20-F 1 jun2702_orix20f.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------- FORM 20-F (Mark One) [ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 001-14856 ORIX KABUSHIKI KAISHA (Exact name of Registrant as specified in our charter) ORIX CORPORATION (Translation of Registrant's name into English) Japan (Jurisdiction of incorporation or organization) 3-22-8 Shiba, Minato-ku Tokyo 105-8683, Japan (Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- --------------------- (1) Common stock without par value (the "Shares") New York Stock Exchange* (2) American Depository Shares ("ADSs"), each of New York Stock Exchange which represents one-half of one Share (3) 0.375% Convertible Notes due 2005 (the "Notes") New York Stock Exchange (4) American Depository Notes ("ADNs"), each of New York Stock Exchange which represents one Note in the principal amount of yen2,000,000 Securities registered or to be registered pursuant to Section 12(g) of the Act: None (Title of Class) Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None (Title of Class) Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report. As of March 31, 2002, 84,303,985 Shares and 855,720 ADSs are outstanding. Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark which financial statement item the Registrant has elected to follow. Item 17 Item 18 X --- --- *Not for trading, but only in connection with the registration of American Depositary Shares. ------------------------------------------------------------------------------- TABLE OF CONTENTS ----------------- Page ---- Certain Defined Terms, Conventions and Presentation of Financial Information..................................................................ii Forward Looking Statements...................................................ii PART I........................................................................1 Item 1. Identity of Directors, Senior Management and Advisors...........1 Item 2. Offer Statistics and Expected Timetable.........................1 Item 3. Key information.................................................1 Item 4. Information on the Company......................................8 Item 5. Operating and Financial Review and Prospects...................36 Item 6. Directors, Senior Management and Employees.....................76 Item 7. Major Shareholders and Related Party Transactions..............85 Item 8. Financial Information..........................................86 Item 9. The Offer and Listing..........................................86 Item 10. Additional Information.........................................88 Item 11. Quantitative and Qualitative Disclosures About Market Risk.....96 Item 12. Other than Equity Securities..................................101 PART II.....................................................................101 Item 13. Defaults, Dividend Arrearages and Delinquencies...............101 Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds...........................................101 Item 15. [Reserved]....................................................101 Item 16. [Reserved]....................................................101 PART III....................................................................101 Item 17. Financial Statements..........................................101 Item 18. Financial Statements..........................................101 Item 19. Exhibits......................................................101 CERTAIN DEFINED TERMS, CONVENTIONS AND PRESENTATION OF FINANCIAL INFORMATION As used in this Annual Report, unless the context otherwise requires, "Company" and "ORIX" refer to ORIX Corporation and "we", "us", "our" and similar terms refer to ORIX Corporation and our subsidiaries. In this annual report, "subsidiary" and "subsidiaries" refer to consolidated subsidiaries of ORIX, companies in which ORIX owns more than 50%, and "affiliate" and "affiliates" refer to all of our affiliates accounted for by the equity method, companies in which ORIX owns 20-50%. The consolidated financial statements of ORIX have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). Unless otherwise stated or the context otherwise requires, all amounts in such financial statements are expressed in Japanese yen. References in this Annual Report to "yen" or "yen" are to Japanese yen and references to "$" or "dollars" are to United States dollars. Certain monetary amounts included in this Annual Report have been subject to rounding adjustments; accordingly, figures shown as totals in certain tables may not be equal to the arithmetic sum of the figures which precede them. The Company's fiscal year ends on March 31. The fiscal year ended March 31, 2002 is referred to throughout this Annual Report as fiscal 2002 or the 2002 fiscal year, and other fiscal years are referred to in a corresponding manner. References to years not specified as being fiscal years are to calendar years. --------- FORWARD LOOKING STATEMENTS This annual report contains statements that constitute "forward-looking statements" within the meaning of Section 21(E) of the Securities Exchange Act of 1934. When included in this Annual Report, the words, "will", "should", "expects", "intends", "anticipates", "estimates" and similar expressions, among others, identify forward looking statements. Such statements, which include statements contained in "Item 5. Operating and Financial Review and Prospects." and "Item 11. Quantitative and Qualitative Disclosure About Market Risk", inherently are subject to a variety of risks and uncertainties that could cause actual results to differ materially from those set forth in such statements. These forward looking statements are made only as of the date of this Annual Report. The Company expressly disclaims any obligation or undertaking to release any update or revision to any forward looking statement contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based. ii PART I Item 1. Identity of Directors, Senior Management and Advisors. Not applicable. Item 2. Offer Statistics and Expected Timetable. Not applicable. Item 3. Key information. Selected Financial Data The following selected consolidated financial information has been derived from our consolidated financial statements as of each of the dates and for each of the periods indicated below. This information should be read in conjunction with and is qualified in its entirety by reference to our consolidated financial statements, including the notes thereto, included in this Annual Report, which have been audited by Asahi & Co., a member firm of Andersen Worldwide SC, independent accountants. Year ended March 31, --------------------------------------------------------------------------- 1998 1999 2000 2001 2002 2002 ---------- ---------- ---------- ---------- ---------- --------- (In millions of yen and millions of US dollars except per Share data) INCOME STATEMENT DATA Total revenues..................... yen507,143 yen593,941 yen616,513 yen586,149 yen658,462 $4,942 Interest expense................... 142,177 140,846 115,038 109,289 90,348 678 Selling, general and administrative expenses......... 79,671 82,395 90,961 101,156 126,316 948 Provision for doubtful receivables and possible loan losses........ 49,434 51,845 45,573 44,584 51,367 385 Operating income................... 31,041 31,042 52,886 57,148 73,369 551 Equity in net income (loss) of and gain (loss) on sales of affiliates...................... 7,371 (3,727) (838) 2,088 (330) (3) Income before income taxes......... 38,412 27,315 52,048 59,236 73,039 548 Net income......................... 23,731 25,621 30,642 34,157 40,269 302 Basic earnings per Share(1)........ 305.33 330.43 385.27 417.77 489.19 3.67 Diluted earnings per Share(1)...... 305.33 330.43 377.02 400.99 467.11 3.51 Cash dividends per Share........... 15.00 15.00 15.00 15.00 15.00 0.11
--------- (1) Basic earnings per share and Diluted earnings per share have been retroactively adjusted for a stock split. 1 As of March 31, ------------------------------------------------------------------------------------ 1998 1999 2000 2001 2002 2002 ----------- ------------ ------------ ------------- ------------ ------- (In millions of yen and millions of US dollars except number of Shares) BALANCE SHEET DATA Investment in direct financing leases(1)....... yen2,186,022 yen1,952,842 yen1,744,953 yen1,657,709 yen1,658,669 $12,448 Installment loans(1)......... 1,794,825 1,761,887 1,791,439 1,846,511 2,273,280 17,060 ----------- ------------ ------------ ------------ ------------ ------- Subtotal..................... 3,980,847 3,714,729 3,536,392 3,504,220 3,931,949 29,508 Investment in operating leases.................... 435,066 411,156 397,576 451,171 474,491 3,561 Investment in securities..... 500,449 576,206 758,381 942,158 861,336 6,464 Other operating assets....... 65,838 73,345 72,472 132,006 260,373 1,954 ----------- ------------ ------------ ------------ ------------ ------- Operating assets(2).......... 4,982,200 4,775,436 4,764,821 5,029,555 5,528,149 41,487 Allowance for doubtful receivables on direct financing leases and possible loan losses...... (145,741) (132,606) (136,939) (141,077) (152,887) (1,147) Other assets................. 737,850 704,806 713,660 702,833 974,957 7,316 ----------- ------------ ------------ ------------ ------------ ------- Total assets................. yen5,574,309 yen5,347,636 yen5,341,542 yen5,591,311 yen6,350,219 $47,656 ============ ============ ============ ============ ============ ======= Short-term debt.............. 2,576,483 2,184,983 1,912,761 1,562,072 1,644,462 12,341 Long-term debt............... 2,044,570 2,036,028 1,942,784 2,330,159 2,809,861 21,087 Common stock................. 20,180 20,180 41,688 41,820 51,854 389 Additional paid-in capital... 37,303 37,464 59,285 59,885 69,823 524 Shareholders' equity......... 313,821 327,843 425,671 461,323 502,508 3,771 Number of issued Shares...... 64,870,299 64,870,299 68,630,294 82,388,025 84,303,985 -- 1998 1999 2000 2001 2002 ------ ------ ------ ------ ------ (%) SELECTED DATA AND RATIOS(3) Shareholders' equity ratio................... 5.63 6.13 7.97 8.25 7.91 Return on assets............................. 0.45 0.47 0.57 0.62 0.67 Return on equity............................. 7.63 7.99 8.13 7.70 8.36 Allowance/investment in direct financing leases and installment loans.............. 3.7 3.6 3.9 4.0 3.9
--------- (1) The sum of assets considered 90 or more days past due and total impaired assets measured pursuant to Financial Accounting Standards Boards, or FASB Statement 114 amounted to yen271,177 million as of March 31, 2000, yen258,432 million as of March 31, 2001, and yen255,123 million as of March 31, 2002. These sums included investment in direct financing leases considered 90 or more days past due of yen53,743 million as of March 31, 2000, yen53,515 million as of March 31, 2001 and yen67,924 million as of March 31, 2002, installment loans (excluding amounts attributable to treatment under FASB Statement 114) considered 90 or more days past due of yen91,513 million as of March 31, 2000, yen84,827 million as of March 31, 2001, and yen74,199 million as of March 31, 2002, and installment loans considered impaired under the definition contained in FASB Statement 114 of yen125,921 million as of March 31, 2000, yen120,090 million as of March 31, 2001, and yen113,000 million as of March 31, 2002. See "Item 4. Information on the Company--Profile of Businesses--Direct Financing Leases" and "--Installment Loans and Investment Securities". (2) Operating assets are defined as all assets subject to regular, active sales and marketing activities including the assets shown on the balance sheet as investment in 2 direct financing leases, installment loans, investment in operating leases, investment in securities and other operating assets. Operating assets are calculated before allowance for doubtful receivables on direct financing leases and possible loan losses. (3) Shareholders' equity ratio is the ratio as of the period end of shareholders' equity to total assets. Return on assets is the ratio of net income for the period to average total assets during the period. Return on equity is the ratio of net income for the period to average shareholders' equity during the period. Allowance/investment in direct financing leases and installment loans is the ratio as of the period end of the allowance for doubtful receivables on direct financing leases and possible loan losses to the sum of investment in direct financing leases and installment loans. In certain parts of this Annual Report, we have translated Japanese yen amounts into US dollars for the convenience of readers. The rate that we used for translations was yen133.25 = US$1.00, which was the approximate exchange rate in Japan on March 31, 2002. The following table provides the noon buying rates for Japanese Yen expressed in Japanese Yen per US$1.00 during the periods indicated. No representation is made that the Japanese yen or US dollar amounts referred to herein could have been or could be converted into US dollars or Japanese yen, as the case may be, at any particular rate or at all. Year Ended March 31, ---------------------------------------------------------------- 1998 1999 2000 2001 2002 --------- ---------- --------- --------- --------- (Yen per U.S. dollar) High.......................................... yen133.99 yen147.14 yen124.45 yen125.54 yen134.77 Low........................................... 111.42 108.83 101.53 104.19 115.89 Average (of noon buying rates available on the last day of each month during the period).................................... 123.57 128.10 110.02 111.65 125.64 At period-end................................. 133.29 118.43 102.73 125.54 132.70
The following table provides the high and low noon buying rates for Japanese yen per $1.00 during the months indicated. High Low --------- ---------- 2002 January......................................... yen134.64 yen130.93 February........................................ 134.77 132.26 March........................................... 133.46 127.07 April........................................... 133.40 128.13 May............................................. 128.66 123.08 June (through June 21).......................... 125.64 121.23 Risk factors Our business may continue to be adversely affected by the recession in Japan Our business may continue to be adversely affected by the recession in Japan. The recession may affect our new business origination volume, the credit quality of our assets and margins on operating assets. The Japanese economy has shown slow growth or negative growth for most of the last decade. Although from 1995 to early 1997 the economy recovered to some extent, since 1997 recessionary conditions have prevailed. As a result of adverse economic conditions in Japan, we may be unable to originate more leases and loans and our non-performing assets may increase. Our allowance for doubtful receivables on direct financing leases and possible loan losses may prove to be inadequate. Adverse economic conditions may prevent our customers from meeting their financial obligations. The value of collateral securing our loans and the value of equipment that we lease to customers may decline. Our ability to re-lease or remarket equipment on favorable terms may also be limited by adverse economic conditions in Japan. Any such event may have an adverse effect on our results of operation and financial condition. 3 Our credit losses on exposures to Japanese real estate-related companies and construction companies may exceed our allowances for these loans At March 31, 2002, we had loans outstanding of yen311,609 million to real estate-related companies and construction companies. Of that amount, we maintained an allowance for possible loan losses of yen31,045 million. Our allowance for doubtful receivables on direct financing leases and possible loan losses may be inadequate to cover credit losses on our loans to real estate related companies and construction companies. Japanese real estate-related companies and construction companies have been severely affected by the collapse of the bubble economy in Japan. Because of the large declines in real estate prices, these companies have suffered enormous losses on investments in real estate and loans secured by real estate. Some of these losses have been recognized in the financial statements of these companies and some have not. Companies in these sectors are suffering from other difficult business conditions resulting from the collapse of the bubble economy, including the lack of liquidity in the real estate market and a decrease in major development projects. Therefore, these companies may have difficulty paying amounts due on loans. In addition, the value of real estate collateral securing our loans from real estate-related companies and construction companies may further decline. This may prevent us from fully recovering our loans to those companies if they default on their obligations. Our business may continue to be adversely affected by adverse economic conditions in the United States A portion of our revenue is derived from our operations in the United States, and we have significant investments in securities of US issuers. The US economy has shown slow growth since the second half of the year ended March 31, 2001, accompanied by declining stock prices and corporate earnings, and according to some authorities is currently in recession. Our results of operations have been and may continue to be adversely affected by adverse economic conditions in the United States. Adverse effects on our US operations might include: o an increase in provisions for doubtful receivables and possible loan losses if the financial condition of our US customers deteriorates; o an increase in write-downs of securities and other investments if the market values of securities continue to decline and such declines are not expected to be temporary or as a consequence of the insolvency of issuers; and o an increase of losses on sale of or unrealized loss on real estate holdings if the value of our real estate in the United States declines significantly. Adverse developments affecting other Asian economies may continue to adversely affect our business The economies of Hong Kong, Indonesia, Malaysia, Korea and other Asian countries where we operate have experienced problems since the second half of 1997. Although economic conditions in some of these countries have improved, we may suffer losses on investments in these countries and poor operating results on our businesses in these countries if these countries experience o declines in the value of the local currency, o declines in gross domestic product, o declines in corporate earnings, o political turmoil, or o stock market volatility. These and other factors could result in o lower demand for our services, o further deterioration of credit quality of our customers in Asian markets, 4 o the need to provide financial support to our Asian subsidiaries or affiliates, or o further write-offs of Asian assets. Changes in market interest rates and currency exchange rates could adversely affect our assets and our financial condition and results of operations We are subject to risks relating to changes in market rates of interest and currency exchange rates. Significant increases in market interest rates, or the perception that an increase may occur, could adversely affect our ability to originate new transactions, including direct financing leases and loans, and our ability to grow. On the other hand, a decrease in interest rates could result in faster prepayments of loans. In addition, changes in market interest rates could affect the interest income that we receive on interest-earning assets differently than the interest rates we pay on interest-bearing liabilities. This could increase our interest expense more than our revenues. An increase in market interest rates could make some of our floating-rate loan customers default on our loans to them. Not all of our assets and liabilities are matched by currency. As a consequence, rapid or significant changes in currency exchange rates could have an adverse impact on our assets and our financial condition and results of operations. We may suffer losses on our investment portfolio We hold large investments in debt and equity securities, mainly in Japan and the United States. At March 31, 2002, the book value of our investments in securities was yen861,336 million. We may suffer losses on these investments because of changes in market prices, defaults or other reasons. 6.2% of our investment in securities at March 31, 2002 was marketable equity securities, mainly common stock of Japanese listed companies. The market values of these equity securities are volatile and have declined substantially in recent years. Unrealized gains and losses on equity securities are generally recorded in shareholders' equity, net of income taxes, and are not directly charged to income. However, declines in market value on available-for-sale securities are charged to income if we believe that these declines are other than temporary. We recorded yen10,848 million in charges of this kind in the year ended March 31, 2001 and yen19,742 million in charges of this kind in the year ended March 31, 2002. We may have to record more charges of this kind in the future. We have substantial investments in debt securities, mainly long-term corporate bonds with fixed interest rates. We may realize losses on investments in debt securities as a result of issuer defaults or deterioration in issuers' credit quality. We may also realize losses on our investment portfolio if market interest rates increase. Current market interest rates for yen-denominated obligations are particularly low. We may suffer losses if we are unable to remarket leased equipment returned to us We lease equipment under direct financing leases and operating leases. In both cases there is a risk that we will suffer losses at the end of the lease if we are unable to realize the residual value of the equipment that is estimated at the beginning of the lease. This risk is particularly significant in operating leases, because the lease term is much shorter than the useful life of the equipment. If we are unable to sell or re-lease the equipment at the end of the lease, it may not recover our investment in the equipment and it may suffer losses. Our estimates of the residual value of equipment are based on current market values of used equipment and estimates of when and how much equipment will become obsolete. If equipment values and product market trends differ from our expectations, such estimates may prove to be wrong. Our allowance for doubtful receivables on direct financing leases and possible loan losses may be insufficient We maintain an allowance for doubtful receivables on direct financing leases and possible loan losses. This allowance reflects our judgment of the loss potential, after considering factors such as: o the nature and characteristics of obligors, 5 o economic conditions and trends, o charge-off experience, o delinquencies, o future cash flows, and o the value of underlying collateral and guarantees. We cannot be sure that our allowance for doubtful receivables on direct financing leases and possible loan losses will be adequate over time to cover credit losses in these portfolios. This allowance may turn out to be inadequate if adverse changes in the Japanese economy or other economies in which we compete or discrete events adversely affect specific customers, industries or markets. If our allowance for doubtful receivables on direct financing leases and possible loan losses is insufficient to cover these changes or events, we could be adversely affected. We may lose market share or suffer reduced interest margins if our competitors compete with us on pricing and other terms We compete primarily on the basis of pricing, terms and transaction structure. Other important competitive factors include industry experience, client service and relationships. From time to time, our competitors seek to compete aggressively on the basis of pricing and terms and we may lose market share if we are unwilling to match our competitors because we want to maintain our interest margins. Because some of our competitors are larger than us and have access to capital at a lower cost than we have, they may be better able to maintain profitable interest margins while still reducing prices. To the extent that we match our competitors' pricing or terms, we may experience lower interest margins. Our access to liquidity and capital may be restricted by economic conditions Our primary sources of funds are cash flow from operations, borrowings from banks and other institutional lenders, and funding from capital markets activities, such as offerings of commercial paper, medium-term notes, straight bonds, asset-backed securitizations and other debt securities. A downgrade in our credit ratings could result in an increase in our interest expense and could have an adverse impact on our ability to access the commercial paper market or the public and private debt markets, which could have an adverse effect on our financial position and liquidity. Even if we are unable to access these markets on acceptable terms, we have access to other sources of liquidity, including bank borrowings, cash flow from our operations and sales of our assets. We cannot be sure, however, that these other sources will be adequate if our credit ratings are downgraded or other adverse conditions arise. We continue to rely significantly on short-term funding from Japanese commercial banks. Only a portion of this funding is provided under committed facilities. We also rely on the capital markets as a funding source, including the commercial paper and corporate bond markets. We are taking steps to reduce refinancing risks by diversifying our funding sources and increasing committed credit facilities from Japanese banks and foreign banks. Despite these efforts, committed credit facilities are subject to financial and other covenants and conditions to drawdown, including minimum net worth requirements, and the risk that we will be unable to roll over other short-term funding remains. Inability to assert claims against independent auditors Our consolidated financial statements as of March 31, 2001, and 2002 and for the three years ended March 31, 2002 included in this Annual Report have been audited by Asahi & Co., independent public accountants and a member firm of Andersen Worldwide SC. 6 It has been reported in the press that Arthur Andersen LLP, which is the US member firm of Andersen Worldwide SC, is under investigation by various agencies of the US government for its role as independent auditors of Enron Corp. and its subsidiaries ("Enron") and that Arthur Andersen LLP has been convicted in a US federal court on obstruction of justice charges. It has also been reported that shareholders and employees of Enron have commenced legal proceedings against Arthur Andersen LLP seeking substantial damages related to its audit of Enron. Arthur Andersen LLP may suffer significant financial and reputational loss as a result of such investigations and actions, including as a result of substantial damage or settlement payments and loss of audit clients and employees, which may ultimately lead to its insolvency and dissolution. Asahi & Co. has informed ORIX that: o while it receives certain technical assistance and support from Arthur Andersen LLP as a member firm of Andersen Worldwide SC in connection with its audit of our financial statements which are prepared in accordance with US GAAP, Asahi & Co. is a legal entity separate from Arthur Andersen LLP and therefore does not expect to incur any direct or indirect liability as a result of any investigations or legal actions against Arthur Andersen LLP; o Asahi & Co. may seek an affiliation with, or pursue a merger or other combination with another accounting firm in Japan affiliated with, one of the other leading US accounting firms; and o Asahi & Co. has entered into a binding cooperation agreement with KPMG International to provide Asahi & Co. with technical and other services. However, there is no assurance that developments affecting Arthur Andersen LLP will not have a material adverse effect on the financial condition of Asahi & Co. Asahi & Co. may not be able to establish a relationship with one of the other leading US accounting firms, through a combination with another Japanese accounting firm or otherwise. Furthermore, it is possible that the entity resulting from any such combination will not legally succeed to or otherwise assume the liabilities of Asahi & Co. Accordingly, there is no assurance that investors in ORIX securities will be able to assert any claims against, or recover any damages from, Asahi & Co. or its legal successors in respect of this Annual Report, including the consolidated financial statements of ORIX included herein. Efforts by other companies to reduce their cross-shareholdings may adversely affect market prices for the Shares Many companies in Japan have announced plans to reduce their cross-shareholdings in other companies. Our own dispositions of other companies' shares could encourage those companies to dispose of Shares. Dispositions by other companies of Shares may adversely affect market prices for the Shares. We expect to be treated as a passive foreign investment company We expect, for the purpose of US federal income taxes, to be treated as a passive foreign investment company because of the composition of our assets and the nature of our income. If an investor in our securities is a US person, because we are a passive foreign investment company, such investor will be subject to special US federal income tax rules that may have negative tax consequences on a disposition of such securities or on receipt of certain distributions on such securities and will require annual reporting. If you hold fewer than 100 shares, you will not have all the rights of shareholders with 100 or more shares 100 shares constitute one "unit". A holder who owns fewer than 100 shares, or ADRs evidencing fewer than 200 ADSs, will own less than a whole unit. The Japanese Commercial Code restricts the rights of a shareholder who holds shares of less than a whole unit. In general, holders of shares constituting less than a unit do not have the right to vote, to bring derivative actions or to examine the books and records of the issuer. Transfers of shares constituting less than one unit are significantly limited. Under the unit share system, holders of shares constituting less than a unit have the right to require us to purchase their shares. However, holders of ADRs are unable to withdraw underlying shares representing less than one unit. Therefore, as a practical matter, they cannot require us to purchase these underlying shares. As a result, holders of ADRs with shares in lots of less than one unit may not have access to 7 the Japanese markets through the withdrawal mechanism to sell their shares. The unit share system does not affect the transfer of ADSs, which may be transferred in lots of any size. Foreign Exchange Fluctuations May Affect the Value of the ADSs and Dividends Market prices for the ADNs or ADSs may fall if the value of the yen declines against the U.S. dollar. In addition, the amount of principal, interest and other payments made to holders of ADNs or cash dividends and other cash payments made to holders of ADSs would be reduced if the value of the yen declines against the U.S. dollar. Item 4. Information on the Company. General ORIX Corporation is a corporation (kabushiki kaisha) formed under Japanese law. Our principal place of business is at 3-22-8 Shiba, Minato-ku, Tokyo 105-8683, 813-5419-5000. E-mail: koho@orix.co.jp; URL: www.orix.co.jp Corporate History ORIX was founded as a Japanese corporation in 1964 in Osaka, Japan as Orient Leasing Co., Ltd., a specialist in equipment leasing. We have grown over the succeeding decades to become one of Japan's largest and most innovative financial services companies, providing a broad range of commercial and consumer finance products and services. Our historical development has until recently closely paralleled the expansion and globalization of the Japanese economy. Our initial expansion occurred just prior to a period of sustained economic growth in Japan that began in 1965 and lasted through the early 1970s. The Japanese leasing industry gradually matured over the course of the 1970s. During this period, we continued to grow rapidly by expanding and diversifying our range of products and services, as well as through overseas expansion. In 1971 we established our first overseas office in Hong Kong, which became a base for regional expansion. In April 1970 ORIX listed its shares on the second section of the Osaka Securities Exchange. From February 1973 the