters Nobuyuki Kobayashi Corporate Administration Department Akira Fukushima IT Business Headquarters, President, ORIX Computer Systems Corporation, President, ORIX Callcenter Corporation |
Executive Officers Hiroshi Nakamura Compliance Coordination Office Kozo Endo Business Organization Reform (As of June 29, 2004) Shintaro Agata Treasury Department Tetsuo Matsumoto Real Estate Finance Headquarters Tadao Saika District Sales Headquarters Hideaki Morita Kinki (Osaka) Sales Headquarters Eiji Mitani Administration Center, Sales Administration Department, Tokyo Sales Headquarters Yoshitaka Matsuno International Headquarters Masayuki Okamoto Investment Banking Headquarters |
Teruo Isogai President, ORIX Auto Leasing Corporation Tamio Umaki President, ORIX Rentec Corporation Yutaka Okazoe Deputy President, ORIX Real Estate Corporation Izumi Mizumori President, ORIX Life Insurance Corporation Yoshiyuki Yoshizumi Deputy President, ORIX Auto Leasing Corporation Tsutomu Matsuzaki President, Nittetsu Lease Co., Ltd., President, Nittetsu Leasing Auto Co., Ltd. |
(As of June 23, 2004)
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Table of Contents
THE NEW YORK STOCK EXCHANGE CORPORATE GOVERNANCE LISTING STANDARDS
Our ADRs have been listed on the New York Stock Exchange, the NYSE, since 1998. We are therefore required to comply with the NYSE’s new corporate governance listing standards, Section 303A.11, which were approved by the SEC in November 2003. As a foreign issuer, we are not required to follow several of the NYSE listing standards.
Our corporate governance practices
differ in certain significant respects
from those that U.S. companies must adopt
in order to maintain an NYSE listing and,
in accordance with Section 303A.11 of the
NYSE’s Listed Company Manual, we provide
a brief, general summary of such
differences.
The composition of our Board of
Directors and of the committees of our
board differs significantly in terms of
independence from the composition
requirements for boards and committees
that U.S. companies must satisfy in order
to maintain a NYSE listing. We are not
required to meet the NYSE’s independence
requirements for individuals on our Board
of Directors or our nominating,
compensation, and audit committees. Under
Japanese law, a majority of the
membership on our committees must be
“outside directors”—a Japanese law
concept that shares similarities with the
U.S. concept of “independent director.”
However, we are not required to include
on our Board of
Directors a majority of outside directors, nor are we required to compose our committees exclusively from outside directors. Five of our twelve directors are considered outside directors.
Under the Commercial Code of Japan,
an outside director is a director (i) who
does not execute the company’s business,
(ii) who has not before executed the
business of the company or its
subsidiaries in the capacity of director,
executive officer (shikkou-yaku),
manager, or employee, and (iii) who does
not execute the business of any
subsidiary of the company in the capacity
of director or executive officer of such
subsidiary or in the capacity of manager
or any other employee of the company or
any of its subsidiaries.
In addition to differences in
composition requirements for our board,
we are not required to:
| • | make publicly
available one or more documents that
summarize all aspects of our corporate
governance guidelines or prepare a
written code that states the objectives,
responsibilities, and performance
evaluation criteria in a manner that
satisfies the NYSE’s requirements; or |
|||
| • | adopt a code of business conduct and
ethics for our directors, officers, and
employees that addresses fully the topics
necessary to satisfy the NYSE’s
requirements. |
|||
ORIX Corporation
58
Table of Contents
FINANCIAL SECTION
CONTENTS
| 60 | Ten-Year Summary | |||
| 62 | Consolidated Balance Sheets | |||
| 64 | Consolidated Statements of Income | |||
| 65 | Consolidated Statements of Shareholders’ Equity | |||
| 66 | Consolidated Statements of Cash Flows | |||
| 67 | Notes to Consolidated Financial Statements | |||
67
|
1. | Significant Accounting and Reporting Policies | ||
75
|
2. | Acquisitions | ||
76
|
3. | Cash Flow Information | ||
76
|
4. | Investment in Direct Financing Leases | ||
77
|
5. | Investment in Operating Leases | ||
78
|
6. | Installment Loans | ||
78
|
7. | Allowance for Doubtful Receivables on Direct Financing Leases and Probable Loan Losses | ||
79
|
8. | Investment in Securities | ||
82
|
9. | Securitization Transactions | ||
84
|
10. | Business Transactions with Special Purpose Entities | ||
85
|
11. | Investment in Affiliates | ||
88
|
12. | Goodwill and Other Intangible Assets | ||
90
|
13. | Short-Term and Long-Term Debt | ||
92
|
14. | Deposits | ||
93
|
15. | Income Taxes | ||
97
|
16. | Pension Plans | ||
99
|
17. | Stock-Based Compensation | ||
100
|
18. | Accumulated Other Comprehensive Income (Loss) | ||
102
|
19. | Shareholders’ Equity | ||
103
|
20. | Brokerage Commissions and Net Gains on Investment Securities | ||
103
|
21. | Life Insurance Operations | ||
103
|
22. | Other Operations | ||
103
|
23. | Write-downs of Long-Lived Assets | ||
105
|
24. | Discontinued Operations | ||
105
|
25. | Per Share Data | ||
106
|
26. | Derivative Financial Instruments and Hedging | ||
107
|
27. | Significant Concentrations of Credit Risk | ||
108
|
28. | Estimated Fair Value of Financial Instruments | ||
110
|
29. | Commitments, Guarantees and Contingent Liabilities | ||
112
|
30. | Segment Information | ||
| 116 | Report of Independent Registered Public Accountants | |||
ORIX Corporation
59
Table of Contents
TEN-YEAR SUMMARY
ORIX Corporation and its Subsidiaries
| Millions of yen | ||||||||||||||||||||
| Years Ended March 31 | ||||||||||||||||||||
| 1995 | 1996 | 1997 | 1998 | 1999 | ||||||||||||||||
Financial Position |
||||||||||||||||||||
Investment in Direct Financing Leases |
¥ | 1,715,177 | ¥ | 1,913,836 | ¥ | 2,067,616 | ¥ | 2,186,022 | ¥ | 1,952,842 | ||||||||||
Installment Loans |
1,619,397 | 1,628,916 | 1,700,697 | 1,794,825 | 1,761,887 | |||||||||||||||
Investment in Operating Leases |
342,058 | 413,419 | 465,737 | 435,066 | 411,156 | |||||||||||||||
Investment in Securities |
278,807 | 345,935 | 434,488 | 500,449 | 576,206 | |||||||||||||||
Other Operating Assets |
42,162 | 55,161 | 58,193 | 65,838 | 73,345 | |||||||||||||||
Operating Assets |
¥ | 3.997,601 | ¥ | 4,357,267 | ¥ | 4,726,731 | ¥ | 4,982,200 | ¥ | 4,775,436 | ||||||||||
Allowance for Doubtful Receivables on Direct Financing Leases and Probable Loan Losses |
¥ | (47,400 | ) | ¥ | (81,886 | ) | ¥ | (117,567 | ) | ¥ | (145,741 | ) | ¥ | (132,606 | ) | |||||
Allowance/Investment in Direct Financing Leases and Installment Loans |
1.4 | % | 2.3 | % | 3.1 | % | 3.7 | % | 3.6 | % | ||||||||||
Short-Term Debt, Long-Term Debt and Deposits |
¥ | 3,755,538 | ¥ | 3,986,809 | ¥ | 4,217,334 | ¥ | 4,628,670 | ¥ | 4,274,280 | ||||||||||
Shareholders’ Equity |
¥ | 238,050 | ¥ | 276,251 | ¥ | 308,584 | ¥ | 313,821 | ¥ | 327,843 | ||||||||||
Total Assets |
¥ | 4,405,556 | ¥ | 4,751,758 | ¥ | 5,089,975 | ¥ | 5,574,309 | ¥ | 5,347,636 | ||||||||||
Revenues and Expenses |
||||||||||||||||||||
Total Revenues |
¥ | 362,702 | ¥ | 382,603 | ¥ | 428,294 | ¥ | 507,143 | ¥ | 593,941 | ||||||||||
Interest Expense |
¥ | 167,937 | ¥ | 138,394 | ¥ | 130,743 | ¥ | 142,177 | ¥ | 140,846 | ||||||||||
Selling, General and Administrative Expenses |
¥ | 58,561 | ¥ | 61,569 | ¥ | 70,902 | ¥ | 79,671 | ¥ | 82,395 | ||||||||||
Income before Discontinued Operation, Extraordinary Gain, Cumulative Effect of a Change in
Accounting Principle and Income Taxes |
¥ | 33,629 | ¥ | 35,027 | ¥ | 36,889 | ¥ | 38,412 | ¥ | 27,315 | ||||||||||
Income from continuing operations |
¥ | 17,072 | ¥ | 18,003 | ¥ | 19,044 | ¥ | 23,731 | ¥ | 25,621 | ||||||||||
Net Income |
¥ | 17,072 | ¥ | 18,003 | ¥ | 19,044 | ¥ | 23,731 | ¥ | 25,621 | ||||||||||
Return on Assets |
0.39 | % | 0.39 | % | 0.39 | % | 0.45 | % | 0.47 | % | ||||||||||
Return on Equity |
7.29 | % | 7.00 | % | 6.51 | % | 7.63 | % | 7.99 | % | ||||||||||
Per Share Data: (yen) |
||||||||||||||||||||
Net income (basic earnings per share) |
¥ | 219.31 | ¥ | 231.27 | ¥ | 244.64 | ¥ | 305.33 | ¥ | 330.43 | ||||||||||
Net income (diluted earnings per share) |
¥ | 219.31 | ¥ | 231.27 | ¥ | 244.64 | ¥ | 305.33 | ¥ | 330.43 | ||||||||||
Shareholders’ equity per share |
¥ | 3,058.03 | ¥ | 3,548.77 | ¥ | 3,964.16 | ¥ | 4,041.87 | ¥ | 4,232.02 | ||||||||||
Operations |
||||||||||||||||||||
Direct Financing Leases: |
||||||||||||||||||||
New receivables added |
¥ | 888,931 | ¥ | 1,022,267 | ¥ | 1,050,849 | ¥ | 1,227,719 | ¥ | 1,076,387 | ||||||||||
New equipment acquisition |
¥ | 731,632 | ¥ | 847,774 | ¥ | 886,806 | ¥ | 1,093,519 | ¥ | 913,221 | ||||||||||
Installment Loans: |
||||||||||||||||||||
New loans added |
¥ | 539,145 | ¥ | 503,627 | ¥ | 593,074 | ¥ | 715,030 | ¥ | 706,758 | ||||||||||
Operating Leases: |
||||||||||||||||||||
New equipment acquisitions |
¥ | 97,895 | ¥ | 95,802 | ¥ | 92,932 | ¥ | 98,566 | ¥ | 92,272 | ||||||||||
Investment In Securities: |
||||||||||||||||||||
New securities added |
¥ | 75,551 | ¥ | 114,199 | ¥ | 135,324 | ¥ | 217,225 | ¥ | 302,035 | ||||||||||
Other Operating Transactions: |
||||||||||||||||||||
New assets added |
¥ | 8,692 | ¥ | 26,617 | ¥ | 24,336 | ¥ | 35,898 | ¥ | 39,733 | ||||||||||
Number of Employees |
6,723 | 6,991 | 7,594 | 8,203 | 9,037 | |||||||||||||||
ORIX Corporation
60
Table of Contents
| Millions of yen | ||||||||||||||||||||
| Years Ended March 31 | ||||||||||||||||||||
| 2000 | 2001 | 2002 | 2003 | 2004 | ||||||||||||||||
Financial Position |
||||||||||||||||||||
Investment in Direct Financing Leases |
¥ | 1,744,953 | ¥ | 1,657,709 | ¥ | 1,658,669 | ¥ | 1,572,308 | ¥ | 1,453,575 | ||||||||||
Installment Loans |
1,791,439 | 1,846,511 | 2,273,280 | 2,288,039 | 2,234,940 | |||||||||||||||
Investment in Operating Leases |
397,576 | 451,171 | 474,491 | 529,044 | 536,702 | |||||||||||||||
Investment in Securities |
758,381 | 942,158 | 861,336 | 677,435 | 551,928 | |||||||||||||||
Other Operating Assets |
68,943 | 98,175 | 245,897 | 76,343 | 72,049 | |||||||||||||||
Operating Assets |
¥ | 4,761,292 | ¥ | 4,995,724 | ¥ | 5,513,673 | ¥ | 5,143,169 | ¥ | 4,849,194 | ||||||||||
Allowance for Doubtful Receivables on Direct Financing Leases and Probable Loan Losses |
¥ | (136,939 | ) | ¥ | (141,077 | ) | ¥ | (152,887 | ) | ¥ | (133,146 | ) | ¥ | (128,020 | ) | |||||
Allowance/Investment in Direct Financing Leases and Installment Loans |
3.9 | % | 4.0 | % | 3.9 | % | 3.4 | % | 3.5 | % | ||||||||||
Short-Term Debt, Long-Term Debt and Deposits |
¥ | 4,010,468 | ¥ | 4,070,545 | ¥ | 4,679,566 | ¥ | 4,239,514 | ¥ | 3,859,180 | ||||||||||
Shareholders’ Equity |
¥ | 425,671 | ¥ | 461,323 | ¥ | 502,508 | ¥ | 505,458 | ¥ | 564,047 | ||||||||||
Total Assets |
¥ | 5,341,542 | ¥ | 5,591,311 | ¥ | 6,350,219 | ¥ | 5,931,067 | ¥ | 5,624,957 | ||||||||||
Revenues and Expenses |
||||||||||||||||||||
Total Revenues |
¥ | 616,513 | ¥ | 586,149 | ¥ | 657,294 | ¥ | 681,820 | ¥ | 720,773 | ||||||||||
Interest Expense |
¥ | 115,038 | ¥ | 109,289 | ¥ | 90,279 | ¥ | 71,846 | ¥ | 60,597 | ||||||||||
Selling, General and Administrative Expenses |
¥ | 90,961 | ¥ | 101,156 | ¥ | 128,316 | ¥ | 144,271 | ¥ | 161,835 | ||||||||||
Income before Discontinued Operation, Extraordinary Gain, Cumulative Effect of a Change in
Accounting Principle and Income Taxes |
¥ | 52,048 | ¥ | 59,236 | ¥ | 72,306 | ¥ | 45,179 | ¥ | 102,157 | ||||||||||
Income from continuing operations |
¥ | 30,642 | ¥ | 34,157 | ¥ | 39,706 | ¥ | 24,433 | ¥ | 50,619 | ||||||||||
Net Income |
¥ | 30,642 | ¥ | 34,157 | ¥ | 40,269 | ¥ | 30,243 | ¥ | 54,020 | ||||||||||
Return on Assets |
0.57 | % | 0.62 | % | 0.67 | % | 0.49 | % | 0.93 | % | ||||||||||
Return on Equity |
8.13 | % | 7.70 | % | 8.36 | % | 6.00 | % | 10.10 | % | ||||||||||
Per Share Data: (yen) |
||||||||||||||||||||
Net income (basic earnings per share) |
¥ | 385.27 | ¥ | 417.77 | ¥ | 489.19 | ¥ | 361.44 | ¥ | 645.52 | ||||||||||
Net income (diluted earnings per share) |
¥ | 377.02 | ¥ | 400.99 | ¥ | 467.11 | ¥ | 340.95 | ¥ | 607.52 | ||||||||||
Shareholders’ equity per share |
¥ | 5,199.12 | ¥ | 5,646.11 | ¥ | 6,007.52 | ¥ | 6,039.43 | ¥ | 6,739.64 | ||||||||||
Operations |
||||||||||||||||||||
Direct Financing Leases: |
||||||||||||||||||||
New receivables added |
¥ | 1,073,074 | ¥ | 842,396 | ¥ | 1,083,070 | ¥ | 1,000,896 | ¥ | 801,787 | ||||||||||
New equipment acquisition |
¥ | 905,898 | ¥ | 723,330 | ¥ | 980,379 | ¥ | 895,848 | ¥ | 713,240 | ||||||||||
Installment Loans: |
||||||||||||||||||||
New loans added |
¥ | 807,477 | ¥ | 740,639 | ¥ | 1,340,400 | ¥ | 1,268,170 | ¥ | 1,124,276 | ||||||||||
Operating Leases: |
||||||||||||||||||||
New equipment acquisitions |
¥ | 101,020 | ¥ | 143,158 | ¥ | 146,203 | ¥ | 173,567 | ¥ | 189,737 | ||||||||||
Investment In Securities: |
||||||||||||||||||||
New securities added |
¥ | 333,249 | ¥ | 397,218 | ¥ | 348,347 | ¥ | 231,294 | ¥ | 122,066 | ||||||||||
Other Operating Transactions: |
||||||||||||||||||||
New assets added |
¥ | 70,443 | ¥ | 128,984 | ¥ | 204,121 | ¥ | 116,736 | ¥ | 186,265 | ||||||||||
Number of Employees |
9,503 | 9,529 | 11,271 | 11,833 | 12,481 | |||||||||||||||
Notes:
|
1. | In fiscal 1998, new loans and new securities added included increases of ¥18,999 million and ¥34,189 million, respectively, as a result of the acquisition of ORIX Trust and Banking Corporation. In fiscal 2002, new receivables added and new equipment acquisitions of direct financing leases, new loans added and new securities added Included Increases of ¥248,101 million, ¥252,436 million, ¥5,841 million and ¥1,042 million, respectively, as a result of the acquisition of IFCO Inc. In addition, new loans added included ¥132,127 million in housing loans that were purchased from Asahi Mutual Life Company in fiscal 202. In fiscal 2003. new receivables added arid new equipment acquisitions of direct financing leases included increases of ¥112,007 million, ¥112,605 million, respectively, as a result of the acquisition of Nittetsu Lease Co., Ltd. | ||||
| 2. | In fiscal 2001, the Company implemented a 1.2-for-1 stock split on May 19.2000. Per share data has been adjusted for this stock splits retroactively. | |||||
| 3. | As a result of the recording “Discontinued Operations” in fiscal 2004 in accordance with FASB Statement No. 144 (“Accounting for Impairment or Disposal of Long-Lived Assets”), certain amounts in the prior years have been reclassified retroactively. | |||||
ORIX Corporation
61
Table of Contents
CONSOLIDATED BALANCE SHEETS
ORIX Corporation and its Subsidiaries As of March 31, 2003 and 2004
| Millions of | ||||||||||||
| Millions of yen | U.S. dollars | |||||||||||
| ASSETS | 2003 | 2004 | 2004 | |||||||||
Cash and Cash Equivalents |
¥ | 204,677 | ¥ | 152,235 | $ | 1,440 | ||||||
Restricted Cash |
18,671 | 35,621 | 337 | |||||||||
Time Deposits |
1,184 | 677 | 6 | |||||||||
Investment in Direct Financing Leases |
1,572,308 | 1,453,575 | 13,753 | |||||||||
Installment Loans |
2,288,039 | 2,234,940 | 21,146 | |||||||||
Allowance for Doubtful Receivables on Direct
Financing Leases
and Probable Loan Losses |
(133,146 | ) | (128,020 | ) | (1,211 | ) | ||||||
Investment in Operating Leases |
529,044 | 536,702 | 5,078 | |||||||||
Investment in Securities |
677,435 | 551,928 | 5,222 | |||||||||
Other Operating Assets |
76,343 | 72,049 | 682 | |||||||||
Investment in Affiliates |
144,974 | 157,196 | 1,487 | |||||||||
Other Receivables |
146,650 | 142,711 | 1,350 | |||||||||
Inventories |
100,893 | 121,441 | 1,149 | |||||||||
Prepaid Expenses |
41,494 | 44,139 | 418 | |||||||||
Office Facilities |
77,043 | 71,196 | 674 | |||||||||
Other Assets |
185,458 | 178,567 | 1,690 | |||||||||
| ¥ | 5,931,067 | ¥ | 5,624,957 | $ | 53,221 | |||||||
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
ORIX Corporation
62
Table of Contents
| Millions of | ||||||||||||||
| Millions of yen | U.S. dollars | |||||||||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | 2003 | 2004 | 2004 | |||||||||||
| Short-Term Debt | ¥ | 1,120,434 | ¥ | 903,916 | $ | 8,553 | ||||||||
| Deposits | 262,467 | 292,545 | 2,768 | |||||||||||
| Trade Notes, Accounts Payable and Other Liabilities | 265,264 | 279,852 | 2,647 | |||||||||||
| Accrued Expenses | 82,012 | 96,668 | 914 | |||||||||||
| Policy Liabilities | 608,553 | 592,782 | 5,609 | |||||||||||
| Income Taxes: | ||||||||||||||
Current |
34,869 | 31,703 | 299 | |||||||||||
Deferred |
116,031 | 122,234 | 1,157 | |||||||||||
| Deposits from Lessees | 79,366 | 78,491 | 743 | |||||||||||
| Long-Term Debt | 2,856,613 | 2,662,719 | 25,194 | |||||||||||
Total liabilities |
5,425,609 | 5,060,910 | 47,884 | |||||||||||
| Commitments and Contingent Liabilities | ||||||||||||||
| Shareholders’ Equity: | ||||||||||||||
Common stock: |
||||||||||||||
Authorized |
259,000,000 shares | |||||||||||||
Issued |
84,365,914 shares in 2003 and |
|||||||||||||
| 84,366,314 shares in 2004 | 52,067 | 52,068 | 493 | |||||||||||
| Additional paid-in capital | 70,002 | 70,015 | 662 | |||||||||||
| Retained Earnings: | ||||||||||||||
Legal reserve |
2,220 | 2,220 | 21 | |||||||||||
Retained earnings |
429,163 | 481,091 | 4,552 | |||||||||||
| Accumulated other comprehensive loss | (39,747 | ) | (33,141 | ) | (313 | ) | ||||||||
| Treasury stack, at cost: | ||||||||||||||
672,905 shares in 2003 and 675,307 shares
in 2004 |
(8,247 | ) | (8,206 | ) | (78 | ) | ||||||||
| 505,458 | 564,047 | 5,337 | ||||||||||||
| ¥ | 5,931,067 | ¥ | 5,624,957 | $ | 53,221 | |||||||||
ORIX Corporation
63
Table of Contents
CONSOLIDATED STATEMENTS OF INCOME
ORIX Corporation and its
Subsidiaries For the Years Ended March 31, 2002, 2003 and 2004
| Millions of | ||||||||||||||||
| Millions of yen | U.S. dollars | |||||||||||||||
| 2002 | 2003 | 2004 | 2004 | |||||||||||||
Revenues: |
||||||||||||||||
Direct financing leases |
¥ | 121,914 | ¥ | 122,928 | ¥ | 112,372 | $ | 1,063 | ||||||||
Operating leases |
118,954 | 122,526 | 130,488 | 1,235 | ||||||||||||
Interest on loans and investment securities |
121,962 | 131,590 | 116,744 | 1,105 | ||||||||||||
Brokerage commissions and net gains on
investment securities |
18,367 | 10,857 | 26,025 | 246 | ||||||||||||
Life insurance premiums and related investment income |
152,333 | 138,511 | 134,212 | 1,270 | ||||||||||||
Residential condominium sales |
58,078 | 71,165 | 98,034 | 928 | ||||||||||||
Gains on sales of real estate under operating leases |
685 | 3,257 | 9,116 | 86 | ||||||||||||
Interest income on deposits |
1,374 | 526 | 884 | 8 | ||||||||||||
Other operating revenues |
63,627 | 80,460 | 92,898 | 879 | ||||||||||||
Total revenues |
657,294 | 681,820 | 720,773 | 6,820 | ||||||||||||
Expenses: |
||||||||||||||||
Interest expense |
90,279 | 71,846 | 60,597 | 573 | ||||||||||||
Depreciation—operating leases |
76,681 | 79,993 | 83,919 | 794 | ||||||||||||
Life insurance costs |
139,786 | 125,684 | 119,653 | 1,132 | ||||||||||||
Costs of residential condominium sales |
49,517 | 60,769 | 88,679 | 839 | ||||||||||||
Other operating expenses |
29,614 | 41,359 | 52,561 | 497 | ||||||||||||
Selling, general and administrative expenses |
126,316 | 144,271 | 161,835 | 1,532 | ||||||||||||
Provision for doubtful receivables and probable loan losses |
51,367 | 54,706 | 49,592 | 469 | ||||||||||||
Write-downs of long-lived assets |
2,716 | 50,682 | 12,345 | 117 | ||||||||||||
Write-downs of securities |
19,742 | 14,325 | 5,240 | 50 | ||||||||||||
Foreign currency transaction loss (gain), net |
(1,360 | ) | 1,211 | 1,577 | 15 | |||||||||||
Total expenses |
584,658 | 644,846 | 635,998 | 6,018 | ||||||||||||
Operating Income |
72,636 | 36,974 | 84,775 | 802 | ||||||||||||
Equity in Net Income (Loss) of Affiliates |
(449 | ) | 6,203 | 17,924 | 170 | |||||||||||
Gain (Loss) on Sales of Affiliates |
119 | 2,002 | (542 | ) | (5 | ) | ||||||||||
Income before Discontinued Operations, Extraordinary Gain,
Cumulative Effect of a Change in Accounting Principle and
Income Taxes |
72,306 | 45,179 | 102,157 | 967 | ||||||||||||
Provision for Income Taxes |
32,600 | 20,746 | 51,538 | 488 | ||||||||||||
Income from continuing operations |
39,706 | 24,433 | 50,619 | 479 | ||||||||||||
Discontinued operations |
||||||||||||||||
Income from discontinued operations, net (including gains
on sales of ¥3,747 million in fiscal 2004) |
733 | 1,109 | 4,713 | 45 | ||||||||||||
Provision for income taxes |
(303 | ) | (450 | ) | (1,921 | ) | (19 | ) | ||||||||
Discontinued operations, net of applicable tax effect |
430 | 659 | 2,792 | 26 | ||||||||||||
Income before extraordinary gain and cumulative effect of a
change in accounting principle |
40,136 | 25,092 | 53,411 | 505 | ||||||||||||
Extraordinary Gain, net of applicable tax effect |
— | 3,214 | 609 | 6 | ||||||||||||
Cumulative Effect of a Change in Accounting Principle,
net of applicable tax effect |
133 | 1,937 | — | — | ||||||||||||
Net Income |
¥ | 40,269 | ¥ | 30,243 | ¥ | 54,020 | $ | 511 | ||||||||
| U.S. | ||||||||||||||||
| Yen | dollars | |||||||||||||||
Amounts per Share of Common Stock: |
||||||||||||||||
Basic: |
||||||||||||||||
Income from continuing operations |
¥ | 482.35 | ¥ | 292.00 | ¥ | 604.88 | $ | 5.72 | ||||||||
Discontinued Operations |
5.22 | 7.88 | 33.37 | 0.32 | ||||||||||||
Extraordinary Gain |
— | 38.41 | 7.27 | 0.07 | ||||||||||||
Cumulative Effect of a Change in Accounting Principle |
1.62 | 23.15 | — | — | ||||||||||||
Net Income |
489.19 | 361.44 | 645.52 | 6.11 | ||||||||||||
Diluted: |
||||||||||||||||
Income from continuing operations |
460.59 | 275.63 | 569.33 | 5.39 | ||||||||||||
Discontinued Operations |
4.98 | 7.41 | 31.35 | 0.30 | ||||||||||||
Extraordinary Gain |
— | 36.14 | 6.84 | 0.06 | ||||||||||||
Cumulative Effect of a Change in Accounting Principle |
1.54 | 21.77 | — | — | ||||||||||||
Net Income |
467.11 | 340.95 | 607.52 | 5.75 | ||||||||||||
Cash Dividends |
15.00 | 15.00 | 25.00 | 0.24 | ||||||||||||
The accompanying notes to consolidated financial statements are an integral
part of these statements.
ORIX Corporation
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
ORIX Corporation and its Subsidiaries For the Years Ended March 31, 2002, 2003 and 2004
| Millions of | ||||||||||||||||
| Millions of yen | U.S. dollars | |||||||||||||||
| 2002 | 2003 | 2004 | 2004 | |||||||||||||
Common Stock: |
||||||||||||||||
Beginning balance |
¥ | 41,820 | ¥ | 51,854 | ¥ | 52,067 | $ | 493 | ||||||||
Common stock issued in public and private offering |
9,657 | — | — | — | ||||||||||||
Exercise of warrants and stock acquisition rights |
377 | 213 | 1 | 0 | ||||||||||||
Ending balance |
51,854 | 52,067 | 52,068 | 493 | ||||||||||||
Additional Paid-in Capital: |
||||||||||||||||
Beginning balance |
59,885 | 69,823 | 70,002 | 662 | ||||||||||||
Value ascribed to warrants attached to 0.64% bonds issued |
141 | — | — | — | ||||||||||||
Common stock issued in public and private offering |
9,223 | — | — | — | ||||||||||||
Exercise of warrants, stock acquisition rights and stock
options |
376 | 211 | 8 | 0 | ||||||||||||
Common stock issued for acquisitions of
minority interests of subsidiaries |
198 | — | — | — | ||||||||||||
Other, net |
— | (32 | ) | 5 | 0 | |||||||||||
Ending balance |
69,823 | 70,002 | 70,015 | 662 | ||||||||||||
Legal Reserve: |
||||||||||||||||
Beginning balance |
2,090 | 2,220 | 2,220 | 21 | ||||||||||||
Transfer from retained earnings |
130 | — | — | — | ||||||||||||
Ending balance |
2,220 | 2,220 | 2,220 | 21 | ||||||||||||
Retained Earnings: |
||||||||||||||||
Beginning balance |
361,262 | 400,175 | 429,163 | 4,061 | ||||||||||||
Cash dividends |
(1,226 | ) | (1,255 | ) | (2,092 | ) | (20 | ) | ||||||||
Transfer to legal reserve |
(130 | ) | — | — | — | |||||||||||
Net income |
40,269 | 30,243 | 54,020 | 511 | ||||||||||||
Ending balance |
400,175 | 429,163 | 481,091 | 4,552 | ||||||||||||
Accumulated Other Comprehensive Income (Loss): |
||||||||||||||||
Beginning balance |
4,552 | (13,440 | ) | (39,747 | ) | (376 | ) | |||||||||
Net cumulative effect of adopting FASB Statement No. 133 |
(8,400 | ) | — | — | — | |||||||||||
Net change of unrealized gains on investment in securities |
(19,588 | ) | (12,839 | ) | 23,131 | 219 | ||||||||||
Net change of minimum pension liability adjustments |
(2,150 | ) | 2,652 | (3,785 | ) | (36 | ) | |||||||||
Net change of foreign currency translation adjustments |
10,308 | (15,119 | ) | (15,710 | ) | (148 | ) | |||||||||
Net change of unrealized losses on derivative instruments |
1,838 | (1,001 | ) | 2,970 | 28 | |||||||||||
Ending balance |
(13,440 | ) | (39,747 | ) | (33,141 | ) | (313 | ) | ||||||||
Treasury
Stock: |
||||||||||||||||
Beginning balance |
(8,286 | ) | (8,124 | ) | (8,247 | ) | (78 | ) | ||||||||
Exercise of stock options |
219 | 8 | 202 | 2 | ||||||||||||
Other, net |
(57 | ) | (131 | ) | (161 | ) | (2 | ) | ||||||||
Ending balance |
(8,124 | ) | (8,247 | ) | (8,206 | ) | (78 | ) | ||||||||
Total Shareholders’ Equity |
||||||||||||||||
Beginning balance |
461,323 | 502,508 | 505,458 | 4,783 | ||||||||||||
Increase, net |
41,185 | 2,950 | 58,589 | 554 | ||||||||||||
Ending balance |
¥ | 502,508 | ¥ | 505,458 | ¥ | 564,047 | $ | 5,337 | ||||||||
Summary of Comprehensive Income: |
||||||||||||||||
Net income |
¥ | 40,269 | ¥ | 30,243 | ¥ | 54,020 | $ | 511 | ||||||||
Other comprehensive income (loss) |
(17,992 | ) | (26,307 | ) | 6,606 | 63 | ||||||||||
Comprehensive income |
¥ | 22,277 | ¥ | 3,936 | ¥ | 60,626 | $ | 574 | ||||||||
The
accompanying notes to consolidated financial statements are an integral part
of these statements.
ORIX Corporation
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CONSOLIDATED STATEMENTS OF CASH FLOWS
ORIX Corporation and its Subsidiaries For the Years Ended March 31, 2002, 2003 and 2004
| Millions of | ||||||||||||||||
| Millions of yen | U.S. dollars | |||||||||||||||
| 2002 | 2003 | 2004 | 2004 | |||||||||||||
Cash Flows from Operating Activities: |
||||||||||||||||
Net Income |
¥ | 40,269 | ¥ | 30,243 | ¥ | 54,020 | $ | 511 | ||||||||
Adjustments to reconcile net income to net cash provided by
operating activities: |
||||||||||||||||
Depreciation and amortization |
117,019 | 118,097 | 121,530 | 1,150 | ||||||||||||
Provision for doubtful receivables and probable loan losses |
51,367 | 54,706 | 49,592 | 469 | ||||||||||||
Increase (decrease) in policy liabilities |
40,777 | 5,889 | (15,771 | ) | (149 | ) | ||||||||||
Deferred tax provision (benefit) |
17,530 | (23,222 | ) | (2,881 | ) | (27 | ) | |||||||||
Gains from securitization transactions |
(9,235 | ) | (9,649 | ) | (446 | ) | (4 | ) | ||||||||
Equity in net (income) loss of affiliates |
449 | (6,203 | ) | (17,924 | ) | (170 | ) | |||||||||
(Gain) loss on sales of affiliates |
(119 | ) | (2,002 | ) | 542 | 5 | ||||||||||
Extraordinary gain |
— | (3,214 | ) | (609 | ) | (6 | ) | |||||||||
Cumulative
effect of a change in accounting principle |
(133 | ) | (1,937 | ) | — | — | ||||||||||
Gains on sales of available-for-sale securities |
(13,795 | ) | (7,588 | ) | (8,728 | ) | (82 | ) | ||||||||
Gains on sales of real estate under operating lease |
(685 | ) | (3,257 | ) | (9,116 | ) | (86 | ) | ||||||||
Write-downs of long-lived assets |
2,716 | 50,682 | 12,345 | 117 | ||||||||||||
Write-downs of securities |
19,742 | 14,325 | 5,240 | 50 | ||||||||||||
Decrease (increase) in restricted cash |
(2,865 | ) | 1,195 | (17,393 | ) | (165 | ) | |||||||||
Decrease (increase) in inventories |
2,133 | (21,824 | ) | (18,197 | ) | (172 | ) | |||||||||
Increase in prepaid expenses |
(9,255 | ) | (2,975 | ) | (1,974 | ) | (19 | ) | ||||||||
Increase
(decrease) in accrued expenses |
223 | (2,370 | ) | 7,481 | 71 | |||||||||||
Increase in deposits from lessees |
8,464 | 4,303 | 683 | 6 | ||||||||||||
Other, net |
(6,967 | ) | 15,021 | (5,582 | ) | (53 | ) | |||||||||
Net cash provided by operating activities |
257,635 | 210,150 | 152,812 | 1,446 | ||||||||||||
Cash Flows from Investing Activities: |
||||||||||||||||
Purchases of lease equipment |
(838,105 | ) | (923,483 | ) | (873,248 | ) | (8,262 | ) | ||||||||
Principal payments received under direct financing leases |
768,923 | 742,183 | 731,702 | 6,923 | ||||||||||||
Net proceeds from securitization of lease and loan receivables |
258,926 | 239,050 | 35,704 | 338 | ||||||||||||
Installment loans made to customers |
(1,334,532 | ) | (1,214,672 | ) | (1,130,986 | ) | (10,701 | ) | ||||||||
Principal
collected on installment loans |
865,598 | 1,071,841 | 1,092,698 | 10,339 | ||||||||||||
Proceeds from sales of operating lease assets |
39,921 | 62,323 | 116,531 | 1,103 | ||||||||||||
Investment in and dividends received from affiliates, net |
(20,457 | ) | (23,208 | ) | 5,822 | 55 | ||||||||||
Proceeds
from sales of investments in affiliates,
including proceeds from a sale of related option |
815 | 2,232 | — | — | ||||||||||||
Purchases of available-for-sale securities |
(289,055 | ) | (193,580 | ) | (90,527 | ) | (857 | ) | ||||||||
Proceeds from sales of available-for-sale securities |
325,758 | 264,021 | 164,860 | 1,560 | ||||||||||||
Maturities of available-for-sale securities |
67,290 | 95,187 | 88,601 | 838 | ||||||||||||
Purchases of other securities |
(50,243 | ) | (23,674 | ) | (32,707 | ) | (309 | ) | ||||||||
Proceeds from sales of other securities |
6,717 | 21,413 | 12,648 | 120 | ||||||||||||
Purchases of other operating assets |
(119,700 | ) | (2,847 | ) | (8,966 | ) | (85 | ) | ||||||||
Proceeds from sales of other operating assets |
1,841 | 63,596 | 10,468 | 99 | ||||||||||||
Net decrease in call loans |
9,500 | — | — | — | ||||||||||||
Acquisitions of subsidiaries, net of cash acquired |
3,846 | (13,669 | ) | (8,861 | ) | (84 | ) | |||||||||
Sales of subsidiaries, net of cash disposed |
552 | 36,469 | 24 | 0 | ||||||||||||
Other, net |
(3,306 | ) | (20,232 | ) | 10,215 | 96 | ||||||||||
Net cash provided by (used in) investing activities |
(305,711 | ) | 182,950 | 123,978 | 1,173 | |||||||||||
Cash Flows from Financing Activities: |
||||||||||||||||
Repayment of short-term debt, net |
(171,114 | ) | (122,365 | ) | (94,192 | ) | (891 | ) | ||||||||
Proceeds from (repayment of) commercial paper, net |
101,279 | (485,288 | ) | (106,712 | ) | (1,010 | ) | |||||||||
Proceeds from long-term debt |
975,220 | 811,334 | 811,099 | 7,674 | ||||||||||||
Repayment of long-term debt |
(729,593 | ) | (776,959 | ) | (971,619 | ) | (9,193 | ) | ||||||||
Net increase in deposits due to customers |
46,929 | 37,224 | 30,078 | 285 | ||||||||||||
Issuance of common stock |
19,315 | 392 | 8 | 0 | ||||||||||||
Dividends paid |
(1,226 | ) | (1,255 | ) | (2,092 | ) | (20 | ) | ||||||||
Net increase (decrease) in call money |
5,000 | (5,000 | ) | 5,000 | 47 | |||||||||||
Other, net |
306 | (123 | ) | 146 | 2 | |||||||||||
Net cash provided by (used in) financing activities |
246,116 | (542,040 | ) | (328,284 | ) | (3,106 | ) | |||||||||
Effect of Exchange Rate Changes on Cash and Cash Equivalents |
1,297 | (1,131 | ) | (948 | ) | (10 | ) | |||||||||
Net Increase (Decrease) in Cash and Cash Equivalents |
199,337 | (150,071 | ) | (52,442 | ) | (497 | ) | |||||||||
Cash and Cash Equivalents at Beginning of Year |
155,411 | 354,748 | 204,677 | 1,937 | ||||||||||||
Cash and Cash Equivalents at End of Year |
¥ | 354,748 | ¥ | 204,677 | ¥ | 152,235 | $ | 1,440 | ||||||||
The accompanying notes to consolidated financial statements are an integral
part of these statements.
ORIX Corporation
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ORIX Corporation and its Subsidiaries
1. Significant Accounting and Reporting Policies
In preparing the accompanying consolidated financial statements, ORIX
Corporation (the “Company”) and its subsidiaries have complied with accounting
principles generally accepted in the United States of America (“US GAAP”),
modified for the accounting for stock splits (see (o)). Significant accounting
and reporting policies are summarized as follows:
(a) Basis of presenting financial statements
The Company and its domestic subsidiaries maintain their books in
conformity with Japanese income tax laws and accounting practices, which
differ in certain respects from accounting principles generally accepted in
the United States of America.
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States
of America and, therefore, reflect certain adjustments to the Company’s book
and records. The principal adjustments relate to accounting for direct
financing leases, accounting for impairment of long-lived assets and
long-lived assets to be disposed of, use of the straight-line method of
depreciation for operating lease equipment, deferral of life insurance policy
acquisition cost and calculation of policy liabilities, accounting for
derivative instruments and hedging activities, accounting for goodwill and
intangible assets resulting from business combinations, and a reflection of
the income tax effect on such adjustments.
(b) Principles of consolidation
The consolidated financial statements include the accounts of the Company
and all of its subsidiaries. Investments in affiliates, where the Company has
the ability to exercise significant influence by way of 20%–50% ownership or
other means, are accounted for by using the equity method. A lag period of up
to three months is used on a consistent basis when considered necessary and
appropriate for recognizing the results of subsidiaries and affiliates.
The consolidated financial statements also include variable interest
entities to which the Company and its subsidiaries are primary beneficiaries
pursuant to FASB Interpretation No. 46 (revised
December 2003) (FIN 46(R) (“Consolidation of Variable Interest Entities”).
All significant intercompany accounts and transactions have been eliminated
in consolidation.
(c) Use of estimates
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. The Company has identified seven areas where it
believes assumptions and estimates are particularly critical to the financial
statements. These are the determination of the allowance for doubtful
receivables on direct financing leases and probable loan losses (see (g)), the
determination of impairment of investment in securities (see (i)), the
determination of impairment of long-lived assets (see (h)) and goodwill (see
(w)), the determination of valuation allowance for deferred tax assets (see
(j)), the determination of benefit obligations and net periodic pension cost
(see (m)), the determination and periodic reassessment of the unguaranteed
residual value for direct financing leases and operating leases (see (e)), and
the determination and reassessment of insurance policy liabilities and
deferred policy acquisition costs (see (f)).
(d) Foreign currencies translation
The Company and its subsidiaries maintain their accounting records in their
respective functional currency.
Transactions in foreign currencies are recorded in the entity’s
functional currency based on the prevailing exchange rates on the transaction
date.
The financial statements of foreign subsidiaries and affiliates are
translated into Japanese yen by applying the exchange rates in effect at the
end of each fiscal year to all assets and liabilities. Income and expenses are
translated at the average rates of exchange prevailing during the fiscal year.
The currencies in which the operations of the foreign subsidiaries and
affiliates are conducted are regarded as the functional currencies of these
companies. Foreign currency translation adjustments reflected in accumulated
other comprehensive income (loss) in shareholders’ equity are from the
translation of foreign currency financial statements into Japanese yen.
(e) Recognition of revenues
Direct financing leases—Direct financing leases consist of full-payout
leases for various equipment types, including office equipment, industrial
machinery and transportation equipment (aircraft, vessels and automobiles).
The excess of aggregate lease rentals plus the estimated unguaranteed residual
value over the cost of the leased equipment constitutes the unearned lease
income to be taken into income over the lease term. The estimated residual
values represent estimated proceeds from the disposition of equipment at the
time the lease is terminated. Estimates of unguaranteed residual values are
based on current market values of used equipment and estimates of when and how
much equipment will become obsolete. Certain direct lease origination costs
(“initial direct costs”) are being deferred and amortized over the lease term
as a yield adjustment. The
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unamortized balance of initial direct costs is reflected as a component of
investment in direct financing leases. Amortization of unearned lease income
and initial direct cost is computed using the interest method.
Installment loans—Interest income on installment loans is recognized on an
accrual basis. Certain direct loan origination costs, offset by loan
origination fees (“loan origination costs, net”), are being deferred and
amortized over the contractual term of the loan as an adjustment of the related
loan’s yield using the interest method.
Interest payments received on impaired loans are recorded as interest
income unless the collection of the remaining investment is doubtful at which
time payments received are recorded as reductions of principal (see Note 7).
Non-accrual policy—Revenues on direct financing leases and installment
loans are no longer accrued at the time when principal or interest become past
due 90 days or more, or earlier, if management believes their collectibility is
doubtful. The Company and its subsidiaries used 180 days for suspending
recognition of income in the prior fiscal years. This change from 180 to 90
days did not have a significant effect on the Company and its subsidiaries’
results of operations or financial position. Accrued but uncollected interest
is reclassified to investment in direct financing leases or installment loans
in the accompanying consolidated balance sheet and becomes subject to the
allowance for doubtful receivables and probable loan loss process. Cash
repayments received on these accounts are applied first against any due but
unpaid principal payments with the balance taken to income until qualifying for
a return to accrual status.
Operating leases—Revenues from operating leases are recognized on a
straight-line basis over the contract terms. Operating lease assets are
recorded at cost and are depreciated over their estimated useful lives mainly
on a straight-line basis. Estimated average useful lives of operating leases
assets classified as transportation equipment is 9 years, as measuring
equipment and personal computers is 5 years, as real estate and other is 33
years. Gains or losses arising from dispositions of operating lease assets,
except real estate under operating leases, are included in operating lease
revenues. Gains or losses arising from dispositions of real estate under
operating leases are separately disclosed as “Gains on sales of real estate
under operating leases” or “Discontinued operations-Income from discontinued
operations, net” depending on the continuing involvement in such real estate by
the Company or its subsidiaries. If the Company or its subsidiaries have
significant continuing involvement in operations of disposed real estate, in
the form such as asset or property management, gains or losses are presented as
“Gains on sales of real estate under operating leases.” Estimates of residual
values are based on current market values of used equipment and estimates of
when and how much equipment will become obsolete.
Brokerage commissions and net gains on investment securities—Brokerage
commissions and net gains on investment securities are recorded on a trade date
basis.
Residential condominiums—Revenues from the sales of residential
condominiums are recognized when a contract is in place, a closing has taken
place, the buyer’s initial and continuing investment is adequate to demonstrate
a commitment to pay for the property and the Company and its subsidiaries do
not have a substantial continuing involvement in the property.
(f) Insurance premiums and expenses
Premium income from life insurance policies are recognized as earned premiums
when due.
Life insurance benefits are recorded as expenses when they are incurred.
Policy liabilities for future policy benefits are established for by the net
level premium method, based on actuarial estimates of the amount of future
policyholder benefits. The policies are characterized as long-duration policies
and mainly consist of endowments, term life insurance and whole life insurance.
Computation of policy liabilities and reserves necessarily includes assumptions
about mortality, lapse rates and future yields on related investments and other
factors applicable at the time the policies are written. The average rates of
assumed investment yields are 2.8%, 2.0% and 1.7% for fiscal 2002, 2003 and
2004, respectively. The Company continually evaluates the potential for changes
in the estimates and assumptions applied in determining policy liabilities,
both positive and negative, and uses the results of these evaluations both to
adjust recorded liabilities and to adjust underwriting criteria and product
offerings.
FASB Statement No. 60 (“Accounting and Reporting by Insurance
Enterprises”) requires insurance companies to defer certain costs associated
with writing insurances (“deferred policy acquisition costs”) and amortize over
the respective policy periods in proportion to anticipated premium revenue.
Deferred policy acquisition costs are the costs related to the acquisition of
new and renewal insurance policies and consist primarily of first-year
commissions in excess of recurring policy maintenance costs and certain
variable costs and expenses for underwriting policies. Amortization charged to
income for fiscal 2002, 2003 and 2004 amounted to ¥11,424 million, ¥11,740
million and ¥10,017 million ($95 million), respectively.
(g) Allowance for doubtful receivables on direct financing leases and probable loan losses
The allowance for doubtful receivables on direct financing leases and
probable loan losses is maintained at a level which, in the judgment of
management, is adequate to provide for probable losses inherent in lease and
loan portfolios. The allowance is increased by provisions charged to income and
is decreased by charge-offs, net of recoveries.
Developing the allowance for doubtful receivables on direct financing
leases and probable loan losses is subject to numerous estimates and judgments.
In evaluating the adequacy of the allowance, management considers various
factors, including the nature and characteristics of the obligor, current
economic conditions, credit concentrations or deterioration in pledged
collateral, historical loss experience, delinquencies and future cash flows
expected to be received. Generally, large-balance non-homogeneous loans are
individually assessed whether each of the loans is impaired. If a
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loan is deemed to be impaired, it is evaluated based on the present value of
expected future cash flows or the fair value of the collateral securing the
loan if the loan is collateral dependent. Smaller-balance homogeneous loans and
lease receivables are collectively evaluated considering current economic
conditions and trends, prior charge-off experience for each category of
collateralized receivables and uncollateralized receivables, delinquencies and
non-accruals.
Receivables are charged off when, in the opinion of management, the
likelihood of any future collection is believed to be minimal. The Company and
its subsidiaries do not have a practice of charging loans off after they are
past due for a specific arbitrary period, for example, six months or one year.
(h) Impairment of long-lived assets
Effective April 1, 2002, the Company and its subsidiaries adopted FASB
Statement No. 144 (“Accounting for the Impairment or Disposal of Long-Lived
Assets”), FASB Statement No. 144 superseded FASB Statement No. 121 (“Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of”). Under FASB Statement No. 144, impairment losses are recorded
with respect to long-lived assets used in operations, consisting primarily of
real estate development projects, golf courses and other operating assets, when
events and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amount of those assets. The net carrying value of assets not
recoverable is reduced to fair value if lower than the carrying value. In
determining fair value, recent transactions involving sales of similar assets,
appraisals prepared internally by the Company’s own staff of appraisers,
independent third party appraisals and other valuation techniques are utilized.
(i) Investment in securities
Trading securities are reported at fair value with unrealized gains and losses
included in income.
Available-for-sale securities are reported at fair value, and unrealized
gains or losses are recorded through other comprehensive income (loss), net of
applicable income taxes.
Held-to-maturity securities are recorded at amortized cost.
Generally, the Company and its subsidiaries recognize losses related to
available-for-sale securities and held-to-maturity securities for which the
market price has been significantly below the acquisition cost (or current
carrying value if an adjustment has been made in the past) for more than six
months. In determining whether the decline in the market value of a debt
security is other than temporary, the Company and its subsidiaries consider
whether there has been a significant deterioration in a bond issuer’s credit
rating, an issuer’s default or a similar event. In addition, the Company and
its subsidiaries charge against income losses related to securities in certain
other situations where, even though the market value has not remained
significantly below the carrying value for six months, the decline in the
market value of a security is based on issuer’s specific economic conditions
and not just general declines in the related market and where it is considered
unlikely that the market value of the security will recover within the next six
months. For financial periods prior to the quarter ended March 31, 2003, the
period used for considering whether impairment was other than temporary was
twelve months.
However, with respect to equity securities, if the Company and its
subsidiaries have a significant long-term business relationship with the
company, management considers the probability of the market value recovering
within the following six months. As part of this review, the company’s
operating results, net asset value and future performance forecasts as well as
general market conditions are taken into consideration. If management believes,
based on this review, that the market value of an equity security may
realistically be expected to recover, the loss will continue to be classified
as temporary. Temporary declines in market value are recorded through other
comprehensive income (loss), net of applicable income taxes. If after an
additional six months the market value is still significantly below the
acquisition cost, the loss will be considered other than temporary and the
decline in market value charged to income. For the financial periods prior to
the quarter ended March 31, 2003, the additional consideration period was
twelve months.
(j) Income taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rate is recognized in income in the period that includes the
enactment date. A valuation allowance is recognized if, based on the weight of
available evidence, it is “more likely than not” that some portion or all of
the deferred tax asset will not be realized.
(k) Securitized assets
The Company and its subsidiaries have securitized and sold to investors
certain lease receivables, loan receivables and investment in securities. In
the securitization process, the assets to be securitized (“the assets”) are
sold to special-purpose entities that issue asset-backed securities to the
investors. The Company and its subsidiaries account for the sale when control
over the assets is surrendered. When the Company and its subsidiaries sell the
assets in a securitization transaction, the carrying value of the assets is
allocated to the portion retained and the portion sold,
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based on relative fair values. The Company and its subsidiaries recognize gains
or losses for the difference between the net proceeds received and the
allocated carrying value of the assets sold. Any gain or loss from a
securitization transaction is recorded as revenue of direct financing leases,
interest on loans and investment securities, or brokerage commissions and net
gains on investment securities.
Retained interests include subordinated interests, servicing assets,
excess spread assets and cash collateral. Retained interests are initially
recorded at allocated carrying value of the assets based on their fair value
and are periodically reviewed for impairment. When a decline in fair value below the carrying
value of a retained interests is other than temporary, the Company and its
subsidiaries consider the value of the retained interests to be impaired and
record a write-down of the retained interests to fair value.
Fair values of retained interests are estimated by determining the present
value of future expected cash flows based on management’s estimates of key
assumptions, including expected credit loss, discount rate and prepayment rate.
(l) Derivative financial instruments
On April 1, 2001, the Company and its subsidiaries adopted FASB Statement
No. 133 (“Accounting for Derivative Instruments and Hedging Activities”) and
FASB Statement No. 138 (“Accounting for Certain Derivative Instruments and
Certain Hedging Activity, an amendment of FASB Statement No. 133”). All
derivatives are recognized on the balance sheet at their fair values. On the
date the Company or a subsidiary enters into a derivative contract, the Company
or its subsidiary designates the derivative as either a hedge of the fair value
of a recognized asset or liability or of an unrecognized firm commitment (“fair
value” hedge), a hedge of a forecasted transaction or of the variability of
cash flows to be received or paid related to a recognized asset or liability
(“cash flow” hedge), a foreign-currency fair-value or cash-flow hedge (“foreign
currency” hedge), a hedge of a net investment in foreign operation or a
non-hedging transaction. For all hedging relationships, at inception the
Company and its subsidiaries formally document the risk-management objective
and strategy for undertaking the hedge transaction. The Company and its
subsidiaries also document the hedged risk, the hedge type and the hedging
instrument for each hedging activity. The Company and its subsidiaries also
formally assess, both at the hedge’s inception and on an ongoing basis, whether
the derivatives that are used in hedging transactions are highly effective in
offsetting changes in fair values or cash flows of hedged items. When it is
determined that a derivative is not highly effective for a hedge, hedge
accounting is discontinued.
Changes in the fair value of a derivative that is highly effective and
that is designated and qualifies as a fair-value hedge, along with the loss or
gain on the hedged asset or liability or unrecognized firm commitment of the
hedged item that is attributable to the hedged risk, are recorded in earnings.
Changes in the fair value of a derivative that is highly effective and that is
designated and qualifies as a cash-flow hedge are recorded in other
comprehensive income (loss) to the extent that the derivative is effective as a
hedge, until earnings are affected by the variability in cash flows of the
designated hedged item. Changes in the fair value of derivatives that are
highly effective as hedges and that are designated and qualify as
foreign-currency hedges are recorded in either earnings or other comprehensive
income (loss), depending on whether the hedge transaction is a fair-value hedge
or a cash-flow hedge. However, if a derivative is used as a hedge of a net
investment in a foreign operation, its changes in fair value, to the extent
effective as a hedge, are recorded in the cumulative translation adjustments
account within other comprehensive income (loss). The ineffective portion of
the change in fair value of a derivative instrument that qualifies as either a
fair-value hedge or a cash-flow hedge is reported in earnings.
The Company and its subsidiaries discontinue hedge accounting
prospectively when it is determined that the derivative is no longer effective
in offsetting changes in the fair value or cash flows of the hedged item, the
derivative expires or is sold, terminated, or exercised, the derivative is no
longer designated as a hedging instrument, because it is unlikely that a
forecasted transaction will occur, a hedged firm commitment no longer meets the
definition of a firm commitment, or management determines that designation of
the derivative as a hedging instrument is no longer appropriate.
When hedge accounting is discontinued because it is determined that the
derivative no longer qualifies as an effective fair-value hedge, the Company
and its subsidiaries continue to carry the derivative on the balance sheet at
its fair value and no longer adjusts the hedged asset or liability for changes
in fair value. When hedge accounting is discontinued because the hedged item no
longer meets the definition of a firm commitment, the Company and its
subsidiaries continue to carry the derivative on the balance sheet at its fair
value, removes any asset or liability that was recorded pursuant to recognition
of the firm commitment from the balance sheet, and recognize any gain or loss
in earnings. When hedge accounting is discontinued because it is probable that
a forecasted transaction will not occur, the Company and its subsidiaries
continue to carry the derivative on the balance sheet at its fair value with
subsequent changes in fair value included in earnings, and gains and losses
that were accumulated in other comprehensive income (loss) are recognized
immediately in earnings. In all other situations in which hedge accounting is
discontinued, the Company and its subsidiaries continue to carry the derivative
at its fair value on the balance sheet and recognize any subsequent changes in
its fair value in earnings.
The Company and its subsidiaries also hold derivative instruments for
trading purposes, customer accommodation or not qualified as hedging
instruments. The Company and its subsidiaries record these derivative
instruments on the balance sheet at fair value. The changes in fair values are
recorded in earnings.
The Company and its subsidiaries occasionally purchase or originate
financial instruments that contain an embedded derivative instrument. Upon
acquisition of such financial instrument, the Company and its subsidiaries
assess whether the economic characteristics of the embedded derivative
instrument are clearly and closely related to the economic characteristics of
the financial instrument (“host contract”), whether the financial instrument
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that embodies both the embedded derivative instrument and the host contract is
currently measured at fair value with changes in fair value reported in
earnings, and whether a separate instrument with the same terms as the
embedded instrument would meet the definition of a derivative instrument. If
the embedded derivative instrument is determined not to be clearly and closely
related to the host contract, is not currently measured at fair value with
changes in fair value reported in earnings, and the embedded derivative
instrument would qualify as a derivative instrument, the embedded derivative
instrument is separated from the host contract and valued at fair value with
changes recorded in earnings.
(m) Pension plans
The Company and certain subsidiaries have trusted contributory and
non-contributory funded pension plans covering substantially all of their
employees. The Company and its subsidiaries adopted FASB Statement No. 87
(“Employers’ Accounting for Pensions”), and the costs of pension plans are
accrued based on amounts determined using actuarial methods under the
assumptions of discount rate, rate of increase in compensation levels,
expected long-term rate of return on plan assets and others.
In June 2001, the Japanese pension law was amended to permit an employer
to elect to transfer the entire substitutional portion benefit obligation from
the employer pension fund (“EPF”) to the government together with a specified
amount of plan assets determined pursuant to a government formula. In August
2003, the Company and certain subsidiaries received government approval of
exemption from the obligation for benefits related to future employee service
with respect to the substitutional portion of its EPF. The Company and certain
subsidiaries will account for the transfer to the Japanese government of a
substitutional portion of an EPF in accordance with EITF Issue No. 03-2
(“Accounting for the Transfer to the Japanese Government of the Substitutional
Portion of Employee Pension Fund Liabilities”). As specified in EITF Issue No.
03-2, the entire separation process is to be accounted for at the time of
completion of the transfer to the government of the benefit obligation and
related plan assets as a settlement in accordance with FASB Statement No. 88
(“Employers’ Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits”). The effect of the transfer on
the consolidated financial statements of the Company and its subsidiaries has
not yet been determined.
(n) Stock-based compensation
Stock-based compensation expense is accounted in accordance with APB
Opinion No. 25 (“Accounting for Stock Issued to Employees”) as permitted by
FASB Statement No. 123 (“Accounting for Stock-Based Compensation”) amended by
FASB Statement No. 148 (“Accounting for Stock-Based Compensation—Transition
and Disclosure”). FASB Statement No. 123 provides entities a choice of
recognizing related compensation expense by adopting the fair value method or
to continue to measure compensation using the intrinsic value approach under
APB Opinion No. 25. The Company chose to use the intrinsic value approach
pursuant to APB Opinion No. 25 and recognized no compensation expense in
fiscal 2002, 2003 and 2004.
Had compensation cost for the Company’s stock option plans been
determined consistent with FASB Statement No. 123, net income and earnings per
share (EPS) in fiscal 2002, 2003 and 2004 would have been as follows:
| Millions of | ||||||||||||||||
| Millions of yen | U.S. dollars | |||||||||||||||
| 2002 | 2003 | 2004 | 2004 | |||||||||||||
As reported: |
||||||||||||||||
Net income |
¥ | 40,269 | ¥ | 30,243 | ¥ | 54,020 | $ | 511 | ||||||||
Less: Total stock-based compensation expenses determined by fair
value based method |
(1,183 | ) | (1,726 | ) | (1,735 | ) | (16 | ) | ||||||||
Pro forma: |
||||||||||||||||
Net income |
39,086 | 28,517 | 52,285 | 495 | ||||||||||||
| Yen | U.S. dollars | |||||||||||||||
| 2002 | 2003 | 2004 | 2004 | |||||||||||||
Net income— |
||||||||||||||||
As reported: |
||||||||||||||||
Basic EPS |
¥ | 489.19 | ¥ | 361.44 | ¥ | 645.52 | $ | 6.11 | ||||||||
Diluted EPS |
467.11 | 340.95 | 607.52 | 5.75 | ||||||||||||
Pro forma: |
||||||||||||||||
Basic EPS |
474.82 | 340.81 | 624.78 | 5.91 | ||||||||||||
Diluted EPS |
453.42 | 321.55 | 588.04 | 5.56 | ||||||||||||
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(o) Stock splits
Stock splits implemented prior to October 1, 2001 have been accounted for
by transferring an amount equivalent to the par value of the shares from
additional paid-in capital to common stock as required by the Japanese
Commercial Code (the “Code”). No accounting recognition is made for stock
splits when common stock already includes a portion of the proceeds from shares
issued at a price in excess of par value. This method of accounting is in
conformity with accounting principles generally accepted in Japan.
Based on an amendment to the Code, effective on October 1, 2001, the
above-mentioned method of accounting based on the regulation has become
unnecessary.
In the United States, stock splits in comparable circumstances are
considered to be stock dividends and are accounted for by transferring from
retained earnings to common stock and additional paid-in capital amounts equal
to the fair market value of the shares issued. Common stock is increased by the
par value of the shares and additional paid-in capital is increased by the
excess of the market value over par value of the shares issued. Had such stock
splits made prior to October 1, 2001 been accounted for in this manner,
additional paid-in capital as of March 31, 2004 would have increased by
approximately ¥24,674 million ($233 million), with a corresponding decrease in
retained earnings. Total shareholders’ equity would remain unchanged. A stock
split on May 19, 2000 was excluded from the above amounts because the stock
split was not considered to be a stock dividend under accounting principles
generally accepted in the United States of America.
(p) Cash and cash equivalents
Cash and cash equivalents include cash on hand, deposits placed with banks
and short-term highly liquid investments with original maturities of three
months or less.
(q) Restricted cash
Restricted cash consists of cash held in trusts for the segregation of
assets under an investor protection fund and deposits related to servicing
agreements.
(r) Other operating assets
Other operating assets consist primarily of operating facilities
(including golf courses, hotels and a training facility), which are stated at
cost less accumulated depreciation, and depreciation is calculated mainly on
the straight-line basis over the estimated useful lives of the assets.
Accumulated depreciation is ¥2,926 million and ¥4,248 million ($40 million) as
of March 31, 2003 and 2004, respectively. Estimated useful lives range up to 50
years for buildings, up to 75 years for fixtures and up to 20 years for
machinery and equipment.
(s) Other receivables
Other receivables consist primarily of payments made on behalf of lessees
for property tax, maintenance fees and insurance premiums in relation to direct
financing lease contracts and receivables from the sale of lease assets.
(t) Inventories
Inventories include advance and/or progress payments for development of
residential condominiums for sale and completed residential condominiums
(including completed residential condominiums waiting to be delivered to buyers
under the contracts for sale). Advance and/or progress payments for sale
are carried at cost less any impairment losses and finished goods (including
completed residential condominiums) are stated at the lower of cost or market.
As of March 31, 2003 and 2004, advance and/or progress payments were ¥75,755
million and ¥93,822 million ($888 million), respectively, and finished goods
were ¥25,138 million and ¥27,619 million ($261 million), respectively.
(u) Office facilities
Office facilities are stated at cost less accumulated depreciation.
Depreciation is calculated on a declining-balance basis or straight-line basis
over the estimated useful lives of the assets. Accumulated depreciation is
¥23,234 million and ¥22,670 million ($214 million) as of March 31, 2003 and
2004, respectively. Estimated useful lives range up to 50 years for buildings
and fixtures and up to 20 years for machinery and equipment.
(v) Other assets
Other assets consist primarily of the excess of purchase prices over the
net assets acquired in acquisitions (goodwill) and other intangible assets (see
(w)), deferred policy acquisition costs which are amortized over the contract
periods, leasehold deposits and advance payments made in relation to purchases
of assets to be leased.