shares have been listed on the first sections of the Tokyo, Osaka, and Nagoya stock exchanges. In 1973, to respond to the outsourcing needs of our corporate clients for automobile management, we established ORIX Auto Leasing Corporation, which exclusively leases automobiles. In 1976, we entered the domestic rental segment as we established ORIX Rentec Corporation, which rents measurement equipments to corporations. In the 1980s, the Japanese financial sector began a process of gradual deregulation, while the yen became a significant international currency. New entrants and competition within the leasing industry increased, prompting us and other leasing companies to provide more specialized and sophisticated services and to increase international leasing activities. During this period, we continued to expand our range of products and services, and placed increased emphasis on identifying and exploiting synergies among our various business units to make optimal use of corporate resources. In March 1986, we acquired ORIX Securities Corporation (then Akane Securities K.K.) and expanded the range of our financial products and services. In 1989, we changed our name to ORIX Corporation, reflecting our increasingly international profile and diversification from the leasing business. Since the early 1990s, the Japanese economy has experienced a protracted period of economic stagnation and, in recent years, instability within the financial sector. However, we have continued to diversify into other financial activities. For example, in 1990, we commenced the structuring and sale of commodities funds within Japan and, in 1991, we entered the life insurance business. We have also actively pursued real estate development, finance and management operations, using a variety of resources to provide total solutions to our customers' financing needs. We have also sought to enter into Japan's personal financial services markets. In this regard, in 1997, we established a Personal Financial Services Department. In April 1998, we acquired ORIX Trust and Banking Corporation (then Yamaichi Trust & Bank, Ltd.). This acquisition provided us with a general banking license, which 8 includes permission to accept deposits, and a trust business license. Our housing loan and card loan operations have grown to become a significant part of these retail operations. In September 1998, we became the twelfth Japanese company to list our shares on the New York Stock Exchange. Deregulation in Japan has produced a more dynamic market environment that we believe will bring significant changes in our principal businesses. To sustain our position in financial services and support profitability, we are working to augment our specialized capabilities and to exploit business opportunities presented by this environment. For example, we have reorganized our Investment Banking Headquarters and Real Estate Finance Headquarters to ensure that the extensive experience and sophisticated know-how gained over many years can be effectively utilized to develop and provide value-added and specialized services. Capital Expenditures We are a financial institution with significant leasing, real estate development and other operations based on investment in tangible assets. As such, we are continually acquiring and building such assets as part of our business. A detailed discussion of these activities is presented elsewhere in this annual report, including in "Item 4. Information on the Company" and "Item 5. Operating and Financial Review and Prospects." We also have made a number of acquisitions of significant investments in other companies. Some of our more significant recent transactions are described below. In July 1999, we acquired the lease and rental operations of NEC Home Electronics Lease Ltd., consisting primarily of direct financing lease receivables, for approximately yen55 billion. These operations were conducted by ORIX Media Supply. Financing lease receivables were subsequently transferred to ORIX, and in April 2001 we sold this subsidiary to Sogo Medical Corporation. In July 1999, we acquired the remaining stake in Banc One Mortgage Capital Markets, LLC in the United States, previously our joint venture with Bank One Corporation, a major US bank holding company, to increase our securitization capability and ability to service commercial property loans. As a result, investment in securities and installment loans increased $363 million and $149 million respectively. Banc One Mortgage Capital Markets, LLC has been renamed and currently operates as ORIX Capital Markets, LLC. In September 2000, a consortium led by us, Softbank Corporation and The Tokio Marine and Fire Insurance Company, Ltd. purchased all the shares of common stock of the Aozora Bank, Ltd. (then Nippon Credit Bank of Japan) from the Japanese Deposit Insurance Corporation. We acquired a 14.99% stake in the bank, and our investment amounted to approximatelyyen15 billion. In April 2001, we acquired the operating assets and employees of Nihon Jisho. The assets include office buildings and residential rental properties owned and operated by Nihon Jisho, land for residential subdivision development, and shares in subsidiaries involved in building maintenance and real estate appraisal businesses. At the date of the acquisition, these assets amounted to yen23 billion. In July 2001, we acquired a 100%-owned leasing subsidiary of Senko Co., Ltd., a major transportation company based in Osaka. The acquisition of this subsidiary, with yen15 billion in total assets, marked our initial entry into the truck leasing market, a strategic priority. Shortly afterward, we significantly expanded on this market entry with the acquisition in September 2001 of an 80% interest in IFCO Inc. ("IFCO") from Isuzu Motors Limited, which continues to hold the remaining 20% interest. We acquired our 80% interest at a price of yen20 billion. IFCO is a truck leasing company with approximately 67,000 vehicles under lease and approximately yen300 billion in total assets as of September 30, 2001. We purchased yen132 billion of housing loans from Asahi Mutual Life Company ("Asahi Mutual Life") in December 2001. In March 2002, we acquired 22.14% of the outstanding common shares of Fuji Fire and Marine Insurance Co. Ltd. ("Fuji Fire & Marine"). Under this agreement, the American International Group ("AIG") also obtained a 9 similar 22.14% stake in Fuji Fire & Marine. We purchased 108,768,000 shares at yen166 per share, for approximately yen18 billion. Prior to and during the year ended March 31, 2002, we purchased approximately yen100 billion of real estate in connection with our establishment of a real estate investment corporation sponsored by ORIX ("the JREIT"), the investment units of which have been listed on the Tokyo Stock Exchange in June 2002. This real estate is included in other operating assets. Subsequent to completion of the offering of investment units of the JREIT, these assets no longer remain on our consolidated balance sheets. We retained approximately 20% of the investment units of the JREIT. In connection with the public offering of the investment units, we received the proceeds of approximately yen50 billion. In March 2002, we reached an agreement with Hiroshima Sogo-Bank, Ltd. to form a strategic business alliance in which we purchased 95% of the outstanding shares of Hiroshima Sogo Leasing Co., Ltd. with Hiroshima Sogo-Bank, Ltd. retaining the remaining 5%. Hiroshima Sogo Leasing Co., Ltd. has assets of approximatelyyen27 billion. On May 24, 2002, we announced that it had reached a basic agreement with Nippon Steel Corporation and Nippon Steel Trading Co., Ltd. to purchase 90% and 10% of the outstanding shares of Nittetsu Lease Co., Ltd. and Nittetsu Leasing Auto Co., Ltd., respectively, from Nippon Steel Trading Co., Ltd. The purchase is scheduled to be completed in July 2002. Nittetsu Lease Co., Ltd. had a book value in total assets of approximatelyyen137 billion as of March 31, 2002. In general, we seek to expand and deepen our product and service offerings and enhance our financial performance by pursuing acquisition opportunities. Particularly in the current economic market environment in Japan, we believe there are numerous attractive potential acquisitions. We are continually reviewing acquisition opportunities, and is selectively pursuing several such opportunities. We have in the past deployed a significant amount of capital for acquisition activities, and expects to continue to do so. 10 Our Portfolio The following chart shows the breakdown of our portfolio of businesses as of March 31, 2002. Business profile Major customers Major operating companies --------------------------------- ------------------------------------- ------------------------------- Direct financing leases Information-related and office Middle market corporate customers ORIX Corporation equipment Shipping companies ORIX Auto Leasing Corporation Industrial equipment Airline companies ORIX Alpha Corporation Construction and civil IFCO Inc. engineering machinery ORIX Asia Limited Commercial services equipment ORIX Financial Services, Inc. Automobiles ORIX Leasing Malaysia Berhad Marine vessels PT. ORIX Indonesia Finance Aircraft ORIX Leasing Pakistan Limited ORIX Australia Corporation Limited ORIX Europe Limited Operating leases Measuring and analytical Middle market corporate customers ORIX Corporation equipment Shipping companies ORIX Rentec Corporation Automobiles Airline companies ORIX Rent-A-Car Corporation Marine vessels ORIX Real Estate Corporation Aircraft ORIX Australia Corporation Limited Real estate ORIX Aviation Systems Limited Installment loans Corporate finance Middle market corporate customers ORIX Corporation Housing loans Consumers ORIX Trust and Banking Corporation Card loans ORIX Credit Corporation Other consumer loans ORIX Club Corporation ORIX Asia Limited ORIX Leasing Malaysia Berhad PT. ORIX Indonesia Finance ORIX Financial Services, Inc. ORIX Europe Limited ORIX IRELAND LIMITED Life insurance Life insurance products sold Middle market corporate customers ORIX Life Insurance Corporation through agents and directly Consumers to consumers Other operations Securities brokerage Consumers ORIX Corporation Trust banking Middle market corporate customers ORIX Securities Corporation Securities investment ORIX COMMODITIES Corporation Venture capital investment ORIX Capital Corporation Securities and futures trading ORIX Estate Corporation Alternative investment 11
Business profile Major customers Major operating companies --------------------------------- ------------------------------------- ------------------------------- Commodities funds ORIX Real Estate Corporation Insurance agency services ORIX Asset Management Corporation Ship management ORIX Asset Management and Loan Real estate development and Services Corporation management ORIX Investment Corporation Asset management ORIX Trust and Banking Corporation Leisure facility management ORIX USA Corporation Golf course management ORIX Asia Limited Training facilities management ORIX Capital Markets, LLC Driving school ORIX Real Estate Equities, Inc. Commercial mortgage servicing ORIX Investment and Management Hotel management Private Limited Professional baseball team ORIX Europe Limited Environmental services ORIX IRELAND LIMITED
The following table sets out certain information as of March 31, 2002 with respect to the Company's significant subsidiaries including for each subsidiary the name, country of incorporation of residence, and proportion of ownership interest (direct or indirect) by ORIX: Company Principal business Country ORIX ownership (%) -------------------------------- ------------------------------------------ ------------------ ------------------ Japan ORIX Alpha Corporation.......... Leasing, Lending Japan 100 ORIX Auto Leasing Corporation... Automobile Leasing Japan 100 ORIX Rentec Corporation......... Precision Measuring Japan 100 and OA Equipment Rentals ORIX Credit Corporation......... Consumer Loans Japan 100 ORIX Capital Corporation........ Venture Capital Japan 100 ORIX Rent-A-Car Corporation..... Automobile Rentals Japan 100 ORIX Securities Corporation..... Securities Brokerage and Online Trading Japan 100 ORIX Estate Corporation......... Real Estate and Leisure Facility Management Japan 100 ORIX COMMODITIES Corporation.... Securities and Futures Trading Japan 100 ORIX Club Corporation........... Consumer Loans Japan 100 ORIX Life Insurance Corporation. Life Insurance Japan 100 ORIX Trust and Banking Japan 100 Corporation.................. Trust, Banking Services and Housing Loans ORIX Real Estate Corporation.... Real Estate Development and Management Japan 100 ORIX Asset Management and Loan Services Corporation......... Loan Servicing Japan 100 ORIX Investment Corporation..... Alternative Investment Japan 100 ORIX Asset Management Corporation.................. REIT Management Japan 100 IFCO Inc........................ Automobile Leasing Japan 80 Asia & Oceania ORIX Investment and Management Private Limited.............. Venture Capital Singapore 100 12
Company Principal business Country ORIX ownership (%) -------------------------------- ------------------------------------------ ------------------ ------------------ ORIX Asia Limited............... Leasing and Investment Banking China (Hong Kong) 100 ORIX Leasing Malaysia Berhad.... Leasing, Lending, Hire Purchase Malaysia 80 PT. ORIX Indonesia Finance...... Leasing, Automobile Leasing Indonesia 83 ORIX Australia Corporation Limited...................... Leasing, Automobile Leasing and Rentals Australia 100 Middle East & North Africa ORIX Leasing Pakistan Limited... Leasing, Automobile Leasing, Lending Pakistan 57 North America ORIX Capital Markets, LLC....... Loan Servicing, Corporate Debt Investment USA 100 ORIX USA Corporation............ Investment Banking, Leasing USA 100 ORIX Real Estate Equities, Inc.. Real Estate Development and Management USA 100 ORIX Financial Services, Inc.... Leasing, Lending USA 100 Europe ORIX Europe Limited............. Corporate Financing UK 100 ORIX IRELAND LIMITED............ Accounting and Administration Services Ireland 100 ORIX Aviation Systems Limited... Aircraft Leasing Ireland 100
Strategy Business strategy Strengthening core middle market cross selling activities The key to our strategy in Japan is a nation-wide corporate network that allows us to serve a core customer base comprised mainly of small and medium-sized companies. This client base forms the foundation of our strategy of cross-selling a variety of products and services to our clients. We are working to further strengthen these cross-selling activities by increasing our client base and expanding the range of innovative and value-added financial solutions that we can provide. In efforts to increase the client base, we are pursuing three strategies. First, we continue to leverage our existing sales force, which includes the sales personnel of the parent company and those of subsidiaries and affiliates, to search out new contacts. Second, ORIX has a program called ORIX Quick Lease, in which small-ticket leases are offered through vendors and other distributors. In this program, the vendors are in direct contact with customers and ORIX carries out the credit evaluation and administration. ORIX evaluates the applications for such leases, identifying and contacting potential candidates for other products that ORIX provides. Management believes that this strategy should continue to allow ORIX to efficiently search out new opportunities for cross-selling. Third, ORIX has made a number of substantial acquisitions in recent years, which has allowed it to expand our customer base. From these acquisitions ORIX can approach the existing clients of the acquired company to offer our other products and services. Members of our sales force act as both marketing agents and collectors of information on market demand. After meeting with customers and assessing their needs, sales personnel offer suitable products from specialized sections within ORIX such as ORIX Auto Leasing, ORIX Life Insurance, ORIX Trust and Banking, ORIX Securities, the Investment Banking Headquarters or the Real Estate Finance Headquarters. The marketing staff also provides 13 information on market developments to these specialized sections in order that they can develop products tailored to customer demands. Increasing profitability through greater specialization Our efforts to provide more innovative and value-added products support our strategy of increasing profitability through greater specialization. The demands of our customers are diverse and require sophisticated solutions. A traditional approach to financing, especially in the low-margin environment prevailing in Japan, would not enable ORIX to meet financial objectives. In order to satisfy the increasingly sophisticated financing needs of our customers and increase profitability, ORIX continues to expand our areas of specialization by offering training to existing employees, employing outside specialists and implementing organizational reforms to promote synergies amongst different sectors within ORIX. In addition, ORIX has made a number of acquisitions of companies with specialist capabilities. Recent examples include two building maintenance companies, and IFCO, a specialist truck lessor. An important component of this focus on specialization is to increase the fee component of financial services. Particularly in Japan, where interest rates remain at record low levels and competition in the financing business is intense, it is necessary to create value by concentrating on providing value-added services along with financing. For example, ORIX Auto Leasing provides automobile fleet leasing to corporate clients that includes not only financing, but also service contracts that increase the overall profitability of the auto leasing business. Pursuing investment banking opportunities Based on our extensive experience in corporate finance and real estate-related businesses, we are pursuing a number of investment banking opportunities. These activities are conducted primarily by the Investment Banking Headquarters and the Real Estate Finance Headquarters located in the parent company, ORIX Corporation. Both these areas are important components of efforts to increase profitability through greater specialization. ORIX will continue to leverage our existing marketing network to gather information and provide investment banking services to our core customer base of small and medium-sized enterprises and pursue new sources of revenues, including investment banking and advisory fee businesses. In order to promote more synergies, ORIX established the Investment Banking Headquarters in August 2000 by combining a number of teams and specialists that were spread throughout the company and were involved in investment banking activities. Our sales staff began receiving incentives based on the information that they gather for the investment banking business and it believes the potential in this area is substantial. Part of our investment banking strategy includes making selective equity investments in existing companies. ORIX intends to provide the necessary expertise, information and human resources from the ORIX network, with the goal of raising the market value of the companies in which it invests and realizing capital gains when such companies are listed or sold. Related to this investment banking focus is the strengthening of our real estate-related finance operations. ORIX formed the Real Estate Finance Headquarters to restructure and concentrate resources from a number of subsidiaries into one specialized section and to leverage our existing strengths in order to better position ourself to take advantage of deregulation and structural changes in the real estate market in Japan and the opportunities created thereby. We are one of the few companies in Japan that have the expertise to handle both the financing as well as the development, leasing and management of real estate. In addition, ORIX has been able to transfer know-how from our real estate operations in the United States and combine such experience with our expertise in the Japanese market. In addition, with the restructuring of financial markets in Japan and deregulation that has opened up more opportunities for loan servicing companies, we have expanded our operations in loan servicing via our wholly-owned subsidiary, ORIX Asset Management and Loan Services Corporation ("OAMLS") that was established in 1999. OAMLS is now a major player in the distressed asset business in Japan. OAMLS also became the first company to be rated as a master, primary and special servicer in Japan, receiving the second highest ranking in all three categories by Standards and Poor's. ORIX expects the loan servicing business to become an important fee 14 business in the coming years. In 2000, ORIX also established ORIX Asset Management to engage in the management of JREITs. Growing retail financial services ORIX believes that the retail financial services market in Japan has strong growth potential, aided by deregulation and growing consumer demand for innovative and attractive products and services. The range of products now offered by ORIX includes: o Life insurance and medical insurance o Bank deposits o Housing loans o Consumer card loans o Small-lot commodities funds o Discount brokerage services We are taking advantage of direct marketing methods and technologies to make our products available and attractive to retail customers on a cost-effective basis. For example, ORIX Life Insurance markets life insurance through newspaper advertisements and the Internet rather than through sales offices and agents, thereby reducing costs and insurance premiums. ORIX Trust and Banking also reduces our administrative costs for direct deposits by servicing our customers over the Internet and by telephone, thus allowing it to offer higher interest rates on our deposits. As part of this retail strategy, We are also making efforts to strengthen the ORIX brand. ORIX Create Corporation was established in 1999 to build and manage the ORIX brand and has focused our efforts on creating, maintaining and promoting the ORIX brand in the retail financial markets. Pursuing selected international opportunities By actively pursuing selected business opportunities in the Americas, Asia-Oceania, Europe, the Middle East and Northern Africa, ORIX has been able to take advantage of our expertise in leasing and other financial services to expand into these local markets while diversifying our sources of income. International operations have also allowed ORIX to introduce new products and services from overseas markets into the Japanese market. The United States, where ORIX has operated since 1974, is likely to continue to be the largest single concentration of international operations, and ORIX expects to continue the strategy of focusing on selected specialized areas in leasing, corporate lending, real estate development and management, the corporate and real estate debt market, and commercial mortgage-backed securities business. Despite recent economic deterioration in a number of Asian markets where ORIX operates, ORIX intends generally to maintain our present operations, and may pursue selected opportunities to expand our business in these markets if attractive opportunities arise. In all geographic areas, ORIX will focus on areas where it expects to be able to utilize our existing expertise to expand operations or acquire specialized knowledge in particular financial services in order to pursue opportunities outside of Japan. 15 The Leasing Market in Japan The Japanese leasing industry is highly fragmented, with 310 companies registered with the Japan Leasing Association as of March 31, 2002. In addition to these companies, a number of large credit companies not registered with the Japan Leasing Association also finance installment sales, which from the customer's perspective are economically similar to lease contracts. Except as otherwise noted, the data below is derived from data published by the Japan Leasing Association. Comparable data is not available for installment sales. In fiscal 2002, the total annual value of new lease contracts reported by the Japan Leasing Association was yen7,734 billion. The value of new lease contracts in fiscal 2002 based on purchase costs represented 8.71% of total private fixed investment in Japan, as estimated by the Cabinet Office, a ministry of the Central Japanese Government. These leases include only financing leases as defined under Japanese GAAP, and as a result do not include installment sales contracts classified under U.S. GAAP, and by us, as direct financing leases. The largest segment of financing leases in fiscal 2002 was information-related equipment (including computers and related equipment), which represented 39.8% of the total value of lease contracts, followed by industrial equipment (17.8%) and commercial service equipment (14.4%). Small and medium-sized companies represented 45.1% of the total customer base in Japan as measured by value of lease contracts, while large companies comprised 47.7% of the customer base. The following tables contain some additional information regarding the Japanese leasing market. The figures for the year ended March 31, 2002 in the Annual New Lease Contracts table are preliminary estimates. The figures for private fixed investments are estimates provided by the Cabinet Office. Lease Financings by Equipment Type Years ended March 31, --------------------------------------------------------- 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- Information-related equipment................ 42.4% 44.0% 43.6% 39.8% 39.8% Industrial equipment......................... 18.1 16.7 18.4 18.6 17.8 Commercial service equipment................. 14.6 14.5 13.8 15.0 14.4 Office equipment............................. 8.7 8.1 8.1 8.0 8.5 Transportation equipment..................... 7.2 6.6 6.5 7.4 8.1 Medical equipment............................ 3.4 3.8 3.9 4.1 4.3 Other........................................ 5.6 6.3 5.8 7.1 7.2
Annual New Lease Contracts Year ended March 31, -------------------------------------------------------------- 1998 1999 2000 2001 2002 -------- -------- -------- -------- -------- (Billions of yen) Total receivables under new lease contracts.. yen7,930 yen7,145 yen7,402 yen7,946 yen7,734 Annual new lease contracts (cost basis)...... 7,018 6,315 6,586 6,992 6,915 Private fixed investment..................... 83,571 77,797 75,232 79,989 79,400 Annual new lease contracts as a percentage of private fixed investment............... 8.40% 8.12% 8.75% 8.74% 8.71%
Overview of Activities Scope of domestic operations Domestically our group is comprised as of March 31, 2002 of the Company, 100 subsidiaries, and a number of investments in affiliates. As of that date, we employed approximately 8,250 staff in Japan excluding our affiliates, and our domestic operations were serviced by a network of approximately 650 offices throughout Japan. 16 Approximately 78% of our revenues in the year ended March 31, 2002 were generated by our domestic operations. Activities conducted principally through subsidiaries include our automobile leasing business conducted by ORIX Auto Leasing and our operating lease business for high-precision measuring equipment and personal computers conducted by ORIX Rentec. In addition to our leasing business, we have developed major operations in areas such as the life insurance business conducted by ORIX Life Insurance and real estate management and development conducted by ORIX Real Estate. Scope of international activities Since the establishment of our first overseas subsidiary in Hong Kong in 1971, we have competed in selected international markets through subsidiaries and investments in joint ventures as affiliates. At March 31, 2002, we operated in 21 countries outside Japan through 94 subsidiaries and affiliates. Our overseas operations, including the affiliates, employ approximately 4,500 staff, and include a network of approximately 200 offices. ORIX USA is our base for operations in the Americas. Stockton Holdings Limited, an affiliate, conducts reinsurance operations and trades in futures. In July 1999, we increased our ownership of Banc One Mortgage Capital Markets, LLC from 45% to 100% and renamed the operations as ORIX Capital Markets, LLC, which services commercial mortgage loans and corporate debt. In the Asia and Oceania region, ORIX Asia, a Hong Kong operating subsidiary, is engaged in leasing and installment sales operations and makes housing loans. Singapore has also become an important center for our business in the region. ORIX also engages in leasing activities in other countries. Some of our domestic subsidiaries, such as ORIX Rentec and ORIX Auto Leasing, have also established overseas operations. Profile of Businesses Domestic operations are conducted by ORIX and a number of subsidiaries and affiliates. In general, our domestic sales staff sells the full range of our products. However, some staff, such as the real estate staff, have specialized functions. Domestic subsidiaries, such as ORIX Auto Leasing, ORIX Rentec and ORIX Life Insurance, offer opportunities for cross-selling and other coordinated activities with our companies. Other subsidiaries serve more specialized functions. Products and services of these subsidiaries are handled by their dedicated sales staff, whose specialized training and experience are required in the markets they serve. Our main customer base is comprised of small and medium-sized businesses. However, it has expanded our client base to large corporations in some business segments, such as leasing of high-precision measuring equipment. We have also targeted individual customers as a growth area in various business segments, such as the card loan, housing loan, rent-a-car and life insurance businesses. Through our various product lines and distribution channels, we provide a variety of financing solutions responsive to the varying financing needs of our customers. We offer financing alternatives that accommodate specific maintenance, asset risk, cash flow, accounting, tax and other requirements of our customers. In many of our financing operations, we are able to offer a variety of financing alternatives for the same asset, including direct financing leases, operating leases or installment loans. We also offer options such as fixed or variable interest rates, principal installments and varying prepayment or cancellation options. The extensive experience of our staff in leasing and secured financing allows them to effectively evaluate residual value risk and to manage equipment and residual value risks by locating alternative users or purchasers. See "--Management of residual assets". 17 Direct financing leases Direct financing leases are one of our core business activities. The table below provides a geographical breakdown of our investment in direct financing leases as of March 31, 2002: As of March 31, ---------------------------------------------------- 2002 ---------------------------------------------------- (Percentage of (In millions of yen) direct financing leases) -------------------- ------------------------ Investment in direct financing leases in: Japan................................................... yen1,255,537 75.7% Overseas................................................ 403,132 24.3 ------------ ------ Total.............................................. yen1,658,669 100.0% ============ =====
As of March 31, 2002, the total balance of our investment in direct financing leases represented 30.0% of our total operating assets. The table below provides a geographical breakdown of revenues from our direct financing leases for the year ended March 31, 2002: 18 Year ended March 31, ---------------------------------------------------- 2002 ---------------------------------------------------- (Percentage of (In millions of yen) direct financing leases) -------------------- ------------------------ Revenues from direct financing leases in: Japan................................................... yen84,151 69.0% Overseas................................................ 37,763 31.0 ---------- ------ Total.............................................. yen121,914 100.0% ========== ======