(w) Goodwill and other intangible assets
In June 2001, FASB Statement No. 141 (“Business Combinations”) and FASB
Statement No. 142 (“Goodwill and Other Intangible Assets”) were issued. FASB
Statement No. 141 requires that all business combinations be accounted for
using the purchase method. Accounting for business combinations using the
pooling of interests method is no longer allowed. FASB Statement No. 141 also
requires that intangible assets acquired in a business combination be
recognized apart from goodwill if the intangible assets meet one of two
criteria—either the contractual-legal criterion or the separability criterion.
The provisions of FASB Statement No. 141 apply to all business combinations
initiated or business combinations accounted for by the purchase method
completed after June 30, 2001. On April 1, 2002, as a result of the adoption of
FASB Statement No. 141, the Company and its subsidiaries recorded a transition
gain of ¥1,937 million, net of tax of ¥353 million, as a cumulative effect of a
change in accounting principle, due to
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the write-off of unamortized deferred credits that existed as of March 31,
2002. The deferred credits relate to an excess of the fair value over cost
arising from business combinations completed and investments accounted for by
the equity method acquired before July 1, 2001.
FASB Statement No. 142 establishes how intangible assets (other than those
acquired in a business combination) should be accounted for upon acquisition.
It also addresses how goodwill and other intangible assets should be accounted
for subsequent to their acquisition. Both goodwill and intangible assets that
have indefinite useful lives will no longer be amortized but will be tested at
least annually for impairment. Intangible assets with finite lives will
continue to be amortized over their useful lives. The provisions of FASB
Statement No. 142 were adopted in their entirety by the Company and its
subsidiaries as of April 1, 2002.
Until March 31, 2002, the Company and its subsidiaries amortized goodwill
over the periods ranging from 5 to 25 years, with respect to acquisitions that
occurred prior to July 1, 2001. Beginning April 1, 2002 (July 1, 2001 for
acquisitions occurring on or after that date), the Company and its subsidiaries
ceased amortization of goodwill pursuant to the provisions of FASB Statement
No. 142 (See Note 12).
(x) Trade notes, accounts payable and other liabilities
Trade notes, accounts payable and other liabilities include derivative
payables and minority interests.
(y) Capitalization of interest costs
The Company and its subsidiaries capitalized interest costs of ¥3,260
million, ¥490 million and ¥222 million ($2 million) in fiscal 2002, 2003 and
2004, respectively, related to specific long-term real estate development
projects.
(z) Advertising
The costs of advertising are expensed as incurred. The total amounts
charged to advertising expense in fiscal 2002, 2003 and 2004 are ¥9,103
million, ¥9,472 million and ¥9,725 million ($92 million), respectively.
(aa) Restructuring costs
During April 2001, a subsidiary in the United States announced its
intention to consolidate certain of its U.S. locations into one location. The
consolidation allowed the subsidiary to substantially reduce operating
expenses, increase efficiency and redesign processes as the subsidiary pursues
new business opportunities. In connection therewith, in accordance with EITF
Issue No. 94-3 (“Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)”), the subsidiary recorded accrued expenses of ¥2,585
million and ¥93 million in selling, general and administrative expenses in the
accompanying consolidated statements of income in fiscal 2002 and 2003,
respectively. No additional accrued expense was recorded in fiscal 2004. As of
March 31, 2004, the remaining balance of ¥83 million ($1 million) is included
in trade notes, accounts payable and other liabilities in the accompanying
consolidated balance sheets consisting primarily of remaining severance and
lease obligations.
In June 2002, FASB Statement No. 146 (“Accounting for Costs Associated
with Exit or Disposal Activities”) was issued, and has been adopted for the
exit or disposal activities initiated after December 31, 2002. Adoption of this
Statement did not have a significant effect on the Company and its
subsidiaries’ results of operations or financial position.
(ab) Discontinued operations
The Company and its subsidiaries have followed FASB Statement No.144
(“Accounting for the Impairment or Disposal of Long-Lived Assets”). FASB
Statement No.144 broadened the scope of discontinued operations to the
operating results of any assets with their own identifiable cash flows, which
the Company and its subsidiaries will not have significant continuing
involvement. Certain properties were sold or to be disposed of by sale in
fiscal 2004 without significant continuing involvements and the related results
of operations for the presented periods in the accompanying consolidated
financial statements were reclassified.
(ac) Financial statements presentation in U.S. dollars
The translations of the Japanese yen amounts into U.S. dollars are
included solely for the convenience of the readers, using the prevailing
exchange rate at March 31, 2004, which was ¥105.69 to $1.00. The convenience
translations should not be construed as representations that the Japanese yen
amounts have been, could have been, or could in the future be, converted into
U.S. dollars at this or any other rate of exchange.
(ad) Earnings per share
Basic earnings per share is computed by dividing income from continuing
operations and net income by the weighted average number of shares of common
stock outstanding in each period and diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock.
Earnings per share is adjusted for any stock splits and stock dividends
retroactively.
(ae) Issuance of stock by a subsidiary or an affiliate
When a subsidiary or an affiliate issues stocks to unrelated third
parties, the Company’s ownership interest in the subsidiary or the affiliate
decreases. In the event that the price per share is more or less than the
Company’s average carrying amount per share, the Company adjusts the carrying
amount of its investment in the subsidiary and the affiliate and recognizes
gain or loss in the year in which the change in ownership interest occurs.
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(af) New accounting pronouncements
In June 2001, the FASB issued Statement No. 143 (“Accounting for Asset
Retirement Obligations”), which addresses financial accounting and reporting
for recognition of a liability for an asset retirement obligation and the
associated asset retirement cost. Companies are required to recognize a
liability equal to the fair value of the asset retirement obligation as of the
date the retirement obligation is incurred. The Company and its subsidiaries
adopted FASB Statement No. 143 as of April 1, 2003. Adoption of this Statement
did not have a significant effect on the Company and its subsidiaries’ results
of operations or financial position.
In April 2002, the FASB issued Statement No. 145 (“Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections”), which rescinds certain authoritative pronouncements and amends,
or clarifies the applicability of others. This Statement is effective for
fiscal years beginning after May 15, 2002, but the provisions related to the
amendment of FASB Statement No. 13 are effective for transactions occurring
after May 15, 2002. The provisions of this Statement were adopted by the
Company on April 1, 2003. Adoption of this Statement did not have a significant
effect on the Company and its subsidiaries’ results of operations or financial
position.
In January 2003, the FASB issued Interpretation No. 46 (“Consolidation of
Variable Interest Entities”). FASB Interpretation No. 46 addresses
consolidation by business enterprises of variable interest entities,
representing those entities whose total equity investment at risk is not
sufficient to permit the entity to finance its activities without additional
subordinated financial support from other parties, or whose equity investors
cannot make significant decisions about the entity’s operations or do not
absorb the entity’s expected losses or residual returns. The Interpretation
requires that the primary beneficiary (defined as the person or entity that is
expected to absorb a majority of the entity’s expected losses or receive a
majority of the entity’s expected residual returns or both) to consolidate the
VIE. Qualifying SPEs in FASB Statement No. 140 (“Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities—a replacement
of FASB Statement No. 125”) are not affected by the Interpretation. The revised
Interpretation No. 46 (FIN 46 (R)) was issued in December 2003. The Company and
its subsidiaries fully adopted FIN 46(R) at March 31, 2004. See Note 10 for
further information concerning the Company’s VIEs and the effects of the
adoption of this Interpretation on the Company and its subsidiaries’ results of
operations or financial position.
In April 2003, FASB Statement No. 149 (“Amendment of Statement 133 on
Derivative Instruments and Hedging Activities”) was issued. This Statement
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities
under FASB Statement No. 133 (“Accounting for Derivative Instruments and
Hedging Activities”). This Statement is effective for contracts entered into or
modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003. All provisions of this Statement were applied prospectively.
Adoption of this Statement did not have a significant effect on the Company and
its subsidiaries’ results of operations or financial position.
In May 2003, FASB Statement No. 150 (“Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity”) was issued.
The Statement improves the accounting for certain financial instruments that,
under previous guidance, issuers could account for as equity. The new Statement
requires that those instruments be classified as liabilities in the statement
of financial position. Part of the classification and measurement provisions of
this Statement are deferred indefinitely pending further Board action. Adoption
of this Statement will not have a significant effect on the Company and its
subsidiaries’ results of operations or financial position.
In December 2003, FASB Statement No. 132 (revised 2003) (FASB Statement
No. 132 (R)) (“Employers’ Disclosures about Pensions and Other Postretirement
Benefits”) was issued. FASB Statement No. 132(R) revises and prescribes
employers’ disclosures about pension plans and other postretirement benefit
plans; it does not change the measurement or recognition of those plans. FASB
Statement No. 132(R) retains the disclosures required by the original FASB
Statement No. 132 and required additional disclosures about plan assets,
benefit obligations, cash flows and other relevant quantitative and qualitative
information. FASB Statement No. 132(R) is generally effective for fiscal years
ending after December 15, 2003. The Company and its subsidiaries adopted this
Statement for fiscal 2004 and provided Note 16 in accordance with the
disclosure requirements of this Statement.
(ag) Reclassifications
Certain amounts in the 2002 and 2003 consolidated financial statements
have been reclassified to conform to the 2004 presentation. On the consolidated
balance sheets, certain inventories included in advances and other operating
assets as of March 31, 2003 were reclassified to a separate account as
inventories. The remaining amount in advances after the reclassification to
inventories has been included in other assets. On the consolidated statements
of income, gains on sales of real estate under operating leases included in
operating leases for the years ended March 31, 2002 and 2003 were reclassified
as a separate account.
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2. Acquisitions
The Company has followed FASB Statement No. 141 (“Business Combinations”)
and FASB Statement No. 142 (“Goodwill and Other Intangible Assets”) for
acquisitions subsequent to June 30, 2001. For acquisitions completed prior to
July 1, 2001, the Company followed APB Opinion No. 16 (“Business
Combinations”).
On September 28, 2001, the Company acquired 80% of the truck leasing
company IFCO Inc., a subsidiary of Isuzu Motors Limited. The aggregate
purchase price was ¥20,310 million, which was paid in cash. By combining the
know-how developed at the Company and its subsidiaries with IFCO’s expertise,
the Company plans to expand its automobile-related business in Japan. The
results of IFCO’s operations have been included in the consolidated financial
statements since the date of acquisition. This acquisition was accounted for
under the purchase method.
The fair values of the net assets acquired from this acquisition at the date
of acquisition were as follows:
| Millions of yen | ||||
Investment in direct financing leases (net) |
¥ | 252,436 | ||
Other assets |
49,933 | |||
Intangible assets other than goodwill |
5,645 | |||
Total assets acquired |
308,014 | |||
Current liabilities |
124,404 | |||
Long-term debt |
163,300 | |||
Total liabilities assumed |
287,704 | |||
Net assets acquired |
¥ | 20,310 | ||
Of the ¥5,645 million of acquired intangible assets other than goodwill,
¥3,830 million was assigned to the business model of logistic/vehicle
maintenance know-how that has an amortization period of eight years and ¥1,815
million was assigned to a customer database that has an amortization period of
seven years.
During fiscal 2002, the Company and its subsidiaries acquired 23 other
entities for a total cost of ¥10,321 million, which was paid in cash. Goodwill
recognized from these transactions amounted to ¥249 million, which is not
deductible for income tax calculation purposes. Acquisitions were made in line
with the Company’s plans to expand its leasing operations and real estate
operations in Japan.
On July 31, 2002, the Company acquired a 90% interest in Nittetsu Lease
Co., Ltd. from Nippon Steel Corporation. The aggregate purchase price was
¥5,016 million, which was paid in cash. The Company acquired Nittetsu Lease in
line with its plans to expand its domestic leasing operations. The results of
Nittetsu Lease’s operations have been included in the consolidated financial
statements since the date of acquisition. The acquisition was accounted for
under the purchase method.
The fair values of the net assets acquired from this acquisition at the date
of acquisition were as follows:
| Millions of yen | ||||
Investment in direct financing leases (net) |
¥ | 112,605 | ||
Other assets |
28,970 | |||
Intangible assets other than goodwill |
2,910 | |||
Goodwill (non-tax deductible) |
271 | |||
Total assets acquired |
144,756 | |||
Short-term and long-term debt |
131,862 | |||
Other liabilities |
7,878 | |||
Total liabilities assumed |
139,740 | |||
Net assets acquired |
¥ | 5,016 | ||
Of the ¥2,910 million of acquired intangible assets with an indefinite
useful life other than goodwill, ¥1,455 million was assigned to “trademarks,”
and ¥1,455 million was assigned as the value of a “shareholders agreement” and
a “business cooperation agreement” that the Company signed with the seller,
Nippon Steel Corporation.
During fiscal 2003, the Company and its subsidiaries acquired 10 other
entities for a total cost of ¥25,530 million, which was paid in cash. Goodwill
recognized in these transactions amounted to ¥3,127 million, which is not
deductible for income tax calculation purposes. Acquisitions were made in line
with the Company’s plans to expand real estate operations and guarantee
business in Japan.
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On December 31, 2003, Footwork Express Co., Ltd. (previously OSL Co.,
Ltd.), a 69.2% owned subsidiary of the Company, acquired net assets that
constituted a business of reorganization company, Footwork Logistics
Corporation (previously reorganization company, Footwork Express Co., Ltd.).
The aggregate purchase price was ¥3,112 million ($29 million), of which ¥2,598
million ($24 million) was paid on December 31, 2003 and ¥514 million ($5
million) was paid on March 30, 2004, respectively, in cash. The Company
purchased a business of Footwork Logistics Corporation in line with its plans
to expand its corporate rehabilitation business in Japan. The Company includes
balance sheet of Footwork Express as of December 31, 2003, the date of latest
available financial statements, in the accompanying consolidated financial
statements.
The fair values of the net assets acquired from this acquisition at the date
of acquisition were as follows:
| Millions of | ||||||||
| Millions of yen | U.S. dollars | |||||||
Intangible assets other than goodwill |
¥ | 2,225 | $ | 21 | ||||
Other assets |
887 | 8 | ||||||
Total assets acquired |
3,112 | 29 | ||||||
Net assets acquired |
¥ | 3,112 | $ | 29 | ||||
Of the ¥2,225 million
($21 million) of acquired intangible assets other
than goodwill, ¥1,343 million ($13 million) was assigned to trade name that has
an indefinite useful life and ¥614 million ($6 million) was assigned to a
customer base that has an amortization period of 20 years and ¥268 million ($2
million) was assigned to a business license that has an amortization period of
half year. Furthermore, there is a possibility that additional payments may
have to be made up to the fiscal 2007, depending upon the level of net income
attained as stipulated in the business transfer contract. In this case,
additional payments will be accounted for as an adjustment to the purchase
price.
During fiscal 2004, the Company and its subsidiaries acquired five other
entities for a total cost of ¥10,658 million ($101 million), which was paid in
cash. Goodwill recognized in these transactions amounted to ¥1,230 million
($12 million), which is not deductible for income tax calculation purposes.
The Company reflected certain preliminary estimates with respect to the value
of the underlying net assets of these entities in determining amounts of the
goodwill. Thus, the amount of the goodwill would possibly be adjusted upon
completion of the purchase price allocation. Acquisitions were made in line
with the Company’s plans to expand real estate operations, operating leasing
business and corporate rehabilitation business in Japan.
The segment in which goodwill is allocated is disclosed in Note 12 “Goodwill
and Other Intangible Assets”.
3. Cash Flow Information
Cash payments for interest and income taxes during fiscal 2002, 2003 and
2004 are as follows:
| Millions of | ||||||||||||||||
| Millions of yen | U.S. dollars | |||||||||||||||
| 2002 | 2003 | 2004 | 2004 | |||||||||||||
Interest |
¥ | 97,020 | ¥ | 74,885 | ¥ | 60,951 | $ | 577 | ||||||||
Income taxes |
13,021 | 25,641 | 56,364 | 533 | ||||||||||||
4. Investment in Direct Financing Leases
Investment in direct financing leases at March 31, 2003 and 2004 consists of
the following:
| Millions of | ||||||||||||
| Millions of yen | U.S. dollars | |||||||||||
| 2003 | 2004 | 2004 | ||||||||||
Minimum lease payments receivable |
¥ | 1,620,648 | ¥ | 1,510,856 | $ | 14,295 | ||||||
Estimated residual value |
93,002 | 84,582 | 800 | |||||||||
Initial direct costs |
23,286 | 21,379 | 202 | |||||||||
Unearned lease income |
(164,628 | ) | (163,242 | ) | (1,544 | ) | ||||||
| ¥ | 1,572,308 | ¥ | 1,453,575 | $ | 13,753 | |||||||
In connection with the securitization of direct financing lease
receivables, as described in Note 9, the Company and its subsidiaries retained
subordinated interests of ¥100,424 million and ¥50,072 million ($474 million)
as of March 31, 2003 and 2004, respectively, which are included in investment
in the above table.
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Minimum lease payments receivable (including guaranteed residual values
and subordinated interests retained) are due in periodic installments through
2022. At March 31, 2004, the amounts due in each of the next five years and
thereafter are as follows:
| Millions of | ||||||||
| Years ending March 31, | Millions of yen | U.S. dollars | ||||||
2005 |
¥ | 558,803 | $ | 5,287 | ||||
2006 |
378,663 | 3,583 | ||||||
2007 |
254,504 | 2,408 | ||||||
2008 |
154,262 | 1,460 | ||||||
2009 |
95,379 | 902 | ||||||
Thereafter |
69,245 | 655 | ||||||
Total |
¥ | 1,510,856 | $ | 14,295 | ||||
Gains and losses from the disposition of direct financing lease assets are
not significant for fiscal 2002, 2003 and 2004.
5. Investment in Operating Leases
Investment in operating leases at March 31, 2003 and 2004 consists of the
following:
| Millions of | ||||||||||||
| Millions of yen | U.S. dollars | |||||||||||
| 2003 | 2004 | 2004 | ||||||||||
Transportation equipment |
¥ | 280,672 | ¥ | 320,973 | $ | 3,037 | ||||||
Measuring equipment and personal computers |
147,333 | 157,717 | 1,492 | |||||||||
Real estate and other |
315,859 | 290,037 | 2,744 | |||||||||
| 743,864 | 768,727 | 7,273 | ||||||||||
Accumulated depreciation |
(230,558 | ) | (249,007 | ) | (2,356 | ) | ||||||
Net |
513,306 | 519,720 | 4,917 | |||||||||
Rental receivables |
15,738 | 16,982 | 161 | |||||||||
| ¥ | 529,044 | ¥ | 536,702 | $ | 5,078 | |||||||
Gains/losses from disposition of real estate under operating lease assets
are disclosed separately as gains on sales of real estate under operating
leases and discontinued operations, respectively, in the accompanying
consolidated statements of income.
For fiscal 2002, 2003 and 2004, gains from the disposition of assets under
operating leases other than real estate are ¥2,782 million, ¥4,424 million and
¥2,783 million ($26 million), respectively, and are included in operating lease
revenues.
The operating lease contracts include non-cancelable lease terms ranging
from one month to 22 years. The minimum future rentals on non-cancelable
operating leases are as follows:
| Millions of | ||||||||
| Years ending March 31, | Millions of yen | U.S. dollars | ||||||
2005 |
¥ | 67,873 | $ | 642 | ||||
2006 |
43,964 | 416 | ||||||
2007 |
28,074 | 266 | ||||||
2008 |
16,978 | 161 | ||||||
2009 |
7,089 | 67 | ||||||
Thereafter |
28,061 | 265 | ||||||
Total |
¥ | 192,039 | $ | 1,817 | ||||
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6. Installment Loans
The composition of installment loans by domicile and type of borrower at
March 31, 2003 and 2004 is as follows:
| Millions of | ||||||||||||
| Millions of yen | U.S. dollars | |||||||||||
| 2003 | 2004 | 2004 | ||||||||||
Borrowers in Japan: |
||||||||||||
Consumer— |
||||||||||||
Housing loans |
¥ | 531,904 | ¥ | 504,386 | $ | 4,772 | ||||||
Card loans |
271,636 | 247,598 | 2,343 | |||||||||
Other |
32,668 | 54,634 | 517 | |||||||||
| 836,208 | 806,618 | 7,632 | ||||||||||
Corporate— |
||||||||||||
Real estate related companies |
276,332 | 310,847 | 2,941 | |||||||||
Commercial and industrial companies |
821,992 | 850,539 | 8,047 | |||||||||
| 1,098,324 | 1,161,386 | 10,988 | ||||||||||
| 1,934,532 | 1,968,004 | 18,620 | ||||||||||
Overseas corporate, industrial and other borrowers |
333,313 | 250,460 | 2,370 | |||||||||
Loan origination costs, net |
20,194 | 16,476 | 156 | |||||||||
| ¥ | 2,288,039 | ¥ | 2,234,940 | $ | 21,146 | |||||||
Generally, all installment loans, except card loans, are made under agreements, which require the borrower to provide
collateral or guarantors.
At March 31, 2004, the contractual maturities of installment loans for each of the next five years
and thereafter are as follows:
| Millions of | ||||||||
| Years ending March 31, | Millions of yen | U.S. dollars | ||||||
2005 |
¥ | 604,439 | $ | 5,719 | ||||
2006 |
309,360 | 2,927 | ||||||
2007 |
267,358 | 2,530 | ||||||
2008 |
216,504 | 2,048 | ||||||
2009 |
191,753 | 1,814 | ||||||
Thereafter |
629,050 | 5,952 | ||||||
Total |
¥ | 2,218,464 | $ | 20,990 | ||||
Included in interest on loans and investment securities in the
consolidated statements of income is interest income on loans of ¥99,732
million, ¥115,610 million and ¥107,490 million ($1,017 million) for fiscal
2002, 2003 and 2004, respectively.
7. Allowance for Doubtful Receivables on Direct Financing Leases and Probable Loan Losses
Changes in the allowance for doubtful receivables on direct financing
leases and probable loan losses for fiscal 2002, 2003 and 2004 are as follows:
| Millions of | ||||||||||||||||
| Millions of yen | U.S. dollars | |||||||||||||||
| 2002 | 2003 | 2004 | 2004 | |||||||||||||
Beginning balance |
¥ | 141,077 | ¥ | 152,887 | ¥ | 133,146 | $ | 1,260 | ||||||||
Provisions charged to income |
51,367 | 54,706 | 49,592 | 469 | ||||||||||||
Charge-offs |
(50,690 | ) | (78,744 | ) | (54,471 | ) | (515 | ) | ||||||||
Recoveries |
1,350 | 2,180 | 1,892 | 18 | ||||||||||||
Other* |
9,783 | 2,117 | (2,139 | ) | (21 | ) | ||||||||||
Ending balance |
¥ | 152,887 | ¥ | 133,146 | ¥ | 128,020 | $ | 1,211 | ||||||||
*Other includes foreign currency translation adjustments and the effect of
acquisitions.
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Table of Contents
The balance of the allowance broken down into direct financing leases and
installment loans at March 31, 2003 and 2004 is as follows:
| Millions of | ||||||||||||
| Millions of yen | U.S. dollars | |||||||||||
| 2003 | 2004 | 2004 | ||||||||||
Balance of allowance related to: |
||||||||||||
Direct financing leases |
¥ | 42,588 | ¥ | 41,008 | $ | 388 | ||||||
Installment loans |
90,558 | 87,012 | 823 | |||||||||
Total |
¥ | 133,146 | ¥ | 128,020 | $ | 1,211 | ||||||
Under FASB Statement No. 114 (“Accounting by Creditors for Impairment of
a Loan”), impaired loans shall be measured based on the present value of
expected future cash flows discounted at the loan’s original effective
interest rate. As a practical expedient, impairment is measured based on the
loan’s observable market price or the fair value of the collateral if the loan
is collateral dependent. Certain loans, such as large groups of
smaller-balance homogeneous loans (these include individual housing loans and
card loans which are not restructured) and lease receivables, are collectively
evaluated for impairment. When the measure of the impaired loan is less than
the recorded investment in the loan, the impairment is recorded through a
valuation allowance.
The recorded investments in loans considered impaired are ¥97,278 million
and ¥93,542 million ($885 million) as of March 31, 2003 and 2004,
respectively. Of these amounts, it was determined that a valuation allowance
was required with respect to loans which had outstanding balances of ¥63,975
million and ¥72,033 million ($682 million) as of March 31, 2003 and 2004,
respectively. For such loans, the Company and its subsidiaries recorded a
valuation allowance of ¥36,073 million and ¥39,187 million ($371 million) as
of March 31, 2003 and 2004, respectively. This valuation allowance is included
in the allowance for doubtful receivables on direct financing leases and
probable loan losses in the accompanying consolidated balance sheets.
The average recorded investments in impaired loans for fiscal 2002, 2003
and 2004 were ¥115,265 million and ¥102,413 million, ¥94,346 million ($893
million), respectively.
The Company and its subsidiaries recognized interest income on impaired
loans of ¥1,200 million, ¥1,107 million and ¥990 million ($9 million), and
collected in cash interest on impaired loans of ¥1,080 million, ¥914 million
and ¥954 million ($9 million) in fiscal 2002, 2003 and 2004, respectively.
The Company and its subsidiaries use 90 days for suspending recognition
of income from direct financing leases and loans, however, the Company and its
subsidiaries used 180 days in prior fiscal years. (see Note 1(e)) As of March
31, 2003, investment in direct financing leases and smaller-balance
homogeneous loans past due 90 days or more and still accruing income were
¥8,778 million and ¥6,686 million, respectively.
As of March 31, 2003 and
2004, the balances of direct financing leases on non-accrual status were
¥39,047 million and ¥36,568 million ($346 million), and the balances of
smaller-balance homogeneous loans on non-accrual status were ¥53,901 million
and ¥43,176 million ($409 million), respectively.
8. Investment in Securities
Investment in securities at March 31, 2003 and 2004 consists of the
following:
| Millions of | ||||||||||||
| Millions of yen | U.S. dollars | |||||||||||
| 2003 | 2004 | 2004 | ||||||||||
Trading securities |
¥ | 12,154 | ¥ | 26,354 | $ | 249 | ||||||
Available-for-sale securities |
537,888 | 386,797 | 3,660 | |||||||||
Held-to-maturity securities |
10,638 | — | — | |||||||||
Other securities |
116,755 | 138,777 | 1,313 | |||||||||
Total |
¥ | 677,435 | ¥ | 551,928 | $ | 5,222 | ||||||
Gains and losses realized from the sale of trading securities and net
unrealized holding gains or losses on trading securities are included in gains
on investment securities, net (see Note 20).
For fiscal 2002, 2003 and 2004, net unrealized holding gains and losses on
trading securities are gains of ¥98
million, losses of ¥1,610 million and gains of ¥1,977 million ($19
million), respectively.
During fiscal 2002 and 2003, the Company and its subsidiaries sold
available-for-sale securities for aggregate proceeds of ¥325,758 million and
¥264,021 million, respectively, resulting in gross realized gains of ¥18,147
million and ¥9,822 million, respectively, and gross realized losses of ¥4,352
million and ¥2,234 million, respectively. During fiscal 2004, the Company and
its subsidiaries sold available-for-sale securities for aggregate proceeds of
¥164,860 million ($1,560 million), resulting in gross realized gains of ¥10,910
million ($103 million) and gross realized losses of ¥ 2,182 million ($21
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Table of Contents
million). The cost of the securities sold was based on the average cost of each
such security held at the time of the sale.
During fiscal 2002, 2003 and 2004, the Company and its subsidiaries
charged losses on securities of ¥19,742 million, ¥14,325 million and ¥5,240
million ($50 million), respectively, to income for declines in market value of
available-for-sale securities and held-to-maturity securities where the decline
was considered as other than temporary.
Other securities consist mainly of non-marketable equity securities,
preferred capital shares carried at cost and investment funds accounted for
under the equity method.
The amortized cost basis amounts, gross unrealized holding gains, gross
unrealized holding losses and fair values of available-for-sale and
held-to-maturity securities in each major security type at March 31, 2003 and
2004 are as follows:
| March 31, 2003 | ||||||||||||||||
| Millions of yen | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | unrealized | unrealized | ||||||||||||||
| cost | gains | losses | Fair value | |||||||||||||
Available-for-sale: |
||||||||||||||||
Japanese and foreign government bond securities |
¥ | 41,466 | ¥ | 173 | ¥ | (100 | ) | ¥ | 41,539 | |||||||
Japanese prefectural and foreign municipal bond securities |
13,826 | 91 | (51 | ) | 13,866 | |||||||||||
Corporate debt securities |
309,551 | 2,281 | (4,633 | ) | 307,199 | |||||||||||
Mortgage-backed and other asset-backed securities |
133,812 | 5,344 | (3,355 | ) | 135,801 | |||||||||||
Funds in trust |
4,606 | — | (942 | ) | 3,664 | |||||||||||
Equity securities |
25,476 | 12,956 | (2,613 | ) | 35,819 | |||||||||||
| ¥ | 528,737 | ¥ | 20,845 | ¥ | (11,694 | ) | ¥ | 537,888 | ||||||||
Held-to-maturity: |
||||||||||||||||
Asset-backed securities |
¥ | 10,638 | ¥ | 397 | ¥ | (5 | ) | ¥ | 11,030 | |||||||
| ¥ | 10,638 | ¥ | 397 | ¥ | (5 | ) | ¥ | 11,030 | ||||||||
| March 31, 2004 | ||||||||||||||||
| Millions of yen | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | unrealized | unrealized | ||||||||||||||
| cost | gains | losses | Fair value | |||||||||||||
Available-for-sale: |
||||||||||||||||
Japanese and foreign government bond securities |
¥ | 14,520 | ¥ | 87 | ¥ | (146 | ) | ¥ | 14,461 | |||||||
Japanese prefectural and foreign municipal bond securities |
16,761 | 20 | (115 | ) | 16,666 | |||||||||||
Corporate debt securities |
174,398 | 2,524 | (2,977 | ) | 173,945 | |||||||||||
Mortgage-backed and other asset-backed securities |
124,398 | 5,169 | (3,387 | ) | 126,180 | |||||||||||
Equity securities |
17,562 | 39,030 | (1,047 | ) | 55,545 | |||||||||||
| ¥ | 347,639 | ¥ | 46,830 | ¥ | (7,672 | ) | ¥ | 386,797 | ||||||||
| March 31, 2004 | ||||||||||||||||
| Millions of U.S. dollars | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | unrealized | unrealized | ||||||||||||||
| cost | gains | losses | Fair value | |||||||||||||
Available-for-sale: |
||||||||||||||||
Japanese and foreign government bond securities |
$ | 137 | $ | 1 | $ | (1 | ) | $ | 137 | |||||||
Japanese prefectural and foreign municipal bond securities |
159 | 0 | (1 | ) | 158 | |||||||||||
Corporate debt securities |
1,650 | 24 | (28 | ) | 1,646 | |||||||||||
Mortgage-backed and other asset-backed securities |
1,177 | 49 | (32 | ) | 1,194 | |||||||||||
Equity securities |
166 | 369 | (10 | ) | 525 | |||||||||||
| $ | 3,289 | $ | 443 | $ | (72 | ) | $ | 3,660 | ||||||||
The following table provides information about available-for-sale investments
with gross unrealized losses, as of March 31, 2004, and the length of
80
Table of Contents
period for which individual securities have been in a continuous unrealized
loss position:
| Millions of yen | ||||||||||||||||||||||||
| Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
| Gross | Gross | Gross | ||||||||||||||||||||||
| unrealized | unrealized | unrealized | ||||||||||||||||||||||
| Fair value | losses | Fair value | losses | Fair value | losses | |||||||||||||||||||
Japanese and foreign government bond
securities |
¥ | 3,453 | ¥ | (146 | ) | ¥ | — | ¥ | — | ¥ | 3,453 | ¥ | (146 | ) | ||||||||||
Japanese prefectural and foreign
municipal bond securities |
7,725 | (115 | ) | — | — | 7,725 | (115 | ) | ||||||||||||||||
Corporate debt securities |
117,563 | (1,764 | ) | 13,982 | (1,213 | ) | 131,545 | (2,977 | ) | |||||||||||||||
Mortgage-backed securities |
10,735 | (578 | ) | 25,910 | (2,809 | ) | 36,645 | (3,387 | ) | |||||||||||||||
Equity securities |
1,237 | (794 | ) | 1,864 | (253 | ) | 3,101 | (1,047 | ) | |||||||||||||||
| ¥ | 140,713 | ¥ | (3,397 | ) | ¥ | 41,756 | ¥ | (4,275 | ) | ¥ | 182,469 | ¥ | (7,672 | ) | ||||||||||
| Millions of U.S. dollars | ||||||||||||||||||||||||
| Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
| Gross | Gross | Gross | ||||||||||||||||||||||
| unrealized | unrealized | unrealized | ||||||||||||||||||||||
| Fair value | losses | Fair value | losses | Fair value | losses | |||||||||||||||||||
Japanese and foreign government bond
securities |
$ | 33 | $ | (1 | ) | $ | — | $ | — | $ | 33 | $ | (1 | ) | ||||||||||
Japanese prefectural and foreign
municipal bond securities |
73 | (1 | ) | — | — | 73 | (1 | ) | ||||||||||||||||
Corporate debt securities |
1,112 | (17 | ) | 132 | (11 | ) | 1,244 | (28 | ) | |||||||||||||||
Mortgage-backed securities |
102 | (5 | ) | 245 | (27 | ) | 347 | (32 | ) | |||||||||||||||
Equity securities |
12 | (8 | ) | 17 | (2 | ) | 29 | (10 | ) | |||||||||||||||
| $ | 1,332 | $ | (32 | ) | $ | 394 | $ | (40 | ) | $ | 1,726 | $ | (72 | ) | ||||||||||
Approximately 200 investment positions were in an unrealized loss position
as of March 31, 2004. The gross unrealized losses on these securities are
attributable to a number of factors including changes in interest rates and
credit spreads and market trends. As part of its ongoing monitoring process,
management has concluded that none of these securities were
other-than-temporarily impaired at March 31, 2004. The Company and its
subsidiaries have the ability and intent to hold these securities for a time
sufficient to recover its amortized cost.
The following is a summary of the contractual maturities of debt securities
classified as available-for-sale securities held at March 31, 2004:
| Millions of yen | Millions of U.S. dollars | |||||||||||||||
| Amortized cost | Fair value | Amortized cost | Fair value | |||||||||||||
Due within one year |
¥ | 63,028 | ¥ | 63,307 | $ | 596 | $ | 599 | ||||||||
Due after one to five years |
148,252 | 147,490 | 1,403 | 1,395 | ||||||||||||
Due after five to ten years |
72,915 | 72,771 | 690 | 689 | ||||||||||||
Due after ten years |
45,882 | 47,684 | 434 | 452 | ||||||||||||
| ¥ | 330,077 | ¥ | 331,252 | $ | 3,123 | $ | 3,135 | |||||||||
Securities not due at a single maturity date, such as mortgage-backed
securities, are included in the above table based on their final maturities.
Certain borrowers may have the right to call or prepay obligations. This right
may cause
actual maturities to differ from the contractual maturities summarized
above.
Included in interest on loans and investment securities in the
consolidated statements of income is interest income on investment securities
of ¥22,230 million, ¥15,980 million and ¥9,254 million ($88 million) for fiscal
2002, 2003 and 2004, respectively.
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Table of Contents
9. Securitization Transactions
During fiscal 2002, 2003 and 2004, the Company and its subsidiaries sold
direct financing lease receivables and installment loans in securitization
transactions. Certain information with respect to these transactions is as
follows:
| Millions of | ||||||||||||||||
| Millions of yen | U.S. dollars | |||||||||||||||
| 2002 | 2003 | 2004 | 2004 | |||||||||||||
Direct financing leases: |
||||||||||||||||
Balance securitized |
¥ | 202,767 | ¥ | 150,956 | ¥ | 26,284 | $ | 249 | ||||||||
Gains recognized on securitization |
6,159 | 3,205 | 170 | 2 | ||||||||||||
Subordinated interests retained |
48,542 | 25,388 | — | — | ||||||||||||
Installment loans: |
||||||||||||||||
Balance securitized |
46,062 | 78,674 | 9,250 | 88 | ||||||||||||
Gains recognized on securitization |
3,076 | 6,444 | 276 | 3 | ||||||||||||
Subordinated interests retained |
12,345 | 32,850 | 263 | 2 | ||||||||||||
Regarding securitizations of direct financing lease receivables, for
fiscal 2002, 2003 and 2004, revenues from retained interests of ¥11,336
million, ¥12,348 million and ¥9,542 million ($90 million), respectively, are
included in revenues from direct financing leases in the consolidated
statements of income. Regarding securitizations of installment loans, revenues
from retained interests of ¥2,105 million, ¥7,075 million and ¥12,175 million
($115 million), respectively, are included in interest on loans and investment
securities in the consolidated statements of income.
Retained interests are subordinate to the investors’ interests. Their
value is subject to credit risk, interest rate risk and prepayment risk on the
sold financial assets. The investors and special-purpose entities have no
recourse to the Company or its subsidiaries’ other assets for failure of
debtors to pay.
As of March 31, 2003 and 2004, there were no significant servicing assets
and liabilities related to the Company and its subsidiaries’ securitization
transactions.
Economic assumptions used in measuring the retained interests related to
securitization transactions completed during fiscal 2002, 2003 and 2004 are as
follows:
| 2002 | 2003 | 2004 | ||||||||||||||||||||||||||
| Installment loans | Installment loans | Installment loans | ||||||||||||||||||||||||||
| Direct financing | Direct financing | Direct financing | Commercial | |||||||||||||||||||||||||
| leases | Card loans | leases | Card loans | Mortgage loans ( * 1) | leases | mortgage loans | ||||||||||||||||||||||
Expected credit loss |
0.07%-1.70 | % | 0.72 | % | 0.03%-1.70 | % | 0.84%-1.42 | % | 0.69 | % | 0.01 | % | 2.39 | % | ||||||||||||||
Discount rate |
3.62%-5.36 | % | 1.62 | % | 2.35%-5.36 | % | 1.26%-1.35 | % | 0.68%-2.11 | % | 8.35 | % | 1.79 | % | ||||||||||||||
Annual prepayment rate (* 2) |
— | — | — | — | 5.95 | % | — | 19.18 | % | |||||||||||||||||||
( * 1) Mortgage loans contain commercial mortgage loans and housing loans.
( * 2) With respect to direct financing leases, card loans and commercial
mortgage loans sold in fiscal 2003, the Company and its subsidiaries did not
make separate assumptions for prepayment rates but considered the effect of
prepayments in estimating discount rates or principal payments.
Retained interests from securitization transactions in fiscal 2004 and
prior years are recorded in the consolidated balance sheets at March 31, 2004.
Key economic assumptions used in measuring the fair value of retained interests
as of March 31, 2004, and the impacts of 10% and 20% adverse changes to the
assumptions on the fair value are as follows:
| 2004 | ||||||||||||||||
| Installment loans | ||||||||||||||||
| Direct financing | Commercial | |||||||||||||||
| leases | Card loans | mortgage loans | Housing loans | |||||||||||||
Expected credit loss |
0.01%-2.12 | % | 0.22%-0.31 | % | 1.50%-3.58 | % | 0.98 | % | ||||||||
Discount rate |
2.47%-8.35 | % | 0.95%-2.03 | % | 1.62%-1.71 | % | 0.44%-3.33 | % | ||||||||
Annual prepayment rate ( * 3) |
1.76%-12.56 | % | — | 22.89%-32.64 | % | 7.63 | % | |||||||||
( * 3) With respect to card loans, the Company’s subsidiary did not make
separate assumptions for prepayment rates but considered the effect of
prepayments in estimating principal payments. With respect to commercial
mortgage loans, the Company did not make separate assumptions for prepayment
rate rather considered the effect of prepayments in estimating discount rates
in fiscal 2003. However, the Company began to make separate assumptions for
prepayment rate in fiscal 2004.
82
Table of Contents
| Millions of yen | Millions of U.S. dollars | |||||||||||||||||||||||||||||||
| Installment loans | Installment loans | |||||||||||||||||||||||||||||||
| Direct financing | Commercial | Direct financing | Commercial | |||||||||||||||||||||||||||||
| leases | Card loans | mortgage loans | Housing loans | leases | Card loans | mortgage loans | Housing loans | |||||||||||||||||||||||||
Fair value of retained interests |
¥ | 55,389 | ¥ | 59,072 | ¥ | 1,236 | ¥ | 5,062 | $ | 524 | $ | 559 | $ | 12 | $ | 48 | ||||||||||||||||
Weighted average life (in years) |
1.0-6.4 | — | 2.9 | 10.7 | 1.0-6.4 | — | 2.9 | 10.7 | ||||||||||||||||||||||||
Expected credit loss: |
||||||||||||||||||||||||||||||||
+10% |
426 | 617 | 5 | 23 | 4 | 6 | 0 | 0 | ||||||||||||||||||||||||
+20% |
852 | 1,229 | 11 | 46 | 8 | 12 | 0 | 0 | ||||||||||||||||||||||||
Discount rate: |
||||||||||||||||||||||||||||||||
+10% |
396 | 221 | 2 | 19 | 4 | 2 | 0 | 0 | ||||||||||||||||||||||||
+20% |
788 | 441 | 5 | 37 | 7 | 4 | 0 | 0 | ||||||||||||||||||||||||
Prepayment rate: |
||||||||||||||||||||||||||||||||
+10% |
452 | — | 23 | 83 | 4 | — | 0 | 1 | ||||||||||||||||||||||||
+20% |
682 | — | 39 | 160 | 6 | — | 0 | 2 | ||||||||||||||||||||||||
These sensitivities are hypothetical and should be used with caution. As
the amounts indicate, changes in fair value based on a 10% variation in
assumptions generally cannot be extrapolated because the relationship of the
change in assumption to the change in fair value may not be linear. Also, in
the above table, the effect of a variation in a particular assumption on the
fair value of the retained interest is calculated without changing any other
assumption; in reality, changes in one factor may result in changes in another,
which might magnify or counteract the sensitivities.
Certain cash flows received from/(paid to) special-purpose entities for
all securitization activities in fiscal 2002, 2003 and 2004 are summarized as
follows:
| Millions of | ||||||||||||||||
| Millions of yen | U.S. dollars | |||||||||||||||
| 2002 | 2003 | 2004 | 2004 | |||||||||||||
Proceeds from new securitizations |
¥ | 258,926 | ¥ | 239,050 | ¥ | 35,704 | $ | 338 | ||||||||
Servicing fees received |
231 | 470 | 551 | 5 | ||||||||||||
Cash flows received on interests retained |
10,315 | 21,201 | 31,742 | 300 | ||||||||||||
Repurchases of ineligible assets and
delinquent assets |
(25,247 | ) | (26,122 | ) | (23,647 | ) | (224 | ) | ||||||||
Quantitative information about delinquencies, net credit losses, and
components of securitized financial assets and other assets managed together in
fiscal 2003 and 2004 are as follows:
March 31, 2003
| March 31, 2003 | ||||||||||||
| Millions of yen | ||||||||||||
| Principal amount of | ||||||||||||
| receivables more | ||||||||||||
| Total principal | than 90 days | |||||||||||
| amount of | past-due and | |||||||||||
| receivables | impaired loans | Net credit losses | ||||||||||
Types of assets: |
||||||||||||
Direct financing leases |
¥ | 1,897,391 | ¥ | 47,825 | ¥ | 25,445 | ||||||
Installment loans |
2,425,906 | 157,865 | 51,119 | |||||||||
Total assets managed or securitized |
4,323,297 | ¥ | 205,690 | ¥ | 76,564 | |||||||
Less: assets securitized |
(462,950 | ) | ||||||||||
Assets held in portfolio |
¥ | 3,860,347 | ||||||||||
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| March 31, 2004 | ||||||||||||||||||||||||
| Millions of yen | Millions of dollars | |||||||||||||||||||||||
| Principal amount | Principal amount | |||||||||||||||||||||||
| of receivables | of receivables | |||||||||||||||||||||||
| more than 90 | more than 90 | |||||||||||||||||||||||
| Total principal | days past-due | Total principal | days past-due | |||||||||||||||||||||
| amount of | and impaired | amount of | and impaired | |||||||||||||||||||||
| receivables | loans | Net credit losses | receivables | loans | Net credit losses | |||||||||||||||||||
Types of assets: |
||||||||||||||||||||||||
Direct financing leases |
¥ | 1,633,875 | ¥ | 36,568 | ¥ | 13,921 | $ | 15,459 | $ | 346 | $ | 132 | ||||||||||||
Installment loans |
2,374,449 | 136,718 | 38,658 | 22,466 | 1,294 | 365 | ||||||||||||||||||
Total assets managed or securitized |
4,008,324 | ¥ | 173,286 | ¥ | 52,579 | 37,925 | $ | 1,640 | $ | 497 | ||||||||||||||
Less: assets securitized |
(319,809 | ) | (3,026 | ) | ||||||||||||||||||||
Assets held in portfolio |
¥ | 3,688,515 | $ | 34,899 | ||||||||||||||||||||
The total securitized assets, as of March 31, 2004, are ¥339,943 million
($3,216 million), but the assets of ¥20,134 million ($191 million), of which
the Company and a subsidiary’s only continuing involvement is the servicing,
are not included in the table above.
A subsidiary entered into a collateralized bond obligation transaction in
fiscal 1999 and accounted for the transaction as a sale. The assets
securitized as a result of the transaction were ¥45,478 million as of March
31, 2003, and were not included in the table above. The bond was matured in
fiscal 2004, and the subsidiary received ¥6,630 million ($63 million) from
special-purpose entities.
In fiscal 2004 and prior years, the Company and its subsidiaries entered
into other lease receivable securitization programs that were not accounted
for as sales. The payables under these securitization programs of ¥105,281
million and ¥76,393 million ($723 million) are included in long-term debt, and
the minimum lease payments receivable of ¥141,664 million and ¥116,289 million
($1,100 million) and cash collateral of ¥3,242 million and ¥2,911 million ($28
million) are included in investment in direct financing leases and other
assets in the consolidated balance sheets as of March 31, 2003 and 2004,
respectively.
10. Business Transactions with Special Purpose Entities
The Company and its subsidiaries use special purpose companies,
partnerships and trusts (hereinafter referred to as SPEs) in the ordinary
course of business. These SPEs are not always accompanied by and are not
generally controlled by voting rights. FASB Interpretation No.46 (revised
December 2003) (“Consolidation of Variable Interest Entities”) was first
issued in January 2003, and effective March 31, 2003, for the SPEs created
after January 31, 2003. In December 2003, the revised FASB Interpretation
No.46 (“FIN 46(R)”) was announced, and all SPEs were tested for consolidation
in accordance with FIN 46(R). FIN 46(R) addresses consolidation by business
enterprises of SPEs within the scope of the Interpretation. Generally these
SPEs are entities where a) the total equity investment at risk is not
sufficient to permit the entity to finance its activities without additional
subordinated financial support provided by any parties including the equity
holders or b) as a group the holders of the equity investment at risk do not
have (1) the direct or indirect ability to make decisions about an entity’s
activities through voting rights or similar rights, or (2) the obligation to
absorb the expected losses of the entity or (3) the right to receive the
expected residual returns of the entity . There are certain exceptions to
these general criteria. Entities within the scope of the Interpretation are
called variable interest entities (“VIEs”). The variable interest holder who
will absorb a majority of the expected losses or receive a majority of the
expected residual returns or both is defined as the primary beneficiary of the
entity. VIEs are consolidated by the primary beneficiary of the entity.
Information about significant SPEs for the Company and its subsidiaries are
as follows:
(a) SPEs for liquidating customer assets
The Company and its subsidiaries may use SPEs in structuring financing
for customers to liquidate specific customer assets. The SPEs are typically
used to provide a structure that is bankruptcy remote with respect to the
customer and the use of SPEs structures is requested by such customer. Such
SPEs typically acquire assets to be liquidated from the customer, borrow
non-recourse loans from financial institutions and have an equity investment
made by the customer. By using cash flows from the liquidated assets, these
SPEs repay the loan and pay dividends to equity investors if sufficient funds
exist.
The Company and its subsidiaries provide installment loans to such SPEs
in the aggregate of ¥14,210 million and ¥16,197 million ($153 million) as of
March 31, 2003 and 2004, and occasionally make investments in these SPEs,
which amount to ¥18,856 million and ¥15,937 million ($151 million) as of March
31, 2003 and 2004, respectively. The Company and its subsidiaries’ risk
exposure is limited to the amounts of the loans and investments referred to
above.
Total assets of such SPEs are ¥186,512 million and ¥201,841 million
($1,910 million) as of March 31, 2003 and 2004, respectively. Among those
SPEs, no SPEs were subject to consolidation.
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(b) SPEs for acquisition of real estate and real estate development projects for customers
Customers and the Company and its subsidiaries are involved with SPEs
formed to acquire real estate and/or develop real estate projects. In each
case, a customer establishes and makes an equity investment in an SPE that is
designed to be bankruptcy remote from the customer. The SPE acquires real
estate and/or develops real estate projects.
The Company and its subsidiaries provide non-recourse loans to SPEs in the
aggregate of ¥13,611 million and ¥12,683 million ($120 million) as of March 31,
2003 and 2004, and/or make investments in these SPEs, which amount to ¥2,685
million and ¥4,840 million ($46 million) as of March 31, 2003 and 2004,
respectively. The Company and its subsidiaries’ risk exposure is limited to the
amounts of the loans and investments referred to above.
Total assets of such SPEs are ¥29,537 million and ¥34,296 million ($324
million) as of March 31, 2003 and 2004, respectively. Among those SPEs, one SPE
was consolidated at March 31, 2004, and its assets of ¥8,706 million ($82
million) are mainly included in inventories in the consolidated balance sheets.
The consolidated SPE borrows from financial institutions, and ¥8,040
million ($76 million) of the SPE’s assets are pledged as collateral for the
non-recourse loans as of March 31, 2004. The lenders of the non-recourse loans
have no recourse to other assets of the Company and its subsidiaries.
(c) SPEs for acquisition of real estate for the Company and its subsidiaries’ real estate-related business
The Company and its subsidiaries acquire real estate and establish SPEs to
simplify the administration activities necessary for the real estate. The
Company and its subsidiaries have always consolidated such SPEs even though the
Company and its subsidiaries may not have voting rights since substantially all
of such SPEs’ subordinated interests are issued to the Company and its
subsidiaries, and therefore controlled by and for the benefit of the Company
and its subsidiaries.
Total assets of such SPEs are ¥26,093 million and ¥48,809 ($462 million)
as of March 31, 2003 and 2004, respectively. Those assets are mainly included
in investment in operating leases and other operating assets in the
consolidated balance sheets as of March 31, 2003 and 2004, respectively.
Certain SPEs borrow non-recourse loans from financial institutions, and
¥11,041 million ($104 million) of the SPEs’ assets are pledged as collateral
for the non-recourse loans as of March 31, 2004. The lenders of the
non-recourse loans have no recourse to other assets of the Company and its
subsidiaries.
(d) Kumiai structures
In Japan, certain subsidiaries provide investment products to their
customers that employ a contractual mechanism known as a kumiai, which in part
result in the subsidiaries forming a type of SPE. As a means to finance the
purchase of aircraft or other large-ticket items to be leased to third parties,
the Company and its subsidiaries arrange and market kumiai products to
investors, who invest a portion of the funds necessary into the kumiai
structure. The remainder of the purchase funds are borrowed by the kumiai
structure in the form of a non-recourse loan from one or more financial
institutions. The kumiai investors (and any lenders to the kumiai structure)
retain all of the economic risks and rewards in connection with purchase and
leasing activities of the kumiai structure, and all related gains or losses are
recorded on the financial statements of investors in the kumiai. The Company
and its subsidiaries are responsible for the arrangement and marketing of these
products, and may act as servicer or administrator in kumiai transactions. The
fee income for the arrangement and administration of these transactions is
recognized in the consolidated financial statements. The Company and its
subsidiaries do not guarantee or otherwise have any financial commitments or
exposure with respect to the kumiai or its related SPE.
The Company has evaluated each of these structures pursuant to
Interpretation No. 46(R) and has concluded that although the SPEs that are part
of the Kumiai structure are VIEs, the Company and its subsidiaries do not have
the primary beneficial interest. As a result, these SPEs are not consolidated
by the Company and its subsidiaries.
11. Investment in Affiliates
Investment in affiliates at March 31, 2003 and 2004 consists of the
following:
| Millions of | ||||||||||||
| Millions of yen | U.S. dollars | |||||||||||
| 2003 | 2004 | 2004 | ||||||||||
Common stock, at equity value |
¥ | 131,388 | ¥ | 149,237 | $ | 1,412 | ||||||
Loans |
13,586 | 7,959 | 75 | |||||||||
| ¥ | 144,974 | ¥ | 157,196 | $ | 1,487 | |||||||
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Certain affiliates are listed on stock exchanges. The aggregate investment
in and quoted market value of those affiliates amounted to ¥38,664 million and
¥37,385 million, respectively, as of March 31, 2003 and ¥45,548 million ($431
million) and ¥51,884 million ($491 million), respectively, as of March 31,
2004.
In fiscal 2002, 2003 and 2004, the Company and its subsidiaries received
dividends from affiliates of ¥473 million, ¥2,060 million and ¥3,136 million
($30 million), respectively.
The balance of excess of cost over the underlying equity at acquisition
dates of investment in affiliates amounted to ¥30,487 million and ¥31,189
million ($295 million) as of March 31, 2003 and 2004, respectively.
During fiscal year ended March 31, 2003, the Company acquired an interest
in two affiliates accounted for under the equity method for which the purchase
price allocation was not complete as of March 31, 2003. Upon completion of
valuation of investees’ assets and liabilities during fiscal 2004 it was
determined that the fair value of investees’ assets and liabilities exceeded
the purchase price paid. This excess of fair value of the Company’s
proportionate interest in the net assets of investees upon acquisition has been
recorded first as a reduction of noncurrent assets of the investees with the
excess reported as an extraordinary gain of ¥609 million ($6 million), net of
tax of ¥421 million ($ 4 million), during fiscal 2004.
On March 30, 2002, the Company acquired approximately a 22% interest in
The Fuji Fire and Marine Insurance Company Limited (“Fuji”) for ¥18,105
million. The Company recorded its share of earnings by the equity method from
the date of acquisition through December 31, 2002, the date of latest available
financial statements for the year ended March 31, 2003. At March 31, 2002, the
Company reflected certain preliminary estimates with respect to the value of
the underlying net assets of Fuji in the Company’s consolidated financial
statements. Fuji had not, prior to the investment by the Company, prepared
financial statements in accordance with US GAAP. Fuji began the process of
preparing financial statements in accordance with US GAAP shortly after the
investment in Fuji was made by the Company. However, the process of preparing
US GAAP financial statements as of the acquisition date was not completed until
January 2003. At that time it was determined that the Company’s proportionate
share of the fair value of the net assets acquired exceeded the acquisition
cost. In accordance with the provisions of FASB Statement No. 141, the excess
remaining after first reducing noncurrent assets to zero was recorded as an
extraordinary gain of ¥3,214 million, net of tax of ¥2,206 million, in the year
ended March 31, 2003.
The Company formed a consortium with the Hanwha Group (a conglomerate or
chaebol located in the Republic of Korea), and Macquarie Life Limited (a life
insurance company located in Australia). The consortium entered into a stock
purchase agreement (“Purchase Agreement”) with Korea Deposit Insurance
Corporation (“KDIC”), and acquired 51% of the outstanding shares of Korea Life
Insurance Co., Ltd. (“KLI”) on December 12, 2002. Pursuant to the Purchase
Agreement, the Company acquired 17% of the outstanding shares for approximately
275 billion Korean won (¥27,778 million) and made a payment for half of this
amount on December 12, 2002. With respect to the other half of the purchase
price (the “second payment”), the Company is required to make the second
payment two years from the date of the Purchase Agreement. At the acquisition
date, the excess of the purchase price over the Company’s proportionate share
of the fair value of the net assets of KLI was equal to the purchase price of
¥27,778 million, as KLI had negative assets as of the acquisition date.
The Purchase Agreement also provides that the Company and other consortium
members have the right to obtain additional shares of the KLI from KDIC (“the
Right”). With respect to the Right, the Company and the Hanwha Group entered
into a separate agreement providing that the Company can sell the Right to the
Hanwha Group at any time from the date of the acquisition through the fifth
anniversary of the acquisition date. On the acquisition date, the Company sold
50% of the Right to the Hanwha Group for 21,133 million Korean won (¥2,170
million) as the consideration for the Right. The Company recorded the proceeds
in gain on sales of affiliates in the consolidated statements of income.
Since the Company, through the Consortium Agreement and the Shareholders
Agreement, has the ability to influence the operations and the financial
policies of KLI, the Company accounts for this investment by the equity method
and has recorded its share of earnings from the date of acquisition through
December 31, 2002, the date of latest available financial statements, for the
year ended March 31, 2003.
On June 11, 2002, ORIX JREIT Inc. (“ORIX JREIT”), a wholly-owned Japanese
real estate investment corporation as of March 31, 2002, completed an initial
public offering of its investment units, which had been previously issued by
ORIX JREIT to the Company. Through this initial public offering, the Company as
a unitholder sold to investors 80% or 98,700 units out of 123,372 units of the
outstanding units of ORIX JREIT and recognized ¥3,174 million of gain included
in other operating revenues in the accompanying consolidated statements of
income for the year ended March 31, 2003. The Company received aggregate net
cash proceeds from the sale of ¥49,528 million or ¥501,800 per unit. As of the
date of the public offering, ORIX JREIT invested in 40 properties located in
Japan, including 33 office buildings, three residential buildings and four
commercial properties such as hotels and retail buildings with total assets of
approximately ¥116,775 million.
Subsequent to the initial public offering, the Company accounted for the
remaining investment in ORIX JREIT using the equity method of accounting. In
addition, ORIX JREIT entered into an asset management agreement with one of the
Company’s subsidiaries and paid ¥470 million of management fees from June 2002
to March 2003 for the year ended March 31, 2003, ¥847 million ($8 million) for
the year ended March 31, 2004, respectively.
The Company and its subsidiaries sold office buildings under operating
leases to ORIX JREIT and recognized ¥7,617 million ($72 million) of gains on
the sales, which were included in gains on sales of real estate under operating
leases in the accompanying consolidated statements of income for
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the year ended March 31, 2004. The related intercompany profits have been
eliminated based on the Company’s proportionate share under the equity method.
During fiscal year ended March 31, 2004, ORIX JREIT issued 52,000 units of
ORIX JREIT to the public at an issue price of ¥ 463,873 ($4,389) per unit,
receiving aggregate proceeds of ¥ 24,121 million ($228 million). As a result of
the issuance of new units, the ownership interest of the Company and its
subsidiary in ORIX JREIT decreased from 21% to 15%. Because the issuance price
per unit issued by ORIX JREIT was less than the average carrying amount per
unit of the Company and a subsidiary, the Company and a subsidiary were
required to adjust the carrying amounts of their investments in ORIX JREIT by ¥ 396 million ($4 million) and recognized losses in earnings.
Companies comprising a significant portion of investment in affiliates are
Stockton Holdings Limited (29% of equity share), The Fuji Fire and Marine
Insurance Company Limited (22%), ORIX JREIT Inc. (15%) and Korea Life Insurance
Co., Ltd. (17%).
Combined and condensed information relating to the affiliates accounted
for by the equity method for the fiscal year ended March 31, 2003 and 2004 are
as follows (some operation data for entities reflect only the period since the
Company made the investment and on the lag basis as described above):
| Millions of | ||||||||||||
| Millions of yen | U.S. dollars | |||||||||||
| 2003 | 2004 | 2004 | ||||||||||
Operations: |
||||||||||||
Total revenues |
¥ | 378,761 | ¥ | 1,272,013 | $ | 12,035 | ||||||
Income before income taxes |
44,887 | 111,109 | 1,051 | |||||||||
Net income |
34,593 | 93,734 | 887 | |||||||||
Financial position: |
||||||||||||
Total assets |
¥ | 5,307,035 | ¥ | 5,528,819 | $ | 52,312 | ||||||
Total liabilities |
5,104,873 | 5,181,197 | 49,023 | |||||||||
Shareholders’ equity |
202,162 | 347,622 | 3,289 | |||||||||
The Company had no significant transactions with these companies except
described above.
In fiscal 2002, the affiliates, either individually or on a combined
basis, were not significant to the financial position or results of operations
of the Company and, therefore, combined condensed information has not been
provided.
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Table of Contents
12. Goodwill and Other Intangible Assets
Changes in goodwill by reportable segment for fiscal 2003 and 2004 are as
follows:
| Millions of yen | ||||||||||||||||||||||||||||||||||||||||
| Corporate | Real estate | |||||||||||||||||||||||||||||||||||||||
| financial | Rental | related | Asia and | |||||||||||||||||||||||||||||||||||||
| services | operations | finance | Real estate | Life insurance | Other | The Americas | Oceania | Europe | Total | |||||||||||||||||||||||||||||||
Balance at March 31, 2002 |
¥ | 338 | ¥ | 746 | ¥ | (737 | ) | ¥ | (171 | ) | ¥ | 4,452 | ¥ | 167 | ¥ | 7,442 | ¥ | 2,664 | ¥ | 262 | ¥ | 15,163 | ||||||||||||||||||
Acquired |
271 | — | 3,002 | — | — | 54 | — | 71 | — | 3,398 | ||||||||||||||||||||||||||||||
Impairment |
— | — | — | — | — | — | — | — | (274 | ) | (274 | ) | ||||||||||||||||||||||||||||
Other (net)* |
— | — | 737 | 171 | — | — | (705 | ) | 8 | 12 | 223 | |||||||||||||||||||||||||||||
Current period change |
271 | — | 3,739 | 171 | — | 54 | (705 | ) | 79 | (262 | ) | 3,347 | ||||||||||||||||||||||||||||
Balance at March 31, 2003 |
609 | 746 | 3,002 | — | 4,452 | 221 | 6,737 | 2,743 | — | 18,510 | ||||||||||||||||||||||||||||||
Acquired |
— | 832 | — | — | — | 398 | — | — | — | 1,230 | ||||||||||||||||||||||||||||||
Impairment |
— | (464 | ) | — | — | — | — | — | — | — | (464 | ) | ||||||||||||||||||||||||||||
Other (net)* |
— | — | (693 | ) | — | — | (53 | ) | (964 | ) | 18 | — | (1,692 | ) | ||||||||||||||||||||||||||
Current period change |
— | 368 | (693 | ) | — | — | 345 | (964 | ) | 18 | — | (926 | ) | |||||||||||||||||||||||||||
Balance at March 31, 2004 |
¥ | 609 | ¥ | 1,114 | ¥ | 2,309 | ¥ | — | ¥ | 4,452 | ¥ | 586 | ¥ | 5,773 | ¥ | 2,761 | ¥ | — | ¥ | 17,584 | ||||||||||||||||||||
| Millions of U.S. dollars | ||||||||||||||||||||||||||||||||||||||||
| Corporate | Real estate | |||||||||||||||||||||||||||||||||||||||
| financial | Rental | related | Asia and | |||||||||||||||||||||||||||||||||||||
| services | operations | finance | Real estate | Life insurance | Other | The Americas | Oceania | Europe | Total | |||||||||||||||||||||||||||||||
Balance at March 31, 2003 |
$ | 6 | $ | 7 | $ | 28 | $ | — | $ | 42 | $ | 3 | $ | 63 | $ | 26 | $ | — | $ | 175 | ||||||||||||||||||||
Acquired |
— | 8 | — | — | — | 4 | — | — | — | 12 | ||||||||||||||||||||||||||||||
Impairment |
— | (4 | ) | — | — | — | — | — | — | — | (4 | ) | ||||||||||||||||||||||||||||
Other (net)* |
— | — | (7 | ) | — | — | (0 | ) | (9 | ) | 0 | — | (18 | ) | ||||||||||||||||||||||||||
Current period change |
— | 4 | (7 | ) | — | — | 4 | (9 | ) | 0 | — | (8 | ) | |||||||||||||||||||||||||||
Balance at March 31, 2004 |
$ | 6 | $ | 11 | $ | 21 | $ | — | $ | 42 | $ | 7 | $ | 54 | $ | 26 | $ | — | $ | 167 | ||||||||||||||||||||
*Other includes effect of an adoption of FASB Statement No. 141, foreign
currency translation adjustments and certain other reclassifications.