Our revenues from direct financing leases represented 18.5% of our total revenues in the year ended March 31, 2002. The typical direct financing lease is for one specific user, with financial terms designed to recoup most, if not all, of the initial cost of the equipment during the initial contractual lease term. Payments are usually made monthly in a fixed amount. A direct financing lease is generally non-cancellable during the term of the lease. The term of a typical direct financing lease in Japan is approximately five years. We engage in direct financing lease operations in Japan and in most countries in which we have operations. Our direct financing lease operations cover most types of equipment, broadly categorized into information-related and office equipment, industrial equipment, commercial services equipment, transportation equipment, and other equipment. The following table shows the balance of direct financing lease assets by category of equipment: As of March 31, ------------------------------------------------------------------- 1998 1999 2000 2001 2002 ------------ ------------ ------------ ------------ ------------ (In millions of yen) Information-related and office equipment..... yen 623,203 yen 493,298 yen 373,281 yen 334,174 yen 262,524 Industrial equipment......................... 473,140 444,261 394,581 372,542 286,942 Commercial services equipment................ 273,730 224,080 194,809 193,624 186,115 Transportation equipment..................... 443,486 414,093 398,521 415,246 603,843 Other........................................ 372,463 377,110 83,761 342,123 319,245 ------------ ------------ ----------- ------------ ------------ Total................................... yen2,186,022 yen1,952,842 yen1,744,953 yen1,657,709 yen1,658,669 ============ ============ ============ ============ ============
The balance of investment in direct financing leases as of March 31, 2002 is essentially unchanged from that of the prior fiscal year-end, as a sharp increase in the balance of transportation equipment leases primarily due to acquisitions was offset by declines in other categories due to the securitization of lease assets and a decline in the level of new contracts compared with the previous fiscal year. The above table does not include securitized lease assets. If securitized assets were included the total balance of direct financing lease assets would be yen1,968,872 million as of March 31, 2001, and yen2,033,818 million as of March 31, 2002. At March 31, 2002, no single lessee represented more than 1% of our total portfolio of direct finance leases. As of March 31, 2002, approximately 75.7% of our direct financing leases were to lessees located in Japan, and approximately 15.0% of our direct financing leases were to lessees located in the United States. The following table shows a breakdown of the components of investment in direct financing leases: 19 As of March 31, -------------------------------------------------------------------- 1998 1999 2000 2001 2002 ------------ ------------ ------------ ------------ ------------ (In millions of yen) Minimum lease payments receivable............ yen2,348,361 yen2,100,934 yen1,881,289 yen1,771,625 yen1,727,729 Estimated residual value..................... 64,052 58,827 57,900 56,566 80,206 Initial direct costs......................... 28,294 29,374 26,042 24,616 23,224 Unearned lease income........................ (254,685) (236,293) (220,278) (195,098) (172,490) ------------ ------------ ------------ ------------ ------------ Total................................... yen2,186,022 yen1,952,842 yen1,744,953 yen1,657,709 yen1,658,669 ============ ============ ============ ============ ============
Information-related and office equipment Information-related and office equipment includes computers and related equipment, as well as communication-related equipment. Japanese companies have significantly increased investment in information systems, and outsourcing by Japanese firms has increased the importance of lease financing. This category represents a major portion of our direct financing lease portfolio, reflecting our strategy to focus on profitable small-ticket leasing. Profitability was emphasized and contracted lease balances were stringently monitored. In addition, due to the small-lot nature of this type of agreement, lease assets in this market were often securitized, causing a decline in balance. We have also employed vendor programs in this sector to improve the efficiency of our origination activities, and we have systematized the contract process and automated credit evaluation. In the small-ticket lease sector we compete mainly with captive and non-captive credit companies rather than traditional leasing firms. We compete with these firms by maintaining a nationwide network of sales offices. We have been successful in penetrating the market. In particular we have developed a new customer base through our relationships with dealers and distributors. We also provide a range of complementary products and services. Industrial equipment Industrial equipment primarily consists of construction and heavy equipment, and pulp and paper milling equipment. The balance of investment in industrial machinery has decreased in line with the lower level of new contracts compared to previous year due to depressed domestic demand and the slowdown of the US economy. Commercial services equipment Commercial services equipment includes gaming machines, cash registers, showcases and point-of-sales systems. Despite an overall decline in Japanese personal consumption, the balance of investment in commercial services equipment has declined only slightly. Transportation equipment Transportation equipment within the direct financing lease portfolio consists almost entirely of automobile fleet leasing to corporate clients. ORIX Auto Leasing and IFCO, 80% of which was acquired in September 2001, are our main companies handling domestic operations. We also have automobile leasing companies in several countries in Asia and Oceania. This segment has become important in the direct financing lease portfolio as the demand for auto leasing services has increased both in Japan and in our overseas markets. Domestic demand for automobile leasing services has increased due to the general trends towards outsourcing and greater acceptance of fleet leasing by corporate customers. In addition, there is an increasing trend for Japanese companies not to own their own vehicle fleets, particularly when dealer negotiation, maintenance and the payment of taxes, insurance and other costs can be handled by one vendor, such as us. We maintain a nationwide service network of approximately 8,000 agents and repair shops with which we have entered into arrangements to provide services for our leased automobiles. To further upgrade automobile maintenance capabilities, we supply ORIX-brand low-cost, high-quality automobile replacement parts to cooperating auto repair facilities. In addition, in a joint arrangement with three oil refining and distribution companies in 1998, we began to issue an Auto Management Service Card that can be used anywhere in Japan to allow customers to monitor fuel costs on a centralized basis and obtain other data services. Moreover, to deal with legal, labor-related, accident, and other types of risks, we provide comprehensive risk management services and 20 assist customers, from a variety of perspectives, in effectively managing and controlling costs related to automobile usage. We are coordinating the marketing activities of our various business lines and subsidiaries to promote automobile leasing. In recent periods we have increased the scope of our corporate fleet leasing operations. As of March 31, 2002, we had a total of approximately 390,000 vehicles under lease. Based on the year ended March 31, 2001 data, we had a market share of approximately 12% of the domestic automobile leasing industry, which we believe made us the largest independent automobile lessor in Japan. We believe that our value-added services relating to vehicle maintenance and post-accident procedures enable us to provide quick and efficient comprehensive maintenance services. In order to diversify our access to secondary markets, and increase the returns on the eventual sale of vehicles from our fleet on which leases have expired, we have established five specialist automobile auction sites in Japan. These sites handled the sale of approximately 40,000 vehicles in the year ended March 31, 2002. Other equipment Other equipment that we lease to Japanese clients includes a wide range of medical equipment. Quality of our assets The following table provides information about our past due receivables and provisions for direct financing leases. Average balances are calculated on the basis of fiscal quarter-end balances: As of March 31, ------------------------------------------------ 2000 2001 2002 --------- --------- --------- (In millions of yen, except percentage data) 90+ days past due direct financing leases............... yen53,743 yen53,515 yen67,924 90+ days past due direct financing leases as a percentage of the balance of investment in direct financing leases..................................... 3.1% 3.2% 4.1% Provisions as a percentage of average balance of investment in direct financing leases................ 1.1% 1.3% 1.3% Allowance for direct financing leases................... yen35,783 yen40,885 yen50,837 Allowance for direct financing leases as a percentage of the balance of 90+ days past due direct financing leases............................................... 66.6% 76.4% 74.8% Allowance for direct financing leases as a percentage of the balance of investment in direct financing leases............................................... 2.05% 2.47% 3.06%
The allowance for direct financing leases increased at March 31, 2002 mainly due to the consolidation of IFCO which was acquired by ORIX in September 2001. See "--Direct financing leases". We believe that the ratio of allowance for doubtful receivables as a percentage of the balance of investment in direct financing leases was adequate as of March 31, 2002, because: o lease receivables are generally diversified and the amount of the realized loss on each contract is likely to be relatively small; o all the lease contracts are collateralized by the underlying leased equipment and we can expect to recover at least a portion of the outstanding lease receivables by selling the underlying equipment; and o the allowance for doubtful receivables on direct financing leases as a percentage of the balance of 90+ days past due direct financing leases was 74.8% as of March 31, 2002. 21 The ratio of charge-offs as a percentage of the balance of the investment in direct financing leases averaged 0.95% for the three years ended March 31, 2002. We recognize that, due to our charge-off policy, historical ratios of charge-offs as a percentage of the balance of our investment in direct financing leases may be lower than if we had taken charge-offs on a more timely basis. Accordingly, in evaluating whether the ratio of allowance for doubtful receivables as a percentage of the balance of our investment in direct financing leases is adequate, we do not give as much weight to historical charge-off ratios as we do to the other factors discussed above. Operating leases Operating leases constitute another of our principal business activities. The table below provides a geographical breakdown of our operating lease assets as of March 31, 2002: As of March 31, 2002 -------------------------------------------------- (percentage of total (In millions of yen) operating leases) -------------------- -------------------- Investment in operating leases in: Japan................................................... yen338,719 71.4% Overseas................................................ 135,772 28.6 ---------- ----- Total................................................ yen474,491 100.0% ========== =====
As of March 31, 2002, our total operating lease assets represented 8.6% of our total operating assets. The table below provides a geographical breakdown of revenues from our operating leases for the year ended March 31, 2002: Year ended March 31, 2002 ------------------------------------------------------- (percentage of total revenues (In millions of yen) from operating leases) -------------------- ------------------------------ Revenues from operating leases in: Japan................................................... yen 87,732 72.6% Overseas................................................ 33,075 27.4 ---------- ------ Total................................................ yen120,807 100.0% ========== ======
In the year ended March 31, 2002, our revenues from operating leases represented 18.3% of our total revenues. Operating leases differ from direct financing leases in that they are generally cancellable by the lessee. The lessor does not substantially recoup the initial cost of the item through lease payments during the initial lease term. Therefore, the lessor usually leases out the same item sequentially to more than one customer (or to the same customer under successive lease contracts) during its useful life. In the Japanese marketplace, operating leases are often referred to as rentals. The lessor in an operating lease bears the inventory risk. This means that the lessor must always maintain strong links to secondary markets for the purchase and sale of used equipment. The principal participants in these informal, unregulated markets are brokers and dealers who specialize in the purchase and sale of used equipment. Our operating lease operations cover most types of equipment. These are broadly classified into three principal market segments: transportation equipment, measuring equipment and personal computers, and real estate and other. The following table shows the balance of operating lease assets by segment: 22 As of March 31, -------------------------------------------------------------- 1998 1999 2000 2001 2002 ---------- ---------- ---------- ---------- ---------- (In millions of yen) Transportation equipment..................... yen195,392 yen181,886 yen159,548 yen165,218 yen187,605 Measuring equipment and personal computers... 59,989 58,552 58,431 77,808 71,527 Real estate and other........................ 179,685 170,718 179,597 208,145 215,359 ---------- ---------- ---------- ---------- ---------- Total................................... yen435,066 yen411,156 yen397,576 yen451,171 yen474,491 ========== ========== ========== ========== ==========
The balance of our total investment in operating leases increased by 5.2%, or yen23,320 million, from March 31, 2001 to March 31, 2002. Transportation equipment Transportation equipment that we lease out under operating leases consists mainly of aircraft, automobiles and oceangoing vessels. Our fleet of aircraft as of March 31, 2002 stood at 23 owned and 39 managed aircraft. These are leased principally to European and North American carriers. We own 21 Airbus 320s, one Airbus 340 and one Boeing 737. We have limited our investment to these types of aircraft due to their relative liquidity in the leasing market. Our aircraft lease operations are managed by ORIX Aviation Systems. The weighted average useful life of our transportation equipment is 12 years. Our two principal markets for automobile operating leases are Japan and Australia, although we also maintain automobile operating lease operations in several Asian countries. Measuring equipment and personal computers We have developed a strong position in the domestic measuring equipment and personal computer rental sector. We believe that we are the industry leader in the domestic market for measuring equipment. Our customers include major domestic and overseas electronics companies. We rent measuring equipment and personal computers primarily through a specialist subsidiary, ORIX Rentec. We believe that our inventory of more than 380,000 pieces of measuring and diagnostic equipment is the largest of its kind in Japan. Our measuring and diagnostic equipment is used mainly in manufacturing facilities and research and development centers. This includes: o equipment for testing emissions from cellular phones and personal handyphones; o equipment for testing noise emissions; o equipment for testing compliance of electrical circuitry with prescribed standards; o laboratory and field use meteorological and environmental testing equipment (pollution monitoring equipment); and o equipment for monitoring, testing and evaluating the electromagnetic performance of printed circuit boards and the efficiency of microprocessors. ORIX Rentec maintains a website for the auction of used personal computers and measuring equipment. The weighted average useful life for our measuring equipment and personal computers is three years. Real estate and other We maintain a portfolio of 57 rental dormitories, which we rent to major domestic corporations for use by their staff. We also own and operate for rental purposes office buildings, approximately 2,000 apartment units, and a number of other real estate properties, located mainly in or near Tokyo and Osaka. The weighted average useful life for our real estate and other is 40 years. 23 Installment loans and investment securities In the year ended March 31, 2002, our revenues from interest on loans and investment securities were yen121,962 million representing 18.5% of our total revenues. As of March 31, 2002, the balance of installment loans was yen2,273,280 million and the balance of investment in securities was yen861,336 million. Installment loans The table below provides a geographical breakdown of investment in installment loans as of March 31, 2002: As of March 31, 2002 ------------------------------------------------ (percentage of total (In millions of yen) installment loans) -------------------- -------------------- Investment in installment loans: Japan.................................................. yen1,840,289 81.0% Overseas............................................... 432,991 19.0 ------------ ------ Total............................................. yen2,273,280 100.0% ============ ======
The following table shows the balance of installment loans by domicile and type of borrowers. As of March 31, ----------------------------------------------------------------- 1998 1999 2000 2001 2002 ------------ ------------ ------------ ------------ ------------ (In millions of yen) Domestic consumer: Housing loans........................... yen 426,559 yen 411,215 yen 396,748 yen 392,896 yen 557,461 Card loans.............................. 98,187 118,347 121,272 181,215 230,358 Other................................... 55,811 43,663 56,461 43,959 44,829 ------------ ------------ ------------ ------------ ------------ Subtotal................................ 580,557 573,225 574,481 618,070 832,648 ------------ ------------ ------------ ------------ ------------ Domestic commercial: Real estate related companies........... 213,911 188,085 203,537 222,818 278,367 Commercial and industrial companies..... 607,952 614,988 657,355 627,252 708,031 ------------ ------------ ------------ ------------ ------------ Subtotal................................ 821,863 803,073 860,892 850,070 986,398 ------------ ------------ ------------ ------------ ------------ Total domestic consumer and commercial.. 1,402,420 1,376,298 1,435,373 1,468,140 1,819,046 Foreign commercial, industrial and other borrowers................................. 377,761 368,661 337,754 357,446 432,771 Direct loan origination costs, net........... 14,644 16,928 18,312 20,925 21,463 ------------ ------------ ------------ ------------ ------------ Total........................................ yen1,794,825 yen1,761,887 yen1,791,439 yen1,846,511 yen2,273,280 ============ ============ ============ ============ ============
As of March 31, 2002, we had no concentration of loans to borrowers in a single industry, other than loans to real estate related companies. At March 31, 2002, it had loans outstanding of yen311,609 million to real estate related companies and construction companies. Of that amount, a valuation allowance was required for loans with an outstanding balance of yen31,045 million. The remaining outstanding balance represents performing loans or the portion of loans secured by collateral. As of March 31, 2002, approximately 81% of loans were to borrowers in Japan and approximately 11% were to borrowers in the United States. 24 The above table does not include securitized assets. If securitized assets were included, the total balance of installment loans would be yen1,887,596 million as of March 31, 2001 and yen2,349,242 million as of March 31, 2002. Loans to domestic consumer borrowers We have three distinct categories of domestic consumer lending: housing loans, card loans and other lending. We select the type of borrower, undertake systematic credit and risk analysis, and tailor products to meet specific customer needs. Our lending experience in the real estate development sector has enabled us to form strong relationships with developers which provide us with attractive housing loan opportunities. Substantially all of our card loans and small-lot consumer loans are unsecured. Despite the relatively small size of these loans, we have emphasized the selection of borrower type, and has developed products that differentiate it from our competitors. For example, it provides card loans that offer higher credit-quality individuals lower interest rates than those offered by consumer finance companies. It also undertakes rigorous credit evaluation procedures. We distribute our housing loans principally through contacts with real estate developers and brokers while we distribute other consumer loan products through direct mail, print media and the Internet. In the year ended March 31, 2000, we transferred our housing loan business from our Real Estate Finance Headquarters to ORIX Trust and Banking in order to respond effectively to diverse demands for housing loans from owners-occupiers as well as investors. In September 2001, the Company, ORIX Trust and Banking and Asahi Mutual Life reached a preliminary agreement for ORIX Trust and Banking to purchase housing loan assets from Asahi Mutual Life. The purchase was completed at the end of December 2001 (approximately 14,400 loans totaling yen132 billion). Loans to domestic commercial borrowers Loans to domestic commercial borrowers include loans to real estate-related companies, as well as general corporate lending. Historically, a substantial portion of loans extended by ORIX were to real estate-related companies. However, in recent years, we have made few new loans to real estate-related companies. Reflecting changing industry trends, we receive financing proposals more for short-term bridge finance for homes and other real estate than for long-term project finance. We expect steady demand to continue for this type of lending in the short-to-medium term. Commercial lending covers the spectrum of Japanese corporate lending, including loans to the leisure industry, loans to consumer finance companies, and loans to the Japanese retail sector. Despite sluggish economic conditions in Japan, we have been able to achieve moderate growth in this segment by offering financing products that meet our customers' diverse needs. Loans to foreign borrowers Loans to foreign borrowers include our overseas ship finance operations and general corporate lending. These borrowers are primarily in the United States and Hong Kong. Substantially all of our overseas installment loans are to corporate customers, such as multinational shipping companies and North American corporate customers. Quality of our assets We classify past due installment loans into two categories: installment loans considered impaired under the definitions contained in FASB Statement 114 and 90+ days past due loans excluding amounts attributable to treatment under FASB Statement 114. The following table provides information about our recorded investment in loans considered impaired under the definition contained in FASB Statement 114. The valuation allowance for each period is the required valuation allowance less the value of the collateral from impaired loans, calculated under FASB Statement 114. 25 As of March 31, ------------------------------------------------ 2000 2001 2002 ---------- ---------- ---------- (In millions of yen) Impaired loans......................................... yen125,921 yen120,090 yen113,000 Impaired loans requiring a valuation allowance......... 83,408 73,636 71,802 Valuation allowance.................................... 51,791 47,037 45,862
The allowance for impaired loans accounted for under FASB Statement 114 relates mainly to non-performing assets resulting from the collapse of the Japanese real estate market in and following 1992. Following the adoption of FASB Statement 114 in the year ended March 31, 1996, we increased the allowance for the category, principally as a result of a decline in the value of real estate collateral supporting these loans, despite the absence of significant change in the level of total outstanding value of these loans. In the year ended March 31, 2002, a charge-off of impaired loans amounting to yen8,475 million resulted in a decrease in the outstanding balances of impaired loans as of March 31, 2002 compared to March 31, 2001. The following table provides the outstanding balances of impaired loans by region and type of borrowers. Domestic consumer loans in the "Others" category primarily consist of loans secured by stock and golf club memberships: As of March 31, ------------------------------------------------ 2000 2001 2002 ---------- ---------- ---------- (In millions of yen) Domestic consumer: Housing loans..................................... yen -- yen -- yen -- Card loans........................................ -- -- -- Others............................................ 646 625 2,193 ---------- ---------- ---------- Subtotal...................................... 646 625 2,193 Domestic commercial: Real estate related companies..................... 49,432 48,527 40,184 Commercial and industrial companies............... 64,131 59,288 58,338 ---------- ---------- ---------- Subtotal...................................... 113,563 107,815 98,522 Foreign, commercial, industrial and other borrowers.... 11,712 11,650 12,285 ---------- ---------- ---------- Total.................................................. yen125,921 yen120,090 yen113,000 ========== ========== ==========
The following table provides information as to past due loans and allowance for installment loans, excluding amounts attributable to treatment under FASB Statement 114. Average balances are calculated on the basis of fiscal quarter-end balances: As of March 31, ------------------------------------------------ 2000 2001 2002 ---------- ---------- ---------- (In millions of yen, except percentage data) 90+ days past due loans not attributable to treatment under FASB Statement 114............................. yen91,513 yen84,827 yen74,199 90+ days past due loans not attributable to treatment under FASB Statement 114 as a percentage of the balance of installment loans excluding FASB Statement 114 loans.................................. 5.4% 4.9% 3.4% Provisions as a percentage of average balance of installment loans.................................... 1.1% 1.0% 1.0% Allowance for possible loan losses not attributable to treatment under FASB Statement 114................... yen49,365 yen53,155 yen56,188 26
As of March 31, ------------------------------------------------ 2000 2001 2002 ---------- ---------- ---------- (In millions of yen, except percentage data) Allowance for loans not attributable to treatment under FASB Statement 114 as a percentage of the balance of 90+ days past due loans not attributable to treatment under FASB Statement 114................... 53.9% 62.7% 75.7% Allowance for loans not attributable to treatment under FASB Statement 114 as a percentage of the balance of installment loans excluding FASB Statement 114 loans. 2.96% 3.08% 2.60%
At March 31, 2002, the allowance for loans not attributable to treatment under FASB Statement 114 as a percentage of 90+ days past due loans not attributable to treatment under FASB Statement 114 loans increased, reflecting a decline in value of collateral underlying assets and overall economic conditions in Japan with remained stagnant. The following table shows the balance of 90+ days past due loans not attributable to treatment under FASB Statement 114 by domicile and type of borrowers: As of March 31, ----------------------------------------------- 2000 2001 2002 --------- --------- --------- (In millions of yen) Domestic consumer: Housing loans..................................... yen67,066 yen60,316 yen53,577 Card loans and other.............................. 16,825 14,832 9,585 Domestic commercial: Real estate related companies..................... 191 808 195 Commercial and industrial companies............... 2,103 2,050 2,192 Foreign, commercial, industrial and other borrowers.... 5,328 6,821 8,650 --------- --------- --------- Total......................................... yen91,513 yen84,827 yen74,199 ========= ========= =========
The majority of these past-due loans were domestic housing loans to consumers secured by collateral (mostly first mortgages) where we received partial payments. A significant majority of these housing loans are to consumers who purchased condominiums for investment purposes. We make provisions against losses in this portfolio by way of general reserves for installment loans included in allowance for doubtful receivables. We make allowance for domestic housing loans after careful evaluation of the value of collateral underlying the loans, past loss experience and any economic conditions that may affect the default rate. These conditions include corporate and personal bankruptcies and increased unemployment rates. We determine the allowance for card loans and other on the basis of past loss experience, general economic conditions and the current portfolio composition. In addition, we determine the amounts of necessary charge-offs and these amounts are added to provision against losses. We believe that the level of the allowance as of March 31, 2002 was adequate because: o we expect to recover a portion of the outstanding balance for 90+ days past due loans (excluding FASB Statement 114 loans) primarily because most 90+ days past due loans are domestic housing loans, which are generally made to individuals and generally secured by first mortgages; and o the allowance for possible loan losses not attributable to treatment under FASB Statement 114 as a percentage of the balance of 90+ days past due loans not attributable to treatment under FASB Statement 114 was 75.7% as of March 31, 2002. 27 The ratio of charge-offs as a percentage of the balance of installment loans averaged 0.93% for the three years ended March 31, 2002. We recognize that, due to our charge-off policies, historical ratios of charge-offs as a percentage of the balance of our investment in installment loans may be lower than if we had taken charge-offs on a more timely basis. Accordingly, in evaluating whether the ratio of allowance for possible loan losses as a percentage of the balance of installment loans is adequate, we do not give as much weight to historical charge-off ratios as we do to the other factors discussed above. Investment securities We maintain a sizable investment in various securities. The largest segment of this portfolio is the investment of the reserves in our life insurance operations. This is approximately 53.1% of our total investment in securities as of March 31, 2002. These reserves are generally invested in corporate debt. Overseas, we also have substantial holdings in corporate debt in the United States as well as emerging markets in Latin America, Eastern Europe and Southeast Asia. The following table shows our investment in securities by category of investment: As of March 31, -------------------------------------------------------------------------- 2000 2001 2002 -------------------- -------------------- -------------------- (In millions of yen, except percentage data) Trading securities.............. yen 390 0.1% yen 581 0.1% yen 879 0.1% Available-for-sale securities... 689,638 90.9 841,409 89.3 718,919 83.5 Held-to-maturity securities..... 11,404 1.5 13,005 1.4 16,008 1.9 Other securities................ 56,949 7.5 87,163 9.2 125,530 14.5 ---------- ----- ---------- ----- ---------- ----- Total...................... yen758,381 100.0% yen942,158 100.0% yen861,336 100.0% ========== ===== ========== ===== ========== =====