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Table of Contents
The amount of goodwill amortization included in net income in fiscal 2002
was ¥728 million. The effects on income from continuing operations, net income
and net income per share, which exclude such goodwill amortization from fiscal
2002, would have been as follows:
| Millions of | ||||||||||||||||
| Millions of yen | U.S. dollars | |||||||||||||||
| 2002 | 2003 | 2004 | 2004 | |||||||||||||
Income from continuing operations, as reported |
¥ | 39,706 | ¥ | 24,433 | ¥ | 50,619 | $ | 479 | ||||||||
Add back: Goodwill amortization |
728 | — | — | — | ||||||||||||
Income from continuing operations, excluding goodwill amortization |
¥ | 40,434 | ¥ | 24,433 | ¥ | 50,619 | $ | 479 | ||||||||
| Yen | U.S. dollars | |||||||||||||||
| Basic: | 2002 | 2003 | 2004 | 2004 | ||||||||||||
Income from continuing operations, as reported |
¥ | 482.35 | ¥ | 292.00 | ¥ | 604.88 | $ | 5.72 | ||||||||
Add back: Goodwill amortization |
8.84 | — | — | — | ||||||||||||
Income from continuing operations, excluding goodwill amortization |
¥ | 491.19 | ¥ | 292.00 | ¥ | 604.88 | $ | 5.72 | ||||||||
| Yen | U.S. dollars | |||||||||||||||
| Diluted: | 2002 | 2003 | 2004 | 2004 | ||||||||||||
Income from continuing operations, as reported |
¥ | 460.59 | ¥ | 275.63 | ¥ | 569.33 | $ | 5.39 | ||||||||
Add back: Goodwill amortization |
8.42 | — | — | — | ||||||||||||
Income from continuing operations, excluding goodwill amortization |
¥ | 469.01 | ¥ | 275.63 | ¥ | 569.33 | $ | 5.39 | ||||||||
| Millions of | ||||||||||||||||
| Millions of yen | U.S. dollars | |||||||||||||||
| 2002 | 2003 | 2004 | 2004 | |||||||||||||
Net income, as reported |
¥ | 40,269 | ¥ | 30,243 | ¥ | 54,020 | $ | 511 | ||||||||
Add back: Goodwill amortization |
728 | — | — | — | ||||||||||||
Net income, excluding goodwill amortization |
¥ | 40,997 | ¥ | 30,243 | ¥ | 54,020 | $ | 511 | ||||||||
| Yen | U.S. dollars | |||||||||||||||
| Basic: | 2002 | 2003 | 2004 | 2004 | ||||||||||||
Net income, as reported |
¥ | 489.19 | ¥ | 361.44 | ¥ | 645.52 | $ | 6.11 | ||||||||
Add back: Goodwill amortization |
8.84 | — | — | — | ||||||||||||
Net income, excluding goodwill amortization |
¥ | 498.03 | ¥ | 361.44 | ¥ | 645.52 | $ | 6.11 | ||||||||
| Yen | U.S. dollars | |||||||||||||||
| Diluted: | 2002 | 2003 | 2004 | 2004 | ||||||||||||
Net income, as reported |
¥ | 467.11 | ¥ | 340.95 | ¥ | 607.52 | $ | 5.75 | ||||||||
Add back: Goodwill amortization |
8.42 | — | — | — | ||||||||||||
Net income, excluding goodwill amortization |
¥ | 475.53 | ¥ | 340.95 | ¥ | 607.52 | $ | 5.75 | ||||||||
As of March 31, 2003, intangible assets not subject to amortization are
¥3,294 million and the gross carrying amount of intangible assets subject to
amortization includes software of ¥34,644 million and others of ¥6,174 million
associated with accumulated amortization of ¥18,108 million. The aggregate
amortization expense for the net carrying amount of intangible assets in fiscal
2003 is ¥7,440 million.
As of March 31, 2004, intangible assets not subject to amortization are
¥3,361 million ($32 million) and the gross carrying amount of intangible assets
subject to amortization includes software of ¥36,913 million ($349 million) and
others of ¥8,455 million ($80 million) associated with accumulated amortization
of ¥21,399 million ($202 million). The aggregate amortization expense for the
net carrying amount of intangible assets in fiscal 2004 is ¥7,603 million ($72
million).
The estimated amortization expenses for each of five succeeding fiscal
years are ¥6,184 million ($59 million) in fiscal 2005, ¥5,555 million ($53
million) in fiscal 2006, ¥4,611 million ($44 million) in fiscal 2007, ¥2,957
million ($28 million) in fiscal 2008 and ¥1,176 million ($11 million) in fiscal
2009, respectively.
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13. Short-Term and Long-Term Debt
Short-term debt consists of notes payable to banks, bank overdrafts and
commercial paper.
The composition of short-term debt and the weighted average interest rate on
short-term debt at March 31, 2003 and 2004 are as follows:
| March 31, 2003 | ||||||||
| Weighted | ||||||||
| Millions of yen | average rate | |||||||
Short-term debt in Japan, mainly from banks |
¥ | 296,310 | 1.1 | % | ||||
Short-term debt outside Japan, mainly from banks |
296,861 | 2.2 | ||||||
Commercial paper in Japan |
522,814 | 0.1 | ||||||
Commercial paper outside Japan |
4,449 | 2.4 | ||||||
| ¥ | 1,120,434 | 0.9 | ||||||
| March 31, 2004 | ||||||||||||
| Millions of | Weighted | |||||||||||
| Millions of yen | U.S. dollars | average rate | ||||||||||
Short-term debt in Japan, mainly from banks |
¥ | 241,746 | $ | 2,287 | 1.5 | % | ||||||
Short-term debt outside Japan, mainly from banks |
241,890 | 2,289 | 2.7 | |||||||||
Commercial paper in Japan |
417,854 | 3,954 | 0.1 | |||||||||
Commercial paper outside Japan |
2,426 | 23 | 1.6 | |||||||||
| ¥ | 903,916 | $ | 8,553 | 1.2 | ||||||||
Long-term debt at March 31, 2003 and 2004 consists of the following:
| March 31, 2003 | ||||||
| Millions of | ||||||
| Due | yen | |||||
Banks: |
||||||
Fixed rate: 1.3% to 7.5% |
2004–2015 | ¥ | 198,680 | |||
Floating rate: principally based on LIBOR plus 0.0% to 0.8% |
2004–2011 | 730,970 | ||||
Insurance companies and others: |
||||||
Fixed rate: 0.5% to 6.7% |
2004–2011 | 388,646 | ||||
Floating rate: principally based on LIBOR plus 0.0% to 0.6% |
2005–2012 | 275,583 | ||||
Unsecured 0.1% to 3.1% bonds |
2004–2013 | 768,587 | ||||
Unsecured 0.0% to 0.4% convertible notes |
2005–2007 | 68,630 | ||||
Unsecured 0.6% to 1.6% bonds with warrants |
2004–2006 | 6,900 | ||||
Unsecured 0.0% bonds with stock acquisition rights |
2023 | 49,921 | ||||
Unsecured 0.0% to 7.2% notes under medium-term note program |
2004–2012 | 245,300 | ||||
0.5% to 7.6% payables under securitized lease receivables |
2004–2009 | 105,281 | ||||
0.8% to 5.8% payables under securitized loan receivables |
2010 | 18,115 | ||||
| ¥ | 2,856,613 | |||||
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| March 31, 2004 | ||||||||||
| Millions of | ||||||||||
| Due | Millions of yen | U.S. dollars | ||||||||
Banks: |
||||||||||
Fixed rate: 0.9% to 7.2% |
2005-2014 | ¥ | 124,031 | $ | 1,173 | |||||
Floating rate: principally based on LIBOR plus 0.2% to 0.8% |
2005-2021 | 790,947 | 7,484 | |||||||
Insurance companies and others: |
||||||||||
Fixed rate: 0.5% to 6.7% |
2005-2014 | 379,788 | 3,593 | |||||||
Floating rate: principally based on LIBOR plus 0.0% to 0.8% |
2005-2021 | 248,972 | 2,356 | |||||||
Unsecured 0.6% to 3.1% bonds |
2005-2013 | 744,113 | 7,041 | |||||||
Unsecured 0.0% to 0.4% convertible notes |
2005-2007 | 68,473 | 648 | |||||||
Unsecured 0.6% to 1.6% bonds with warrants |
2005-2006 | 3,400 | 32 | |||||||
Unsecured 0.0% bonds with stock acquisition rights |
2023 | 45,956 | 435 | |||||||
Unsecured 0.0% to 6.1% notes under medium-term note program |
2005-2013 | 159,332 | 1,508 | |||||||
0.4% to 3.0% payables under securitized lease receivables |
2006-2009 | 76,393 | 723 | |||||||
0.5% to 5.8% payables under securitized loan receivables |
2005-2010 | 21,314 | 201 | |||||||
| ¥ | 2,662,719 | $ | 25,194 | |||||||
The repayment schedule for the next five years and thereafter for long-term
debt at March 31, 2004 is as follows:
| Millions of | ||||||||
| Years ending March 31, | Millions of yen | U.S. dollars | ||||||
2005 |
¥ | 811,186 | $ | 7,675 | ||||
2006 |
660,615 | 6,251 | ||||||
2007 |
513,290 | 4,857 | ||||||
2008 |
323,653 | 3,062 | ||||||
2009 |
176,310 | 1,668 | ||||||
Thereafter |
177,665 | 1,681 | ||||||
Total |
¥ | 2,662,719 | $ | 25,194 | ||||
For borrowings from banks, insurance companies and other financial
institutions, and for bonds, interest payments are usually paid semi-annually
and principal repayments are made upon maturity of the loan contracts or bonds.
For medium-term notes, interest payments are mainly made annually and principal
is repaid upon maturity of the notes.
The Company issued Euro yen convertible bonds of ¥40,000 million in
October 1999 and ¥28,840 million (added premium of ¥840 million) in December
2001. These are currently convertible into approximately 3,381,000 shares and
1,892,000 shares of common stock at fixed conversion prices of ¥11,831.80 and
¥14,800.00 per share, respectively. The conversion prices shall be adjusted, if
the Company issues new shares at less than the current market price of the
shares.
The Company issued unsecured Japanese yen bonds with warrants. These bonds
were issued in conjunction with compensation plans that are described in Note
17. “Stock-Based Compensation.” These bonds in the amount of ¥1,800 million and
¥1,600 million (excluding value of warrants) were issued at par in September
2000 and July 2001, respectively.
The Company issued U.S. dollar zero coupon senior bond of $400 million,
net of unamortized discount of $622 million, in June 2002. The bond has stock
acquisition rights that are currently convertible into approximately 3,136,000
shares of common stock at a conversion price of $127.44 per share. The stock
acquisition rights may be exercised (1) if
the closing price at Tokyo Stock Exchange for the shares for at least 20
trading days in a period of 30 consecutive trading days ending on the last
trading day of such quarter is more than specified conversion trigger price
which will be accreted from $140.48 for the quarter including the date of
issuance to $355.05 for the quarter ending the date of the bond maturity, (2)
during any period in which the issuer rating or the long-term senior debt
credit rating assigned to the Company is below a specified level, (3) if the
bond is called for redemption or (4) if specified corporate transactions have
occurred.
Total committed lines for the Company and its subsidiaries were ¥862,147
million and ¥875,797 million ($8,286 million) at March 31, 2003 and 2004,
respectively, and, of these lines, ¥797,449 million and ¥765,608 million
($7,244 million) were available at March 31, 2003 and 2004, respectively. Of
the available committed lines, ¥86,459 million and ¥97,664 million ($924
million) were long-term committed credit lines at March 31, 2003 and 2004,
respectively.
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As of March 31, 2003 and 2004, ¥80,000 million and ¥64,000 million ($606
million) of the total committed lines were restricted for commercial paper
backup purposes, and no borrowings were made under these lines at each balance
sheet date.
Some of the debt and commitment contracts contain covenant clauses. The
covenants include select objective requirements relating to the need for the
Company and its subsidiaries to maintain prescribed levels of equity or credit
rating issued by the rating agencies. As of March 31, 2004, the Company and its
subsidiaries were in compliance with such objective covenant requirements.
The agreements related to debt payable to banks provide that the banks
under certain circumstances may request additional security for loans and have
the right to offset cash deposited against any short-term or long-term debt
that becomes due and, in case of default and certain other specified events,
against all other debt payable to the banks. Whether such provisions can be
enforced will depend upon the factual circumstances.
In addition to the minimum lease payments receivable related to the
payables under securitized lease receivables described in Note 9.
“Securitization Transactions,” the short-term and long-term debt payable to
financial institutions are secured by the following assets as of March 31,
2004:
| Millions of | ||||||||
| Millions of yen | U.S. dollars | |||||||
Minimum lease payments, loans and future rentals |
¥ | 71,960 | $ | 681 | ||||
Investment in securities (include repurchase facilities of ¥116,318 million ($1,101 million)) |
116,560 | 1,103 | ||||||
Other operating assets and office facilities, net |
4,173 | 39 | ||||||
| ¥ | 192,693 | $ | 1,823 | |||||
As
of March 31, 2004, securities and other assets of
¥7,884 million ($75
million) were pledged for collateral security deposits.
As of March 31, 2004, a subsidiary pledged borrowed bonds through
security lending transactions with the fair values of ¥22,466 million ($213
million) for collateral security deposits.
Under agreements with customers on brokerage business, the Company and
its subsidiaries received customers’ securities with an approximate value of
¥48,613 million ($460 million) as of March 31, 2004, that may be sold or
repledged by the Company and its subsidiaries. As of March 31, 2004, ¥23,581
million ($223 million) at market value of the securities are repledged as
collateral for short-term debt.
Loan agreements relating to short-term and long-term debt from commercial
banks and certain insurance companies provide that minimum lease payments and
installment loans are subject to pledges as collateral against these debts at
any time if requested by the lenders. To date, the Company has not received
any such requests from the lenders.
14. Deposits
Deposits at March 31, 2003 and 2004 consist of the following:
| Millions of | ||||||||||||
| Millions of yen | U.S. dollars | |||||||||||
| 2003 | 2004 | 2004 | ||||||||||
Time deposits |
¥ | 214,801 | ¥ | 242,102 | $ | 2,291 | ||||||
Other deposits |
47,666 | 50,443 | 477 | |||||||||
Total |
¥ | 262,467 | ¥ | 292,545 | $ | 2,768 | ||||||
The balances of time deposits, including certificates of deposit, issued
in amounts of ¥10 million ($95 thousand) or more were ¥146,353 million and
¥159,873 million ($1,513 million) at March 31, 2003 and 2004, respectively.
The maturity schedule of time deposits at March 31, 2004 is as follows:
| Millions of | ||||||||
| Years ending March 31, | Millions of yen | U.S. dollars | ||||||
2005 |
¥ | 124,085 | $ | 1,174 | ||||
2006 |
38,291 | 362 | ||||||
2007 |
41,566 | 393 | ||||||
2008 |
21,816 | 207 | ||||||
2009 |
16,344 | 155 | ||||||
Total |
¥ | 242,102 | $ | 2,291 | ||||
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Table of Contents
15. Income Taxes
Income before discontinued operations, extraordinary gain, cumulative
effect of a change in accounting principle and income taxes, and the provision
for income taxes in fiscal 2002, 2003 and 2004 are as follows:
| Millions of | ||||||||||||||||
| Millions of yen | U.S. dollars | |||||||||||||||
| 2002 | 2003 | 2004 | 2004 | |||||||||||||
Income before discontinued operations, extraordinary gain,
cumulative effect of a change in accounting principle and
income taxes: |
||||||||||||||||
Domestic |
¥ | 61,797 | ¥ | 35,884 | ¥ | 80,163 | $ | 759 | ||||||||
Foreign |
10,509 | 9,295 | 21,994 | 208 | ||||||||||||
| ¥ | 72,306 | ¥ | 45,179 | ¥ | 102,157 | $ | 967 | |||||||||
Provision for income taxes: |
||||||||||||||||
Current — |
||||||||||||||||
Domestic |
¥ | 13,907 | ¥ | 43,356 | ¥ | 50,469 | $ | 478 | ||||||||
Foreign |
1,163 | 612 | 3,950 | 37 | ||||||||||||
| 15,070 | 43,968 | 54,419 | 515 | |||||||||||||
Deferred — |
||||||||||||||||
Domestic |
13,912 | (28,521 | ) | (11,733 | ) | (111 | ) | |||||||||
Foreign |
3,618 | 5,299 | 8,852 | 84 | ||||||||||||
| 17,530 | (23,222 | ) | (2,881 | ) | (27 | ) | ||||||||||
Provision for income taxes |
¥ | 32,600 | ¥ | 20,746 | ¥ | 51,538 | $ | 488 | ||||||||
The Company and its domestic subsidiaries are subject to a National
Corporate tax of 30%, an Inhabitant tax of approximately 6% and a deductible
Enterprise tax of approximately 10%, which in the aggregate resulted in a
statutory income tax rate of approximately 42% in fiscal 2002, 2003 and 2004.
The effective income tax rate is different from the statutory tax rate
primarily because of certain non-deductible expenses for tax purposes, a change
in valuation allowance and the effect of lower income tax rates on foreign
subsidiaries and a domestic life insurance subsidiary.
Under the provisions of FASB Statement No. 109 (“Accounting for Income
Taxes”), the effect of a change in tax laws or rates is included in income in
the period the change is enacted and includes a cumulative recalculation of
deferred tax balances based on the new tax laws or rates. The Amendments to
Local Tax Laws, which were enacted on March 31, 2003 (effective from April 1,
2004), decreased the statutory tax rate to approximately 40.7%. During fiscal
2004, the statutory tax rate increased to 40.9%, due to the tuning of tax rate
by each local tax authority. As a result, the net deferred tax liability
decreased ¥2,420 million which decreased provision for income taxes in fiscal
2003, and increased ¥724 million ($7 million) which increased provision for
income taxes in fiscal 2004.
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Reconciliation of the differences between tax provision computed at the
statutory rate and consolidated provisions for income taxes in fiscal 2002,
2003 and 2004 are as follows:
| Millions of | ||||||||||||||||
| Millions of yen | U.S. dollars | |||||||||||||||
| 2002 | 2003 | 2004 | 2004 | |||||||||||||
Income before discontinued operations, extraordinary gain,
cumulative effect of a change in accounting principle and
income taxes |
¥ | 72,306 | ¥ | 45,179 | ¥ | 102,157 | $ | 967 | ||||||||
Tax provision computed at statutory rate |
¥ | 30,369 | ¥ | 18,975 | ¥ | 42,906 | $ | 406 | ||||||||
Increases (reductions) in taxes due to: |
||||||||||||||||
Change in valuation allowance |
549 | 2,597 | 1,019 | 10 | ||||||||||||
Charge-off of deferred tax assets recognized for excess of the tax
basis over the amounts for financial reporting of investments in
subsidiaries |
— | — | 5,586 | 53 | ||||||||||||
Non-deductible expenses for tax purposes |
641 | 1,013 | 744 | 7 | ||||||||||||
Effect of a change in tax rate |
— | (2,420 | ) | 724 | 7 | |||||||||||
Amortization of goodwill |
176 | — | — | — | ||||||||||||
Effect of lower tax rates on foreign subsidiaries and domestic life
insurance subsidiary |
(873 | ) | (705 | ) | (1,225 | ) | (12 | ) | ||||||||
Effect of gain on sales of domestic subsidiaries |
1,648 | — | — | — | ||||||||||||
Other, net |
90 | 1,286 | 1,784 | 17 | ||||||||||||
Provision for income taxes |
¥ | 32,600 | ¥ | 20,746 | ¥ | 51,538 | $ | 488 | ||||||||
In fiscal 2004, ¥5,586 million ($53 million) of deferred tax assets which had been recognized for excess of the tax basis over the amounts for
financial reporting of investments in subsidiaries was written down; due to the change in the management’s future tax plan, the temporary differences
for these deferred tax assets will no longer reverse in the foreseeable future and, accordingly, should no longer be recognized.
Total income taxes recognized in fiscal 2002, 2003 and 2004 are as follows:
| Millions of | ||||||||||||||||
| Millions of yen | U.S. dollars | |||||||||||||||
| 2002 | 2003 | 2004 | 2004 | |||||||||||||
Provision for income taxes |
¥ | 32,600 | ¥ | 20,746 | ¥ | 51,538 | $ | 488 | ||||||||
Income tax on discontinued operations |
303 | 450 | 1,921 | 19 | ||||||||||||
Income tax on extraordinary gain |
— | 2,206 | 421 | 4 | ||||||||||||
Income tax on cumulative effect of a change in accounting principle |
51 | 353 | — | — | ||||||||||||
Income tax on other comprehensive income (loss): |
||||||||||||||||
Net cumulative effect of adopting FASB statement No. 133 |
(5,698 | ) | — | — | — | |||||||||||
Net unrealized gains (losses) on investment in securities |
(11,694 | ) | (7,046 | ) | 15,179 | 144 | ||||||||||
Minimum pension liability adjustments |
(1,517 | ) | 1,986 | (2,573 | ) | (25 | ) | |||||||||
Foreign currency translation adjustments |
680 | (835 | ) | (3,192 | ) | (31 | ) | |||||||||
Net unrealized gains (losses) on derivative instruments |
1,204 | (445 | ) | 2,111 | 20 | |||||||||||
Total income taxes |
¥ | 15,929 | ¥ | 17,415 | ¥ | 65,405 | $ | 619 | ||||||||
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The tax effects of temporary differences giving rise to the deferred tax assets
and liabilities at March 31, 2003 and 2004 are as follows:
| Millions of | ||||||||||||
| Millions of yen | U.S. dollars | |||||||||||
| 2003 | 2004 | 2004 | ||||||||||
Assets: |
||||||||||||
Net operating loss carryforwards |
¥ | 25,887 | ¥ | 11,209 | $ | 106 | ||||||
Allowance for doubtful receivables on direct financing leases and probable loan losses |
25,514 | 31,239 | 296 | |||||||||
Other operating assets |
2,887 | 3,703 | 35 | |||||||||
Accrued expenses |
8,088 | 11,219 | 106 | |||||||||
Other |
17,730 | 17,127 | 162 | |||||||||
| 80,106 | 74,497 | 705 | ||||||||||
Less: valuation allowance |
(10,029 | ) | (10,792 | ) | (102 | ) | ||||||
| 70,077 | 63,705 | 603 | ||||||||||
Liabilities: |
||||||||||||
Investment in direct financing leases |
117,314 | 97,707 | 925 | |||||||||
Investment in operating leases |
3,899 | 5,280 | 50 | |||||||||
Investment in securities |
2,210 | 17,214 | 163 | |||||||||
Deferred life insurance acquisition costs |
8,749 | 11,640 | 110 | |||||||||
Policy liabilities |
5,709 | 4,040 | 38 | |||||||||
Undistributed earnings |
14,797 | 21,719 | 206 | |||||||||
Prepaid benefit cost |
10,223 | 10,937 | 103 | |||||||||
Other |
5,619 | 2,845 | 27 | |||||||||
| 168,520 | 171,382 | 1,622 | ||||||||||
Net deferred tax liability |
¥ | 98,443 | ¥ | 107,677 | $ | 1,019 | ||||||
Valuation allowance is mainly recognized for deferred tax assets of
consolidated subsidiaries with net operating loss carryforwards for tax
purposes. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment. Based
upon the level of historical taxable income and projections for future taxable
income over the periods in which the deferred tax assets are deductible,
management believes it is more likely than not that the Company and its
subsidiaries will realize the benefits of these deductible differences, net of
the existing valuation allowances at March 31, 2004. The amount of the deferred
tax asset considered realizable, however, could be reduced in the near term if
estimates of future taxable income during the carryforward period are reduced.
The net changes in the total valuation allowance in fiscal 2003 and 2004 were
increases of ¥2,412 million and ¥763 million ($7 million), respectively.
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Table of Contents
Certain subsidiaries have net operating loss carryforwards of ¥47,606 million
($450 million) at March 31, 2004, which expire as follows:
| Millions of | ||||||||
| Year ending March 31, | Millions of yen | U.S. dollars | ||||||
2005 |
¥ | 3,005 | $ | 28 | ||||
2006 |
5,794 | 55 | ||||||
2007 |
1,505 | 14 | ||||||
2008 |
1,434 | 14 | ||||||
2009 |
2,723 | 26 | ||||||
Thereafter |
33,145 | 313 | ||||||
Total |
¥ | 47,606 | $ | 450 | ||||
As of March 31, 2004, a deferred tax liability of ¥10,529 million ($100
million) has not been recognized for ¥81,621 million ($772 million) of
undistributed earnings of certain foreign subsidiaries as it is the Company’s
intention to permanently reinvest those earnings. The deferred tax liability
will be recognized when the Company is no longer able to demonstrate that it
plans to permanently reinvest undistributed earnings.
Net deferred tax assets and liabilities at March 31, 2003 and 2004 are
reflected in the accompanying consolidated balance sheets under the following
captions:
| Millions of | ||||||||||||
| Millions of yen | U.S. dollars | |||||||||||
| 2003 | 2004 | 2004 | ||||||||||
Other assets |
¥ | 17,588 | ¥ | 14,557 | $ | 138 | ||||||
Income taxes: Deferred |
116,031 | 122,234 | 1,157 | |||||||||
Net deferred tax liability |
¥ | 98,443 | ¥ | 107,677 | $ | 1,019 | ||||||
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Table of Contents
16. Pension Plans
The Company and certain subsidiaries have trusted contributory and
non-contributory funded pension plans covering substantially all of their
employees. Under the plans, employees are entitled to lump-sum payments at the
time of termination of their employment or to pension payments. The amounts of
such payments are determined on the basis of length of service and
remuneration at the time of termination. The Company and its subsidiaries’
funding policy is to contribute annually the amounts actuarially determined.
Assets of the plans are invested primarily in
interest-bearing securities and marketable equity securities.
The funded status of the defined benefit pension plans, a substantial
portion of which consists of domestic pension plans, as of March 31, 2003 and
2004 is as follows:
| Millions of | ||||||||||||
| Millions of yen | U.S. dollars | |||||||||||
| 2003 | 2004 | 2004 | ||||||||||
Change in benefit obligation: |
||||||||||||
Benefit obligation at beginning of year |
¥ | 66,715 | ¥ | 74,688 | $ | 707 | ||||||
Service cost |
4,060 | 3,737 | 35 | |||||||||
Interest cost |
1,728 | 1,655 | 16 | |||||||||
Plan participants’ contributions |
535 | 255 | 2 | |||||||||
Plan amendments |
(3,076 | ) | — | — | ||||||||
Actuarial loss |
6,332 | 2,478 | 23 | |||||||||
Foreign currency exchange rate change |
(345 | ) | (484 | ) | (5 | ) | ||||||
Benefits paid |
(1,653 | ) | (1,522 | ) | (14 | ) | ||||||
Plan curtailment |
(69 | ) | (132 | ) | (1 | ) | ||||||
Settlements |
— | (407 | ) | (4 | ) | |||||||
Special termination benefits |
1 | — | — | |||||||||
Acquisition and other |
460 | 916 | 9 | |||||||||
Benefit obligation at end of year |
¥ | 74,688 | ¥ | 81,184 | $ | 768 | ||||||
Change in plan assets: |
||||||||||||
Fair value of plan assets at beginning of year |
¥ | 55,418 | ¥ | 54,492 | $ | 516 | ||||||
Actual return on plan assets |
(7,718 | ) | 6,457 | 61 | ||||||||
Employer contribution |
7,719 | 6,925 | 66 | |||||||||
Plan participants’ contributions |
535 | 255 | 2 | |||||||||
Benefits paid |
(1,239 | ) | (1,371 | ) | (13 | ) | ||||||
Foreign currency exchange rate change |
(261 | ) | (287 | ) | (3 | ) | ||||||
Settlements |
— | 26 | 0 | |||||||||
Acquisition and other |
38 | 187 | 2 | |||||||||
Fair value of plan assets at end of year |
¥ | 54,492 | ¥ | 66,684 | $ | 631 | ||||||
The funded status of the plans: |
||||||||||||
Funded status |
¥ | (20,196 | ) | ¥ | (14,500 | ) | $ | (137 | ) | |||
Unrecognized prior service cost |
(2,802 | ) | (2,545 | ) | (24 | ) | ||||||
Unrecognized net actuarial loss |
45,170 | 39,587 | 375 | |||||||||
Unrecognized net transition obligation |
359 | 351 | 3 | |||||||||
Net amount recognized |
¥ | 22,531 | ¥ | 22,893 | $ | 217 | ||||||
Amount recognized in the consolidated balance sheets consists of: |
||||||||||||
Prepaid benefit cost |
¥ | 25,119 | ¥ | 26,740 | $ | 253 | ||||||
Accrued benefit liability |
(9,787 | ) | (17,376 | ) | (164 | ) | ||||||
Intangible asset |
112 | 84 | 1 | |||||||||
Accumulated other comprehensive loss, gross of tax |
7,087 | 13,445 | 127 | |||||||||
Net amount recognized |
¥ | 22,531 | ¥ | 22,893 | $ | 217 | ||||||
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Table of Contents
The accumulated benefit obligations for all defined benefit pension plans
were ¥55,435 million and ¥66,642 million ($631 million), respectively, at March
31, 2003 and 2004.
The aggregate projected benefit obligations, aggregate accumulated benefit
obligations and aggregate fair values of plan assets for the plans with the
accumulated benefit obligations in excess of plan assets were ¥35,147 million,
¥23,903 million and ¥14,383 million, respectively, at March 31, 2003 and
¥35,918 million ($340 million), ¥31,733 million ($300 million) and ¥15,069
million ($143 million), respectively, at March 31, 2004.
Net pension cost of the plans for fiscal 2002, 2003 and 2004 consists of the
following:
| Millions of | ||||||||||||||||
| Millions of yen | U.S. dollars | |||||||||||||||
| 2002 | 2003 | 2004 | 2004 | |||||||||||||
Service cost |
¥ | 3,799 | ¥ | 4,060 | ¥ | 3,737 | $ | 36 | ||||||||
Interest cost |
1,757 | 1,728 | 1,655 | 16 | ||||||||||||
Expected return on plan assets |
(1,496 | ) | (1,534 | ) | (1,231 | ) | (12 | ) | ||||||||
Amortization of unrecognized transition obligation |
34 | 11 | 8 | 0 | ||||||||||||
Amortization of unrecognized net actuarial loss |
1,137 | 1,588 | 2,386 | 23 | ||||||||||||
Amortization of unrecognized prior service cost |
(13 | ) | (272 | ) | (272 | ) | (3 | ) | ||||||||
Plan curtailment and settlements |
146 | 13 | 229 | 2 | ||||||||||||
Net periodic pension cost |
¥ | 5,364 | ¥ | 5,594 | ¥ | 6,512 | $ | 62 | ||||||||
The Company and certain subsidiaries use a March 31 measurement date for the
majority of its plans.
Significant assumptions of domestic and foreign pension plans used to determine
these amounts are as follows:
| Domestic | 2002 | 2003 | 2004 | |||||||||
Weighted-average assumptions used to determine benefit obligations at March 31: |
||||||||||||
Discount rate |
2.0 | % | 2.0 | % | ||||||||
Rate of increase in compensation levels |
1.7 | % | 1.9 | % | ||||||||
Weighted-average assumptions used to determine net periodic pension cost for years ended March 31: |
||||||||||||
Discount rate |
3.0 | % | 2.5 | % | 2.0 | % | ||||||
Rate of increase in compensation levels |
2.1 | % | 2.2 | % | 1.7 | % | ||||||
Expected long-term rate of return on plan assets |
3.0 | % | 2.5 | % | 2.0 | % | ||||||
| Foreign | 2002 | 2003 | 2004 | |||||||||
Weighted-average assumptions used to determine benefit obligations at March 31: |
||||||||||||
Discount rate |
6.3 | % | 5.7 | % | ||||||||
Rate of increase in compensation levels |
4.0 | % | 0.1 | % | ||||||||
Weighted-average assumptions used to determine net periodic pension cost for years ended March 31: |
||||||||||||
Discount rate |
7.3 | % | 7.0 | % | 6.3 | % | ||||||
Rate of increase in compensation levels |
4.5 | % | 4.3 | % | 4.0 | % | ||||||
Expected long-term rate of return on plan assets |
9.3 | % | 9.3 | % | 8.5 | % | ||||||
The Company and certain subsidiaries determine the expected long-term rate
of return on plan assets annually based on the composition of the pension asset
portfolios of the plan year and the expected long-term rate of return on these
portfolios. The expected long-term rate of return is designed to approximate
the long-term rate of return actually earned on the plans’ assets over time to
ensure that funds are available to meet the pension obligations that result
from the services provided by employees. The Company and certain subsidiaries
use a number of factors to determine the expected rate of return, including
actual historical returns on the asset classes of the plans’ portfolios and
independent projections of returns of the various asset classes.
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The asset allocation for the Company and certain subsidiaries’ pension plans at
March 31, 2003 and 2004 are as follows:
| 2003 | 2004 | |||||||
Equity securities |
43.8 | % | 30.2 | % | ||||
Debt securities |
43.6 | 31.4 | ||||||
Life insurance company general accounts |
7.1 | 6.2 | ||||||
Short-term financial instruments |
4.4 | 31.0 | ||||||
Other |
1.1 | 1.2 | ||||||
Total |
100.0 | % | 100.0 | % | ||||
Life insurance company general accounts in the above table are accounts
with guaranteed capital and minimum interest rate, in which life insurance
companies manage funds on several contracts.
The Company and certain subsidiaries’ investment policies are designed to
ensure adequate plan assets are available to provide future payments of
pension benefits to eligible participants. The Company and certain
subsidiaries formulate policy portfolio appropriate to produce the expected
long-term rate of return on plan assets, and ensure that plan assets are
allocated under this policy portfolio. The Company and certain subsidiaries
periodically have an external consulting firm monitor the results of actual
return and revise the policy portfolio if necessary.
Equity securities in which the Company and certain subsidiaries invest as
pension plan assets include units of ORIX JREIT Inc. in the amounts of ¥203
million ($2 million) at March 31, 2004.
The Company and certain subsidiaries expect to contribute ¥7,409 million
($70 million) to those pension plans during the year ending March 31, 2005.
In addition, directors and corporate auditors of certain subsidiaries
receive lump-sum payments upon termination of their services under unfunded
termination plans. The amount required based on length of service and
remuneration to date under these plans is fully accrued.
The Company abolished this unfunded termination plans at June 2003.
Total provisions charged to income for all the plans including the
defined benefit plans are ¥6,238 million, ¥7,094 million and ¥9,564 million
($90 million), in fiscal 2002, 2003 and 2004, respectively.
17. Stock-Based Compensation
The Company has four types of stock-based compensation plans as incentive
plans for directors, corporate executive officers, corporate auditors and
selected employees.
In fiscal 1999, 2000 and 2001, the Company granted stock options to
directors, corporate executive officers and certain employees of the Company
and the stock options vested immediately except for the fiscal 2001 plan which
had a vesting period of three years and the exercise periods are 9.75 years,
9.7 years and 10 years from the grant date, respectively. Under the plans,
option holders have the right to purchase in the aggregate 146,000, 145,000
and 316,700 treasury shares of the Company for options granted during fiscal
1999, 2000 and 2001, respectively.
In fiscal 2000, 2001 and 2002, the Company issued unsecured bonds with
detachable warrants. Simultaneously with the issuance of the unsecured bonds,
the Company purchased all of the detachable warrants from the underwriters and
distributed such warrants to corporate auditors and certain employees of the
Company and to directors, corporate auditors and certain employees of
subsidiaries. The warrants issued each fiscal year from fiscal 2000 to 2002
vested immediately with an exercise period of four years. By exercising the
warrants, the warrant holders can purchase in the aggregate, 302,484, 126,143
and 124,303 shares of the Company granted for each fiscal year. The number of
the Company’s shares to be issued for fiscal 2000 plan was adjusted April 1,
2000 for a 1.2-for-1 stock split implemented on May 19, 2000. For financial
reporting purposes, these transactions were accounted for as the issuance of
debt to third parties and separately as the issuance of warrants to directors,
corporate auditors and employees. The issuance of the warrants was accounted
for under the intrinsic value method allowed per FASB Statement No.123
(“Accounting for Stock-Based Compensation”).
In fiscal 2002, the Company granted another option plan of which the
vesting period was two years and the exercise period was 10 years from the
grant date. Under this plan, the Company issued warrants to directors,
corporate executive officers and certain employees of the Company to purchase,
in the aggregate, 300,900 shares of the Company’s common stock at an exercise
price. The issuance of the warrants was accounted for under the intrinsic
value method allowed per FASB Statement No.123.
In fiscal 2003 and 2004 the Company granted stock acquisition rights
which had a vesting period of 1.67 years and 1.92 years and an exercise period
of 9.67 years and 9.92 years, respectively. The acquisition rights were to
purchase, in the aggregate, 453,300 and 516,000 shares of the Company’s common
stock at an exercise price. The acquisition rights were distributed to
directors, corporate executive officers, corporate auditors and certain
employees of the Company, subsidiaries and affiliated companies. The issuance
of the stock acquisition rights was accounted for under the intrinsic value
method allowed per FASB Statement No.123.
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The Board of Directors intends to obtain approval from shareholders, at
the next general meeting, to be held on June 23, 2004, for an additional grant
of stock acquisition rights for 640,000 shares, to directors, corporate
executive officers, corporate auditors and certain employees of the Company,
subsidiaries and affiliated companies during the year ending March 31, 2005.
For all plans above, the exercise prices, which are determined by a
formula linked to the stock price of the Company’s shares on the Tokyo Stock
Exchange, are equal or greater than the fair market value of the Company’s
shares at the grant dates.
The fair value of these stock options was estimated using the Black-Scholes
option pricing model under the following assumptions:
| 2002 | 2003 | 2004 | ||||||||||
Grant-date fair value |
¥ | 5,014 | ¥ | 3,126 | ¥ | 3,351 | ($31.71) | |||||
Expected life |
9.65 Years | 6.95 Years | 8.90 Years | |||||||||
Risk-free rate |
1.21 | % | 0.52 | % | 0.81 | % | ||||||
Expected volatility |
32.31 | % | 43.52 | % | 41.79 | % | ||||||
Expected dividend yield |
0.123 | % | 0.339 | % | 0.346 | % | ||||||
The following table summarizes information about stock option activity for
fiscal 2002, 2003 and 2004:
| 2002 | 2003 | 2004 | ||||||||||||||||||||||||||
| Weighted- | Weighted- | Weighted- | ||||||||||||||||||||||||||
| average | average | average | ||||||||||||||||||||||||||
| exercise price | exercise price | exercise price | ||||||||||||||||||||||||||
| Number of | Number of | Number of | ||||||||||||||||||||||||||
| shares | Yen | shares | Yen | shares | Yen | U. S. dollars | ||||||||||||||||||||||
Outstanding at beginning of
year |
1,276,547 | ¥ | 11,458 | 1,568,253 | ¥ | 11,991 | 1,833,405 | ¥ | 11,333 | $ | 107.23 | |||||||||||||||||
Granted |
425,203 | 12,329 | 453,300 | 7,452 | 516,000 | 7,230 | 68.41 | |||||||||||||||||||||
Exercised |
(124,616 | ) | 7,846 | (62,929 | ) | 6,899 | (25,200 | ) | 7,779 | 73.60 | ||||||||||||||||||
Forfeited or expired |
(8,881 | ) | 9,735 | (125,219 | ) | 7,758 | (273,295 | ) | 11,297 | 106.89 | ||||||||||||||||||
Outstanding at end of year |
1,568,253 | 11,991 | 1,833,405 | 11,333 | 2,050,910 | 10,349 | 97.92 | |||||||||||||||||||||
Exercisable at end of year |
953,953 | ¥ | 10,475 | 767,905 | ¥ | 11,225 | 1,086,010 | ¥ | 13,029 | $ | 123.28 | |||||||||||||||||
The exercise prices of the granted options were adjusted on April 1, 2000 for a 1.2-for-1 stock split implemented on May 19, 2000.
Summary information about the Company’s stock options outstanding and exercisable at March 31, 2004 is as follows:
| Outstanding | Exercisable | |||||||||||||||||||
| Weighted- | ||||||||||||||||||||
| average | Weighted-average | Weighted-average | ||||||||||||||||||
| Range of exercise price | remaining life | exercise price | exercise price | |||||||||||||||||
| Number of | Number of | |||||||||||||||||||
| Yen | shares | Years | Yen | shares | Yen | |||||||||||||||
¥7,230-¥10,000 |
1,053,500 | 8.40 | ¥ | 7,371 | 88,600 | ¥ | 7,784 | |||||||||||||
10,001-13,000 |
563,794 | 5.46 | 11,831 | 563,794 | 11,831 | |||||||||||||||
13,001-16,272 |
433,616 | 4.63 | 15,657 | 433,616 | 15,657 | |||||||||||||||
7,230-16,272 |
2,050,910 | 6.80 | 10,349 | 1,086,010 | 13,029 | |||||||||||||||
| Outstanding | Exercisable | |||||||||||||||||||
| Weighted- | ||||||||||||||||||||
| average | Weighted-average | Weighted-average | ||||||||||||||||||
| Range of exercise price | remaining life | exercise price | exercise price | |||||||||||||||||
| Number of | Number of | |||||||||||||||||||
| U.S. dollars | shares | Years | U.S. dollars | shares | U.S. dollars | |||||||||||||||
$68.41-$94.62 |
1,053,500 | 8.40 | $ | 69.74 | 88,600 | $ | 73.65 | |||||||||||||
94.63-123.00 |
563,794 | 5.46 | 111.94 | 563,794 | 111.94 | |||||||||||||||
123.01-153.96 |
433,616 | 4.63 | 148.14 | 433,616 | 148.14 | |||||||||||||||
68.41-153.96 |
2,050,910 | 6.80 | 97.92 | 1,086,010 | 123.28 | |||||||||||||||
18. Accumulated Other Comprehensive Income (Loss)
Changes in each component of accumulated other comprehensive income
(loss) in fiscal 2002, 2003 and 2004 are as follows. Comprehensive income
(loss) and its components have been reported, net of tax, in the consolidated
statements of shareholders’ equity.
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Table of Contents
| Millions of yen | ||||||||||||||||||||
| Net unrealized | Net unrealized | |||||||||||||||||||
| gains (losses) on | Minimum pension | Foreign currency | losses on | Accumulated other | ||||||||||||||||
| investment in | liability | translation | derivative | comprehensive | ||||||||||||||||
| securities | adjustments | adjustments | instruments | income (loss) | ||||||||||||||||
Balance at March 31, 2001 |
¥ | 34,344 | ¥ | (4,684 | ) | ¥ | (25,108 | ) | ¥ | — | ¥ | 4,552 | ||||||||
Net cumulative effect of adopting FASB Statement No. 133, net of tax of
¥5,698 million |
(8,400 | ) | (8,400 | ) | ||||||||||||||||
Net unrealized losses on investment in securities, net of tax of ¥11,796
million |
(19,555 | ) | (19,555 | ) | ||||||||||||||||
Reclassification adjustment for gains included in net income, net of tax
of ¥(102) million |
(33 | ) | (33 | ) | ||||||||||||||||
Minimum pension liability adjustments, net of tax of ¥1,517 million |
(2,150 | ) | (2,150 | ) | ||||||||||||||||
Foreign currency translation adjustments, net of tax of ¥(680) million |
10,324 | 10,324 | ||||||||||||||||||
Reclassification adjustment for gains include in net income |
(16 | ) | (16 | ) | ||||||||||||||||
Net unrealized losses on derivative instruments, net of tax of ¥51 million |
(76 | ) | (76 | ) | ||||||||||||||||
Reclassification adjustment for losses included in net income, net of tax
of ¥(1,255) million |
1,914 | 1,914 | ||||||||||||||||||
Current period change |
(19,588 | ) | (2,150 | ) | 10,308 | (6,562 | ) | (17,992 | ) | |||||||||||
Balance at March 31, 2002 |
14,756 | (6,834 | ) | (14,800 | ) | (6,562 | ) | (13,440 | ) | |||||||||||
Net unrealized losses on investment in securities, net of tax of ¥7,887
million |
(14,300 | ) | (14,300 | ) | ||||||||||||||||
Reclassification adjustment for losses included in net income, net of tax
of ¥(841) million |
1,461 | 1,461 | ||||||||||||||||||
Minimum pension liability adjustments, net of tax of ¥(1,986) million |
2,652 | 2,652 | ||||||||||||||||||
Foreign currency translation adjustments, net of tax of ¥835 million |
(15,780 | ) | (15,780 | ) | ||||||||||||||||
Reclassification adjustment for losses included in net income |
661 | 661 | ||||||||||||||||||
Net unrealized losses on derivative instruments, net of tax of ¥1,040
million |
(1,785 | ) | (1,785 | ) | ||||||||||||||||
Reclassification adjustment for losses included in net income, net of tax
of ¥(595) million |
784 | 784 | ||||||||||||||||||
Current period change |
(12,839 | ) | 2,652 | (15,119 | ) | (1,001 | ) | (26,307 | ) | |||||||||||
Balance at March 31, 2003 |
1,917 | (4,182 | ) | (29,919 | ) | (7,563 | ) | (39,747 | ) | |||||||||||
Net unrealized gains on investment in securities, net of tax of ¥(17,929)
million |
26,875 | 26,875 | ||||||||||||||||||
Reclassification adjustment for losses included in net income, net of tax
of ¥2,750 million |
(3,744 | ) | (3,744 | ) | ||||||||||||||||
Minimum pension liability adjustments, net of tax of ¥2,573 million |
(3,785 | ) | (3,785 | ) | ||||||||||||||||
Foreign currency translation adjustments, net of tax of ¥3,192 million |
(15,467 | ) | (15,467 | ) | ||||||||||||||||
Reclassification adjustment for losses included in net income |
(243 | ) | (243 | ) | ||||||||||||||||
Net unrealized gains on derivative instruments, net of tax of ¥(1,846)
million |
2,588 | 2,588 | ||||||||||||||||||
Reclassification adjustment for losses included in net income, net of tax
of ¥(265) million |
382 | 382 | ||||||||||||||||||
Current period change |
23,131 | (3,785 | ) | (15,710 | ) | 2,970 | 6,606 | |||||||||||||
Balance at March 31, 2004 |
¥ | 25,048 | ¥ | (7,967 | ) | ¥ | (45,629 | ) | ¥ | (4,593 | ) | ¥ | (33,141 | ) | ||||||
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Table of Contents
| Millions of U.S. dollars | ||||||||||||||||||||
| Net unrealized | Foreign | Net unrealized | Accumulated | |||||||||||||||||
| gains (losses) | Minimum | currency | losses on | other | ||||||||||||||||
| on investment in | pension liability | translation | derivative | comprehensive | ||||||||||||||||
| securities | adjustments | adjustments | instruments | income (loss) | ||||||||||||||||
Balance at March 31, 2003 |
$ | 18 | $ | (39 | ) | $ | (284 | ) | $ | (71 | ) | $ | (376 | ) | ||||||
Net unrealized gains on investment in
securities, net of tax of $(170) million |
254 | 254 | ||||||||||||||||||
Reclassification adjustment for losses included in net income, net
of tax of $26 million |
(35 | ) | (35 | ) | ||||||||||||||||
Minimum pension liability adjustments, net of tax of
$25 million |
(36 | ) | (36 | ) | ||||||||||||||||
Foreign currency translation
adjustments, net of tax of $31 million |
(146 | ) | (146 | ) | ||||||||||||||||
Reclassification adjustment for losses included in net
income |
(2 | ) | (2 | ) | ||||||||||||||||
Net unrealized gains on derivative instruments, net of
tax of $(17)
million |
24 | 24 | ||||||||||||||||||
Reclassification adjustment for losses included in net income, net
of tax of $(3) million |
4 | 4 | ||||||||||||||||||
Current period change |
219 | (36 | ) | (148 | ) | 28 | 63 | |||||||||||||
Balance at March 31, 2004 |
$ | 237 | $ | (75 | ) | $ | (432 | ) | $ | (43 | ) | $ | (313 | ) | ||||||
19. Shareholders’ Equity
Changes in the number of shares issued and outstanding in fiscal 2002, 2003
and 2004 are as follows:
| Number of shares | ||||||||||||
| 2002 | 2003 | 2004 | ||||||||||
Beginning balance |
82,388,025 | 84,303,985 | 84,365,914 | |||||||||
Common stock issued in public and private offering |
1,800,000 | — | — | |||||||||
Exercise of warrants and stock acquisition rights |
95,383 | 61,929 | 400 | |||||||||
Common stock issued for acquisitions of minority interests of subsidiaries |
20,577 | — | — | |||||||||
Ending balance |
84,303,985 | 84,365,914 | 84,366,314 | |||||||||
Prior to October 1, 2001, the Japanese Commercial Code (the “Code”)
provided that an amount equivalent to at least 10% of cash dividends paid and
other cash outlays resulting from appropriation of retained earnings be
appropriated to a legal reserve until such reserve equaled 25% of issued
capital. The Code, amended effective on October 1, 2001, provides that an
amount equivalent to at least 10% of cash dividends paid and other cash outlays
resulting from appropriation of retained earnings be appropriated to the legal
reserve until the aggregate amount of the additional paid-in capital and the
legal reserve equals 25% of the issued capital. The Code also provides that
both additional paid-in capital and the legal reserve are not available for
cash dividends but may be used to reduce a capital deficit and may be reduced
(in the case of the latter, in aggregate, the remainder after such reduction
should not be less than 25% of the issued capital and a resolution of a general
meeting of shareholders is required), or may be capitalized by resolution of
the Board of Directors.
The Code provides that at least one-half of the issue price of new shares
be included in common stock. In conformity therewith, the Company has divided
the principal amount of bonds converted into common stock and proceeds received
from the issuance of common stock, including the exercise of warrants, equally
between common stock and additional paid-in capital by resolution of the Board
of Directors.
The Board of Directors resolved in May 2004 that total of ¥2,092 million
($20 million) dividend shall be distributed to the shareholders of record as of
March 31, 2004. The liability for declared dividends and related impact on
shareholder’s equity are accounted for in the period of such board of
directors’ resolution.
The amount available for dividends under the Code is calculated based on
the amount recorded in the Company’s non-consolidated financial statements
prepared in accordance with accounting principles generally accepted in Japan,
and there are restrictions on the payment of dividends relating to net
unrealized gains on investment in securities and the earnings impact of
derivatives, amounting to ¥20,340 million ($192 million) as of March 31, 2004.
As a result, the amount available for dividends is amounted to ¥101,197 million
($957 million) as of March 31, 2004.
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Retained earnings at March 31, 2004 includes ¥35,822 million ($339
million) relating to equity in undistributed earnings of the companies
accounted for by the equity method.
As of March 31, 2004, the restricted net assets of certain subsidiaries
include regulatory capital requirements for life insurance, banking, securities
brokerage operations of ¥26,149 million ($247 million).
20. Brokerage Commissions and Net Gains on Investment Securities
Brokerage commissions and net gains on investment securities in fiscal 2002,
2003 and 2004 consist of the following:
| Millions of | ||||||||||||||||
| Millions of yen | U.S. dollars | |||||||||||||||
| 2002 | 2003 | 2004 | 2004 | |||||||||||||
Brokerage commissions |
¥ | 2,940 | ¥ | 2,400 | ¥ | 3,967 | $ | 38 | ||||||||
Net gains on investment securities |
15,427 | 8,457 | 22,058 | 208 | ||||||||||||
| ¥ | 18,367 | ¥ | 10,857 | ¥ | 26,025 | $ | 246 | |||||||||
Trading activities—Net gains on investment securities include net trading
revenue of ¥442 million, net trading loss of ¥1,040 million and net trading
revenue of ¥1,500 million ($14 million) for fiscal 2002, 2003 and 2004,
respectively. Net gains of ¥225 million, ¥231 million and ¥431 million ($4
million) on derivative trading instruments are also included in net gains on
investment securities for fiscal 2002, 2003 and 2004, respectively.
21. Life Insurance Operations
Life insurance premiums and related investment income in fiscal 2002, 2003
and 2004 consist of the following:
| Millions of | ||||||||||||||||
| Millions of yen | U.S. dollars | |||||||||||||||
| 2002 | 2003 | 2004 | 2004 | |||||||||||||
Life insurance premiums |
¥ | 135,479 | ¥ | 122,963 | ¥ | 119,458 | $ | 1,130 | ||||||||
Life insurance related investment income |
16,854 | 15,548 | 14,754 | 140 | ||||||||||||
| ¥ | 152,333 | ¥ | 138,511 | ¥ | 134,212 | $ | 1,270 | |||||||||
The benefits and expenses of life insurance operations, included in life
insurance costs in the consolidated statements of income, are associated with
earned premiums so as to result in the recognition of profits over the life of
contracts. This association is accomplished by means of the provision for
future policy benefits and the deferral and subsequent amortization of policy
acquisition costs (principally commissions and certain other expenses relating
to policy issuance and underwriting). These policy acquisition costs are
amortized over the respective policy periods in proportion to premium revenue
recognized. Amortization charged to income for fiscal 2002, 2003 and 2004
amounted to ¥11,424 million, ¥11,740 million and ¥10,017 million ($95
million), respectively.
22. Other Operations
In fiscal 2002, 2003 and 2004, other operating revenues include revenues
from building maintenance operations, which amounted to ¥6,673 million,
¥11,731 million and ¥17,705 million ($168 million), respectively, and their
related expenses were ¥5,448 million, ¥9,602 million and ¥15,599 million ($148
million), respectively. In addition, in fiscal 2002, 2003 and 2004, other
operating revenues include fee income from the servicing of receivables in a
foreign subsidiary, which amounted to ¥6,722 million, ¥5,884 million and
¥6,183 million ($59 million), respectively, and their related expenses were
¥1,275 million, ¥976 million and ¥948 million ($9 million), respectively.
Other items consist of revenues and expenses from golf courses, a
training facility and hotels, operating results from real estate related
business, commissions for the sale of insurance and other financial products
and revenues and expenses from other operations, of which there were no items
exceeding 10% of total other operating revenues and expenses in fiscal 2002,
2003 and 2004, respectively.
Gains and losses from the disposition of operating facilities included in
other operating assets are not significant for fiscal 2002, 2003 and 2004.
23. Write-downs of Long-Lived Assets
In accordance with FASB Statement No.144 (“Accounting for the Impairment
or Disposal of Long-Lived Assets”), the Company and subsidiaries performed
tests for impairment on some assets for which events or changes in
circumstances indicated that the carrying amount might not be recoverable. The
Company and subsidiaries consider an asset’s carrying amount as not recoverable
when such carrying amount exceeds the sum of
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undiscounted cash flows expected to result from the use and eventual
disposition of the asset. When it is determined
that an asset’s carrying amount is not recoverable, an impairment loss is
measured as the amount by which the carrying amount exceeds the asset’s
estimated fair value. Fair value was calculated based on recent transactions
involving sales of similar assets, by independent third party appraisals,
appraisals prepared internally by the Company’s own staff of appraisers or
other valuation techniques to estimate fair value.
During fiscal 2002, 2003 and 2004, the Company and certain subsidiaries
recognized impairment losses for differences between long-lived asset carrying
values and estimated fair values in the amount of ¥2,716 million, ¥50,682
million and ¥12,345 million ($117 million), respectively, which are reflected
as write-downs of long-lived assets. The losses of ¥8,052 million ($76 million)
were included in the real estate segment, ¥3,019 million ($29 million) were
included in the Americas’ segment and ¥143 million ($1 million) were included
in the corporate financial services segment respectively, remaining ¥1,131
million ($11 million) of losses was recorded separately from segment
information for assets considered corporate assets in the year ended March 31,
2004. The detail of significant write-downs is as follows.
Golf courses—At the end of fiscal 2002, the prices of individual golf
memberships were rising and no impairment losses were recorded during the year
ended March 31, 2002. However, in fiscal 2003, after continuing to rise for a
few months, the prices of individual golf course memberships fell steeply.
Further, the fair value of individual golf courses fell during the year and
competition resulted in the reduction in play fees at many courses. Certain
subsidiaries reassessed, in some cases with the assistance of outside
consultants, the expected future cash flows for all of the golf courses they
own. Certain subsidiaries determined that the expected future cash flow for
four golf courses was less than current carrying amount and wrote these golf
courses down to their estimated fair value resulting in write-downs of
long-lived assets of ¥25,270 million in the year ended March 31, 2003. In
fiscal 2004, certain subsidiaries performed tests for impairment at four golf
courses having indications that their cash flows had declined due to
competition with surrounding golf courses, which resulted in the decrease in
the number of visitors and playing fees. As results of the tests, certain
subsidiaries have determined that the expected future cash flow was less than
the current carrying value for two golf courses. Estimated fair values which
were reassessed by independent third party appraisals, had been determined to
be less than the current carrying value, and certain subsidiaries have written
these two golf courses down to their estimated fair values resulting in
write-downs of long-lived assets of ¥3,473 million ($33 million).
Corporate Dormitories—The Company and a subsidiary have a business
activity that consists of leasing corporate dormitory buildings to major
corporations in Japan. During the year ended March 31, 2003, ¥3,137 million of
write-downs for several dormitory properties were recorded, due to the
deterioration of terms and conditions of lease contract between those
corporations and the Company or a subsidiary. During the year ended March 31,
2004, some lease contracts with corporate customers were restructured at lower
rental rates or expired without being renewed, due to cutbacks made by certain
corporate customers of their welfare programs and relating costs. The Company
and a subsidiary performed tests for impairment on all of dormitory buildings
and have determined that expected future cash flows are less than the current
carrying amounts for several dormitory properties. As results of the tests,
the Company and a subsidiary have written these buildings down to their
estimated fair value resulting in write-downs of long-lived assets of ¥2,071
million ($19 million) in the year ended March 31, 2004.
Office Buildings—During the year ended March 31, 2003, ¥7,257 million of
write-downs were recorded, due to decline in current rental rates. During
fiscal 2004, business environments of office buildings have recovered slightly
and rental rates have stopped declining in certain areas, but this trend did
not spread to many other local cities. The Company and its subsidiaries
performed tests for impairment. As results of the tests, the Company has
determined that the expected future cash flow was less than the current
carrying value and has written an office building down to the estimated fair
value resulting in write-down of long-lived asset of ¥766 million ($7 million).
Hotel properties and Commercial Complex—During the year ended March 31,
2003, ¥4,910 million of write-downs were recorded due to the decline in
occupancy rates at several of the hotel properties owned by the Company and
certain subsidiaries. During fiscal 2004, the Company and certain subsidiaries
recorded no impairment losses on the hotel properties. However a subsidiary in
the United States has determined that there was a significant decline in the
expected future cash flow generated from a certain commercial complex in the
redevelopment area due to changes of the development project. Accordingly the
subsidiary has written this property down to the estimated fair value resulting
in write-down of ¥3,019 million ($29 million).
Condominiums—During the year
ended March 31, 2003, ¥6,480 million of write-downs for approximately 540 units
were recorded due to the decline in the expected cash flow by each unit. During
the year ended March 31, 2004, the Company tested for impairment based on cash
flow information by each unit and has written these condominiums down to their
estimated fair value resulting in write-downs of long-lived assets of ¥915
million ($9 million) for approximately 160 units.
Others—During the year ended March 31, 2002 and 2003, the Company and
certain subsidiaries recorded ¥2,716 million and ¥3,628 million of write-downs
of long-lived assets, respectively, for other long-lived assets including
developed and undeveloped land. During the year ended March 31, 2004, the
Company and certain subsidiaries recorded impairment losses of ¥2,101 million
($20 million) for properties due to the continuous decline in the land value of
local cities.
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24. Discontinued Operations
The company and its subsidiaries own various real estate properties,
including commercial and office buildings, for rental operations. FASB
Statement No. 144 (“Accounting for the Impairment or Disposal of Long-Lived
Assets”) requires to reclassify operations related to these real estate sold
or to be disposed of by sale to discontinued operations, if the Company and
its subsidiaries have no significant continuing involvement in sold
properties. In fiscal 2004, the Company, its subsidiaries in Japan and a
subsidiary in the United States sold real estate for rental without
significant continuing involvement in those sold properties and earned ¥3,747
million ($35 million) of aggregated gain. In addition, the Company and its
subsidiaries determined to dispose by sale properties for rental without a
significant continuing involvement in those properties of ¥9,131 million ($86
million) which are included in the investment in operating leases in the
accompanying consolidated balance sheet at March 31, 2004. Under that
Statement, the Company and the subsidiaries report this gain on sales of
rental properties, rental revenues generated and other expenses incurred by
the operations of both the properties, which have been sold and to be disposed
of by sale as income from discontinued operations in the accompanying
consolidated statements of income. Income and expenses generated by the
operations of these properties recognized in fiscal 2002 and 2003 have also
been reclassified as income from discontinued operations in each year in the
accompanying consolidated statements of income. Revenue from operations for
the discontinued operations reclassified during the year ended March 31, 2004
are ¥1,168 million, ¥1,825 million, ¥5,555 million ($53 million), and income
before income taxes are ¥733 million, ¥1,109 million, ¥4,713 million ($45
million) in fiscal 2002, 2003 and 2004, respectively.
25. Per Share Data
In Japan, dividends which were payable to shareholders of record at the
end of a fiscal year had been approved at the shareholders meeting held
subsequent to the year-end until fiscal 2003. In fiscal 2004, the Company
adopted “Company with Committees” board model, which became possible as a
result of amendment to the Japanese Commercial Code effective in April, 2003,
and accordingly dividends for fiscal 2004 were resolved at the board of
directors meeting held subsequent to the year end. Therefore, the declarations
of these dividends are not reflected in the financial statements at such
fiscal year-ends. Reconciliation of the differences between basic and diluted
earnings per share (EPS) in fiscal 2002, 2003 and 2004 is as follows:
| Millions of | ||||||||||||||||
| Millions of yen | U.S. dollars | |||||||||||||||
| 2002 | 2003 | 2004 | 2004 | |||||||||||||
Income from continuing operations |
¥ | 39,706 | ¥ | 24,433 | ¥ | 50,619 | $ | 479 | ||||||||
Effect of dilutive securities— |
||||||||||||||||
Convertible notes |
87 | 85 | 85 | 1 | ||||||||||||
Income from continuing operations for diluted EPS computation |
¥ | 39,793 | ¥ | 24,518 | ¥ | 50,704 | $ | 480 | ||||||||
| Thousands of shares | ||||||||||||
| 2002 | 2003 | 2004 | ||||||||||
Weighted-average shares |
82,318 | 83,672 | 83,685 | |||||||||
Effect of dilutive securities— |
||||||||||||
Warrants |
41 | — | 97 | |||||||||
Convertible notes |
3,962 | 5,273 | 5,273 | |||||||||
Treasury stock |
74 | 5 | 4 | |||||||||
Weighted-average shares for diluted EPS computation |
86,395 | 88,950 | 89,059 | |||||||||
| Yen | U.S. dollars | |||||||||||||||
| 2002 | 2003 | 2004 | 2004 | |||||||||||||
Earnings per share for income from continuing operations: |
||||||||||||||||
Basic |
¥ | 482.35 | ¥ | 292.00 | ¥ | 604.88 | $ | 5.72 | ||||||||
Diluted |
460.59 | 275.63 | 569.33 | 5.39 | ||||||||||||
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26. Derivative Financial Instruments and Hedging
The Company and its subsidiaries adopted FASB Statement No. 133 on April 1,
2001.
(a) Risk management policy
The Company and its subsidiaries manage interest rate risk through asset
liability management systems. The Company and its subsidiaries use derivative
financial instruments to hedge interest rate risk and avoid changes in
interest rates having a significant adverse effect. As a result of interest
rate fluctuations, the fair value of hedged assets and liabilities will
appreciate or depreciate. However, such appreciation or depreciation will
generally be offset by using derivative financial instruments as hedging
instruments. Derivative financial instruments that the Company and its
subsidiaries use as part of the interest risk management include interest rate
swaps and interest rate caps.
The Company and its subsidiaries employ foreign currency borrowings,
foreign exchange forward contracts, and foreign currency swap agreements to
hedge risks that are associated with certain transactions and investments
denominated in foreign currencies due to the potential for changes in exchange
rates. Similarly, in general, overseas subsidiaries structure their
liabilities to match the currency-denomination of assets in each region.
By using derivative instruments, the Company and its subsidiaries are
exposed to credit risk in the event of nonperformance by counterparties. The
Company and its subsidiaries attempt to manage the credit risk by carefully
evaluating the quality of counterparties in advance and regularly monitoring
counterparties and derivative transactions after contracts have been
concluded.