Corporate debt securities consist of general obligation and fixed interest rate instruments. Our portfolio included investments by our US operations in high yield debt securities with a balance of yen45,649 million and in commercial mortgage-backed securities with a balance of yen109,930 million as of March 31, 2002. Trading securities include securities held in the trading portfolio of ORIX Securities, ORIX Commodities and ORIX Capital Markets. The following table provides the fair value of available-for-sale and held-to-maturity securities in each major security type: As of March 31, ------------------------------------------------ 2000 2001 2002 ---------- ---------- ---------- (In millions of yen) Available-for-sale securities: Japanese and foreign government bond securities........ yen 12,895 yen 25,431 yen 25,308 Japanese prefectural and foreign municipal bond securities.......................................... 33,021 39,692 24,374 Corporate debt securities.............................. 482,417 604,145 497,838 Mortgage-backed and other asset-backed securities...... 54,475 94,236 112,891 Funds in trust......................................... 2,479 5,508 4,987 Equity securities...................................... 104,351 72,397 53,521 ---------- ---------- ---------- yen689,638 yen841,409 yen718,919 ========== ========== ========== Held-to-maturity securities: Japanese and foreign government bond securities........ yen -- yen 142 yen 205 Asset-backed securities................................ 11,404 12,864 17,513 ---------- ---------- ---------- yen 11,404 yen 13,006 yen 17,718 ========== ========== ==========
At March 31, 2002, marketable equity securities amounted to approximately 6.2% of our total investment in securities. We make these equity investments mainly to strengthen business relationships with customers. 28 Life insurance Our life insurance business includes insurance underwriting and agency sales. Our life insurance underwriting business is conducted by our subsidiary ORIX Life Insurance. Our life insurance agency sales business is conducted by the Company. Revenues from life insurance premiums and related investment income for the year ended March 31, 2002 were yen152,333 million ($1,143 million), or 23.1% of our total revenues. ORIX Life Insurance ORIX Life Insurance is a full-line life insurance underwriter, with total value of insurance contracts in force at March 31, 2002 amounting to yen3,653 billion. ORIX Life Insurance traditionally distributed our products through agents, including ORIX as well as independent agents. In September 1997 ORIX Life Insurance initiated ORIX Direct. ORIX Direct is Japan's first product suite that includes whole life, endowment, and term life insurance products offered through direct channels. Since this insurance is sold via newspaper advertisements, the Internet, and other direct channels, administration expenses such as agent fees and marketing office expenses are lower than for agency-based businesses. The following table shows a breakdown of the balance of investments by ORIX Life Insurance as of March 31, 2002: As of March 31, 2002 ----------------------------- (In millions of yen) Fixed income securities............................ yen433,463 Marketable equity securities....................... 73 Other securities................................... 23,596 Total investment in securities................ 457,132 Other investments............................. 86,606 Total..................................... yen543,738 Investments by ORIX Life Insurance other than securities consisted principally of real estate for rental and loans. Real estate development and management In addition to our real estate lending operations, we are involved in a range of property development and property management services. We own, operate and provide management services, including tenant and rental income management, for a number of commercial and other properties in Japan, including a corporate training facility, golf courses and hotels. Following our acquisition of Nihon Jisho in April 2001, we also own office building and residential property owned and operated by Nihon Jisho and land for subdivision development, and have subsidiaries involved in building maintenance and real estate appraisal business. In August 2001, we acquired the majority of Kansai Maintenance, a building maintenance company through a tender offer. We expect that the acquisition of Kansai Maintenance will strengthen our ability to provide property operations and management services. In March 2002, we acquired the rest of Kansai Maintenance through a share exchange. The building maintenance business of Nihon Jisho and Kansai Maintenance were combined under a holding company called ORIX Facilities Corporation in May 2002. We actively engage in real estate development. We have earned substantial profit from the planning and development of condominium buildings in Japan. In the year ended March 31, 2002, operating revenues from the condominium business accounted for approximately 48% of other operating revenues. In the United States, ORIX Real Estate Equities engages in real estate development, focusing on "build-to-suit" real estate development. This type of development enables us to secure the profitability of new projects through the prior arrangement of long-term leases and sales contracts. Our real estate development activities cover both the residential and commercial property markets in Japan. We completed the subdivision and sale of approximately 1,100 residential apartment units in the year ended March 31, 29 2001 and approximately 1,900 units in the year ended March 31, 2002. We are also involved in commercial real estate development. The expertise that we have accumulated in more than 16 years in the Japanese real estate market, coupled with our financing capabilities, allow us to create one-stop development packages. Since the adoption of the Law Concerning Securitization of Specified Assets by Special Purpose Companies in September 1998, we have actively engaged in the securitization of real estate assets. In this area, we draw on our experience from US operations and other expertise in handling leases, loans to corporations, and real estate business as we actively work to expand our securitization of real estate and other types of assets as well as developing our loan servicing operations. On May 7, 2002, ORIX JREIT Inc. submitted a filing to the Tokyo Stock Exchange indicating our intention to make an initial public offering of units in the JREIT, 100% of which are presently owned by us. Prior to and during the year ended March 31, 2002, we acquired approximately yen100 billion in real property that was subsequently sold to JREIT. Subsequent to completion of the offering of investment units of the JREIT, these assets no longer remain on our consolidated balance sheets. We retained approximately 20% of the investment units of the JREIT. In connection with the public offering of the investment units, we received proceeds of approximately yen50 billion. Other operations Our other operations include the sale and structuring of commodities funds, securities brokerage, the sale of life and non-life insurance products offered by insurance companies other than ORIX Life Insurance, and several other businesses. Securities brokerage ORIX Securities Corporation is engaged primarily in equity and other securities brokerage activities. As financial sector deregulation proceeds in Japan, we expect that there will be significant opportunities to offer products and services that capitalize on synergies with our other affiliated companies. ORIX Securities has seats on the Tokyo Stock Exchange and the Osaka Securities Exchange. Taking advantage of the deregulation of brokerage commissions in October 1999, ORIX Securities is offering discount brokerage services to individual investors. As part of this move to further develop our activities, ORIX Securities in May 1999 began to offer "ORIX ONLINE," an equity trading service available via telephone and the Internet. Venture capital In 1983 we established ORIX Capital to provide venture capital and related consultancy services for companies that are potential candidates for initial public offerings in Japan. As of March 31, 2002, assets under ORIX Capital's management were approximately yen20,342 million, consisting entirely of equity securities. Insurance agency sales We engage in life insurance agency sales through our network of approximately 1,900 registered sales agents. We serve as a sales agent for ORIX Life Insurance. ORIX Life Insurance also contracts with independent specialized insurance sales agents to market our products. ORIX Life Insurance's sales agents market through customer visits. In September 1999, we formed a joint venture with the American International Group (AIG) to operate in the Japanese nonlife insurance sector. ORIX Insurance Planning Corporation is a domestic nonlife insurance agency that provides various types of nonlife insurance products such as fire and casualty insurance and other products including new types of liability insurance. ORIX Insurance Planning is developing new nonlife insurance products tailored to customers' requirements in cooperation with AIG and organizing distinctive marketing programs for those products. 30 Personal financial services In 1997, we established our Personal Financial Services Department to examine the potential for it to enter the Japanese financial services sector. This market sector has been highly regulated with little product differentiation in Japan, and, consequently, offered us few opportunities. However, with the advent of financial deregulation in Japan, we expect that there will be many opportunities for us to enter the market, and capitalize on the brand recognition that we have built to date. We provide financial consulting and financial products tailored to meet the needs of Japanese consumers. The Personal Financial Services Department began to offer Life Insurance Diagnostic Services in July 1997. These services provide detailed advice to customers regarding the type of insurance most suited to their individual lifetime financial plans. In addition, based on the data gathered while providing these services, the Personal Financial Services Department makes proposals for insurance products tailored to individual customers. General and trust banking ORIX Trust and Banking provides us with a general banking license and a trust business license. We engage primarily in direct marketing of deposit products and housing loans. As of March 31, 2002, the balance of deposits was approximately yen225 billion and the balance of these housing loans was approximately yen318 billion. Waste management We established ORIX Eco Services Corporation in 1998 to help our leasing clients deal with their waste management problems. Our activities include organizing a network of waste disposal companies and introducing as well as acting as intermediary between our customers and these waste disposal companies. Loan Servicing Through our subsidiary ORIX Capital Markets, we engage in the servicing of commercial mortgage loans collateralized primarily by real estate. As of March 31, 2002, ORIX Capital Markets serviced commercial loan portfolios on behalf of itself and outside investors with unpaid principal balances of approximately yen4,957 billion. Other financial services We maintain a network of leasing affiliates throughout Japan that have been established in cooperation with leading regional banks and other financial institutions. Other activities We own the ORIX Baseball Club, a professional baseball team named ORIX BlueWave which we acquired in 1988, as part of an overall initiative to promote our corporate image. Management of Residual Assets Our personnel have extensive experience in managing equipment over its full life cycle. We have the expertise to provide or arrange for required maintenance and repairs, to obtain required regulatory permits and to repossess equipment or real estate from defaulting credits. Although the estimated residual value of equipment under direct financing leases is on average approximately 3% of total receivables, this figure is greater for operating leases which carry inherently higher obsolescence and resale risks. We have established relationships with service, repair and resale facilities throughout Japan, which reduce these risks. For example, ORIX Auto Leasing maintains alliances with approximately 8,000 servicing agents and repair facilities throughout Japan. ORIX Rentec maintains two fully automated facilities that offer repair, servicing and recalibration services on personal computers and measuring equipment, as well as its own Internet auction site for used personal computers 31 and measuring equipment. We also maintain a relationship with a major personal computer manufacturer for personal computer servicing. We also coordinate the disposal of items that are of no further commercial use. Environmental services provided by ORIX Eco Services include those which systematize the ultimate disposal of used leasing equipment. International Operations Since the establishment of our first overseas subsidiary in Hong Kong in 1971, we have competed in selected international markets through our subsidiaries and investments in international joint ventures. Our approach to international expansion has been to focus first on direct financing leases. We have either established wholly-owned operations or set up joint ventures with a strong local partner. In the cases of ORIX Financial Services in the United States and ORIX Polska S.A. in Poland, we have expanded through acquisitions. In addition to direct financing leases, in our international operations in various jurisdictions we offer automobile maintenance leases, operating leases for measuring equipment, personal financial services and aircraft leases. In the United States, we have undertaken a diverse range of financial and real estate-related business including corporate finance as well as real estate financing and development operations. Our international operations have become a substantial part of our operations, generating approximately 22.3% of our total revenues in the year ended March 31, 2002. Of these overseas revenues, approximately 51.3% are from the Americas, 38.7% from the Asia and Oceania region, and the remaining 10.0% from Europe. Approximately 21.2% of our total assets are overseas operating assets, excluding assets attributable to the corporate segment and assets which belong to affiliate operations. Approximately 59.1% of overseas assets as of March 31, 2002 related to the Americas, 32.4% to Asia and Oceania, and the remaining 8.5% to Europe. The Americas After opening a representative office in 1974, we commenced formal operations in the United States in 1981 when we established a wholly-owned subsidiary, ORIX USA. Since then, we have significantly expanded our activities in the United States. ORIX USA owns 100% of the equity of ORIX Real Estate Equities, ORIX Financial Services and ORIX Capital Markets. In the year ended March 31, 2002, we restructured our US operations in order to improve efficiency and to strengthen risk control. Most of the lease receivables of ORIX USA were transferred to ORIX Financial Services, while most of its loan receivables and investment securities were transferred to ORIX Capital Markets. ORIX Real Estate Equities is a real estate development and management company, which we acquired in 1987. ORIX Real Estate Equities is headquartered in Chicago with offices in several major cities in the Unites States, and properties in ten states in the US and Toronto, Canada. The current operations of ORIX Real Estate Equities are focused on three main activities: o build-to-suit development of retail, industrial and office projects; o the acquisition of office and industrial properties that offer value-enhancement opportunities; and o asset and property management. These activities cover properties in our own portfolio as well as third party properties. ORIX Financial Services, which was acquired in 1989, specializes in equipment finance and corporate lending. In the year ended March 31, 2002, weakening conditions in the US economy continued to adversely affect the leasing business related to transportation, construction and other heavy equipment, resulting in an increase in doubtful receivables on direct financial leases. We are proactively responding to this development by implementing a restructuring program of ORIX Financial Services. 32 We have installed a new management team at ORIX Financial Services, replacing 40 members of senior management, and have reduced the number of ORIX Financial Services employees by roughly 40%. In addition, a specialist recovery team has been set up to pursue quick recovery on problem loans. At the same time, we are moving to diversify our portfolio further by increasing activities in business credit, structured finance and other new lending businesses. In 1989 we became involved in the field of commodities trading and management, primarily through our investment in Stockton Holdings, a company that traded in futures and provided reinsurance. As of March 31, 2002 we owned 29.4% of the equity of Stockton Holdings, without taking into account outstanding options. We increased our ownership from 45% to 100% in July 1999 of Banc One Mortgage Capital Markets, LLC, currently called ORIX Capital Markets. ORIX Capital Markets combines origination, commercial mortgage-backed securities investment, and servicing functions into a single entity focused on commercial mortgage capital markets. ORIX Capital Markets is a leading servicer of performing mortgage loans and the largest special servicer in the United States providing loan workout and liquidation expertise on securitized and privately held portfolios. In addition, ORIX Capital Markets also manages a portfolio of principally high yield corporate debt which was transferred from ORIX USA in August 2001. Asia, Oceania and the Middle East In 1971 we established our first overseas office in Hong Kong, and had 56 subsidiaries and affiliates at March 31, 2002. These companies do business in 16 countries in the Asia, Oceania and the Middle East regions. During about 30 years that we have maintained a presence in Asia, ORIX Asia, based in Hong Kong, has been the base for our expansion and operations in the region. ORIX Asia provides a wide range of financial services. Singapore has been another center for our activity in the region. We now have five ORIX subsidiaries and affiliates in Singapore undertaking leasing, rental, ship financing, securities investment and venture capital operations. Although we provide a broad range of financial products and services throughout the Asia and Oceania region, our primary focus has been on the leasing operations. We introduced lease financing to, and are the leading lessor in, most of the countries in this region. In this region, as in other regions, we have employed two strategies in managing our operations. First, we have focused on local business demand rather than on expatriate business demand. This strategy has resulted in our Asia and Oceania portfolios being composed of a large volume of small transactions which has had the effect of dispersing risk. Second, we have sought to procure funds and transact business in the relevant local currency and thus minimize currency fluctuation risk. Our domestic subsidiaries have also been expanding into the region. For example, we have established specialized auto leasing operations in Singapore, Taiwan and Malaysia, and ORIX Rentec established personal computer and measuring equipment rental operations in Singapore in 1995, Malaysia in 1996 and South Korea in 2001. We have also expanded our activities into and throughout Asia and Oceania including the Middle East and North Africa through our overseas subsidiaries and affiliates such as ORIX Australia Corporation Limited, ORIX New Zealand Limited, ORIX Leasing Pakistan Limited, ORIX Investment Bank Pakistan Limited and Infrastructure Leasing & Financial Services, Ltd in India. Europe We initiated our activities in Europe in 1974, when we established a liaison office in London. We conduct our current European operations principally through ORIX Europe Limited ("ORIX Europe"), ORIX IRELAND LIMITED (established in 1988 as a finance vehicle for our European operations), ORIX Aviation Systems in Dublin (which has marketing, technical, legal and administrative teams to develop our international aircraft operating lease business), and ORIX Polska S.A. (an equipment leasing company in Warsaw). Multinational transportation operators are the principal customers of our European operations. 33 Established in 1982, ORIX Europe provides leasing, general and corporate lending and other financial services throughout Europe. These include international ship financing, real estate financing and investment in international securities. Property, Plants and Equipment Because our main business is to provide diverse financial services to our clients, we do not own any factories or facilities which manufacture products. There are no factories currently under construction, and we have no plans to build any factories in the future. Our most important facility that we own is our headquarters building. Our headquarters is in Shiba, Minato-ku, Tokyo and covers a floor space of 19,662 square meters. We have no plans to expand our headquarters or to build additional material offices. See also "--Description of Property". Regulation We are incorporated under the Commercial Code and our corporate activities are governed by the Commercial Code. There is no specific regulatory regime in Japan which governs the conduct of our direct financing lease and operating lease businesses. Our installment loan business is regulated by two principal laws which also regulate the activities of credit card providers: the Acceptance of Contributions, Money and Interest Law and the Regulation of Moneylending Business Law. The Moneylending Business Law requires all companies engaged in the money lending business, whether they are installment finance companies, leasing companies, credit card companies or specialized consumer loan finance companies, to register with the relevant authorities. As registered moneylenders, our registered companies are regulated by the Financial Services Agency, which has the right to review registered moneylenders' operations and inspect their records to monitor compliance with the provisions of the Moneylending Business Law. The Financial Services Agency has the authority, and is obliged, to cancel a registration upon substantial noncompliance with law, failure to comply with some administrative orders and under other circumstances. The insurance industry in Japan is regulated by the Insurance Business Law. Insurance business may not be carried out without a license from the Financial Services Agency. There are two kinds of licenses related to insurance businesses: one for life insurance businesses and another for non-life insurance businesses. The same entity cannot obtain both of these licenses. In general, ORIX Life Insurance, as an insurance company, is prohibited from engaging in any other activity. Insurance solicitation which we conduct is also governed by the Insurance Business Law. We are registered as a sales agent with the Ministry of Finance, the government authority formerly in charge of supervising the insurance business at the time of our application for the registration. We operate our securities business through ORIX Securities. The Securities and Exchange Law of Japan (the "Securities and Exchange Law") and related laws and regulations apply to the securities industry in Japan. The Securities and Exchange Law regulates both the business activities of securities companies and the conduct of securities transactions. ORIX Securities is subject to these and other laws and regulations. Violation of these provisions could result in sanctions against ORIX Securities or our officers and employees. General banking and trust businesses, which are operated by our banking subsidiary, ORIX Trust and Banking, are also regulated. In general, the Banking Law governs the general banking business and the Trust Law and the Trust Business Law govern the trust business. These banking businesses may not be carried out without a license from the Financial Services Agency and are supervised by the Financial Services Agency. The Law for Special Measures Concerning the Debt Management and Collection Business (the Servicer Law), which was enacted in 1998, allows companies meeting certain specified criteria to obtain a license to manage and collect certain assets. At the time of enactment, the consumer loans did not fall within the definition of qualifying assets such that the Servicer Law was essentially not applicable to the servicing of consumer loans. The amendments to the Servicer Law, in effect since September 1, 2001, have expanded the definition of assets to include (i) loan receivables owned by moneylenders which are registered under the Money Lending Business Law, (ii) monetary 34 receivables owned by certain special purpose companies incorporated for the special purpose of collecting and managing the specified assets, and (iii) monetary receivables, regardless of the owner thereof, in respect of which insolvency proceedings have been commenced. ORIX Asset Management, a wholly-owned subsidiary of ORIX Corporation, is registered under the Laws Concerning Investment Trusts and Investment Corporations (the "Investment Trust Law") as an asset manager for JREITs. Under the Investment Trust Law, investment trusts and investment corporations may only make investments that are specifically prescribed by law. Real estate was not among the prescribed investments until November 2000. Permitted real estate investments are not limited to physical real estate, but include investments in specifically prescribed real estate-related rights, such as trust beneficiary interests in real estate. Units can be listed on a stock exchange and are eligible for certain tax benefits, provided they meet applicable requirements under Japanese law. JREITs which are listed on the Tokyo Stock Exchange may only make investments permitted by the JREIT listing rules of the Tokyo Stock Exchange and the rules of the Investment Trusts Association. Investment corporations must register with the Financial Services Agency prior to commencing their investment activities. Outside of Japan, some of our businesses are also subject to regulation and supervision in the jurisdictions in which we operate. Competition Our markets are highly competitive and are characterized by competitive factors that vary by product and geographic region. Our competitors include independent and captive leasing and finance companies and commercial banks. Some of our competitors have substantial market positions. Many of our competitors are large companies that have substantial capital and marketing resources, and some of these competitors are larger than us and may have access to capital at a lower cost than we do. Competition in Japan and a number of other geographical markets has increased in recent years because of deregulation and increased liquidity. The markets for most of our products are characterized by a large number of competitors. However, in some of our markets, such as automobile leasing and small-ticket leasing, competition is relatively more concentrated. Japan's leasing industry has a small number of independent leasing companies. Many leasing firms are affiliated with banks, trading houses, manufacturers and financial organizations. Furthermore, many of these specialize in specific products, product ranges, or geographical regions. We have established a nationwide network and distribute a full range of leasing and other financial products. Similarly, our array of other financial products and services, and the seamless way in which they are presented, make us unique in the Japanese marketplace. This ability to provide comprehensive financial solutions through a single sales staff and cross-sell a variety of products is one of our competitive advantages, and sets it apart from our domestic competitors. Credit tightening has led to a general reduction in aggressive marketing from most domestic competitors. We believe that this factor, coupled with our ability to access funds directly from the capital markets, will allow us to expand our domestic leasing operations as consolidation proceeds within the industry. Recently, a number of non-Japanese finance companies have established bases in Japan, or are in the process of increasing sales and marketing initiatives. Many of these companies compete with us in specific fields. However, in general we maintain the same competitive advantage that we enjoy over many domestic competitors in that we offer a range of products and services that offer customers more than a simple leasing product. Furthermore, our established network of sales offices and experience in the Japanese marketplace provides us with advantages over foreign leasing and asset finance firms entering the Japanese marketplace. In small-ticket leasing we compete more with credit companies than with traditional leasing firms. These companies, like us, have significant experience and expertise in handling a large volume of small-ticket transactions. We use our nationwide coverage and ability to offer a broad range of financial products and services to compete with these firms. Recent consolidation and alliances among life insurance companies in Japan have increased competition within the insurance industry. While Japanese commercial banks are not currently permitted to sell insurance products directly, scheduled deregulation of the insurance industry is expected to permit them to sell life insurance products through subsidiary or affiliate insurance companies at the bank branch offices. In the event that such deregulation is 35 implemented, the commercial banks could pose a competitive challenge to our life insurance operations. If existing Japanese life insurers are acquired by foreign insurers, such foreign insurers would gain access to established networks of sales agents. Description of Property Our operations are generally conducted in leased office space in numerous cities throughout Japan and the other countries in which it operates. Our leased office space is suitable and adequate for our needs. We utilize, or plan to utilize in the foreseeable future, substantially all of our leased office space. We own office buildings, including one used as our principal executive offices, apartment buildings and recreational facilities for our employees with an aggregate value as of March 31, 2002 of yen76,987 million. Legal Proceedings We are a defendant in various lawsuits arising in the ordinary course of our business. We aggressively manage our pending litigation and assesses appropriate responses to lawsuits in light of a number of factors, including potential impact of the actions on the conduct of our operations. In the opinion of management, none of the pending legal matters is expected to have a material adverse effect on our financial condition or results of operations. However, there can be no assurance that an adverse decision in one or more of these lawsuits will not have a material adverse effect. Item 5. Operating and Financial Review and Prospects. General The following discussion and analysis provides information that management believes to be relevant to understanding our consolidated financial condition and results of operations. This discussion should be read in conjunction with the consolidated financial statements of ORIX, including the notes thereto, included in this Annual Report. Overview We are engaged principally in financial service businesses. These include leasing and commercial and consumer finance businesses in Japan and in overseas markets. We earn our revenues mainly from direct financing leases, operating leases and life insurance premiums, as well as interest on loans and investment securities. Our expenses include mainly interest expense, depreciation on operating leases, life insurance costs, selling, general and administrative expenses and provision for doubtful receivables on direct financing leases and possible loan losses. We require funds mainly to purchase equipment for leases, extend loans and invest in securities. We earn most of our revenues from our operations in Japan. Revenues from overseas operations have also contributed significantly to our operating results in recent periods. Overseas operations generated 24.4% and 22.3% of our total revenues in the years ended March 31, 2001 and March 31, 2002, respectively. Presentation of income from investments We present income from investments in separate lines of our consolidated statements of income, depending upon the type of security and whether the security is held in connection with our life insurance operations. The balances of our investments in securities are shown by type of security and operation as of the end of each of the last three years ended March 31, 2002 in the tables below. 36 As of March 31, 2000 --------------------------------------------------- Life Insurance Other operations Total -------------- ---------------- ---------- (In millions of yen) Fixed income securities................................ yen390,523 yen203,689 yen594,212 Marketable equity securities........................... 13,243 91,108 104,351 Other securities....................................... 13,379 46,439 59,818 ---------- ---------- ---------- Total yen417,145 yen341,236 yen758,381 ========== ========== ==========
As of March 31, 2000 --------------------------------------------------- Life Insurance Other operations Total -------------- ---------------- ---------- (In millions of yen) Fixed income securities................................ yen519,995 yen256,514 yen776,509 Marketable equity securities........................... 7,167 65,230 72,397 Other securities....................................... 9,975 83,277 93,252 ---------- ---------- ---------- Total yen537,137 yen405,021 yen942,158 ========== ========== ==========
As of March 31, 2000 --------------------------------------------------- Life Insurance Other operations Total -------------- ---------------- ---------- (In millions of yen) Fixed income securities................................ yen433,463 yen242,956 yen676,419 Marketable equity securities........................... 73 53,448 53,521 Other securities....................................... 23,596 107,800 131,396 ---------- ---------- ---------- Total yen457,132 yen404,204 yen861,336 ========== ========== ==========
Interest we earn on fixed income securities and on interest-earning securities classified in other securities held in connection with operations other than life insurance is reflected in our consolidated statements of income as interest on loans and investment securities. All other income and losses (other than foreign currency transaction gain or loss and write-downs of securities) we recognize on securities held in connection with operations other than life insurance are reflected in our consolidated statements of income as brokerage commissions and gains on investment securities. All income and losses (other than foreign currency transaction gain or loss and write-downs of securities) we recognize on securities held in connection with life insurance operations are reflected in our consolidated statements of income as life insurance premiums and related investment income. Policies relating to non-performing assets and charge-offs We review delinquencies or other transactions which are not in compliance with our internal policies as frequently as every two weeks in the case of domestic transactions. Transactions with payments three months or more overdue are reported to the corporate executive officer responsible for the Investment and Credit Evaluation Group. We stop accruing revenues on direct financing leases and installment loans when principal or interest is past due 180 days or more, or earlier if management determines that it is doubtful that it can collect on direct financing leases and installment loans. The decision is based on factors such as the general economic environment, individual clients' creditworthiness and historical loss experience, delinquencies and accruals. After we have set aside provisions for a non-performing asset, we carefully monitor the quality of any underlying collateral, the status of management of the obligor and other important factors. When we determine that there is little likelihood of continued repayment by the borrower or lessee, we sell the leased equipment or loan collateral, and we record a charge-off for the portion of the lease or loan that remains outstanding. Our charge-off policy is greatly affected by Japanese tax law, which limits the amount of tax deductible charge-offs. Japanese tax law allows companies to charge off doubtful receivables on a tax deductible basis only when specified conditions are met. Japanese tax law does not allow a partial charge-off against the total outstanding receivables to an obligor. Japanese regulations do not specify a maximum time period after which charge-offs must occur. 37 It is common in the United States for companies to charge-off loans after they are past due for a specific arbitrary period, for example, six months or one year. However, we are required to keep our primary records in accordance with Japanese tax law. Japanese tax law does not allow Japanese companies to adopt a policy similar to that in the United States. If we had prepared our accounting records as if each charge-off had occurred at an arbitrary date, the differences in our financial statements would be a reduction in gross receivables, an identical reduction in the allowance for doubtful receivables and a change in the timing of charge-offs. We believe that the most significant of these differences, when comparing ourselves to other non-Japanese companies (particularly US companies), may be the delay in when we record a charge-off. In a period of worsening economic conditions and increasing delinquencies, we may reflect a lower charge-off ratio than we would if we applied the charge-off policies used by some non-Japanese companies. FASB Statement 121 requires that long-lived assets and certain identifiable intangibles held and used by ORIX and its subsidiaries be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We conduct this review for impairment by using undiscounted future cash flows expected to be generated by the assets. During the three years ended March 31, 2002, ORIX and certain subsidiaries wrote down certain real estate development projects included in investment in operating leases, other operating assets, and advances in the consolidated balance sheets to their fair values. An impairment loss was recognized for each of the periods in the amount by which the carrying amount of the assets exceeded fair value determined by external appraisals. Risk Management Our business activities contain elements of risk. We consider the principal types of risk to be credit risk, asset/liability risk, and, to a lesser extent, operational and legal risk. We consider the management of risk essential to conducting our businesses and to maintaining profitability. Accordingly, our risk management systems and procedures are designed to identify and analyze our risks, to set appropriate policies and limits and to continually monitor these risks and limits by means of reliable administrative and information systems and other policies and programs. Credit risk management We have established an organizational structure specifically designed to allow the management of credit risk in each business segment. We employ a risk management system under which both the relevant marketing department and our independent Investment and Credit Evaluation Group make thorough evaluations of customer-, industry-, and country-related risks. The Investment and Credit Evaluation Group consists of approximately 70 specialized staff. In addition, some of our domestic subsidiaries, such as ORIX Auto Leasing and ORIX Credit, have their own independent credit departments. Another independent specialized Real Estate Appraisal Department, consisting of approximately 40 specialized staff, focuses on the appraisal of real estate collateral. Based on internal standards, we methodically evaluate individual financing proposals and determines whether or not they should be approved. Financing and leasing assets are evaluated for credit and collateral risk both during the credit granting process and periodically after the advancement of funds. We maintain a unified set of credit evaluation practices with regard to all of our operations. Our credit evaluation consists of three basic steps: (i) initial evaluation to determine whether it will enter into each individual transaction; (ii) monitoring of contracts for potential defaults or problems; and (iii) corrective action for the management of defaults and other problem transactions. Initial evaluation--domestic Staff members in our sales and marketing business units are authorized to approve credit within limits that correspond to the seniority of the staff member making the credit evaluation. If proposed transactions exceed these credit limits within the marketing departments, the transaction is referred to our Investment and Credit Evaluation Group. In addition, a composite, on-line record of all transactions able to be approved within the sales and marketing business units is available to almost all of our employees, including the Investment and Credit Evaluation Group. If the transaction exceeds the limits which the Investment and Credit Evaluation Group is authorized to approve, the 38 matter is referred to our Investment and Credit Committee for ultimate determination. The Investment and Credit Committee, which consists of at least five corporate executive officers, including the heads of the departments originating relevant transactions, meets twice or three times per month in order to review and approve large domestic and overseas transactions. In the initial evaluation process, the salesperson will first obtain financial statements and other relevant financial information from the customer covering at least the three years prior to the application. We do the evaluation of credit on a cumulative basis so that an existing customer seeking new credit will be re-evaluated if the new application, when coupled with existing, outstanding credit, exceeds the limit granted by the last evaluation. The salesperson will then interview senior management from the customer seeking credit. If further investigation is necessary, we may retain independent credit agencies. The credit evaluation process is provided in a series of manuals that we have developed to ensure that the credit evaluation process is adhered to and executed in a methodical manner. These manuals provide management risk acceptance criteria for: o acceptable maximum credit lines; o selected target markets and products; o the creditworthiness of borrowers, including credit history, financial condition, adequacy of cash flow and quality of management; and o type and value of underlying collateral and guarantees. These manuals are reviewed by management and staff and amended or improved as required. We receive credit-related information such as bankruptcies, defaults, changes in the repayment terms and deterioration of business operations from certain agencies on a daily basis and records such information in the database accessed by the sales and marketing business units. Initial evaluation--international We operate a number of subsidiaries and affiliates outside Japan. All of these companies maintain systems and procedure manuals that are similar to those we maintain within Japan, with modifications incorporated to take into account local business practices and economic conditions and the varying natures of the transactions being undertaken. Some of these companies, particularly subsidiaries at which the Company's secondees are stationed, use systems and procedure manuals that are substantially similar to those used by ORIX, while others, particularly affiliates, use their own credit evaluation procedures. Substantially all subsidiaries refer transactions exceeding fixed limits to our Investment and Credit Evaluation Group, or to the Investment and Credit Committee, for ultimate determination. For some of these companies, we carry out country and region evaluations on a regular basis to minimize exposure to potentially high risk markets. Monitoring We maintain monitoring systems that allow us to evaluate the creditworthiness of customers and identify potential problem transactions. In particular, management reviews the financial position of lessees and borrowers by monitoring the collection of receivables from these lessees and borrowers. Coupled with the initial evaluation systems, this kind of monitoring enables us to manage our exposure to particular industries, countries or regions, customers and products within our portfolio. For each industry segment we carry out periodic, industry sector evaluations to reduce exposure to potentially high risk market segments. We review delinquencies or other transactions which are not in compliance with our accepted practices daily in the case of domestic transactions. Our management reviews accounts that are three months or more overdue. We classify accounts six months overdue as non-accrual. However, some exceptions to these time limits apply when composition of more stringent requirements is necessary due to the nature of the transaction, such as transactions for 39 big ticket aircraft, real property or ship leasing and financing transactions. Under current procedures, we are not aware of any potential problem accounts which are likely to impact future operations. The Investment Credit Evaluation Group monitors the customers' repayment status on-line and reports any delinquencies to the business units. Under internally established rules, the management of each overseas subsidiary and affiliate prepares reports on delinquent transactions on a monthly basis, which are forwarded to our International Credit Group. The International Credit Group then compiles these into a report that is sent to our management. We monitor overseas transactions by product, region, country and currency and the executive management reviews the information semi-annually or more frequently, if necessary. The ratings for country risks are also evaluated semi-annually. Remedial measures As part of the credit management process, we maintain systems that establish procedures for the handling of problem transactions, from consulting measures that help customers rehabilitate their activities, to repossession, legal adjudication, and obtaining further guarantees or collateral as required. Repossession is also integrated, to the extent that it may be, with our secondary market operations. Exchange-rate risk management We enter into foreign exchange forward contracts and foreign currency swap agreements to hedge foreign currency risks. In principle, we hedge foreign currency risk related to our foreign currency denominated transactions and overseas investments, and overseas group companies procure funds locally. However, certain positions involving foreign currency risk are managed individually. Derivatives risk management We establish market risk management regulations determined by the Investment and Credit Committee, and each group company that engages in derivatives transactions has established market risk management parameters. Based on those parameters, the object of the risks which should be managed and the types of hedging methods are clarified, while an internal check system has been established to separate the functions of departments responsible for execution, hedging efficacy evaluation, and related administration tasks. We prepare quarterly reports on each group company's transactions that include compilations of such information as the national principal, fair market value, hedging method, and hedging efficacy associated with each type of transaction and each counterparty. Credit evaluation by industry segment Direct financing leases and operating leases We carry out lease financing credit procedures in accordance with the credit evaluation process. However, in lease transactions, generally the only collateral is the leased item itself, and we generally assume that there is little or no residual value in case of default. Therefore, we place particular emphasis on the creditworthiness of the customer and the soundness of all aspects of the customer's business to minimize any risk of default. Installment loans In installment loan operations, managing credit risk and controlling loan charge-offs depends on the evaluation of each corporate borrower's creditworthiness and the underlying collateral. Except for a range of low-limit personal card loans, all of our consumer lending is done only after interviewing the applicant and receiving all relevant financial data. In order to reduce default and other risks, we only target some borrower profiles, and we always obtain third party credit reports. Our domestic installment loans are mostly secured by real estate collateral, except for card loans which are mostly unsecured because the maximum amount of each loan transaction is relatively small. We use a collateral evaluation manual, issued by our Investment and Credit Evaluation Group, to determine the value of each item of collateral and ascertain the appropriate loan amount for the relevant transaction by considering a loan to value ratio. The value of collateral is derived after considering factors 40 such as the type of collateral and risk factors inherent in each type. In domestic residential home loans, we generally obtain a registered first mortgage, and use the specialized staff from the Real Estate Appraisal Department to assess collateral and other risks. If collateral is a traded security, the value of collateral is determined by referring to our current market value. Separate manuals set out lending principles for loan staff to use in making credit determinations. Most overseas loans are also secured by various forms of collateral. Our overseas subsidiaries which conduct installment loan operations have similar systems and procedures in place to evaluate and monitor the adequacy of collateral in support of a loan. For example, in the case of overseas commercial and home mortgage lending, our subsidiaries employ independent property valuation professionals to assess collateral and other risks. The assessed value of collateral is reviewed periodically, at least once a year, and we generally request the borrower to provide additional collateral where the value is no longer sufficient to support the loan. Other operations In addition to Investment and Credit Evaluation Group staff, the specialized Real Estate Appraisal Group has approximately 40 employees that are experienced in the valuation of real property collateral and development proposals. Separate manuals set out more stringent procedures for transactions where the size or nature of the transaction require greater care, such as transactions for ship leasing and financing, aircraft leasing, investment in securities and transactions involving complex financial products such as commodities funds. The evaluation of credit and collateral is handled by specially trained staff with experience in evaluating the property-, client-, country- and other related risks inherent in these transactions. Our staff promptly report delinquencies and other issues and take any necessary remedial action. Loan loss reserves and credit losses We maintain a consolidated reserve for credit losses on finance receivables at an amount which we believe is sufficient to provide adequate protection against potential credit losses in our portfolios. We determine the level of the allowance for doubtful receivables on direct financing leases and possible loan losses in the manner described in Note 1(f) of the notes to the consolidated financial statements. We review commercial and consumer finance receivables to determine the probability of loss. We take provisions after considering various factors. If an unrecovered balance remains due, we take a final charge-off from provisions at the time we decide collection efforts are no longer useful. Asset/liability management and interest rate risks We annually prepare a performance target report on a consolidated basis. This report is based on the analysis of previous performance and information of each business segment. It projects the value of new business volumes, interest rate trends, and various other factors that may affect performance. The performance target report includes new financial asset marketing targets, a profit projection, balance sheet projections, and medium-term and fiscal-year-based funding plans. The report is reviewed and approved by the Board of Directors, which is responsible for decisions on the execution of operational measures. A semi-annual funding plan, which sets out a planned funding mix as well as required funding volumes and proposed sources, is prepared with the goal of matching fixed-rate liabilities to fixed-rate assets. The Board of Directors also reviews and approves these funding plans. After the approval of these plans, each division operates on a basis consistent with the performance target report. Asset-liability management has become an important element of managing the execution of these operations. Under our asset-liability management system, the relationship between actual performance and the performance target report is compared and analyzed, and asset-liability management charts, gap reports and cash-flow maps are prepared and used to analyze mismatches between existing assets and liabilities. These charts show the contractual maturity, interest rates, and balances of fixed-rate assets and liabilities and also project future trends in these balances. In addition, through profit-loss simulations and asset maturity ladder analysis, we try to ascertain the influence of future market movements on our performance and, based on interest rate forecasts, determine marketing 41 divisions' internal costs and treasury departments' procurement policies. This allows us to maximize our spreads and return on assets and engage in efficient funding activities. In addition, we use an asset-liability management system that enables prompt access to quantitative indicators of interest rate risks. We continue to expand the coverage of this system to monitor our group companies. Changes in market interest rates or in the relationships between short-term and long-term market interest rates or between different interest rate indices (i.e., basis risk) can affect the interest rates charged on interest-earning assets more than they affect the interest rates paid on interest-bearing liabilities, which can result in an increase in interest expense relative to finance income. We manage interest rate risk by changing the proportions of fixed- and floating-rate debt and by utilizing primarily interest rate swaps and, to a lesser extent, other derivative instruments to modify the repricing characteristics of existing interest-bearing liabilities. For example, a fixed-rate, fixed-term loan transaction may initially be funded by short-term floating rate liabilities, resulting in interest rate risk; however, this may later be hedged by way of an interest rate swap, thus eliminating the risk initially created. We seek to limit the impact on profitability of interest rate trends that are contrary to our projections. For example, our typical financing lease contracts call for both principal and interest to be paid in equal lease payments over periods averaging only five years. Thus, even when these leases are financed with short-term funds, we do not require much time to change our asset-liability and interest rate structures through strategic changes in new funding operations, the use of derivatives, and other methods. In addition to the Board of Directors, our management organization includes a committee composed of the Chief Executive Officer and other top managers as well as departmental managers that is capable of rapid decision making with regard to interest rate risks. Most overseas subsidiaries also adhere to a basic policy of matching future cash flows due with assets and liabilities, periodically producing asset-liability management charts and working to reduce any mismatching. Life insurance Our life insurance operations are subject to a number of risks and uncertainties that may be broadly categorized as follows: o insurance risk: the risk that a greater number of policy claims than anticipated will arise resulting in greater levels of expense and reduced earnings, or in some cases, losses; o portfolio management risk: the risk that the return on assets managed will substantially fall short of the rates of return guaranteed to policy holders and the risk that the actual value of assets that policy liability reserves have been invested in will fall, in each case leading to additional provisioning that would negatively impact our earnings; and o overall managerial risk: as with any business, the risk that strategies adopted with regard to new products, marketing or other initiatives will not accurately respond to market needs. In order to cope with these risks we have adopted the following policies: o we employ an in-house actuary to closely monitor micro- and macro-economic and social trends and adopt standards that reduce the chance of unforeseen numbers of policy claims; o while diversifying policy liability reserves in order to avoid a disproportionate exposure to one asset segment, we invest in stable instruments that tend not to be affected by short-term market movements, such as fixed-return corporate debt instruments; and o we monitor the returns we achieve on assets under management and lower guaranteed policy returns (if required) in order to reduce the risk of a shortfall in return on assets under management. 42 Operational and legal risks Like all large financial institutions, we are exposed to many types of operational risk, including the potential for loss caused by a breakdown in information, communication or transaction processing systems or by fraud by employees or outsiders or unauthorized transactions by employees. We attempt to mitigate operational risks by maintaining a system of internal controls designed to keep operational risk at appropriate levels. In so doing, we take into account our consolidated financial position, the characteristics of the businesses and markets in which it operates, competitive circumstances and regulatory considerations. We cannot assure the investors that we will not incur material losses from operational risks in the future. Legal risk arises from the uncertainty of enforceability, through legal or judicial process, of obligations of our customers and counterparties. It also arises from the possibility that changes in law or regulation could adversely affect our businesses. We seek to minimize legal risk through consultation with internal and external legal counsel. In order to enhance our compliance function, we have established the Legal Affairs Group by combining the compliance functions previously performed by the Investment and Credit Evaluation Group and Office of Corporate Auditors. This department is in charge of checking the legality of contracts and business activities of our operations and evaluating legal risk relating to new financial products. In February 2002, we created a compliance manual to guide our employees and began training programs to foster a deeper awareness of compliance issues as part of continued efforts to minimize legal and operational risk. Results of Operations Year Ended March 31, 2002 Compared to Year Ended March 31, 2001 Overview Our consolidated operating assets increased by 9.9%, or yen498,594 million, to yen5,528,149 million as of March 31, 2002 from yen5,029,555 million as of March 31, 2001. This reflected increases in nearly all categories of operating assets, principally installment loans, other operating assets and investment in operating leases, partially offset by a decrease in investment in securities. The other operating assets increased primarily as a result of purchases of properties which were subsequently transferred to a real estate investment corporation sponsored by ORIX (the "JREIT"). Upon completion of the offering of the JREIT units, these assets will be removed from the balance sheet and any portion of the units retained by us will be included in investment in affiliates. Our total revenues for the year ended March 31, 2002 increased by 12.3%, or yen72,313 million, to yen658,462 million from yen586,149 million in the year ended March 31, 2001, reflecting principally an increase of yen53,374 million in other operating revenues. Total expenses for the year ended March 31, 2002 increased by 10.6%, or yen56,092 million, to yen585,093 million. Income before income taxes for the year ended March 31, 2002 increased by 23.3%, to yen73,039 million. Net income increased by 17.9%, or yen6,112 million, to yen40,269 million. The table below contains income statement data for the years ended March 31, 2001 and 2002, as well as the selected amounts and percentages of the changes between the years ended March 31, 2001 and 2002. Year ended March 31, Change ------------------------ --------------------- 2001 2002 Amount Percent ---------- ---------- --------- ------- (In millions of yen) Income statement data Total revenues.......................................... yen586,149 yen658,462 yen72,313 12.3% Direct financing leases............................ 122,003 121,914 (89) (0.1) Operating leases................................... 113,478 120,807 7,329 6.5 Interest on loans and investment securities........ 109,448 121,962 12,514 11.4 43
Year ended March 31, Change ------------------------ --------------------- 2001 2002 Amount Percent ---------- ---------- --------- ------- (In millions of yen) Brokerage commissions and gains on investment securities....................................... 12,055 18,367 6,312 52.4 Life insurance premiums and related investment income........................................... 158,314 152,333 (5,981) (3.8) Interest income on deposits........................ 2,520 1,374 (1,146) (45.5) Other operating revenues........................... 68,331 121,705 53,374 78.1 Total expenses.......................................... 529,001 585,093 56,092 10.6 ---------- ---------- --------- Operating income........................................ 57,148 73,369 16,221 28.4 Equity in net income (loss) of and gain (loss) on sales of affiliates........................................ 2,088 (330) (2,418) (115.8) ---------- ---------- --------- Income before income taxes.............................. 59,236 73,039 13,803 23.3 Net income.............................................. 34,157 40,269 6,112 17.9
The table below contains selected balance sheet data as of March 31, 2001 and 2002, as well as the amounts and percentages of the changes between the two dates. Year ended March 31, Change -------------------------- ----------------------- 2001 2002 Amount Percent ------------ ------------ ----------- ------- (In millions of yen) Balance sheet data Investment in direct financing leases................... yen1,657,709 yen1,658,669 yen 960 0.1% Investment in operating leases.......................... 451,171 474,491 23,320 5.2 Installment loans....................................... 1,846,511 2,273,280 426,769 23.1 Investment in securities................................ 942,158 861,336 (80,822) (8.6) Other operating assets.................................. 132,006 260,373 128,367 97.2 ------------ ------------ ---------- Operating assets........................................ 5,029,555 5,528,149 498,594 9.9 Allowance for doubtful receivables on direct financing leases and possible loan losses...................... (141,077) (152,887) 11,810 8.4 Other assets............................................ 702,833 974,957 272,124 38.7 ------------ ------------ ---------- Total assets............................................ yen5,591,311 yen6,350,219 yen758,908 13.6% ============ ============ ==========
The table below shows the volume of new assets for the years ended March 31, 2001 and 2002, as well as the amounts and percentages of change in these data from the year ended March 31, 2001 to the year ended March 31, 2002. Figures for new equipment acquisitions for direct financing leases and operating leases are based on purchase cost of the equipment. Year ended March 31, Change ------------------------ --------------------- 2001 2002 Amount Percent ---------- ---------- ---------- ------- (In millions of yen) Volume of new assets Direct financing leases: new equipment acquisitions..... yen723,330 yen980,379 yen257,049 35.5% Operating leases: new equipment acquisitions............ 143,158 146,203 3,045 2.1 Installment loans: new loans added...................... 740,639 1,340,400 599,761 81.0 Investment in securities: new securities added.......... 397,218 348,347 (48,871) (12.3) Other operating assets: new assets added................ 128,984 204,121 75,137 58.3