(b) Cash flow hedges
The Company and its subsidiaries designate interest rate swap agreements,
foreign currency swap agreements and foreign exchange forward contracts as
cash flow hedges for variability of cash flows originating from floating rate
borrowings and forecasted transactions. The interest rate swap agreements
outstanding as of March 31, 2004 mature at various dates through 2009. Net
losses on derivative contracts that were reclassified from other comprehensive
loss into earnings through other operating expenses and other operating
revenues were ¥1,914 million, ¥784 million and ¥382 million ($4 million)
during fiscal 2002, 2003 and 2004, respectively. Net losses of ¥224 million,
¥124 million and net gains of ¥19 million ($0 million), which represents the
total ineffectiveness of cash flow hedges, were recorded in earnings, through
other operating expenses and other operating revenues, for fiscal 2002, 2003
and 2004, respectively. Approximately ¥1,558 million ($15 million) of net
derivative losses included in accumulated other comprehensive loss, net of
applicable income taxes at March 31, 2004 will be reclassified into earnings
through other operating expenses within fiscal 2005.
(c) Fair value hedges
The Company and its subsidiaries use financial instruments designated as
fair value hedges to hedge their exposure to interest rate risk and foreign
currency exchange risk. The Company and its subsidiaries designate foreign
currency swap agreements and foreign exchange forward contracts to minimize
foreign currency exposures on operating assets including lease receivables,
loan receivables and borrowings. One subsidiary hedges a portion of the
interest rate exposure of the fair values of certain asset-backed securities
with fixed interest rates using sales of futures and forward contracts on U.S.
treasury securities. Certain subsidiaries, which issued medium-term notes with
fixed interest rates, use interest rate swap contracts to hedge interest rate
exposure of the fair values of these medium-term notes. In cases where the
medium-term notes were denominated in other than the subsidiaries’ local
currency, foreign currency swap agreements are used to hedge foreign exchange
rate exposure. For fiscal 2002, 2003 and 2004, a gain of ¥780 million, ¥0
million and ¥3 million ($0 million) of hedge ineffectiveness associated with
instruments designated as fair value hedges were recorded in earnings through
other operating expenses and other operating revenues, respectively.
(d) Hedges of net investment in foreign operations
The Company uses foreign exchange forward contracts, foreign currency
swap agreements and borrowings denominated in the subsidiaries’ local
currencies to hedge the foreign currency exposure of the net investment in
foreign subsidiaries. The gains and losses of these hedging instruments were
recorded in foreign currency translation adjustments, which is a part of
accumulated other comprehensive income (loss). The net gain or loss of foreign
currency translation adjustments for fiscal 2002, 2003 and 2004 were a loss of
¥4,212 million, a gain of ¥5,052 million and ¥9,010 million ($85 million),
respectively.
(e) Trading and other derivatives
Certain subsidiaries engage in trading activities with various future
contracts. The Company and certain
subsidiaries entered into foreign currency swap agreements, interest rate
swap agreements, caps, collars and foreign exchange forward contracts for risk
management purposes but not qualified for hedge accounting under FASB
Statement No. 133. In accordance with FASB Statement No. 133, conversion
options were bifurcated from the Company and certain subsidiaries’ convertible
bonds and are recorded as stand-alone derivative contracts. At March 31, 2003
and 2004, the total face amounts were ¥82,000 million and ¥29,735 million
($281 million), respectively, and the fair value of conversion option were
¥187 million and ¥910 million ($9 million), respectively.
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The following table provides notional amount information about derivative
instruments as of March 31, 2003 and 2004. The notional amounts of derivatives
do not represent amounts exchanged by the parties and, thus, are not a measure
of the exposure to market risk or credit risk.
| Millions of | ||||||||||||
| Millions of yen | U.S. dollars | |||||||||||
| 2003 | 2004 | 2004 | ||||||||||
Interest rate risk management: |
||||||||||||
Interest rate swap agreements |
¥ | 459,208 | ¥ | 440,894 | $ | 4,172 | ||||||
Options, caps and collars held |
30,462 | 56,361 | 533 | |||||||||
Forward contracts |
75,726 | 97,510 | 923 | |||||||||
Foreign exchange risk management: |
||||||||||||
Foreign exchange forward contracts |
¥ | 88,436 | ¥ | 117,939 | $ | 1,116 | ||||||
Futures |
— | 114 | 1 | |||||||||
Foreign currency swap agreements |
303,051 | 224,628 | 2,125 | |||||||||
Trading activities: |
||||||||||||
Futures |
¥ | 95,121 | ¥ | 213,802 | $ | 2,023 | ||||||
Interest rate swap agreements |
2,000 | — | — | |||||||||
Options, caps and collars held |
6,278 | 1,446 | 14 | |||||||||
Options, caps and collars written |
5,361 | 1,317 | 12 | |||||||||
Foreign exchange forward contracts |
1,876 | 8,387 | 79 | |||||||||
27. Significant Concentrations of Credit Risk
The Company and its subsidiaries have established various policies and
procedures to manage credit exposure, including initial credit approval,
credit limits, collateral and guarantee requirements, obtaining rights of
offset and continuous oversight. The Company and its subsidiaries’ principal
financial instrument portfolio consists of direct financing leases and
installment loans which are secured by title to the leased assets and assets
specifically collateralized in relation to loan agreements. When deemed
necessary, guarantees are also obtained. The value and adequacy of the
collateral are continually monitored. Consequently, the risk of credit loss
from counterparties’ failure to perform in connection with collateralized
financing activities is believed to be minimal. The Company and its
subsidiaries have access to collateral in case of bankruptcy and other losses.
However, if the market of real estate falls greatly and the value of the
secured real estate falls below the mortgage setting amount, the Company and
certain subsidiaries receive the risk, which exceeds their forecast.
At March 31, 2003 and 2004, no concentration with a single obligor
exceeded 1% of consolidated total assets. With respect to the Company and its
subsidiaries’ credit exposures on a geographic basis, approximately ¥4,000
billion, or 81%, at March 31, 2003 and approximately ¥3,878 billion ($36,692
million), or 83%, at March 31, 2004 of the credit risks arising from all
financial instruments are attributable to customers located in Japan. The
largest concentration of credit risks outside of Japan is exposure
attributable to obligors located in the United States of America. The gross
amount of such exposure is ¥553 billion and ¥418 billion ($3,955 million) as
of March 31, 2003 and 2004, respectively.
The Company and its subsidiaries make direct financing lease and
operating lease contracts mostly with lessees in commercial industries for
their office, industry, commercial service, transport and other equipment. At
March 31, 2003 and 2004, the Company and its subsidiaries had concentrations
in certain equipment types included in investment in direct financing leases
and operating leases which exceeded 10% of the consolidated total assets. The
percentage of investment in transportation equipment to consolidated total
assets is 11.7% and 12.1% as of March 31, 2003 and 2004, respectively.
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28. Estimated Fair Value of Financial Instruments
The following information is provided to help readers gain an
understanding of the relationship between amounts reported in the accompanying
consolidated financial statements and the related market or fair value.
The disclosures include financial instruments and derivatives financial
instruments, other than investment in direct financing leases, investment in
subsidiaries and affiliates, pension obligations and insurance contracts.
| March 31, 2003 | ||||||||
| Millions of yen | ||||||||
| Carrying | Estimated | |||||||
| amount | fair value | |||||||
Trading instruments |
||||||||
Trading securities |
¥ | 12,154 | ¥ | 12,154 | ||||
Futures: |
||||||||
Assets |
132 | 132 | ||||||
Liabilities |
59 | 59 | ||||||
Options and other derivatives: |
||||||||
Assets |
177 | 177 | ||||||
Liabilities |
64 | 64 | ||||||
Non-trading instruments |
||||||||
Assets: |
||||||||
Cash and cash equivalents |
204,677 | 204,677 | ||||||
Restricted cash |
18,671 | 18,671 | ||||||
Time deposits |
1,184 | 1,184 | ||||||
Installment loans (net of allowance for probable loan losses) |
2,197,481 | 2,213,872 | ||||||
Investment in securities: |
||||||||
Practicable to estimate fair value |
548,526 | 548,918 | ||||||
Not practicable to estimate fair value |
116,755 | 116,755 | ||||||
Liabilities: |
||||||||
Short-term debt |
1,120,434 | 1,120,434 | ||||||
Deposits |
262,467 | 265,662 | ||||||
Long-term debt |
2,856,613 | 2,879,538 | ||||||
Foreign exchange forward contracts: |
||||||||
Assets |
388 | 388 | ||||||
Liabilities |
644 | 644 | ||||||
Foreign currency swap agreements: |
||||||||
Assets |
7,604 | 7,604 | ||||||
Liabilities |
10,262 | 10,262 | ||||||
Interest rate swap agreements: |
||||||||
Assets |
3,185 | 3,185 | ||||||
Liabilities |
17,616 | 17,616 | ||||||
Options and other derivatives: |
||||||||
Assets |
200 | 200 | ||||||
Liabilities |
1,114 | 1,114 | ||||||
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| March 31, 2004 | ||||||||||||||||
| Millions of yen | Millions of U.S. dollars | |||||||||||||||
| Carrying | Estimated | Carrying | Estimated | |||||||||||||
| amount | fair value | amount | fair value | |||||||||||||
Trading instruments |
||||||||||||||||
Trading securities |
¥ | 26,354 | ¥ | 26,354 | $ | 249 | $ | 249 | ||||||||
Futures: |
||||||||||||||||
Assets |
602 | 602 | 6 | 6 | ||||||||||||
Liabilities |
44 | 44 | 0 | 0 | ||||||||||||
Options and other derivatives: |
||||||||||||||||
Assets |
45 | 45 | 0 | 0 | ||||||||||||
Liabilities |
32 | 32 | 0 | 0 | ||||||||||||
Non-trading instruments |
||||||||||||||||
Assets: |
||||||||||||||||
Cash and cash equivalents |
152,235 | 152,235 | 1,440 | 1,440 | ||||||||||||
Restricted cash |
35,621 | 35,621 | 337 | 337 | ||||||||||||
Time deposits |
677 | 677 | 6 | 6 | ||||||||||||
Installment loans (net of allowance for probable loan losses) |
2,147,928 | 2,162,285 | 20,323 | 20,459 | ||||||||||||
Investment in securities: |
||||||||||||||||
Practicable to estimate fair value |
386,797 | 386,797 | 3,660 | 3,660 | ||||||||||||
Not practicable to estimate fair value |
138,777 | 138,777 | 1,313 | 1,313 | ||||||||||||
Liabilities: |
||||||||||||||||
Short-term debt |
903,916 | 903,916 | 8,553 | 8,553 | ||||||||||||
Deposits |
292,545 | 296,036 | 2,768 | 2,801 | ||||||||||||
Long-term debt |
2,662,719 | 2,672,585 | 25,194 | 25,287 | ||||||||||||
Foreign exchange forward contracts: |
||||||||||||||||
Assets |
1,566 | 1,566 | 15 | 15 | ||||||||||||
Liabilities |
1,264 | 1,264 | 12 | 12 | ||||||||||||
Foreign currency swap agreements: |
||||||||||||||||
Assets |
16,607 | 16,607 | 157 | 157 | ||||||||||||
Liabilities |
1,328 | 1,328 | 13 | 13 | ||||||||||||
Interest rate swap agreements: |
||||||||||||||||
Assets |
1,386 | 1,386 | 13 | 13 | ||||||||||||
Liabilities |
9,364 | 9,364 | 89 | 89 | ||||||||||||
Options and other derivatives: |
||||||||||||||||
Assets |
1,590 | 1,590 | 15 | 15 | ||||||||||||
Liabilities |
1 | 1 | 0 | 0 | ||||||||||||
The estimated fair value amounts were determined using available market
information, discounted cash flow information utilized by the Company and its
subsidiaries in conducting new business and certain valuation methodologies. If
quoted market prices were not readily available, management estimated a fair
value. Accordingly, the estimates may not be indicative of the amounts at which
the financial instruments could be exchanged in a current or future market
transaction. Due to the uncertainty of expected cash flows resulting from
financial instruments, the use of different assumptions and valuation
methodologies may have a significant effect on the derived estimated fair value
amounts.
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Table of Contents
Estimation of fair value
The following methods and significant assumptions were used to estimate
the fair value of each class of financial instrument for which it is
practicable to estimate a value:
Cash and cash equivalents, restricted cash, time deposits and short-term
debt—For cash and cash equivalents, restricted cash, time deposits and
short-term debt, the carrying amounts recognized in the balance sheets were
determined to be reasonable estimates of their fair values due to their
relatively short maturity.
Installment loans—The carrying amounts of floating-rate installment loans
with no significant changes in credit risk and which could be repriced within
a short-term period were determined to be reasonable estimates of their fair
values. For certain homogeneous categories of medium- and long-term fixed-rate
loans, such as housing loans and other loans, the estimated fair values were
calculated by discounting the future cash flows using the current interest
rates charged by the Company and its subsidiaries for new loans made to borrowers with similar credit ratings and remaining maturities.
Investment in securities—For trading securities and available-for-sale
securities, the estimated fair values, which are also the carrying amounts
recorded in the consolidated balance sheets, were generally based on quoted
market prices or quotations provided by dealers. For held-to-maturity
securities, the estimated fair values were based on quoted market prices, if
available. If a quoted market price was not available, estimated fair values
were determined using quoted market prices for similar securities or the
carrying amounts (where carrying amounts were believed to approximate the
estimated fair values).
For other securities, for which there were no quoted market prices,
reasonable estimates of fair values could not be made without incurring
excessive costs.
Deposits—The carrying amounts of demand deposits recognized in the
consolidated balance sheets were determined to be reasonable estimates of
their fair value. The estimated fair values of time deposits were calculated
by discounting the future cash flows. The current interest rates offered for
the deposits with similar terms and remaining average maturities were used as
the discount rates.
Long-term debt—The carrying amounts of long-term debt with floating rates
which could be repriced within short-term periods were determined to be
reasonable estimates of their fair values. For medium-and long-term fixed-rate
debt, the estimated fair values were calculated by discounting the future cash
flows. The borrowing interest rates that were currently available to the
Company and its subsidiaries offered by financial institutions for debt with
similar terms and remaining average maturities were used as the discount
rates.
Derivatives—The fair value of derivatives generally reflects the
estimated amounts that the Company and its subsidiaries would receive or pay
to terminate the contracts at the reporting date, thereby taking into account
the current unrealized gains or losses of open contracts. Discounted amounts
of future cash flows using the current interest rate are available for most of
the Company’s and its subsidiaries’ derivatives.
29. Commitments, Guarantees, and Contingent Liabilities
Commitments—As of March 31, 2004, the Company and its subsidiaries had
commitments for the purchase of equipment to be leased, having a cost of
¥9,996 million ($95 million).
The minimum future rentals on non-cancelable operating leases are as
follows. The longest contract will mature in fiscal 2011.
| Millions of | ||||||||
| Years ending March 31, | Millions of yen | U.S. dollars | ||||||
2005 |
¥ | 1,068 | $ | 10 | ||||
2006 |
889 | 8 | ||||||
2007 |
801 | 8 | ||||||
2008 |
717 | 7 | ||||||
2009 |
404 | 4 | ||||||
Thereafter |
148 | 1 | ||||||
Total |
¥ | 4,027 | $ | 38 | ||||
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The Company and its subsidiaries lease office space under operating lease
agreements, which are primarily cancelable, and made rental payments totaling
¥6,301 million, ¥7,293 million and ¥7,042 million ($67 million) in fiscal 2002,
2003 and 2004, respectively.
Certain computer systems of the Company and its subsidiaries have been
operated and maintained under non-cancelable contracts with third-party service
providers. For such services, the Company and its subsidiaries made payments
totaling ¥966 million, ¥1,795 million and ¥3,320 million ($31 million) in
fiscal 2002, 2003 and 2004, respectively. The longest contract of them will
mature in fiscal 2009. At March 31, 2004, the amounts due in each of the next
five years are as follows:
| Millions of | ||||||||
| Years ending March 31, | Millions of yen | U.S. dollars | ||||||
2005 |
¥ | 3,394 | $ | 32 | ||||
2006 |
3,392 | 32 | ||||||
2007 |
3,372 | 32 | ||||||
2008 |
1,672 | 16 | ||||||
2009 |
110 | 1 | ||||||
Total |
¥ | 11,940 | $ | 113 | ||||
The Company and its subsidiaries have commitments to fund estimated
construction costs to complete ongoing real estate development projects and
other commitments, amounting in total to ¥172,441 million ($1,632 million) as
of March 31, 2004.
The Company and its subsidiaries have agreements under which they are
committed to execute loans as long as the agreed-upon terms are met such as
card loans. As of March 31, 2004, the total unused credit available amount is
¥262,510 million ($2,484 million).
Guarantees—The Company and its subsidiaries adopted FASB Interpretation
No. 45 (“Guarantor’s Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others”), and at the inception
of a guarantee, recognized a liability in the consolidated balance sheets for
the fair value of the guarantees within the scope of FASB Interpretation No. 45
issued or amended on and after January 1, 2003. Adoption of this Statement did
not have a significant effect on the Company and its subsidiaries’ results of
operations or financial position. The following table represents the summary of
guarantees recorded as guarantee liabilities as of the March 31, 2003 and 2004
and potential future payments of the guarantee contracts outstanding:
| Millions of yen | Millions of U.S. dollars | |||||||||||||||||||||||
| 2003 | 2004 | 2004 | ||||||||||||||||||||||
| Book value of | Book value of | Book value of | ||||||||||||||||||||||
| Potential future | guarantee | Potential future | guarantee | Potential future | guarantee | |||||||||||||||||||
| Guarantees | payment | liabilities | payment | liabilities | payment | liabilities | ||||||||||||||||||
Housing loans |
¥ | 49,010 | ¥ | 11,802 | ¥ | 43,402 | ¥ | 10,024 | $ | 411 | $ | 95 | ||||||||||||
Consumer loans |
21,983 | 2,349 | 25,473 | 2,809 | 241 | 27 | ||||||||||||||||||
Corporate loans |
22,142 | 22 | 53,672 | 1,726 | 508 | 16 | ||||||||||||||||||
Other |
8,325 | 120 | 2,964 | — | 28 | — | ||||||||||||||||||
| ¥ | 101,460 | ¥ | 14,293 | ¥ | 125,511 | ¥ | 14,559 | $ | 1,188 | $ | 138 | |||||||||||||
Guarantee of housing loans: The Company and certain subsidiaries
guarantee the housing loans issued by Japanese financial institutions to third
party individuals and employees of the Company and certain subsidiaries. The
Company and its subsidiaries are typically obliged to pay the outstanding
loans when these loans become delinquent more than three months. The housing
loans are usually secured by real properties. Once the Company and its
subsidiaries assume the guaranteed parties’ obligation, the Company and its
subsidiaries acquire the right of the collateral.
Guarantee of consumer loans: A subsidiary guarantees the consumer loans,
typically card loans, issued by Japanese financial institutions. The
subsidiary is obliged to pay the outstanding obligations when these loans
become delinquent generally for more than two months.
Guarantee of corporate loans: The Company and certain subsidiaries
guarantee corporate loans issued by financial institutions for the Company and
its subsidiaries’ customers and unrelated third parties. The Company and its
subsidiaries are obliged to pay the outstanding loans when the guaranteed
parties fail to pay principal and/or interest in accordance with the contract
terms. In some cases, the corporate loans are secured by the guaranteed
parties’ operating assets. Once the Company and its subsidiaries assume the
guaranteed parties’ obligation, the Company and its subsidiaries acquire the
right of the collateral.
Other guarantees: Other guarantees include the guarantees derived from
collection agency agreements. Pursuant to the agreements, the Company collects
third parties’ debt and pays the uncovered amounts.
Litigation—The Company and its subsidiaries are involved in legal
proceedings and claims in the ordinary course of their business. In the
opinion of management, none of such proceedings and claims will have a
significant impact on the Company’s financial position or results of
operations.
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30. Segment Information
The following table presents segment financial information on the basis
that is regularly used by management for evaluating segment performance and
deciding how to allocate resources. The reportable segments are identified
based on the nature of services for operations in Japan and on the basis of
geographic area for overseas operations. With respect to the corporate
financial services segment, the rental operations segment and real estate
related finance in operations in Japan segment, the Company and its
subsidiaries aggregate some operating segments that are determined by region
and type of operating assets for management purposes because they are similar
in the nature of the services, the type of customers and the economic
environment.
Corporate financial services operations are primarily corporate direct
financing leases and lending operations other than real estate related
lending. Rental operations comprise operating leases over measuring equipment,
information-related equipment and automobiles. Real estate related finance
operations include corporate real estate financing activities as well as
personal housing loan lending operations. Real estate operations primarily
comprise residential subdivision developments as well as the rental and
management of office buildings, golf courses, hotels and a training facility.
Life insurance operations include direct and agency life insurance sales and
related activities. The three overseas operating segments, the Americas, Asia
and Oceania, and Europe, include direct financing lease operations, investment
in debt securities, collateralized real estate lending and aircraft and ship
financing operations. Other operations, which are not deemed by management to
be sufficiently significant to disclose as separate items and do not fall into
the above segment categories, are reported under operations in Japan, other.
They primarily include securities brokerage, venture capital operations and
card loans.
The titles of segments “Corporate finance” and “Equipment operating
leases”, which had appeared in previous years’ annual reports, were changed to
“Corporate financial services” and “Rental operations” respectively, to
present the components of these segments more clearly. Furthermore, the
compositions of these two segments have not been changed upon the change in
titles.
Financial information of the segments for fiscal 2002, 2003 and 2004 is as
follows:
| Year ended March 31, 2002 | Millions of yen | |||||||||||||||||||||||||||||||||||||||
| Operations in Japan | Overseas operations | |||||||||||||||||||||||||||||||||||||||
| Corporate | Real estate | |||||||||||||||||||||||||||||||||||||||
| financial | Rental | related | Asia and | |||||||||||||||||||||||||||||||||||||
| services | operations | finance | Real estate | Life insurance | Other | The Americas | Oceania | Europe | Total | |||||||||||||||||||||||||||||||
Revenues |
¥ | 118,794 | ¥ | 67,319 | ¥ | 31,582 | ¥ | 85,516 | ¥ | 154,296 | ¥ | 49,139 | ¥ | 75,195 | ¥ | 56,677 | ¥ | 14,716 | ¥ | 653,234 | ||||||||||||||||||||
Interest revenue |
16,983 | 23 | 20,399 | 235 | — | 34,015 | 33,804 | 11,686 | 4,002 | 121,147 | ||||||||||||||||||||||||||||||
Interest expense |
17,295 | 1,157 | 5,572 | 2,774 | 1 | 3,614 | 28,229 | 17,472 | 7,931 | 84,045 | ||||||||||||||||||||||||||||||
Depreciation and amortization |
37,031 | 41,885 | 1,039 | 5,761 | 373 | 3,565 | 3,812 | 15,386 | 6,166 | 115,018 | ||||||||||||||||||||||||||||||
Other significant non-cash items: |
||||||||||||||||||||||||||||||||||||||||
Provision for doubtful
receivables and probable loan
losses |
18,069 | 24 | 7,563 | 5 | — | 12,578 | 10,434 | 2,519 | 175 | 51,367 | ||||||||||||||||||||||||||||||
Write-downs of long-lived
assets |
— | — | — | 2,716 | — | — | — | — | — | 2,716 | ||||||||||||||||||||||||||||||
Increase in policy liabilities |
— | — | — | — | 40,777 | — | — | — | — | 40,777 | ||||||||||||||||||||||||||||||
Equity in net income (loss) of and
gain (loss) on sides of affiliates |
74 | (2 | ) | 8 | 3 | — | 1,865 | (1,851 | ) | 1,330 | (310 | ) | 1,117 | |||||||||||||||||||||||||||
Discontinued operations |
— | — | — | 614 | — | — | 119 | — | — | 733 | ||||||||||||||||||||||||||||||
Segment profit (loss) |
48,066 | 9,906 | 5,654 | 5,842 | 5,764 | 4,941 | 810 | 5,433 | 600 | 87,016 | ||||||||||||||||||||||||||||||
Segment assets |
1,960,380 | 147,444 | 1,012,896 | 326,473 | 543,738 | 352,433 | 794,330 | 435,093 | 113,844 | 5,686,631 | ||||||||||||||||||||||||||||||
Long-lived assets |
47,894 | 99,090 | 33,013 | 251,186 | 990 | 244 | 86,891 | 77,610 | 59,097 | 656,015 | ||||||||||||||||||||||||||||||
Expenditures for long-lived
assets |
21,971 | 55,038 | 10,560 | 23,905 | — | — | — | 30,316 | — | 141,790 | ||||||||||||||||||||||||||||||
Investment in affiliates |
143 | 24 | 381 | — | — | 33,335 | 25,739 | 19,398 | — | 73,020 | ||||||||||||||||||||||||||||||
112
Table of Contents
| Year ended March 31, 2003 | Millions of yen | |||||||||||||||||||||||||||||||||||||||
| Operations in Japan | Overseas operations | |||||||||||||||||||||||||||||||||||||||
| Corporate | Real estate | |||||||||||||||||||||||||||||||||||||||
| financial | Rental | related | Asia and | |||||||||||||||||||||||||||||||||||||
| services | operations | finance | Real estate | Life insurance | Other | The Americas | Oceania | Europe | Total | |||||||||||||||||||||||||||||||
Revenues |
¥ | 125,560 | ¥ | 67,655 | ¥ | 51,589 | ¥ | 104,454 | ¥ | 138,511 | ¥ | 61,238 | ¥ | 57,909 | ¥ | 55,425 | ¥ | 13,311 | ¥ | 675,552 | ||||||||||||||||||||
Interest revenue |
18,643 | 8 | 28,991 | 414 | — | 41,474 | 30,460 | 10,281 | 951 | 131,222 | ||||||||||||||||||||||||||||||
Interest expense |
18,322 | 1,310 | 6,346 | 2,167 | 86 | 3,453 | 19,177 | 14,794 | 2,061 | 67,716 | ||||||||||||||||||||||||||||||
Depreciation and amortization |
33,967 | 43,161 | 3,099 | 4,623 | 75 | 4,077 | 3,380 | 17,745 | 5,683 | 115,810 | ||||||||||||||||||||||||||||||
Other significant non-cash items: |
||||||||||||||||||||||||||||||||||||||||
Provision for doubtful
receivables and probable loan
losses |
18,431 | 2,431 | 8,499 | 4 | 108 | 14,195 | 8,173 | 2,698 | 167 | 54,706 | ||||||||||||||||||||||||||||||
Write-downs of long-lived
assets |
— | — | — | 50,682 | — | — | — | — | — | 50,682 | ||||||||||||||||||||||||||||||
Increase in policy liabilities |
— | — | — | — | 5,889 | — | — | — | — | 5,889 | ||||||||||||||||||||||||||||||
Equity in net income (loss) of and
gain (loss) on sales of affiliates |
(73 | ) | — | 561 | 2 | — | 3,168 | 4,433 | 3,118 | (1,916 | ) | 9,293 | ||||||||||||||||||||||||||||
Discontinued operations |
— | — | 90 | 615 | — | — | 404 | — | — | 1,109 | ||||||||||||||||||||||||||||||
Segment profit (loss) |
44,158 | 4,402 | 19,572 | (39,441 | ) | 4,791 | 8,452 | 1,332 | 9,765 | (736 | ) | 52,295 | ||||||||||||||||||||||||||||
Segment assets |
1,893,422 | 144,397 | 931,513 | 303,838 | 579,805 | 387,978 | 618,148 | 437,874 | 75,207 | 5,372,182 | ||||||||||||||||||||||||||||||
Long-lived assets |
49,237 | 85,748 | 86,247 | 207,821 | 18,350 | 216 | 70,784 | 74,965 | 41,865 | 635,233 | ||||||||||||||||||||||||||||||
Expenditures for long-lived
assets |
15,244 | 60,093 | 5,201 | 30,106 | 327 | — | 907 | 27,106 | 1,423 | 140,407 | ||||||||||||||||||||||||||||||
Investment in affiliates |
161 | 22 | 13,118 | — | — | 40,636 | 27,866 | 45,790 | 3,583 | 131,176 | ||||||||||||||||||||||||||||||
| Year ended March 31, 2004 | Millions of yen | |||||||||||||||||||||||||||||||||||||||
| Operations in Japan | Overseas operations | |||||||||||||||||||||||||||||||||||||||
| Corporate | Real estate | |||||||||||||||||||||||||||||||||||||||
| financial | Rental | related | Asia and | |||||||||||||||||||||||||||||||||||||
| services | operations | finance | Real estate | Life insurance | Other | The Americas | Oceania | Europe | Total | |||||||||||||||||||||||||||||||
Revenues |
¥ | 128,355 | ¥ | 74,370 | ¥ | 54,792 | ¥ | 143,451 | ¥ | 133,391 | ¥ | 73,986 | ¥ | 47,294 | ¥ | 53,694 | ¥ | 10,708 | ¥ | 720,041 | ||||||||||||||||||||
Interest revenue |
17,954 | 6 | 32,099 | 381 | — | 38,691 | 18,206 | 8,239 | 658 | 116,233 | ||||||||||||||||||||||||||||||
Interest expense |
17,367 | 1,695 | 6,401 | 2,394 | 87 | 3,138 | 13,010 | 12,411 | 1,412 | 57,915 | ||||||||||||||||||||||||||||||
Depreciation and amortization |
35,569 | 46,037 | 4,345 | 4,337 | 73 | 2,805 | 3,441 | 18,018 | 4,795 | 119,420 | ||||||||||||||||||||||||||||||
Other significant non-cash items: |
||||||||||||||||||||||||||||||||||||||||
Provision for doubtful
receivables and probable loan
losses |
18,133 | (155 | ) | 6,870 | 86 | 912 | 16,729 | 4,476 | 2,500 | 41 | 49,592 | |||||||||||||||||||||||||||||
Write-downs of long-lived
assets |
143 | — | — | 8,052 | — | — | 3,019 | — | — | 11,214 | ||||||||||||||||||||||||||||||
Decrease in policy liabilities |
— | — | — | — | 15,771 | — | — | — | — | 15,771 | ||||||||||||||||||||||||||||||
Equity in net income (loss) of and
gain (loss) on sales of affiliates |
(61 | ) | 12 | 475 | 12 | — | 3,144 | 4,369 | 10,925 | (1,330 | ) | 17,546 | ||||||||||||||||||||||||||||
Discontinued operations |
— | — | 1,325 | 487 | — | — | 2,901 | — | — | 4,713 | ||||||||||||||||||||||||||||||
Segment profit (loss) |
43,787 | 9,342 | 18,102 | 6,244 | 5,382 | 10,079 | 7,601 | 17,848 | (1,252 | ) | 117,133 | |||||||||||||||||||||||||||||
Segment assets |
1,806,686 | 147,231 | 909,019 | 309,558 | 582,473 | 412,505 | 472,595 | 413,041 | 56,634 | 5,109,742 | ||||||||||||||||||||||||||||||
Long-lived assets |
83,214 | 89,653 | 71,006 | 192,969 | 25,225 | 786 | 60,208 | 76,368 | 31,683 | 631,112 | ||||||||||||||||||||||||||||||
Expenditures for long-lived
assets |
30,889 | 52,592 | 12,458 | 40,410 | 8,090 | 1 | 8,384 | 30,926 | 20 | 183,770 | ||||||||||||||||||||||||||||||
Investment in affiliates |
99 | 35 | (676 | ) | 634 | 12,852 | 50,568 | 26,778 | 54,360 | 4,528 | 149,178 | |||||||||||||||||||||||||||||
113
Table of Contents
| Year ended March 31, 2004 | Millions of U.S. dollars | |||||||||||||||||||||||||||||||||||||||
| Operations in Japan | Overseas operations | |||||||||||||||||||||||||||||||||||||||
| Corporate | Real estate | |||||||||||||||||||||||||||||||||||||||
| financial | Rental | related | Asia and | |||||||||||||||||||||||||||||||||||||
| services | operations | finance | Real estate | Life insurance | Other | The Americas | Oceania | Europe | Total | |||||||||||||||||||||||||||||||
Revenues |
$ | 1,214 | $ | 704 | $ | 518 | $ | 1,357 | $ | 1,262 | $ | 701 | $ | 447 | $ | 509 | $ | 101 | $ | 6,813 | ||||||||||||||||||||
Interest revenue |
170 | 0 | 304 | 4 | — | 366 | 172 | 78 | 6 | 1,100 | ||||||||||||||||||||||||||||||
Interest expense |
164 | 16 | 61 | 23 | 1 | 30 | 123 | 117 | 13 | 548 | ||||||||||||||||||||||||||||||
Depreciation and amortization |
336 | 436 | 41 | 41 | 1 | 27 | 33 | 170 | 45 | 1,130 | ||||||||||||||||||||||||||||||
Other significant non-cash items: |
||||||||||||||||||||||||||||||||||||||||
Provision for doubtful
receivables and probable loan
losses |
172 | (2 | ) | 65 | 1 | 9 | 158 | 42 | 24 | 0 | 469 | |||||||||||||||||||||||||||||
Write-downs of long-lived
assets |
1 | — | — | 76 | — | — | 29 | — | — | 106 | ||||||||||||||||||||||||||||||
Decrease in policy liabilities |
— | — | — | — | 149 | — | — | — | — | 149 | ||||||||||||||||||||||||||||||
Equity in net income (loss) of and
gain (loss) on sides of affiliates |
(0) | 0 | 5 | 0 | — | 30 | 41 | 103 | (13 | ) | 166 | |||||||||||||||||||||||||||||
Discontinued operations |
— | — | 13 | 5 | — | — | 27 | — | — | 45 | ||||||||||||||||||||||||||||||
Segment profit (loss) |
414 | 88 | 171 | 59 | 51 | 96 | 72 | 169 | (12 | ) | 1,108 | |||||||||||||||||||||||||||||
Segment assets |
17,094 | 1,393 | 8,601 | 2,929 | 5,511 | 3,903 | 4,472 | 3,908 | 535 | 48,346 | ||||||||||||||||||||||||||||||
Long-lived assets |
787 | 848 | 672 | 1,826 | 239 | 7 | 570 | 722 | 300 | 5,971 | ||||||||||||||||||||||||||||||
Expenditures for long-lived
assets |
292 | 498 | 118 | 382 | 77 | 0 | 79 | 293 | 0 | 1,739 | ||||||||||||||||||||||||||||||
Investment in affiliates |
1 | 0 | (6 | ) | 6 | 122 | 478 | 253 | 514 | 43 | 1,411 | |||||||||||||||||||||||||||||
114
Table of Contents
The accounting policies of the segments are almost the same as those
described in Note 1 (“Significant Accounting and Reporting Policies”) except
for the treatment of income tax expenses. Since the Company and its
subsidiaries evaluate performance for the segments based on profit or loss
before income taxes, tax expenses are not included in segment profit or loss.