Total revenues Our total revenues increased by 12.3%, or yen72,313 million, to yen658,462 million in the year ended March 31, 2002 compared to yen586,149 million in the year ended March 31, 2001, reflecting principally an increase of yen53,374 million in other operating revenues due to increases in revenues from our condominium development and fee 44 businesses in Japan and from the sale of real estate in the United States, as well as smaller increases in revenues from operating leases, brokerage commissions and gains on investment securities and interest on loans and investment securities, partially offset by a decrease in revenues from life insurance premiums and related investment income and smaller declines in revenues from direct financing leases and interest income on deposits. Direct financing leases Revenue from direct financing leases was yen121,914 million for the year ended March 31, 2002 which was essentially unchanged from yen122,003 million for the year ended March 31, 2001. Increases in revenues from Japanese operations, principally from acquisitions of lease portfolios and from gains on the sale of securitized lease receivables, were offset by lower overseas revenues due to the shrinkage of our leasing assets in the United States. The average interest rates on domestic direct financing leases, calculated on the basis of quarterly balances in the year ended March 31, 2002 was 5.98% compared to 5.77% in the year ended March 31, 2001, due primarily to the higher volume of the auto leasing business, which has higher than average rates compared to other leasing businesses. The average interest rates on overseas direct financing leases, calculated on the basis of quarterly balances, decreased to 8.96% in the year ended March 31, 2002 from 9.92% in the year ended March 31, 2001, reflecting decrease in market interest rates. The table below shows the balances as of March 31, 2001 and 2002 of investment in direct financing leases by category of equipment, together with the amounts and percentages of the changes between period-ends. As of March 31, Change -------------------------- ------------------------- 2001 2002 Amount Percent ------------ ------------ ------------ ------- (In millions of yen) Investment in direct financing leases Information-related and office equipment................ yen 334,174 yen 262,524 yen (71,650) (21.4)% Industrial equipment.................................... 372,542 286,942 (85,600) (23.0) Commercial services equipment........................... 193,624 186,115 (7,509) (3.9) Transportation equipment................................ 415,246 603,843 188,597 45.4 Other................................................... 342,123 319,245 (22,878) (6.7) ------------ ------------ ------------ Total............................................. yen1,657,709 yen1,658,669 yen 960 0.1% ============ ============ ============
Investment in direct financing leases of yen1,658,669 million for the year ended March 31, 2002 was essentially unchanged from yen1,657,709 million from the previous fiscal year-end, as an increase in investment in direct financing leases of transportation equipment was offset by decreases in investments in other categories of direct financing leases. Investment in direct financing leases of transportation equipment increased primarily as a result of our acquisition in September 2001 of an 80% interest in IFCO, a former subsidiary of Isuzu Motors Limited, for yen20 billion. IFCO is a truck leasing company with approximately 67,000 vehicles under lease and approximately yen300 billion in total assets as of September 2001. However, weak private-sector capital investment and our selective approach to new domestic leasing contracts with an emphasis on profitability over asset growth caused the overall balance of domestic leasing contracts for all other categories of equipment to decline. In addition, increases in investment in direct financing leases in the year ended March 31, 2002 were partially offset by the securitization of leasing assets. The balance of overseas leasing contracts also decreased, reflecting the on-going restructuring of our United States subsidiary, ORIX Financial Services, Inc. and general economic conditions in the United States. During the year ended March 31, 2002, we securitized yen188,853 million of domestic and yen13,914 million of overseas leasing assets. Gains from the securitization of these assets of yen6,159 million were included in direct financing lease revenues. The securitization of these assets, accounted for as off balance sheet assets, contributed to the reduction in the balance of direct financing leases. The balance of direct financing lease assets which were treated as off balance sheet assets amounted to yen375,149 million as of March 31, 2002. The unpaid principal balance outstanding of securitized receivables is excluded from our consolidated balance sheets. In addition, we entered into other lease receivable securitization programs that are not accounted for as a sale, or not treated as off balance sheet assets. Under these securitization programs, we had long-term debt payables of yen40,731 million under securitized lease assets as of March 31, 2002. 45 Operating leases Revenues from operating leases for the year ended March 31, 2002 increased by 6.5%, or yen7,329 million, to yen120,807 million, primarily as a result of increases in revenues from automobile leasing operations in Japan and overseas. Gains from the disposition of operating lease assets included in revenues from operating leases were yen3,467 million in the year ended March 31, 2002, compared to yen7,883 million in the year ended March 31, 2001. The table below shows the balances as of March 31, 2001 and 2002 of our investment in operating leases by category of equipment under lease, together with the amounts and percentages of the changes between period-ends. As of March 31, Change ------------------------- --------------------- 2001 2002 Amount Percent ----------- ---------- --------- ------- (In millions of yen) Investment in operating leases Transportation equipment................................ yen165,218 yen187,605 yen22,387 13.5% Measuring equipment and personal computers.............. 77,808 71,527 (6,281) (8.1) Real estate and other................................... 208,145 215,359 7,214 3.5 ---------- ---------- --------- Total.............................................. yen451,171 yen474,491 yen23,320 5.2% ========== ========== =========
The balance of our investment in operating leases increased by 5.2%, or yen23,320 million, from March 31, 2001 to March 31, 2002, primarily as a result of the acquisition in April 2001 of the operating assets and employees of Nihon Jisho Corporation ("Nihon Jisho"). These assets included office buildings and residential rental properties owned and operated by Nihon Jisho and land for residential subdivision development. In addition, our investment in operating leases increased due to our acquisition of an automobile leasing company in Thailand in August 2001 and the acquisition in September 2001 of IFCO, which holds a number of transportation equipment operating leases. See "--Direct financing leases." Interest on loans and investment securities Interest we earn on installment loans and interest-earning securities held in connection with operations other than life insurance is reflected in our consolidated statements of income as interest on loans and investment securities. For the year ended March 31, 2002, revenues from interest on loans and investment securities increased by 11.4%, or yen12,514 million compared to the year ended March 31, 2001, due primarily to an increase in the balances of domestic corporate loans and consumer housing and card loans. An increase in the balance of corporate loans and commercial mortgage loans in the United States also contributed to the increase. The average interest rates earned on domestic loans calculated on the basis of quarterly balances, slightly decreased to 4.00% in fiscal 2002 from 4.19% in fiscal 2001 primarily due to declines in market interest rates offset by increases in card loans of which interest rates are higher than corporate loans. The average interest rates earned on overseas loans calculated on the basis of quarterly balances, decreased to 7.51% in the year ended March 31, 2002 from 9.29% in the year ended March 31, 2001 primarily due to declines in market interest rates in the United States. The average interest rate earned on domestic investment securities, calculated on the basis of quarterly balances, decreased to 2.31% in the year ended March 31, 2002 from 2.68% in the year ended March 31, 2001, primarily due to declines in domestic market interest rates. The average interest rate earned on overseas investment securities, calculated on the basis of quarterly balances, decreased to 9.41% in the year ended March 31, 2002 from 10.03% in the year ended March 31, 2001 primarily due to declines in the market interest rates in the United States. In the year ended March 31, 2002, we securitized yen46,062 million of installment loans. Gains from the securitization of yen3,076 million were included in interest on installment loans and investment securities. The balance of installment loans treated as off balance sheet assets amounted to yen75,962 million as of March 31, 2002. The table below shows the balances as of March 31, 2001 and 2002 of our installment loans to domestic and foreign borrowers, categorized in the case of domestic borrowers by type of consumer or commercial loan, together with the amounts and percentages of the changes between period-ends. A small portion of these installment loans is held in connection with our life insurance operations, and income from these loans is reflected in our consolidated statements of income as life insurance premiums and related investment income. 46 As of March 31, Change -------------------------- --------------------- 2001 2002 Amount Percent ------------ ------------ ---------- ------- (In millions of yen) Installment loans Domestic consumer Housing loans...................................... yen 392,896 yen 557,461 yen164,565 41.9% Card loans......................................... 181,215 230,358 49,143 27.1 Other.............................................. 43,959 44,829 870 2.0 Subtotal....................................... 618,070 832,648 214,578 34.7 Domestic commercial Real estate-related companies...................... 222,818 278,367 55,549 24.9 Commercial and industrial companies................ 627,252 708,031 80,779 12.9 Subtotal....................................... 850,070 986,398 136,328 16.0 Foreign commercial, industrial and other borrowers...... 357,446 432,771 75,325 21.1 Direct loan origination costs, net...................... 20,925 21,463 538 2.6 ------------ ------------ ---------- Total.......................................... yen1,846,511 yen2,273,280 yen426,769 23.1% ============ ============ ==========
The total balance of installment loans increased by 23.1%, to yen2,273,280 million, from March 31, 2001 to March 31, 2002. In the domestic market, the loan balance increased primarily as a result of expansion of our consumer housing loan and card loan business as well as increased lending to corporate customers. The balance of consumer housing loans increased primarily due to acquisitions and the balance of card loans increased as a result of continued expansion of new business at the card loan subsidiaries. In the overseas market, the loan balance increased primarily as a result of increases in the balance of corporate loans and commercial mortgage loans in the United States. The balance of our investments in securities other than in connection with our life insurance operations decreased to yen404,204 million at March 31, 2002 from yen405,021 million at March 31, 2001, primarily reflecting declines in the Japanese stock market and bond markets in the United States. Brokerage commissions and gains on investment securities All non-interest income and losses (other than foreign currency transaction gain or loss) that we recognize on securities held in connection with operations other than life insurance are reflected in our consolidated statements of income as brokerage commissions and gains on investment securities. Brokerage commissions and gains on investment securities increased by yen6,312 million, or 52.4%, in the year ended March 31, 2002 to yen18,367 million compared to the year ended March 31, 2001. The increase resulted primarily from strong gains on venture capital investments in Japan, partially offset by a decrease in brokerage commissions due primarily to depressed conditions in the Japanese stock market. As of March 31, 2002, gross unrealized gains on available-for-sale securities, including those held in connection with our life insurance operation, were yen41,992 million, compared to yen68,037 million as of March 31, 2001. At March 31, 2002, gross unrealized losses on available-for-sale securities, including those held in connection with our life insurance operations, were yen16,369 million, compared to yen11,018 million as of March 31, 2001. Such unrealized gains decreased and unrealized losses increased primarily due to declines in the Japanese stock market and bond markets in the United States. Life insurance premiums and related investment income In the year ended March 31, 2002, life insurance premiums and related investment income decreased by yen5,981 million, or 3.8%, to yen152,333 million, and life insurance costs decreased by yen3,923 million compared to the year ended March 31, 2001. These declines were due to our policy of emphasizing the marketing of such products as term and whole life insurance that produce lower revenues but higher margins and discontinuing the sale of single premium endowment insurance in the first half of 2001. 47 Interest income on deposits Interest income on deposits not included in other categories of revenues includes principally interest on bank deposits. Interest income on deposits in the year ended March 31, 2002 decreased by yen1,146 million, or 45.5%, from the year ended March 31, 2001, principally as a result of a lower average balance of bank deposits. Other operating revenues Other operating revenues are generated from various businesses, such as the development and sales of residential condominiums and servicing of receivables. Other operating revenues increased in the year ended March 31, 2002 from the year ended March 31, 2001 by yen53,374 million, or 78.1%, to yen121,705 million, principally as a result of growth in our condominium development business and various fee businesses in Japan and the sale of real estate overseas. Revenue from condominium development increased substantially, primarily as a result of a sharp increase in condominium sales to third parties before certain Japanese tax incentives for home purchases were due to expire in June 2001. The deadline for such expiry was subsequently extended. Total expenses Total expenses in the year ended March 31, 2002 increased by 10.6%, or yen56,092 million, to yen585,093 million. Corresponding to the change in revenue, other operating expenses and operating lease depreciation expense grew in the year ended March 31, 2002, but life insurance costs declined in line with lower revenue. Selling, general and administrative expenses increased primarily as a result of the increase in the number of consolidated companies as well as the on-going restructuring of one of our subsidiaries in the United States. We also increased write-downs of securities, as well as provisions for doubtful receivables and possible loan losses. Interest expense decreased, due to declines in market interest rates, our effective use of our asset-liability management system and efficient procurement of funding from the capital markets. There was also a decrease in write-downs of long-lived assets. We also recorded a gain from foreign currency transactions compared to a loss in the same period in the previous year. Interest expense Interest expense amounted to yen90,348 million in the year ended March 31, 2002, a decrease of 17.3% from the year ended March 31, 2001, primarily as the result of declines in market interest rates, our effective use of our asset-liability management system and efficient procurement of funding from the capital markets. The ratio of our funding directly from capital markets to our total debt and deposits was 52.7% and 56.7% at March 31, 2002 and March 31, 2001, respectively. See "--Liquidity and Capital Resources--Diversification of Funding Sources". Notes issued under our medium-term notes program decreased by yen25,009 million to yen324,369 million at March 31, 2002 from yen349,378 million at March 31, 2001, while bonds increased by yen67,188 million to yen862,688 million. Issued and outstanding commercial paper increased to yen1,012,932 million at March 31, 2002 from yen914,611 million at March 31, 2001. The average interest rate on our domestic short-term and long-term debt, calculated on the basis of quarterly balances, was 1.30% in the year ended March 31, 2002, compared to 1.64% in the year ended March 31, 2001. The average interest rate on our short-term and long-term overseas debt, calculated on the basis of quarterly balances, decreased to 5.34% in the year ended March 31, 2002 from 6.81% in the year ended March 31, 2001. Depreciation on operating leases Depreciation on operating leases increased to yen77,047 million in the year ended March 31, 2002, an increase of 12.8% from the level in the year ended March 31, 2001. This increase primarily reflected the higher average asset balance of automobiles, measuring equipment and personal computers, which have relatively short periods for depreciation. Life insurance costs In line with a decrease in life insurance premiums and related investment income, life insurance costs decreased slightly in the year ended March 31, 2002 by yen3,923 million, or 2.7%, to yen139,786 million from the year ended March 31, 2001. 48 Other operating expenses Other operating expenses principally comprise the cost of sales for condominium marketing operations. Other operating expenses increased 81.6%, to yen79,131 million, in the year ended March 31, 2002, reflecting increased condominium sales. Selling, general and administrative expenses Approximately half of our selling, general and administrative expenses consist of wages and other labor-related costs, while the remaining half consists principally of general overhead expenses, such as rent for office spaces, communication expenses and travel expenses. Selling, general and administrative expenses in the year ended March 31, 2002 were yen126,316 million, an increase of 24.9% from the year ended March 31, 2001. This increase in expenses primarily reflected growth in existing businesses and an increase in the number of consolidated companies as well as the costs associated with the on-going restructuring of ORIX Financial Services, Inc., one of our subsidiaries in the United States. Provision for doubtful receivables and possible loan losses We make provisions for doubtful receivables and possible loan losses for direct financing leases and installment loans. Provision for doubtful receivables and possible loan losses in the year ended March 31, 2002 was yen51,367 million, an increase of 15.2% from the year ended March 31, 2001. The table below shows the calculation of the provision for doubtful receivables and possible loan losses for the years ended March 31, 2001 and 2002. Year ended March 31, ---------------------------------------- 2001 2002 ---------- ---------- (In millions of yen) Balance at beginning of period.......................... yen136,939 yen141,077 Provisions charged to income....................... 44,584 51,367 Charge-offs (net): Gross Charge-offs.................................. (46,845) (50,690) Recoveries......................................... 539 1,350 ---------- ---------- Charge-offs (net).................................. (46,306) (49,340) Other.............................................. 5,860 9,783 ---------- ---------- Balance at end of period................................ yen141,077 yen152,887 ========== ==========
In the year ended March 31, 2002, charge-offs increased by 8.2% to yen50,690 million compared to yen46,845 million in the year ended March 31, 2001 primarily as a result of the on-going restructuring of ORIX Financial Services. The increase in the "other" category in the year ended March 31, 2002 compared to the year ended March 31, 2001 reflected primarily provisions added by the consolidation of IFCO which was acquired by ORIX in September 2001. See "--Direct financing leases". Allowance for doubtful receivables on direct financing leases and possible loan losses A breakdown of the allowance for doubtful receivables and possible loan losses as of March 31, 2002 is shown below. The "Other" category includes foreign currency translation adjustments and the effect of acquisitions. 49 Year ended March 31, 2002 ------------------------------------------------------ Installment Loans ------------------------------------------------------ Direct FASB financing Statement No. leases General 114 Total ---------- ------- ------------- ---------- (In millions of yen) Balance at beginning of the period...................... yen40,885 yen53,155 yen47,037 yen141,077 Provisions charged to income....................... 23,237 21,240 6,890 51,367 Charge-offs (net).................................. (21,364) (19,501) (8,475) (49,340) Other.............................................. 8,079 1,294 410 9,783 ---------- --------- --------- ---------- Balance at end of the period............................ yen50,837 yen56,188 yen45,862 yen152,887 ========= ========= ========= ==========
For a discussion of past due receivables and allowances for direct financing leases as of March 31, 2001 and March 31, 2002, see "Item 4. Information on the Company Profile of Business - Direct Finance Leases." In the year ended March 31, 2002, provisions charged to income were yen51,367 million and direct financing leases and loans totaling yen49,340 million were written off. As of March 31, 2002, the allowance was yen152,877 million. The ratio of this figure to the balance of investment in direct financing leases and installment loans was 3.9% as of March 31, 2002, compared to 4.0% as of March 31, 2001. The recorded investment in loans considered impaired under the definition contained in FASB Statement 114 was yen120,090 million as of March 31, 2001 and yen113,000 million as of March 31, 2002. The principal reason for the decline was a charge-off of impaired loans in the amount of yen8,475 million. We determined that a valuation allowance was required for impaired loans which had outstanding balances of yen73,636 million as of March 31, 2001 and yen71,802 million as of March 31, 2002. We recorded a valuation allowance, which is the required valuation allowance less the present value of expected future cash flows and the value of the collateral from impaired loans, calculated under FASB Statement 114, in the amount of yen47,037 million as of March 31, 2001 and yen45,862 million as of March 31, 2002. FASB Statement 114 requires that impaired loans 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 may be measured based on the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance. Some loans, such as large groups of smaller-balance homogeneous loans (e.g., individual housing loans and card loans), and lease receivables are exempt from the provisions of FASB Statement 114. However, provisions for these loans and lease receivables are reflected in the general provisions under installment loans and investment in direct financing leases. The average recorded investments in impaired loans were yen123,715 million for the year ended March 31, 2001 and yen115,265 million for year ended March 31, 2002. We recognized interest income on impaired loans of yen1,414 million for the year ended March 31, 2001 and yen1,200 million for the year ended March 31, 2002. For a discussion of delinquencies on installment loans, see "Item 4. Information on the Company Profile of Business - Installment Loans and Investments Securities." Write-downs of long-lived assets During the year ended March 31, 2002, in accordance with FASB Statement 121, we wrote down yen2,716 million for some real estate included in investment in operating leases, other operating assets and advances in the consolidated balance sheet. Write-downs of securities Our current policy for determining whether declines in the market value of available-for-sale securities are other than temporary places more emphasis on the length of time that the market value has been below the carrying value and less emphasis on the business reasons for owning the securities. 50 Under our current policy, we would, in principle, charge against income losses related to securities: o if the market price for a security has for more than one year remained below our acquisition cost, or below current carrying value if the price of the security has been adjusted in the past, or o if there has been a significant deterioration in a bond issuer's credit rating, an issuer default or similar event. o in certain other situations where, even though the market value has not remained below the carrying value for twelve months, the decline in market value of a security is based on economic conditions and not just general declines in equity markets and where it is considered unlikely that the market value of the security will recover in the next twelve months. However, if we have a significant long-term business relationship with another company, it would also consider the probability of the market value recovering within the following twelve months. As part of this review, we would consider: o the other company's operating results, o the other company's net asset value, o the other company's future performance forecast, and o general market conditions. If we believe, based on this review, that the market value of a security may realistically be expected to recover, the loss for that security will continue to be classified as temporary. Temporary declines in market value are recorded in other comprehensive income (loss), net of applicable income taxes. If after an additional twelve months, the market value for that security is still significantly below the acquisition cost or below current carrying value (if the price of the security has been adjusted in the past), we would classify the loss for that security as other than temporary and charge the decline in market value against income. If the financial condition of issuers deteriorates, the forecasted performance of an investee is not met or actual market conditions are less favorable than those projected by management, we may charge to income additional losses on investment in securities. For example, declines in US bond market prices due largely to deteriorating market conditions and significant deterioration of certain issuers resulted in additional impairment charges during the year ended March 31, 2002. Following this policy, in the years ended March 31, 2001 and 2002, we charged yen10,848 million and yen19,742 million, respectively, to income for declines in market value classified as other than temporary. The writedowns for 2002 included approximately yen7,000 million for bond investments in the United States and approximately yen3,700 million for equity and bond investments related to Enron Corp. Foreign currency transaction loss (gain), net We recognized a foreign currency transaction gain in the amount of yen1,360 million in the year ended March 31, 2002, compared to a loss of yen3,429 million in the year ended March 31, 2001 that resulted primarily from the depreciation of the Indonesia Rupiah against the US dollar. Equity in net income (loss) of and gain (loss) on sales of affiliates Equity in net income (loss) of and gain (loss) on sales of affiliates in the year ended March 31, 2002 was a loss of yen330 million, compared to a gain of yen2,088 million in the year ended March 31, 2001. The adverse result in the year ended March 31, 2002 primarily reflects losses incurred by Stockton Holdings Limited, our 29.4%-owned affiliate. 51 Provision for income taxes Provision for income taxes in the year ended March 31, 2002 was yen32,903 million, compared to the provision of yen25,079 million in the year ended March 31, 2001. The increase of yen7,824 million was primarily due to an increase in income before income taxes. Net income Operating income in the year ended March 31, 2002 was yen73,369 million, compared to operating income of yen57,148 million in the year ended March 31, 2001. Income before income taxes increased by 23.3%, to yen73,039 million, in the year ended March 31, 2002 from the year ended March 31, 2001. Net income increased 17.9%, to yen40,269 million, in the year ended March 31, 2002 from the year ended March 31, 2001. Basic and diluted earnings per share in the year ended March 31, 2002 were yen489.11 and yen467.11, respectively, compared to yen417.77 and yen400.99 in the year ended March 31, 2001. Cash flows Net cash provided by operating activities increased 8.7% to yen257,635 million in the year ended March 31, 2002. While our heightened emphasis on profitability in its marketing operations in the life insurance business resulted in a slowdown in the rate of increase in policy liabilities, an increase of interest on loans along with strong condominium sales, led to the increase in net cash from operating activities. Net cash used in investing activities grew 7.0%, to yen305,711 million in the year ended March 31, 2002, due to a large rise in installment loans made to customers, which offset a rise in proceeds from sales of available-for-sale securities. Net cash provided by financing activities was yen246,116 million in the year ended March 31, 2002, resulting cash and cash equivalents as of March 31, 2002 of yen354,748 million, up yen199,337 million from fiscal 2001. Business Segments The following discussion presents segment financial information on the basis that is regularly used by management for evaluating performance of business segments and deciding how to allocate resources to them. The reporting segments are identified based on the nature of services for domestic operations and on geographic areas for foreign operations. The table below shows the amount of our revenues by business segment for the years ended March 31, 2001 and 2002, as well as the amounts and percentages of the changes from the year ended March 31, 2001 to the year ended March 31, 2002. Year ended March 31, Change -------------------- ----------------------- 2001 2002 Amount Percent ---- ---- ------ ------- (In millions of yen) Domestic business segments Corporate finance.................................. yen 113,113 yen 118,794 yen 5,681 5.0% Equipment operating leases......................... 61,677 67,319 5,642 9.1 Real estate-related finance........................ 24,262 31,582 7,320 30.2 Real estate........................................ 48,438 85,516 37,078 76.5 Life insurance..................................... 157,636 154,296 (3,340) (2.1) Other.............................................. 36,215 49,139 12,924 35.7 ------- ------- ------ ---- Subtotal....................................... 441,341 506,646 65,305 14.8 ------- ------- ------ ---- Overseas business segments The Americas....................................... 79,397 75,195 (4,202) (5.3) Asia and Oceania................................... 48,735 56,677 7,942 16.3 Europe............................................. 15,151 14,716 (435) (2.9) ------- ------- ------ ---- Subtotal....................................... 143,283 146,588 3,305 2.3 ------- ------- ------ ----
52 Year ended March 31, Change -------------------- ----------------------- 2001 2002 Amount Percent ---- ---- ------ ------- (In millions of yen) Total.......................................... 584,624 653,234 68,610 11.7 Reconciliation of segment totals to consolidated amounts 1,525 5,228 3,703 242.8 ------- ------- ------ ---- Total consolidated revenues.................... yen 586,149 yen 658,462 yen 72,313 12.3% ======= ======= ====== ====
The table below shows the amount of our profits by business segment for the years ended March 31, 2001 and 2002, as well as the amounts and percentages of the changes from the year ended March 31, 2001 to the year ended March 31, 2002. Year ended March 31, Change -------------------- ----------------------- 2001 2002 Amount Percent ---- ---- ------ ------- (In millions of yen) Domestic business segments Corporate finance.................................. yen 44,427 yen 48,066 yen 3,639 8.2% Equipment operating leases......................... 11,165 9,906 (1,259) (11.3) Real estate-related finance........................ 1,944 5,654 3,710 190.8 Real estate........................................ (4,604) 5,842 10,446 -- Life insurance..................................... 5,982 5,764 (218) (3.6) Other.............................................. 1,035 4,941 3,906 377.4 ------- ------- ------ Subtotal....................................... 59,949 80,173 20,224 33.7 ------- ------- ------ Overseas business segments The Americas....................................... 8,896 810 (8,086) (90.9) Asia and Oceania................................... 1,203 5,433 4,230 351.6 Europe............................................. 716 600 (116) (16.2) ------- ------- ------ Subtotal....................................... 10,815 6,843 (3,972) (36.7) ------- ------- ------ Total.......................................... 70,764 87,016 16,252 23.0 Reconciliation of segment totals to consolidated amounts (11,528) (13,977) (2,449) -- ------- ------- ------ Total consolidated income before income taxes.. yen 59,236 yen 73,039 yen 13,803 23.3% ======= ======= ======