Equity in net income (loss) of affiliates, minority interest income and
discontinued operations, which are recognized net of tax, are adjusted to
profit or loss before income tax. Gains and losses that management does not
consider for evaluating the performance of the segments, such as write-downs of
certain securities, certain foreign exchange gains or losses and write-offs of
unamortized deferred credits, are excluded from the segment profit or loss and
are regarded as corporate items.
Assets attributed to each segment are consolidated operating assets
(investment in direct financing leases, installment loans, investment in
operating leases, investment in securities and other operating assets),
inventories, advances for investment in operating leases (included in other
assets) and investment in affiliates (not including loans). This has resulted
in depreciation of office facilities being included in each segment’s profit or
loss while the carrying amounts of corresponding assets are not allocated to
each segment’s assets. However, the effect resulting from this allocation is
not significant.
The reconciliation of segment totals to consolidated financial statement
amounts is as follows. Significant items to be reconciled are revenues, segment
profit and segment assets. Other items do not have a significant difference
between segment amounts and consolidated amounts.
| Millions of | ||||||||||||||||
| Millions of yen | U.S. dollars | |||||||||||||||
| 2002 | 2003 | 2004 | 2004 | |||||||||||||
Revenues: |
||||||||||||||||
Total revenues for segments |
¥ | 653,234 | ¥ | 675,652 | ¥ | 720,041 | $ | 6,813 | ||||||||
Revenue related to corporate assets |
5,228 | 7,993 | 6,287 | 60 | ||||||||||||
Revenue from discontinued operations |
(1,168 | ) | (1,825 | ) | (5,555 | ) | (53 | ) | ||||||||
Total consolidated revenues |
¥ | 657,294 | ¥ | 681,820 | ¥ | 720,773 | $ | 6,820 | ||||||||
Segment profit: |
||||||||||||||||
Total profit for segments |
¥ | 87,016 | ¥ | 52,295 | ¥ | 117,133 | $ | 1,108 | ||||||||
Corporate interest expenses, general and administrative
expenses |
(4,215 | ) | (5,403 | ) | (7,975 | ) | (75 | ) | ||||||||
Adjustment of income tax expenses to equity in net income and
minority income |
(1,324 | ) | (986 | ) | (141 | ) | (1 | ) | ||||||||
Corporate write-downs of securities |
(7,556 | ) | (3,408 | ) | (2,637 | ) | (25 | ) | ||||||||
Corporate other gain or loss |
(882 | ) | 3,790 | 490 | 5 | |||||||||||
Discontinued operations |
(733 | ) | (1,109 | ) | (4,713 | ) | (45 | ) | ||||||||
Total consolidated income before discontinued operations,
extraordinary gain, cumulative effect of a change in accounting
principle and income taxes |
¥ | 72,306 | ¥ | 45,179 | ¥ | 102,157 | $ | 967 | ||||||||
Segment assets: |
||||||||||||||||
Total assets for segments |
¥ | 5,686,631 | ¥ | 5,372,182 | ¥ | 5,109,742 | $ | 48,346 | ||||||||
Inventories |
(70,591 | ) | (100,893 | ) | (121,441 | ) | (1,149 | ) | ||||||||
Advances for investment in operating leases |
(101,974 | ) | (43,890 | ) | (39,342 | ) | (372 | ) | ||||||||
Investment in affiliates (not including loans) |
(73,290 | ) | (131,388 | ) | (149,237 | ) | (1,412 | ) | ||||||||
Corporate assets |
72,897 | 47,158 | 49,472 | 468 | ||||||||||||
Total consolidated operating assets |
¥ | 5,513,673 | ¥ | 5,143,169 | ¥ | 4,849,194 | $ | 45,881 | ||||||||
FASB Statement No. 131 (“Disclosure about Segments of an Enterprise and
Related Information”) requires disclosure of information about geographic areas
as enterprise-wide information. Since each segment is identified based on the
nature of services for operations in Japan and on the bases of geographic area
for overseas operations, the information required is incorporated into the
table. Japan and the United States of America are the countries whose revenues
from external customers are significant. Almost all the revenues of the
Americas segment are derived from the United States of America. The basis for
attributing revenues from external customers to individual countries is
principally the location of the foreign subsidiaries and foreign affiliates.
FASB Statement No. 131 requires disclosure of revenues from external
customers for each product and service as enterprise-wide information. The
consolidated statements of income in which the revenues are categorized based
on the nature of the types of business conducted include the required
information. No single customer accounted for 10% or more of the total revenues
for fiscal 2002, 2003 and 2004.
115
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of ORIX Corporation:
We have audited the accompanying consolidated balance sheets of ORIX
Corporation (a Japanese corporation) and its subsidiaries as of March 31, 2003
and 2004, and the related consolidated statements of income, shareholders’
equity and cash flows for each of the years in the three-year period ended
March 31, 2004. These consolidated financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ORIX
Corporation and its subsidiaries as of March 31, 2003 and 2004, and the results
of their operations and their cash flows for each of the years in the
three-year period ended March 31, 2004, in conformity with U.S. generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Company and its subsidiaries have adopted new accounting pronouncements
resulting in changes in the manner certain transactions are accounted. The
method for accounting for goodwill and intangible assets resulting from
business combinations was changed with respect to combinations consummated
after June 30, 2001. As of April 1, 2002, the Company and its subsidiaries
changed the accounting for unamortized deferred credits and goodwill resulting
from prior business combinations and equity method investments.
The accompanying consolidated financial statements as of and for the year
ended March 31, 2004 have been
translated into United States dollars solely for the convenience of the
readers. We have recomputed the translation, and, in our opinion, the
consolidated financial statements expressed in Japanese yen have been
translated into United States dollars on the basis set forth in Note 1 (ac).
Tokyo, Japan
May 7, 2004
116
Table of Contents
DIRECTORY (BY SEGMENT)
| Operations in Japan | ||||||
| Established | ORIX | |||||
| Principal Business | (Acquired) | Ownership | ||||
• Corporate Financial Services |
||||||
ORIX Corporation |
Apr. 1964 | |||||
Tokyo Sales Headquarters |
Leasing, Lending, Other Financial Services | |||||
Kinki (Osaka) Sales Headquarters |
||||||
District Sales Headquarters |
||||||
OQL Headquarters |
||||||
ORIX Alpha Corporation |
Leasing, Lending | Mar. 1972 | 100% | |||
ORIX Auto Leasing Corporation |
Automobile Leasing | Jun. 1973 | 100% | |||
Sun Leasing Corporation |
Medical Equipment Leasing | (Sep. 1999) | 100% | |||
Senko Lease Corporation |
Automobile Leasing | (Jul. 2001) | 100% | |||
IFCO Inc. |
Automobile Leasing | (Sep. 2001) | 80% | |||
Momiji Lease Corporation |
Leasing | (Mar. 2002) | 95% | |||
Nittetsu Lease Co., Ltd. |
Leasing | (Jul. 2002) | 90% | |||
Nittetsu Leasing Auto Co., Ltd. |
Automobile Leasing | (Jul. 2002) | 91% | |||
• Rental Operations |
||||||
ORIX Rentec Corporation |
Precision Measuring & OA Equipment Rentals | Sep. 1976 | 100% | |||
ORIX Rentec (Singapore) Pte. Limited (Singapore) |
Oct. 1995 | 100% | ||||
ORIX Rentec (Malaysia) Sdn. Bhd. (Malaysia) |
Nov. 1996 | 94% | ||||
ORIX Rentec (Korea) Corporation (South Korea) |
Apr. 2001 | 100% | ||||
ORIX Rentec Limited (U.K.) |
Jul. 2001 | 100% | ||||
ORIX Rent-A-Car Corporation |
Automobile Rentals | Feb. 1985 | 100% | |||
JAPAREN Co., Ltd. |
Automobile Rentals | (Oct. 2003) | 100% | |||
• Real Estate-Related Finance |
||||||
ORIX Corporation |
Apr. 1964 | |||||
Real Estate Finance Headquarters |
Real Estate-Related Finance | |||||
ORIX Trust and Banking Corporation |
Trust & Banking Services | (Apr. 1998) | 100% | |||
ORIX Asset Management & Loan Services Corporation |
Loan Servicing | Apr. 1999 | 100% | |||
ORIX Asset Management Corporation |
REIT Management | Sep. 2000 | 100% | |||
• Real Estate |
||||||
ORIX Corporation |
Apr. 1964 | |||||
Real Estate Business Headquarters |
Real Estate Development & Management | |||||
ORIX Estate Corporation |
Real Estate & Leisure Facility Management | (Dec. 1986) | 100% | |||
BlueWave Corporation |
Training Facility & Hotel Management | Aug. 1991 | 100% | |||
ORIX Real Estate Corporation |
Real Estate Development & Management | Mar. 1999 | 100% | |||
ORIX Golf Corporation |
Golf Course Development & Management | Jul. 2000 | 100% | |||
ORIX Facilities Corporation |
Building Maintenance Services | (Sep. 2001) | 85% | |||
• Life Insurance |
||||||
ORIX Life Insurance Corporation |
Life Insurance | Apr. 1991 | 100% | |||
ORIX Financial Alliance Corporation |
Life Insurance Agency | Oct. 2002 | 100% | |||
• Others |
||||||
ORIX Corporation |
Apr. 1964 | |||||
Investment Banking Headquarters*1 |
Investment Banking | |||||
ORIX Insurance Services Corporation |
Casualty & Life Insurance Agency | Sep. 1976 | 100% | |||
ORIX Credit Corporation*2 |
Consumer Loans | Jun. 1979 | 100% | |||
ORIX Capital Corporation |
Venture Capital | Oct. 1983 | 100% | |||
ORIX Securities Corporation |
Securities Brokerage & Online Trading | (Mar. 1986) | 100% | |||
ORIX Baseball Club Co., Ltd. |
Professional Baseball Team Management | (Oct. 1988) | 100% | |||
| *1 | Of the businesses conducted by the Investment Banking
Headquarters, the aircraft finance and ship finance activities are
recorded in the “Europe” and “Asia and Oceania” segments, respectively. |
|||
| *2 | ORIX Club Corporation was merged into ORIX Credit Corporation on
April 1, 2004. |
|||
ORIX Corporation
117
Table of Contents
| Established | ORIX | |||||
| Principal Business | (Acquired) | Ownership | ||||
ORIX COMMODITIES Corporation |
Securities & Futures Trading | Jan. 1990 | 100% | |||
ORIX Eco Services Corporation |
Environmental Management & Consulting Services | Apr. 1998 | 100% | |||
ORIX Interior Corporation |
Sale & Manufacture of Interior Furnishings | Oct. 1998 | 100% | |||
ORIX Investment Corporation |
Alternative Investment | Jun. 1999 | 100% | |||
ORIX M&A Solutions Corporation |
M&A and Corporate Restructuring Advisory Services | Feb. 2003 | 100% | |||
Kuribayashi Leasing Co., Ltd. |
Leasing | (Apr. 1977) | 35% | |||
The Chugin Lease Company Limited |
Leasing | Apr. 1982 | 30% | |||
YAMAGUCHI LEASE CO., LTD. |
Leasing | May 1983 | 35% | |||
Hokugin Lease Co., Ltd. |
Leasing | Jul. 1983 | 30% | |||
Nissay Leasing Co., Ltd. |
Leasing | Mar. 1984 | 30% | |||
The Minato Leasing Co., Ltd. |
Leasing | Jun. 1984 | 35% | |||
The Torigin Leasing Co., Ltd. |
Leasing | Oct. 1984 | 45% | |||
Hyakugo Leasing Company Limited |
Leasing | Oct. 1984 | 45% | |||
Tokugin ORIX Co., Ltd. |
Leasing | Nov. 1984 | 30% | |||
Shigagin Leasing Capital Co., Ltd. |
Leasing | May 1985 | 34% | |||
Sengin Sogo Leasing Co., Ltd. |
Leasing | Oct. 1985 | 29% | |||
Kagawagin Leasing Co., Ltd. |
Leasing | May 1986 | 30% | |||
YAMAGUCHI MORTGAGE CO., LTD. |
Mortgage Lending | Jul. 1989 | 40% | |||
Casco Co., Ltd. |
Consumer Loans | (May 1999) | 40% | |||
ORIX Insurance Planning Corporation |
Non-Life Insurance Agency | Sep. 1999 | 50% | |||
Aozora Card Co., Ltd. |
Consumer Loans | Dec. 2001 | 40% | |||
• ORIX Headquarter Functions (Not Included
in Segment Financial Information) |
||||||
ORIX Corporation |
Apr. 1964 | |||||
International Headquarters |
Administration of Overseas Activities | |||||
ORIX Computer Systems Corporation |
Software Engineering & Systems Management | Mar. 1984 | 100% | |||
ORIX Create Corporation |
Coordination of Advertising Activities | Jul. 1998 | 100% | |||
ORIX Management Information Center Corporation |
Accounting & Administration Services | Oct. 1999 | 100% | |||
ORIX Callcenter Corporation |
Call Center | Nov. 1999 | 100% | |||
ORIX Human Resources Corporation |
Outplacement Services | Feb. 2002 | 100% | |||
| Overseas Operations | ||||||||
| Established | ORIX | |||||||
| Country | Principal Business | (Acquired) | Ownership | |||||
• The Americas |
||||||||
ORIX USA Corporation |
U.S.A. | Corporate Finance | Aug. 1981 | 100% | ||||
| Leasing | ||||||||
| Real Estate | ||||||||
| Loan Servicing | ||||||||
| Debt Investment | ||||||||
| Development | ||||||||
Stockton Holdings Limited |
Bermuda | Futures Trading, Reinsurance | (Jul. 1989) | 29% | ||||
• Asia and Oceania |
||||||||
ORIX Asia Limited |
China | Leasing, Automobile Leasing | Sep. 1971 | 100% | ||||
| (Hong Kong) | ||||||||
ORIX Leasing Singapore Limited |
Singapore | Leasing, Hire Purchase, Factoring | Sep. 1972 | 50% | ||||
ORIX Investment and Management Private Limited |
Singapore | Equity Investment | May 1981 | 100% | ||||
ORIX CAR RENTALS PTE. LTD. |
Singapore | Automobile Leasing & Rentals, Hire Purchase | Sep. 1981 | 45% | ||||
ORIX Corporation
118
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| Established | ORIX | |||||||
| Country | Principal Business | (Acquired) | Ownership | |||||
ORIX Capital Resources Limited |
Singapore | Ship Finance | Nov. 1997 | 100% | ||||
ORIX Ship Resources Private Limited |
Singapore | Ship Finance | Nov. 1997 | 100% | ||||
ORIX Maritime Corporation |
Japan | Ship Operation Management | Nov. 1977 | 100% | ||||
ORIX Leasing Malaysia Berhad |
Malaysia | Leasing, Lending, Hire Purchase | Sep. 1973 | 80% | ||||
ORIX Car Rentals Sdn. Bhd. |
Malaysia | Automobile Rentals | Feb. 1989 | 28% | ||||
ORIX Auto Leasing Malaysia Sdn. Bhd. |
Malaysia | Automobile Leasing | Oct. 2000 | 80% | ||||
PT. ORIX Indonesia Finance |
Indonesia | Leasing, Automobile Leasing | Apr. 1975 | 83% | ||||
ORIX METRO Leasing and Finance Corporation |
Philippines | Leasing, Automobile Leasing | Jun. 1977 | 40% | ||||
Thai ORIX Leasing Co., Ltd. |
Thailand | Leasing | Jun. 1978 | 49% | ||||
ORIX Auto Leasing (Thailand) Co., Ltd. |
Thailand | Automobile Leasing & Rentals | (Aug. 2001) | 85% | ||||
Lanka ORIX Leasing Company Limited |
Sri Lanka | Automobile Leasing, Hire Purchase | Mar. 1980 | 30% | ||||
ORIX Taiwan Corporation |
Taiwan | Leasing, Hire Purchase, Loan Servicing | Oct. 1982 | 95% | ||||
ORIX Auto Leasing Taiwan Corporation |
Taiwan | Automobile Leasing | Apr. 1998 | 100% | ||||
ORIX Auto Leasing Korea Corporation |
Korea | Automobile Leasing | Feb. 2004 | 100% | ||||
ORIX Australia Corporation Limited |
Australia | Leasing, Automobile Leasing & Rentals, | Jul. 1986 | 100% | ||||
| Factoring | ||||||||
AUSTRAL MERCANTILE COLLECTIONS PTY LIMITED |
Australia | Debt Collection Services | Nov. 1998 | 50% | ||||
ORIX Leasing Pakistan Limited |
Pakistan | Leasing, Automobile Leasing | Jul. 1986 | 50% | ||||
ORIX Investment Bank Pakistan Limited |
Pakistan | Investment Banking, Securities Brokerage | Jul. 1995 | 27% | ||||
ORIX New Zealand Limited |
New Zealand | Leasing, Automobile Leasing & Rentals | Aug. 1988 | 100% | ||||
INFRASTRUCTURE LEASING
& FINANCIAL SERVICES LIMITED |
India | Investment Banking, Corporate Finance | (Mar. 1993) | 21% | ||||
ORIX Auto and Business Solutions Limited |
India | Automobile Leasing | Mar. 1995 | 58% | ||||
IL&FS Investsmart Limited |
India | Brokerage Services | (Mar. 2000) | 36% | ||||
IL&FS Education & Technology Services Limited |
India | Education-Related Services | (Aug. 2000) | 30% | ||||
Oman ORIX Leasing Company SAOG |
Oman | Automobile Leasing, Hire Purchase | Jul. 1994 | 10% | ||||
ORIX Leasing Egypt SAE |
Egypt | Leasing | Jun. 1997 | 34% | ||||
Saudi ORIX Leasing Company |
Kingdom of | Leasing, Automobile Leasing | Jan. 2001 | 25% | ||||
| Saudi Arabia | ||||||||
MAF ORIX Finance PJSC |
U.A.E. | Leasing | Apr. 2002 | 36% | ||||
• Europe |
||||||||
ORIX Europe Limited |
U.K. | Corporate Finance | Nov. 1982 | 100% | ||||
ORIX Corporate Finance Limited |
U.K. | Financial Advisory Services | Sep. 1989 | 100% | ||||
ORIX Ireland Limited |
Ireland | Corporate Finance, | May 1988 | 100% | ||||
| Accounting & Administration Services | ||||||||
ORIX Aviation Systems Limited |
Ireland | Aircraft Leasing | Mar. 1991 | 100% | ||||
ORIX Aircraft Corporation |
Japan | Aircraft Leasing | May 1986 | 100% | ||||
ORIX Polska S.A. |
Poland | Leasing, Automobile Leasing | (May 1997) | 100% | ||||
(As of March 31, 2004)
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119
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GROUP NETWORK
Network In Japan
ORIX’s extensive network in Japan includes 937 locations.
The number of offices in each region is indicated in parentheses.
• KINKI (127)
ORIX (9)
ORIX Alpha (2)
ORIX Auto Leasing (7)
Sun Leasing (1)
Senko Lease (4)
IFCO (1)
Nittetsu Lease (1)
Nittetsu Leasing Auto (1)
ORIX Rentec (4)
ORIX Rent-A-Car (42)
JAPAREN (29)
ORIX Trust and Banking (1)
ORIX Asset Management
and Loan Services (1)
ORIX Estate (2)
BlueWave (2)
ORIX Real Estate (1)
ORIX Golf (1)
ORIX Facilities (5)
ORIX Life Insurance (4)
ORIX Financial Alliance (1)
ORIX Credit (1)
ORIX Capital (1)
ORIX Baseball Club (4)
ORIX Interior (2)
• CHUGOKU (54)
ORIX (4)
ORIX Auto Leasing (4)
IFCO (1)
Momiji Lease (3)
Nittetsu Lease (1)
Nittetsu Leasing Auto (1)
ORIX Rentec (1)
ORIX Rent-A-Car (14)
JAPAREN (21)
ORIX Golf (2)
ORIX Facilities (1)
ORIX Life Insurance (1)
• SHIKOKU (26)
ORIX (3)
ORIX Auto Leasing (3)
IFCO (1)
ORIX Rent-A-Car (8)
JAPAREN (11)
• KYUSHU (incl. OKINAWA) (144)
ORIX (7)
ORIX Auto Leasing (9)
Sun Leasing (1)
Senko Lease (2)
IFCO (2)
Nittetsu Lease (2)
Nittetsu Leasing Auto (2)
ORIX Rentec (2)
ORIX Rent-A-Car (59)
JAPAREN (52)
ORIX Trust and Banking (1)
ORIX Asset Management
and Loan Services (1)
ORIX Life Insurance (2)
ORIX Callcenter (2)
• KANTO (166)
ORIX (10)
ORIX Alpha (1)
ORIX Auto Leasing (7)
Senko Lease (1)
IFCO (1)
Nittetsu Lease (1)
Nittetsu Leasing Auto (1)
ORIX Rentec (10)
ORIX Rent-A-Car (99)
JAPAREN (28)
ORIX Trust and Banking (1)
BlueWave (1)
ORIX Golf (4)
ORIX Life Insurance (1)
• CHUBU (131)
ORIX (13)
ORIX Alpha (1)
ORIX Auto Leasing (11)
Sun Leasing (1)
Senko Lease (1)
IFCO (2)
Nittetsu Lease (1)
Nittetsu Leasing Auto (1)
ORIX Rentec (6)
ORIX Rent-A-Car (57)
JAPAREN (30)
BlueWave (1)
ORIX Facilities (2)
ORIX Life Insurance (4)
• HOKKAIDO (70)
ORIX (3)
ORIX Auto Leasing (1)
Sun Leasing (1)
IFCO (1)
ORIX Rentec (1)
ORIX Rent-A-Car (44)
JAPAREN (18)
ORIX Life Insurance (1)
• TOHOKU (66)
ORIX (7)
ORIX Auto Leasing (6)
Sun Leasing (1)
IFCO (2)
Nittetsu Lease (1)
Nittetsu Leasing Auto (1)
ORIX Rentec (1)
ORIX Rent-A-Car (29)
JAPAREN (15)
ORIX Real Estate (1)
ORIX Life Insurance (1)
ORIX Financial Alliance (1)
• TOKYO (153)
ORIX (15)
ORIX Alpha (1)
ORIX Auto Leasing (3)
Sun Leasing (1)
Senko Lease (2)
IFCO (4)
Nittetsu Lease (1)
Nittetsu Leasing Auto (1)
ORIX Rentec (7)
ORIX Rent-A-Car (60)
JAPAREN (21)
ORIX Trust and Banking (4)
ORIX Asset Management
and Loan Services (2)
ORIX Asset Management (1)
BlueWave (2)
ORIX Real Estate (1)
ORIX Golf (1)
ORIX Life Insurance (6)
ORIX Financial Alliance (1)
ORIX Credit (2)
ORIX Capital (1)
ORIX Securities (1)
ORIX Eco Services (1)
ORIX Interior (1)
ORIX Investment (1)
ORIX Maritime (1)
ORIX Aircraft (1)
Other (10)
(As of March 31, 2004)
ORIX Corporation
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Overseas Network
ORIX has a global network that spans 22 countries worldwide. ORIX has 238 locations throughout the United States, Asia, Oceania, Europe, the Middle East, and Northern Africa. The number of offices in each region is indicated in brackets and includes both subsidiaries and affiliates.
(As of March 31, 2004)
ORIX Corporation
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WEBSITE GUIDE
ORIX’s website has been reorganized in fiscal 2004 to better meet the needs of a variety of users. The new website has been divided into three main sections that include: 1. About ORIX; 2. Investor Relations; and 3. News Releases. Please visit our website to access the information that you are interested in.
1. About ORIX:
http://www.orix.co.jp/grp/index_e.htm
Our History:
A short review of the development of ORIX covering the last 40 years
Financial Data:
Historical financial data
Management:
Management profiles and recent management interviews
Corporate Network:
Descriptions and contact information
for ORIX Group companies in Japan and
overseas
Corporate Governance:
Developments of ORIX’s corporate governance over the years
Compliance:
Outline of the Compliance Manual used by ORIX
2. Investor Relations:
http://www.orix.co.jp/grp/ir_e/ir_index.htm
Who is ORIX?:
An introduction to ORIX for first time visitors
CEO Message:
An introduction of ORIX’s CEO Message from the current annual report
Financial Data:
Historical financial data
| • | Quarterly Release: ORIX’s most recent quarterly earnings release |
|||
| • | Five-Year Summary: A summary of financial information for the last five years |
|||
| • | Financial Reports: http://www.orix.co.jp/grp/ir_e/data/ report/index.htm |
|||
Annual Report: |
Released in July of every year, includes the CEO’s message to shareholders, explanation of the fiscal year’s results, and detailed financial information
Quarterly Financial Results: |
Quarterly financial information,
with outline of quarterly results
and consolidated financial
statements
Analysis of Quarterly Financial Results: |
Explanation of financial results
based on “Quarterly Financial
Results” using graphs and tables,
includes historical information of
major financial data
Update Newsletter: |
Newsletter sent to shareholders in
the first, second, and third
quarters
U.S. SEC Form 20-F: |
Annual report filed with the United
States Securities and Exchange
Commission usually in July of every
year
Five-Year Excel Data: |
Downloadable excel file containing
five years of financial data
compiled from information disclosed
in ORIX’s annual reports and U.S.
SEC Form 20-Fs
Stock & Bond Information:
Stock and corporate bond information
| • | Stock Information: Stock and security exchange listings and other stock information |
|||
| • | Stock Price: Details of ORIX’s current historical stock prices |
|||
| • | Analyst Coverage: List of analysts covering ORIX |
|||
| • | Corporate Bonds & Ratings: Information on corporate bonds issued and ratings information |
|||
Management:
Management profiles and recent management interviews
| • | Management Profiles: Information on management |
|||
| • | Management Presentations: Downloadable management interviews (PDF format) |
|||
IR Calendar & Earnings Presentations:
Downloadable past results
presentations (with audio) and
schedule for future results
presentations
FAQs:
List of useful questions and answers
Contact ORIX IR:
Contact information
Information Requests:
Form for requesting ORIX publications
and signing up for ORIX’s e-mail service
3. News Releases:
http://www.orix.co.jp/grp/prs_e/index.htm
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CORPORATE INFORMATION
ORIX Corporation
3-22-8, Shiba, Minato-ku,
Tokyo 105-8683, Japan
Tel: 81-3-5419-5000
Fax: 81-3-5419-5903
Established:
April 17, 1964
Shareholders’
Equity: ¥564,047 million
Number
of Employees: 12,481
Shareholder Information
Total Number of Shares Authorized:
259,000,000
shares
Total Number of Shares Outstanding:
84,366,314
shares
Total Number of American Depository Shares Outstanding:
1,021,620
shares
Number of Shareholders: 9,259
Transfer Agent for Common Shares:
UFJ
Trust Bank Limited
1-4-3,
Marunouchi, Chiyoda-ku,
Tokyo
100-0005, Japan
Depositary Bank for ADRs:
Citibank,
N.A.
111
Wall Street, New York,
New
York 10043, U.S.A.
Stock Exchange Listings
Common Shares and Convertible Notes:
Tokyo
Stock Exchange
Osaka
Securities Exchange
Nagoya
Stock Exchange
Securities
Code: 8591
New York Stock Exchange
Trading
Symbol: IX
If you would like to contact an Investor Relations or Media Representative, please contact us by e-mail or telephone at the address below. Contact information for ORIX subsidiaries nearest you can be found in our Corporate Network in Japan (http://www.orix.co.jp/grp/co_e/list_japan.htm) or our Overseas Corporate Network (http://www.orix.co.jp/ grp/co_e/list_world.htm) on our website.
ORIX Corporation
Corporate Communications,
Office of the President
3-22-8, Shiba, Minato-ku,
Tokyo 105-8683, Japan
Tel: 81-3-5419-5102
Fax: 81-3-5419-5901
E-mail: orixir@orix.co.jp
URL: www.orix.co.jp
To U.S. Holders:
PFIC
It is expected, and the following
discussion assumes, that the Company will
be a “passive foreign investment company”
(a “PFIC”) as defined in Section 1297(a)
of the Internal Revenue Code in the year
of the Offering and in future years by
reason of the composition of its assets
and the nature of its income.
A U.S. Holder who holds Shares will
generally be subject to special rules
(the “PFIC Rules”) with respect to (i)
any “excess distributions” on the Shares
(generally, any distributions received by
the U.S. Holder on the Shares in a
taxable year that are greater than 125%
of the average annual distributions
received by the U.S. Holder in the three
preceding taxable years, or, if shorter,
the U.S. Holder’s holding period for the
Shares) and (ii) any gain realized on the
sale or other disposition (including a
pledge) of the Shares. Under these rules,
(i) the excess distribution or gain would
be allocated ratably over the U.S.
Holder’s holding period for the Shares,
(ii) the amount allocated to the current
taxable year would be taxed as ordinary
income, and (iii) the amount allocated to
each of the prior taxable years would be
subject to tax at the highest rate of tax
in effect for the applicable class of
taxpayer for such year, and an interest
charge for the deemed deferral benefit
would be imposed with respect to the
resulting tax attributable to each such
prior year.
Under the recently enacted Taxpayer
Relief Act of 1997, a U.S. Holder, in
lieu of being subject to the special tax
and interest charges described above, may
make an election to include gain, as
ordinary income, on the stock of a PFIC
under a mark-to-market method. Under such
an election, the U.S. Holder generally
includes in income each year an amount
equal to the excess, if any, of the fair
market value of the PFIC stock as of the
close of the taxable year over the U.S.
Holder’s adjusted basis in such stock.
The U.S. Holder is allowed a deduction
for the excess, if any, of the adjusted
basis of the PFIC stock over its fair
market value as of the close of the
taxable year to the extent of any
unreversed mark-to-market gains
previously included in income with
respect to the stock. Prospective
investors should consult their tax
advisors about the desirability of making
such a mark-to-market election.
A U.S. Holder would also avoid the
application of such special tax and
interest charges if it made an election
to treat the PFIC as a “qualified
electing fund” under Section 1295 of the
Code, provided that the corporation
complies with certain reporting and other
requirements. The Company, however, does
not intend to comply with the
requirements necessary to permit a holder
to make an election to have the Company
treated as a “qualified electing fund.”
A U.S. Holder who beneficially owns Shares
on a PFIC during any year must make an
annual return on IRS Form 8621 that
describes the distributions received with
respect to such Shares and any gain
realized on the sale or other disposition
of such Shares.
(As of March 31, 2004)
ORIX Corporation
123
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Printed in Japan
on recycled paper