The table below shows the balance of our segment assets as of March 31, 2001 and 2002, as well as the amounts and percentages of the changes from March 31, 2001 to March 31, 2002. As of March 31, Change -------------------- ----------------------- 2001 2002 Amount Percent ---- ---- ------ ------- (In millions of yen) Domestic business segments Corporate finance.................................. yen 1,889,538 yen 1,960,380 yen 70,842 3.7% Equipment operating leases......................... 134,270 147,444 13,174 9.8 Real estate-related finance........................ 606,801 1,012,896 406,095 66.9 Real estate........................................ 310,340 326,473 16,133 5.2 Life insurance..................................... 543,886 543,738 (148) (0.0) Other.............................................. 284,835 352,433 67,598 23.7 --------- --------- ------- Subtotal....................................... 3,769,670 4,343,364 573,694 15.2 --------- --------- ------- Overseas business segments The Americas....................................... 804,118 794,330 (9,788) (1.2) Asia and Oceania................................... 402,707 435,093 32,386 8.0
53 As of March 31, Change -------------------- ----------------------- 2001 2002 Amount Percent ---- ---- ------ ------- (In millions of yen) Europe............................................. 158,646 113,844 (44,802) (28.2) --------- --------- ------- ---- Subtotal....................................... 1,365,471 1,343,267 (22,204) (1.6) --------- --------- ------- ---- Total.......................................... 5,135,141 5,686,631 551,490 10.7 Reconciliation of segment totals to consolidated amounts .............................................. (105,586) (158,482) (52,896) -- --------- --------- ------- ---- Total consolidated operating assets............ yen 5,029,555 yen 5,528,149 yen 498,594 9.9% ========= ========= =======
Domestic business segments Corporate finance Our domestic corporate finance segment includes principally direct financing leases of equipment, including information-related and office equipment, industrial equipment, commercial services equipment, transportation equipment, and installment loans to commercial and industrial companies (other than for real estate finance). Our domestic corporate finance segment also includes investment securities (other than those held by ORIX Life Insurance Corporation). The activities of this segment are conducted by the Company, ORIX Auto Leasing Corporation, ORIX Alpha Corporation, IFCO Inc. and a few other domestic subsidiaries. Segment profits in the year ended March 31, 2002 increased 8.2%, or yen3,639 million, to yen48,066 million, from the year ended March 31, 2001. Despite cautious selection of new execution in the corporate finance segment due to continued economic stagnation in Japan, the combination of lower interest rates, growth in direct financing leases as a result of acquisitions and increased corporate lending contributed to profit growth. The balance of segment assets as of March 31, 2002 increased 3.7%, or yen70,842 million, to yen1,960,380 million from March 31, 2001 primarily as a result of the acquisition of IFCO Inc. in September 2001, partially offset by the effects of the securitization of approximately yen190 billion of lease receivables in Japan during the year ended March 31, 2002. Equipment operating leases Our domestic equipment operating lease segment includes primarily operating leases of equipment, including measuring equipment, personal computers and transportation equipment. The activities of this segment are conducted mainly by ORIX Rentec (including direct financing leases extended by ORIX Rentec) and ORIX Rent-A-Car Corporation. In the year ended March 31, 2002, we recorded segment profits of yen9,906 million, representing a decrease of 11.3%, or yen1,259 million, from yen11,165 million in the year ended March 31, 2001, due primarily to the slowdown in IT-related business and the resulting lower utilization rates in rentals of measuring and other equipment. However, the operating margin (income before income taxes divided by operating assets) remained at a relatively high level compared with other segments. The balance of segment assets as of March 31, 2002 increased 9.8%, or yen13,174 million, to yen147,444 million from March 31, 2001. Real estate-related finance Our domestic real estate-related finance business includes principally construction and other real estate development loans to construction companies and real estate developers conducted by our Real Estate Finance Headquarters, as well as housing loans to individuals conducted by ORIX Trust and Banking Corporation. Loans to most corporate customers not in the real estate business are included in the corporate finance segment, even where these loans are secured by real estate. Segment profit for the year ended March 31, 2002 amounted to yen5,654 million, representing an increase of yen3,710 million, or 190.8%, compared to the year ended March 31, 2001. Real estate-related finance assets as of March 31, 2002 increased 66.9%, or yen406,095 million, to yen1,012,896 million from March 31, 2001. Helped by acquisitions of quality assets, housing loans to individuals grew strongly, while non-recourse corporate loans and other transactions grew steadily thanks to marketing of products to meet specific customer needs. In addition, approximately yen100 billion of real estate assets for the JREIT were accumulated in the year ended March 31, 2002 and are included in this segment. 54 Real estate Our domestic real estate business consists principally of condominium development and office rental as well as management of hotels, employee dormitories, and training and other facilities. The activities of this segment are currently conducted by ORIX Real Estate Corporation. For the year ended March 31, 2002, the segment recorded a profit of yen5,842 million compared to a loss of yen4,604 million for the year ended March 31, 2001, primarily due to a substantial increase of contribution from condominium development projects compared with the previous year and lower write-downs of long-lived assets. The balance of real estate assets as of March 31, 2002 increased 5.2%, or yen16,133 million, to yen326,473 million from March 31, 2001. Life insurance business Our life insurance business includes direct and agency life insurance sales and related activities. This segment also includes investment in securities in connection with our life insurance operations. The activities in this segment are conducted by ORIX Life Insurance Corporation, a wholly-owned subsidiary of ORIX. Segment profits in the domestic life insurance business in the year ended March 31, 2002 decreased 3.6%, or yen218 million, to yen5,764 million from the year ended March 31, 2001, roughly the same level as the previous fiscal year, as write-downs of securities were required amid deteriorating market conditions. The outstanding balance of segment assets as of March 31, 2002 of yen543,738 million, was essentially unchanged from yen543,886 million at March 31, 2001. Marketable equity securities held in connection with our life insurance business decreased from yen7,167 million as of March 31, 2001 to yen73 million as of March 31, 2002. Other Our other segment includes: o consumer loans by ORIX Credit Corporation and ORIX Club Corporation; o security brokerage by ORIX Securities Corporation; o commodities trading by ORIX Investment Corporation; and o venture capital operations conducted by ORIX Capital Corporation. This segment recorded a strong improvement in profits. Primarily as a result of gains from venture capital investments and growth in the card loan business, profits in the year ended March 31, 2002 increased by 377.4%, to yen4,941 million from yen1,035 million in the year ended March 31, 2001. The outstanding balance of segment assets as of March 31, 2002 increased by 23.7%, or yen67,598 million, to yen352,433 million from the balance as of March 31, 2001, primarily due to an increase in card loans. Overseas business segments The Americas Our activities in the Americas include: o direct financing leases of transportation equipment and construction machinery; o operating leases of real estate; o installment loans to customers in the industrial and real estate sectors; o investment securities; and 55 o commercial mortgage servicing. We conduct our activities in the Americas mainly through ORIX USA Corporation, ORIX Financial Services, Inc., ORIX Real Estate Equities, Inc., and ORIX Capital Markets LLC, our wholly-owned subsidiaries in the United States. Segment profits in the Americas in the year ended March 31, 2002 decreased by yen8,086 million, to yen810 million from the year ended March 31, 2001. The commercial mortgage-backed securities business in the United States and the sale of some real estate contributed to income, but profits dropped sharply due to write-downs of high-yield securities as corporate profits in the telecommunications and other industries worsened, as well as large provisions for our transportation and commercial equipment leasing at ORIX Financial Services, Inc. and restructuring costs related to this subsidiary. The segment assets as of March 31, 2002 amounted to yen794,330 million, a decrease of 1.2%, or yen9,788 million, from March 31, 2001. Asia and Oceania Our activities in Asia and Oceania include: o direct financing leases of information-related, industrial, commercial service and other equipment; o operating leases of measuring and transportation equipment; o housing and card loans to individual customers; o installment loans to real estate and industrial customers; and o investment securities. These activities are conducted in Asia and Oceania mainly through ORIX Asia Limited, ORIX Australia Corporation Limited, ORIX Leasing Malaysia Berhad and PT. ORIX Indonesia Finance. In Asia and Oceania, we recorded yen5,433 million in segment profits during the year ended March 31, 2002, compared with yen1,203 million during the year ended March 31, 2001. While economic conditions throughout the region were sluggish, careful selection of business in the financing lease and installment loan operations combined with foreign currency exchange gains compared with losses of the previous fiscal year to produce the increase in profit. Segment assets as of March 31, 2002 amounted to yen435,093 million, an increase of 8.0%, or yen32,386 million, from March 31, 2001. Europe Our activities in Europe include operating leases of transportation equipment, installment loans to industrial customers and investment securities. These activities are conducted in Europe mainly through ORIX Ireland Limited, ORIX Europe Limited and ORIX Aviation Systems Limited. Segment profits for the year ended March 31, 2002 amounted to yen600 million, primarily reflecting profits from corporate finance services. Segment profits decreased by yen116 million, or 16.2%, however, primarily due to write-downs of securities. Segment assets at March 31, 2002 amounted to yen113,844 million, a decrease of yen44,802 million, or 28.2%, from March 31, 2001. Year Ended March 31, 2001 Compared to Year Ended March 31, 2000 Overview Despite a decrease in direct financing leases, our consolidated operating assets surpassed the yen5 trillion mark for the first time, growing 5.6%, or yen264.7 billion, from the previous year to yen5,029.6 billion. This reflected a sizeable increase in investment securities, as well as increases in installment loans, operating leases and other operating assets. 56 Revenues reflected increases in operating lease revenues, interest on loans and investment securities, and other operating revenues, including revenues from the condominium development business. However, a substantial decline in life insurance premiums and related investment income, together with a decrease in direct financing lease revenue, caused total revenues to decrease by 4.9%, or yen30,364 million, to yen586,149 million. Corresponding to the change in revenue, operating lease depreciation expense and other operating expenses grew, but life insurance costs declined in line with lower revenue. An increase in the number of consolidated companies produced an increase in selling, general and administrative expenses. However, interest expense decreased, due mainly to declines in domestic interest rates. Thus total expenses decreased by 6.1%, or yen34,626 million, to yen529,001 million. As a result, income before income taxes increased by 13.8% to yen59,236 million. Net income increased for the sixth consecutive fiscal year, rising 11.5% to a historical high of yen34,157 million. The tables below contain selected financial data for the years ended March 31, 2000 and 2001, as well as the amounts and percentages of the changes from the year ended March 31, 2000 to the year ended March 31, 2001. Year ended March 31, Change -------------------- ----------------------- 2000 2001 Amount Percent ---- ---- ------ ------- (In millions of yen) Income statement data Total revenues......................................... yen 616,513 yen 586,149 yen (30,364) (4.9)% Direct financing leases........................... 130,798 122,003 (8,795) (6.7) Operating leases.................................. 100,503 113,478 12,975 12.9 Interest on loans and investment securities....... 97,390 109,448 12,058 12.4 Brokerage commissions and gains on investment securities...................................... 19,700 12,055 (7,645) (38.8) Life insurance premiums and related investment income.......................................... 205,829 158,314 (47,515) (23.1) Interest income on deposits....................... 3,884 2,520 (1,364) (35.1) Other operating revenues.......................... 58,409 68,331 9,922 17.0 Total expenses......................................... 563,627 529,001 (34,626) (6.1) --------- -------- --------- Operating income....................................... 52,886 57,148 4,262 8.1 Equity in net income (loss) of and gain (loss) on sales of affiliates................................. (838) 2,088 2,926 -- --------- -------- --------- Income before income taxes............................. 52,048 59,236 7,188 13.8 Net income............................................. 30,642 34,157 3,515 11.5
As of March 31, Change -------------------- ----------------------- 2000 2001 Amount Percent ---- ---- ------ ------- (In millions of yen) Balance sheet data Investment in direct financing leases.................. yen 1,744,953 yen 1,657,709 yen (87,244) (5.0)% Investment in operating leases......................... 397,576 451,171 53,595 13.5 Installment loans...................................... 1,791,439 1,846,511 55,072 3.1 Investment in securities............................... 758,381 942,158 183,777 24.2 Other operating assets................................. 72,472 132,006 59,534 82.1 --------- --------- --------- Operating assets....................................... 4,764,821 5,029,555 264,734 5.6 Allowance for doubtful receivables on direct financing leases and possible loan losses..................... (136,939) (141,077) (4,138) (3.0) Other assets........................................... 713,660 702,833 (10,827) (1.5) --------- --------- --------- Total assets...................................... yen 5,341,542 yen 5,591,311 yen 249,769 4.7% ========= ========= =========
The table below shows the volume of new assets for the years ended March 31, 2000 and 2001, as well as the amounts and percentages of change in these data from the year ended March 31, 57 2000 to the year ended March 31, 2001. Figures for new equipment acquisitions for direct financing leases and operating leases are based on the purchase cost of the equipment. Year ended March 31, Change -------------------- ----------------------- 2000 2001 Amount Percent ---- ---- ------ ------- (In millions of yen) Volume of new assets Direct financing leases: New equipment acquisitions..... yen 905,898 yen 723,330 yen (182,568) (20.2)% Operating leases: New equipment acquisitions............ 101,020 143,158 42,138 41.7 Installment loans: New loans added...................... 807,477 740,639 (66,838) (8.3) Investment in securities: New securities added.......... 333,249 397,218 63,969 19.2 Other operating assets: New assets added................ 70,443 128,984 58,541 83.1
Total revenues Total revenues decreased by 4.9%, or yen30,364 million, to yen586,149 million in the year ended March 31, 2001 compared to yen616,513 million in the year ended March 31, 2000, reflecting principally a decline of yen47,515 million or 23.1%, in life insurance premiums and related investment income and an yen8,795 million decline in revenue from direct financing leases. These declines were partially offset by increases of yen12,975 million in revenue from operating leases, yen12,058 million in interest on loans and investment securities, and yen9,922 million in other operating revenues. Direct financing leases Revenue from direct financing leases decreased 6.7%, to yen122,003 million. This decrease was due to a decline in the balance of investment in direct financing leases, which resulted from the securitization of lease assets and from a decline in the level of new contract issuance compared with the previous fiscal year. The balance of investment in direct financing leases as of March 31, 2001 decreased 5.0%, to yen1,657,709 million. The average interest rates on domestic direct financing leases, calculated on the basis of quarterly balances, decreased slightly to 5.77% in the year ended March 31, 2001 from 5.79% in the year ended March 31, 2000. The average interest rates on overseas direct financing leases, calculated on the basis of quarterly balances, increased to 9.92% in the year ended March 31, 2001 from 9.67% in the year ended March 31, 2000, reflecting an increase in the amount of high-yield contracts. The table below shows the balances as of the dates indicated of investment in direct financing leases by category of equipment, together with the amounts and percentages of the changes between period-ends. As of March 31, Change -------------------- ----------------------- 2000 2001 Amount Percent ---- ---- ------ ------- (In millions of yen) Investment in direct financing leases Information-related and office equipment................ yen 373,281 yen 334,174 yen (39,107) (10.5)% Industrial equipment.................................... 394,581 372,542 (22,039) (5.6) Commercial services equipment........................... 194,809 193,624 (1,185) (0.6) Transportation equipment................................ 398,521 415,246 16,725 4.2 Other................................................... 383,761 342,123 (41,638) (10.8) --------- --------- --------- Total.............................................. yen 1,744,953 yen 1,657,709 yen (87,244) (5.0)% ========= ========= =========
Investment in direct financing leases decreased by 5.0% from March 31, 2000 to March 31, 2001. New investment in leased equipment in the year ended March 31, 2001 amounted to yen723,330 million, a decrease of 20.2% from the year ended March 31, 2000. Robust growth in the automobile leasing business in Japan led to an increase in the balance of transportation equipment leases. However, weak private-sector capital investment and our selective approach to new domestic leasing contracts with emphasis on profitability over asset growth caused the 58 overall balance of domestic leasing contracts to decline. The balance of overseas leasing contracts also decreased owing to the deceleration of economic growth in the United States. During the year ended March 31, 2001, we securitized yen167,802 million of domestic and yen17,064 million of overseas leasing assets. Gains from the securitization of these assets of yen3,722 million were included in direct financing lease revenues. The securitization of these assets, accounted for as off balance sheet assets, contributed to the reduction in the balance of direct financing leases. The balance of direct financing lease assets which were treated as off balance sheet assets amounted to yen311,163 million as of March 31, 2001. The unpaid principal balance outstanding of securitized receivables is excluded from our consolidated balance sheets. See note 9 of the notes to the consolidated financial statements. In addition, we entered into other lease receivable securitization programs that are not accounted for as sale, or not treated as off balance sheet assets. Under these securitization programs, we had long-term debt payables of yen72,210 million under securitized lease assets as of March 31, 2001. Operating leases Revenues from operating leases increased by 12.9%, or yen12,975 million, to yen113,478 million from the year ended March 31, 2000 to the year ended March 31, 2001. The continued strength of IT-related investment in Japan supported strong growth in the rental of measuring and information related equipment. In our office building and commercial real estate leasing business, proactive investments in new properties contributed to overall growth in related leasing revenues. Consequently, revenue from operating leases increased by 12.9%, to yen113,478 million. Gains from the disposition of operating lease assets included in revenues from operating leases were yen7,883 million in the year ended March 31, 2001, compared to yen4,144 million in the year ended March 31, 2000. The table below shows the balances as of the dates indicated of our investment in operating leases by category of equipment under lease, together with the amounts and percentages of the changes between period-ends. As of March 31, Change -------------------- ----------------------- 2000 2001 Amount Percent ---- ---- ------ ------- (In millions of yen) Investment in operating leases Transportation equipment................................ yen 159,548 yen 165,218 yen 5,670 3.6% Measuring equipment and personal computers.............. 58,431 77,808 19,377 33.2 Real estate and other................................... 179,597 208,145 28,548 15.9 ------- ------- ------ Total.............................................. yen 397,576 yen 451,171 yen 53,595 13.5% ======= ======= ======
The balance of our total investment in operating leases increased by 13.5%, or yen53,595 million, from March 31, 2000 to March 31, 2001 due to the steady performance of the measuring equipment and office automation equipment rental businesses. Regarding our real estate leasing business, we also progressively acquired office buildings and commercial use real estate, such as in the Minato Mirai Complex in Yokohama. Although the outstanding balance of transportation equipment, which includes aircraft, declined on a local currency basis due to asset sales and depreciation, the balance increased on a yen basis due to the depreciation of the yen. Interest on loans and investment securities Interest we earn on installment loans and interest-earning securities held in connection with operations other than life insurance is reflected in our consolidated statements of income as interest on loans and investment securities. Revenues from interest on loans and investment securities increased by 12.4%, or yen12,058 million, from the year ended March 31, 2000 to the year ended March 31, 2001, due to an increase in the balance of high-yield card loans. An increase in investment in US corporate bonds also contributed to the increase. The average interest rate earned on domestic loans, calculated on the basis of quarterly balances, increased to 4.19% in the year ended March 31, 2001 from 3.97% in the year ended March 31, 2000, primarily due to an increase in the balance of high-yield card loans. The average interest rate earned on domestic investment securities, calculated on the basis of quarterly balances, decreased to 2.68% in the year ended March 31, 2001 from 2.86% in the year ended March 31, 2000, reflecting a decline in domestic market interest rates. The average interest rate earned on overseas loans, 59 calculated on the basis of quarterly balances, decreased to 9.29% in the year ended March 31, 2001 from 9.35% in the year ended March 31, 2000, primarily due to a reduction in high-yield loans. The average interest rate earned on overseas investment securities, calculated on the basis of quarterly balances, increased to 10.03% in the year ended March 31, 2001 from 8.84% in the year ended March 31, 2000, primarily reflecting increased investment in high-yielding commercial mortgage-backed securities and corporate debt securities in the US. The table below shows the balances as of the dates indicated of our installment loans to domestic and foreign borrowers, categorized in the case of domestic borrowers by type of consumer or commercial loan, together with the amounts and percentages of the changes between period-ends. A small portion of these installment loans is held in connection with our life insurance operations, and income from these loans is reflected in our consolidated statements of income as life insurance premiums and related investment income. As of March 31, Change -------------------- ----------------------- 2000 2001 Amount Percent ---- ---- ------ ------- (In millions of yen) Installment loans Domestic consumer Housing loans........................................ yen 396,748 yen 392,896 yen (3,852) (1.0)% Card loans........................................... 121,272 181,215 59,943 49.4 Other................................................ 56,461 43,959 (12,502) (22.1) --------- --------- ------ Subtotal........................................... 574,481 618,070 43,589 7.6 Domestic commercial Real estate-related companies........................ 203,537 222,818 19,281 9.5 Commercial and industrial companies.................. 657,355 627,252 (30,103) (4.6) --------- --------- ------ Subtotal........................................... 860,892 850,070 (10,822) (1.3) --------- --------- ------ Foreign commercial, industrial and other borrowers...... 337,754 357,446 19,692 5.8 Direct loan origination costs, net...................... 18,312 20,925 2,613 14.3 --------- --------- ------ Total.............................................. yen 1,791,439 yen 1,846,511 yen 55,072 3.1% ========= ========= ======
The total balance of installment loans increased by 3.1%, to yen1,846,511 million, from March 31, 2000 to March 31, 2001. In the domestic retail market, the loan balance increased as a result of expansion of our card loan business. In the year ended March 31, 2001, we securitized yen27,563 million of installment loans. Gains from securitization of yen1,006 million were included in interest on installment loans and investment securities. The balance of installment loans treated as off balance sheet assets amounted to yen41,085 million as of March 31, 2001. The balance of our investments in securities other than in connection with our life insurance operations increased from yen341,236 million at March 31, 2000 to yen405,021 million at March 31, 2001. Fixed income securities increased by yen52,825 million, principally reflecting increased investment in commercial mortgage-backed securities in the US. Brokerage commissions and gains on investment securities All non-interest income and losses (other than foreign currency transaction gain or loss) which we recognize on securities held in connection with operations other than life insurance are reflected in our consolidated statements of income as brokerage commissions and gains on investment securities. Brokerage commissions and gains on investment securities decreased by yen7,645 million, or 38.8%, in the year ended March 31, 2001 to yen12,055 million. ORIX Securities Corporation generates all of the brokerage commissions accounted for in this segment. Although the online trading business of ORIX Securities Corporation grew, the weakness of the Japanese stock market inhibited growth in the overall level of brokerage commissions. Revenues from gains on investment securities decreased in the year ended March 31, 2001, reflecting reduced sales of equity securities in Japan and overseas. At March 31, 2001, gross unrealized gains on available-for-sale securities, including those held in connection with our life insurance operations, were yen68,037 million. Gross unrealized gains on equity securities decreased by 60 yen36,932 million from the year ended March 31, 2000 to the year ended March 31, 2001. Due to the weakness of the domestic equities market, unrealized gains on IT-related equity securities at March 31, 2001 declined. At March 31, 2001, gross unrealized losses on available-for-sale securities, including those held in connection with our life insurance operations, were yen11,018 million. Life insurance premiums and related investment income Life insurance premiums and related investment income decreased by yen47,515 million, or 23.1%, to yen158,314 million and life insurance costs fell approximately yen50.0 billion in the year ended March 31, 2001. These declines were due to our policy of emphasizing profitability as we devoted considerable energy to the marketing of such products as term and whole life insurance that produce lower revenues but higher margins. Interest income on deposits Interest income on deposits not included in other categories of revenues includes principally interest on bank deposits. Interest income on deposits in the year ended March 31, 2001 decreased by yen1,364 million, or 35.1%, from the year ended March 31, 2000, principally as a result of a lower average balance of bank deposits. Other operating revenues Other operating revenues are generated from various businesses, such as the development and sales of residential apartments, sales of commodities funds and servicing of receivables. Other operating revenues increased by yen9,922 million, or 17.0%, from the year ended March 31, 2000 to the year ended March 31, 2001, principally as a result of growth in our condominium development business and growth in commission income from our servicer business and other businesses. Total expenses Total expenses decreased by 6.1%, to yen529,001 million, from the year ended March 31, 2000 to the year ended March 31, 2001. Interest expense decreased in the year ended March 31, 2001 mainly due to a decline in domestic market interest rates. Life insurance costs decreased 25.8%, corresponding to the decrease in life insurance premium revenue. Other operating expenses increased 13.8% from the year ended March 31, 2000 to the year ended March 31, 2001, corresponding to the increase in revenue from the condominium development business. We recognized a write-down of securities in the amount of yen10,848 million in the year ended March 31, 2001. Interest expense Interest expense was yen109,289 million in the year ended March 31, 2001, a decrease of 5.0% from the year ended March 31, 2000. The decrease in interest expense principally reflects the decline in domestic interest rates. In addition, as a result of effective control of market risks, such as interest rate and liquidity risks by using the asset-liability management system, we were able to respond quickly to changing market environments. The ratio of our funding directly from capital markets, interest expense related to which was significantly lower than traditional bank borrowing, were 56.8% and 56.7% at March 31, 2000 and 2001, respectively. See "--Funding and Liquidity--Diversification of Funding Sources". Notes issued under our medium-term note program increased by yen21,157 million from yen328,221 million at March 31, 2000 to yen349,378 million at March 31, 2001, the amount of issued and outstanding commercial paper decreased from yen977,436 million at March 31, 2000 to yen914,611 million at March 31, 2001 reflecting the decrease of commercial paper issued overseas, and long-term asset backed securities increased from yen56,034 million at March 31, 2000 to yen72,210 million at March 31, 2001. The average interest rates on our domestic short-term and long-term debt, calculated on the basis of quarterly balances, decreased from 1.81% in the year ended March 31, 2000 to 1.64% in the year ended March 31, 2001. The average interest rates on our short-term and long-term overseas debt, calculated on the basis of quarterly balances, increased from 6.39% in the year ended March 31, 2000 to 6.81% in the year ended March 31, 2001. 61 Depreciation on operating leases Depreciation on operating leases increased to yen68,316 million in the year ended March 31, 2001, an increase of 12.5% from the level in the year ended March 31, 2000. This increase was principally due to acquisitions of assets. Life insurance costs In line with a decrease in life insurance premiums, life insurance costs decreased by yen49,955 million, or 25.8%, to yen143,709 million from the year ended March 31, 2000 to the year ended March 31, 2001. We use the net level premium method to evaluate our future life insurance policy liabilities. This method requires the preliminary calculation of fund management yields, contract withdrawal/ discontinuance rates, mortality rates, and other calculations at the time an insurance contract is signed. The projected yield figures used in this calculation were 3.3% in the year ended March 31, 2000 and 3.0% in the year ended March 31, 2001. Other operating expenses Other operating expenses principally comprise the cost of sales for condominium marketing operations. Other operating expenses increased by yen5,278 million or 13.8% from the year ended March 31, 2000 to the year ended March 31, 2001, reflecting increased condominium sales. Selling, general and administrative expenses Approximately half of selling, general and administrative expenses consist of wages and other labor-related costs, while the remaining half consists principally of general overhead expenses, such as rent for office spaces, communication expenses and travel expenses. Selling, general and administrative expenses in the year ended March 31, 2001 were yen101,156 million, an increase of 11.2% from the year ended March 31, 2000. This increase in expenses primarily reflects advertising and other expenses increased as a result of the expansion of the retail card loan business. In addition, as the number of consolidated companies increased in the preceding year, these companies recognized expenses on a full-year basis. Provision for doubtful receivables and possible loan losses We make provisions for doubtful receivables and possible loan losses for direct financing leases and installment loans. Provision for doubtful receivables and possible loan losses in fiscal 2001 was yen44,584 million, a decrease of 2.2% from the corresponding amount in the year ended March 31, 2000. The table below shows the calculation of the provision for doubtful receivables and possible loan losses for the year ended March 31, 2000 and the year ended March 31, 2001. The "Other" category includes foreign currency translation adjustments and the effect of an acquisition. Year ended March 31, ---------------------------- 2000 2001 ------------ ------------ (In millions of yen) Balance at beginning of period.................... yen 132,606 yen 136,939 Provisions charged to income................... 45,573 44,584 Charge-offs (net) Gross Charge-offs.............................. (37,697) (46,845) Recoveries..................................... 354 539 ------------ ------------ Charge-offs (net).............................. (37,343) (46,306) Other.......................................... (3,897) 5,860 ------------ ------------ Balance at end of period.......................... yen 136,939 yen 141,077 ============ ============ Allowance for doubtful receivables on direct financing leases and possible loan losses A breakdown of the allowance for doubtful receivables and possible loan losses as of March 31, 2001 is shown below. The "Other" category includes foreign currency translation adjustments and the effect of an acquisition. 62 Year ended March 31, 2001 ------------------------------------------------------- Installment Loans ------------------------------------------------------- Direct FASB financing Statement leases General No. 114 Total ------------ ----------- ----------- ------------ (In millions of yen) Balance at beginning of the period...................... yen 35,783 yen 49,365 yen 51,791 yen 136,939 Provisions charged to income......................... 22,619 16,417 5,548 44,584 Charge-offs (net).................................... (20,679) (14,442) (11,185) (46,306) Other................................................ 3,162 1,815 883 5,860 ----------- ----------- ----------- ------------ Balance at end of the period............................ yen 40,885 yen 53,155 yen 47,037 yen 141,077 =========== =========== =========== ============
In the year ended March 31, 2001, provisions charged to income were yen44,584 million and direct financing leases and loans totaling yen46,306 million were written off. As of March 31, 2001, the allowance was yen141,077 million. The ratio of this figure to the balance of investment in direct financing leases and installment loans was 4.0% as of March 31, 2001, compared to 3.9% as of March 31, 2000. The recorded investment in loans considered impaired under the definition contained in FASB Statement 114 was yen125,921 million as of March 31, 2000 and yen120,090 million as of March 31, 2001. The principal reason for the decline was a charge-off of impaired loans in the amount of yen11,185 million. We determined that a valuation allowance was required for impaired loans which had outstanding balances of yen83,408 million as of March 31, 2000 and yen73,636 million as of March 31, 2001. We recorded a valuation allowance, which is the required valuation allowance less the value of the collateral from impaired loans, calculated under FASB Statement 114, in the amount of yen51,791 million as of March 31, 2000 and yen47,037 million as of March 31, 2001. FASB Statement 114 requires that impaired loans 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 may be measured based on the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance. Some loans, such as large groups of smaller-balance homogeneous loans (e.g., individual housing loans), and lease receivables are exempt from the provisions of FASB Statement 114. However, provisions for these loans and lease receivables are reflected in the general provisions under installment loans and investment in direct financing leases. The average recorded investments in impaired loans were yen128,658 million for the year ended March 31, 2000 and yen123,715 million for the year ended March 31, 2001. We recognized interest income on impaired loans of yen1,429 million for the year ended March 31, 2000 and yen1,414 million for the year ended March 31, 2001. Write-downs of long-lived assets During the year ended March 31, 2001, in accordance with FASB Statement 121, we wrote down yen4,090 million for some real estate development projects included in "investment in operating leases", "other operating assets" and "advances" in the consolidated balance sheets. Write-downs of securities Our current policy for determining whether declines in the market value of available-for-sale securities are other than temporary places more emphasis on the length of time that the market value has been below the carrying value and less emphasis on the business reasons for owning the securities. Our policy primarily reflects the continued poor performance of Japanese equity markets and decreasing cross-shareholdings by Japanese companies in general. Predictions in prior years that market conditions would improve have proved to be inaccurate and market prices of some of our stocks continued to be below their acquisition costs for the year ended March 31, 2001. We view this as a strong indication that the declines in the market value of these available-for-sale securities are other than temporary. Although we have not abandoned our practice of holding 63 securities for business relationship purposes, Japanese companies in general are increasingly willing to sell securities previously held for business relationship purposes. Under our current policy, we would, in principle, charge against income losses related to securities if o the market price for a security has for more than one year been below our acquisition cost, or below current carrying value if the price of the security has been adjusted in the past; or o there has been an issuer default or similar event. However, if we have a significant long-term business relationship with an entity, we would also consider the probability of the market value recovering within the following twelve months. As part of this review, we would consider: o the entity's operating results; o the entity's net asset value; o the entity's future performance forecast; and o general market conditions. If we believe, based on this review, that the market value of a security may realistically be expected to recover, the loss for that security will continue to be classified as temporary. Temporary declines in market value are recorded in other comprehensive income (loss), net of applicable income taxes. If after an additional twelve months, the market value for that security is still significantly below the acquisition cost, we would classify the loss for that security as other than temporary and charge the decline in market value against income. Following this policy, in the year ended March 31, 2001, we charged yen10,848 million to income for declines in market value classified as other than temporary. In the year ended March 31, 2000, we charged yen12,297 million to income for declines in market value classified as other than temporary. Foreign currency transaction loss (gain), net We recognized a foreign currency transaction loss in the amount of yen3,429 million in the year ended March 31, 2001, compared to a gain of yen839 million in the year ended March 31, 2000. This loss principally resulted from the depreciation of the Indonesia Rupiah against the US dollar, as a subsidiary procured a portion of our funding through dollar-denominated loans. Equity in net income (loss) of and gain (loss) on sales of affiliates Equity in net income (loss) of and gain (loss) on sales of affiliates in the year ended March 31, 2001 was a profit of yen2,088 million compared to a loss of yen838 million in fiscal 2000. The gain in the year ended March 31, 2001 was improved from the loss in the year ended March 31, 2000, because loss from the sale of unprofitable affiliates was recognized in the previous year. The income in the year ended March 31, 2001 also reflects favorable financial performance of most domestic and foreign affiliates. Provision for income taxes Provision for income taxes in the year ended March 31, 2001 was yen25,079 million, compared to the provision of yen21,406 million in the year ended March 31, 2000. The increase of yen3,673 million was primarily due to an increase in income before income taxes. Net income Operating income was yen57,148 million, compared to the operating income of yen52,886 million in the year ended March 31, 2000. Income before income taxes increased by 13.8% to yen59,236 million in the year ended March 31, 64 2001. Net income increased 11.5%, to yen34,157 million from the year ended March 31, 2000 to the year ended March 31, 2001. Basic and diluted earnings per share in the year ended March 31, 2001 were yen418 and yen401 respectively, compared to yen385 and yen377 in the year ended March 31, 2000. Cash flows Net cash provided by operating activities decreased by yen81,509 million, or 25.6%, from the year ended March 31, 2000 to the year ended March 31, 2001, to a total of yen237,122 million. This decrease was substantially due to our life insurance operations where most of the premiums are received in cash, while the largest related expense, policy benefit payments, requires cash outlays that are spread over a number of years. Net cash used in investing activities was yen285,652 million in the year ended March 31, 2001, approximately the same level as in the previous fiscal year. While the rise in investment in lease equipment assets was less than in the previous fiscal year, greater funds were required for insurance business-related securities investments as well as for the JREIT-related and other real estate acquisitions. Net cash used in financing activities was yen64,620 million in the year ended March 31, 2001, compared to net cash used in financing activities of yen6,053 million in the year ended March 31, 2000. Cash and cash equivalents decreased 41.6% from March 31, 2000 to March 31, 2001. Business Segments The following discussion presents segment financial information on the basis that is regularly used by management for evaluating performance of business segments and deciding how to allocate resources to them. The reporting segments are identified based on the nature of services for domestic operations and on geographic areas for foreign operations. The table below shows the amount of our revenues by business segment for the years ended March 31, 2000 and 2001, as well as the amounts and percentages of the changes from the year ended March 31, 2000 to the year ended March 31, 2001. Year ended March 31, Change -------------------------- -------------------------- 2000 2001 Amount Percent ----------- ----------- ----------- ----------- (In millions of yen) Domestic business segments Corporate finance.................................... yen 121,415 yen 113,113 yen (8,302) (6.8)% Equipment operating leases........................... 53,000 61,677 8,677 16.4 Real estate-related finance.......................... 17,294 24,262 6,968 40.3 Real estate.......................................... 44,873 48,438 3,565 7.9 Life insurance....................................... 204,746 157,636 (47,110) (23.0) Other................................................ 30,882 36,215 5,333 17.3 ----------- ----------- ----------- Subtotal........................................... 472,210 441,341 (30,869) (6.5) ----------- ----------- ----------- Overseas business segments The Americas......................................... 74,525 79,397 4,872 6.5 Asia and Oceania..................................... 49,739 48,735 (1,004) (2.0) Europe............................................... 18,260 15,151 (3,109) (17.0) ----------- ----------- ----------- Subtotal........................................... 142,524 143,283 759 0.5 ----------- ----------- ----------- Total.............................................. 614,734 584,624 (30,110) (4.9) Reconciliation of segment totals to consolidated amounts. 1,779 1,525 (254) (14.3) ----------- ----------- ----------- Total consolidated revenues........................ yen 616,513 yen 586,149 yen (30,364) (4.9)% =========== =========== ===========
The table below shows the amount of our profits by business segment for the years ended March 31, 2000 and 2001, as well as the amounts and percentages of the changes from the year ended March 31, 2000 to the year ended March 31, 2001. 65 Year ended March 31, Change -------------------------- -------------------------- 2000 2001 Amount Percent ----------- ----------- ----------- ----------- (In millions of yen) Domestic business segments Corporate finance...................................... yen 40,918 yen 44,427 yen 3,509 8.6% Equipment operating leases............................. 7,823 11,165 3,342 42.7 Real estate-related finance............................ (3,415) 1,944 5,359 -- Real estate............................................ (8,241) (4,604) 3,637 -- Life insurance......................................... 5,455 5,982 527 9.7 Other.................................................. (1,036) 1,035 2,071 -- ----------- ----------- ----------- Subtotal............................................. 41,504 59,949 18,445 44.4 ----------- ----------- ----------- Overseas business segments The Americas........................................... 18,775 8,896 (9,879) (52.6) Asia and Oceania....................................... 3,371 1,203 (2,168) (64.3) Europe................................................. 278 716 438 157.6 ----------- ----------- ----------- Subtotal............................................. 22,424 10,815 (11,609) (51.8) ----------- ----------- ----------- Total................................................ 63,928 70,764 6,836 10.7 Reconciliation of segment totals to consolidated amounts. (11,880) (11,528) 352 -- ----------- ----------- ----------- Total consolidated income before income taxes........ yen 52,048 yen 59,236 yen 7,188 13.8% =========== =========== ===========
The table below shows the amount as of the dates indicated of our assets by business segment, as well as the amounts and percentages of the changes between period-ends. Year ended March 31, Change -------------------------- -------------------------- 2001 2002 Amount Percent ----------- ----------- ----------- ----------- (In millions of yen) Domestic business segments Corporate finance.................................... yen 1,968,590 yen 1,889,538 yen (79,052) (4.0)% Equipment operating leases........................... 113,389 134,270 20,881 18.4 Real estate-related finance.......................... 597,274 606,801 9,527 1.6 Real estate.......................................... 276,494 310,340 33,846 12.2 Life insurance....................................... 425,335 543,886 118,551 27.9 Other................................................ 242,280 284,835 42,555 17.6 ----------- ----------- ----------- Subtotal........................................... 3,623,362 3,769,670 146,308 4.0 ----------- ----------- ----------- Overseas business segments The Americas......................................... 691,403 804,118 112,715 16.3 Asia and Oceania..................................... 369,540 402,707 33,167 9.0 Europe............................................... 159,608 158,646 (962) (0.6) ----------- ----------- ----------- Subtotal........................................... 1,220,551 1,365,471 144,920 11.9 ----------- ----------- ----------- Total.............................................. 4,843,913 5,135,141 291,228 6.0 Reconciliation of segment totals to consolidated amounts .............................................. (79,092) (105,586) (26,494) -- ----------- ----------- ----------- Total consolidated operating assets................ yen 4,764,821 yen 5,029,555 yen 264,734 5.6% =========== =========== ===========
Domestic business segments Corporate finance In the domestic corporate finance segment, segment profit increased 8.6%, or yen3,509 million, from the year ended March 31, 2000 to yen44,427 million in the year ended March 31, 2001. The balance of segment assets declined 4.0%, or yen79,052 million, from March 31, 2000 to yen1,889.5 billion as of March 31, 2001. The increase in segment profits principally reflects a rise in automobile leasing revenue and a decline in interest expense and provision for doubtful receivables and possible loan losses. 66 The balance of domestic direct financing leases declined due to the effects of the securitization in direct finance lease assets initiated during the year ended March 31, 2001 of yen167,802 million and a decline in the level of new contracts. The balance of domestic loans included in our corporate finance segment decreased in the period due to the impact of the recession in Japan. We have introduced more stringent screening and is more selective in new loan transactions. Equipment operating leases In the year ended March 31, 2001, we recorded yen11,165 million of profit in this segment. This represents an increase of 42.7% from segment profit of yen7,823 million in the year ended March 31, 2000. The balance of segment assets increased by 18.4%, or yen20,881 million, from March 31, 2000 to yen134,270 million as of March 31, 2001. Continued strength in IT-related investment in Japan supported strong growth in demand for measuring instrument leasing and information-related equipment and higher utilization rates. Our rent-a-car business also continued our steady growth. Real estate-related finance In the year ended March 31, 2001, segment profit amounted to yen1,944 million, compared to a loss of yen3,415 million in the year ended March 31, 2000. Real estate-related finance assets increased 1.6%, or yen9,527 million, from March 31, 2000 to yen606,801 million as of March 31, 2001. Steady growth in investment in and resale of real estate-related distressed assets and the development of new corporate sector business such as non-recourse loans led to a significant increase in earnings. ORIX Trust and Banking recorded strong performance providing individuals with housing loans. Real estate In the year ended March 31, 2001, the real estate segment loss was yen4,604 million compared to a loss of yen8,241 million in the year ended March 31, 2000. Because of the continuing decline in land prices in Japan, we proceeded with sales of old properties and consequently recorded losses on such sales as well as recorded valuation losses on long-lived assets. For a discussion of write-downs of long lived real estate, see "--Write-downs of long lived assets". However, such losses were offset by steady growth of the condominium development business related to the "Sanctus" series of condominiums and other developments. Owing to our active acquisition of profitable rental properties, the balance of real estate assets increased 12.2%, or yen33,846 million, from March 31, 2000 to yen310,340 million as of March 31, 2001. Life insurance business Segment profits in the domestic life insurance business increased 9.7%, or yen527 million, from the year ended March 31, 2000 to yen5,982 million in fiscal 2001. Due to our shift in strategy from emphasizing volume to profitability, the weight of term, life-long insurance and other relatively profitable products has increased. The outstanding balance of segment assets increased 27.9%, or yen118,551 million, from March 31, 2000 to yen543,886 million as of March 31, 2001. The growth in segment assets reflected strong demand for our "ORIX Direct" policies. Marketable equity securities held in connection with our life insurance business decreased from yen13,243 million as of March 31, 2000 to yen7,167 million as of March 31, 2001. Other The other segment's results improved from a segment loss of yen1,036 million in the year ended March 31, 2000 to a gain of yen1,035 million in the year ended March 31, 2001. The other segment has increased due to such businesses as the card loan business and futures investments. The outstanding balance of segment assets increased 17.6%, or yen42,555 million, from March 31, 2000 to yen284,835 million as of March 31, 2001. 67 Overseas business segments The Americas Segment profit in the Americas decreased 52.6%, or yen9,879 million, from the year ended March 31, 2000 to yen8,896 million in the year ended March 31, 2001. Commercial mortgage-backed loan securitization operations continued to make a major contribution to performances in the Americas. However, the economic slowdown in the United States adversely affected demand for finance leasing of transportation construction and other equipment, and also gave rise to a large increase in provisions for doubtful receivables. In addition, a decline in market prices for certain debt securities in the United States resulted in a loss on the revaluation of such securities. The segment assets amounted to yen804,118 million as of March 31, 2001, an increase of 16.3% or yen112,715 million, from March 31, 2000 reflecting the influence of the depreciation of the yen. Asia and Oceania In Asia and Oceania, we recorded a yen1,203 million segment profit during fiscal 2001, compared with a yen3,371 million profit in the year ended March 31, 2000. Segment assets amounted to yen402,707 million as of March 31, 2001, an increase of 9.0%, or yen33,167 million, from March 31, 2000. The foreign exchange loss incurred as a result of the sharp depreciation of the Indonesian Rupiah contributed to a decline in segment earnings. Of segment assets, yen325,364 million as of March 31, 2001 was invested in Asia. These assets included yen171,484 million of shipping loans secured by first mortgages. Substantially all non-shipping assets in Asia are denominated in local currencies. Europe Segment profit amounted to yen716 million in the year ended March 31, 2001, an increase of yen438 million, or 157.6%, from fiscal 2000. Earnings grew as a result of strong performance of investment in securities. Segment assets amounted to yen158,646 million at March 31, 2001, a decrease of yen962 million, or 0.6%, from March 31, 2000. Fewer new contracts caused a decline in the outstanding balance. Liquidity and Capital Resources Overview We continually require funds for working capital and to grow our business. We manage our funding and liquidity by monitoring the relative maturities of assets and liabilities and by borrowing funds, primarily in the Japanese financial and capital markets but also in significant amounts overseas. Funds raised are used to fund asset growth and to meet debt obligations and other commitments, on a timely and cost-effective basis. We place a priority on the ready and rapid access to funding in order to be able to respond rapidly to client and transactional requirements. By monitoring cash flow requirements from sales and marketing activities, and the funding supply and demand balance, we seek to ensure timely and ample access to funding. Our primary sources of funding are borrowings from commercial banks and other institutional lenders, commercial paper, medium term notes, straight bonds, asset-backed securitizations and other term debt. A downgrade in our credit ratings could result in an increase in our interest expense and could have an adverse impact on our ability to access the commercial paper market or the public and private debt markets, which could have an adverse effect on our financial position and liquidity. Even if we are unable to access these markets on acceptable terms, we have access to other sources of liquidity, including bank borrowings, cash flows from our operations and sales of our assets. We cannot be sure, however, that these other sources will be adequate if our credit ratings are downgraded or other adverse conditions arise. The tables below show the maturities of contractual cash obligations and other commercial commitments. 68 Payments due by period (In millions of yen) ---------------------------------------------------------------------------- Less than 1 Total year 1-3 years 4-5 years After 5 years ----- ------------ --------- --------- ------------- Contractual cash obligations Long-term debt yen 2,809,861 yen 677,095 yen 1,223,075 yen 767,506 yen 142,185 Operating leases 5,642 1,192 2,006 1,631 813 Unconditional purchase obligations 6,032 6,032 -- -- -- --------- ------- --------- ------- ------- Total contractual cash obligations yen 2,821,535 yen 684,319 yen 1,225,081 yen 769,137 yen 142,998 ========= ======= ========= ======= =======
Amount of commitment expiration per period (In millions of yen) ---------------------------------------------------------------------------- Less than 1 Total year 1-3 years 4-5 years After 5 years ----- ------------ --------- --------- ------------- Other commercial commitments Guarantees yen 42,775 yen 11,632 yen 18,760 yen 6,902 yen 5,481 Committed credit lines and other 142,771 19,403 32,350 28,370 62,648 ------- ------ ------ ------ ------ Total commercial commitments yen 185,546 yen 31,035 yen 51,110 yen 35,272 yen 68,129 ======= ====== ====== ====== ======
We continue to rely significantly on short-term funding from Japanese commercial banks. Only a portion of this funding is provided under committed facilities. We also rely on the capital markets as a funding source, including the commercial paper and corporate bond markets. We are taking steps to reduce refinancing risks by diversifying our funding sources and increasing committed credit facilities from Japanese banks and foreign banks. Despite these efforts, committed credit facilities are subject to financial and other covenants and conditions to drawdown, including minimum net worth requirements, and the risk that we will be unable to roll over other short-term funding remains. We have securitized and sold to investors certain lease receivables, loan receivables and investment securities. In the securitization process, the assets to be securitized are sold to special purpose entities ("SPEs"), which issue asset-backed securities to the investors. SPEs may be organized as trusts, partnerships, or corporations. We use SPEs in a manner consistent with conventional practices in the securitization industry, the purpose of which is to isolate the receivables for the benefit of investors. The use of SPEs enables us to access the highly liquid and efficient markets for the sale of these types of financial assets when they are packaged in securitized forms. For the assets that are securitized and removed from our consolidated balance sheets, the investors and SPEs have no recourse to our other assets for failure of debtors to pay. In addition, we do not make any guarantees to investors for payment in such transactions. Therefore, when securitizing assets in this manner, we do not have any exposed assets or contingent liabilities other than those recognized on our consolidated balance sheets. Diversification of funding sources We are improving our funding costs and diversifying our funding sources by taking advantage of the opportunities afforded by financial deregulation and the development of new financial markets in Japan. We have increased the share of our direct funding from the capital markets in recent years through debt offerings and reduced our reliance on borrowings from banks in recent periods. The balance of capital market instruments as a percentage of our total debt was 52.7% at March 31, 2002 and 56.7% at March 31, 2001. Japanese finance companies were allowed for the first time to issue commercial paper in the domestic market in June 1993. In the following month, we became the first finance company to issue domestic commercial paper. From April 1, 1998, we have been able to issue commercial paper directly to investors without the use of dealers. While the proceeds from the issuance of commercial paper and bonds previously were not permitted to be used for any 69 loan operations, in May 1999 new legislation eliminated this restriction for some qualifying lenders. Because we are a qualifying lender, we are able to issue commercial paper and bonds and use the proceeds without restriction. Prior to the establishment of the current regulatory regime for asset-backed securities, we issued Japan's first asset-backed securities of leasing assets in January 1992. Then, in June 1992, Japan took a significant deregulatory step in enacting the so-called Business Asset Securitization Law, which came into effect in June 1993 and facilitated the securitization of leasing and installment sale assets. Since the Act was revised to allow asset-backed commercial paper to be issued in the domestic market in 1996 we have issued asset-backed commercial paper, backed by lease receivables. As of March 31, 2002, our outstanding balance of unsecured bonds was yen862,688 million. We have also sought to diversify our funding sources by developing overall financial relationships with a number of banks overseas and through securities issuances overseas, principally to fund overseas operations. Since 1992, we have established several euro medium-term note programs for various ORIX entities. These programs have been integrated into one multi-issuer program which includes as issuers ORIX Corporation and a number of our overseas subsidiaries. This multi-issuer program has a limit of US$5 billion, and allows these ORIX entities direct access to capital markets. The issuance of notes is determined by the funding requirements of the overseas subsidiaries and is controlled by our Treasury Department. ORIX Financial Services has also issued medium-term notes under a separate program within the United States and Canada. As of March 31, 2002, the balance of notes issued under these medium-term note programs stood at yen324,369 million. In September 1998, we listed our shares on the New York Stock Exchange ("NYSE"), which has facilitated raising funds through the issuance of stock outside Japan since that time. In October 1999, we became the first Japan-based company to make a global offering involving the simultaneous issue of new shares and convertible notes registered with the SEC and listed on the NYSE, issuing 3.3 million new shares and yen40 billion (principal amount) in convertible bonds due 2005. In December 2001, we made another dual offering of new shares and convertible bonds, issuing 1.8 million new shares and yen28 billion (principal amount) in convertible bonds due 2007. On June 14, 2002, we issued $1,022 million of zero coupon-senior notes with stock acquisition rights due on June 14, 2022 and received proceeds of approximately $400 million. We intend to use the proceeds for general corporate purposes, including financing the activity of our subsidiaries, working capital and repayment of existing debt. Short-term debt In order to promote stability in borrowings, we shifted a greater portion of our debt from short-term to long-term. The balance of our short-term debt at March 31, 2002 was yen1,644,462 million, representing 36.9% of total debt, i.e., the sum of long-term debt and short-term debt, at March 31, 2002, compared to the level of 40.1% at March 31, 2001. The balance of short-term debt increased by yen82,390 million, or by 5.3%, from March 31, 2001 to March 31, 2002; however, the percentage of short-term debt to total debt declined by 3.2 percentage points in the same period. Commercial paper at March 31, 2002 increased by yen98,321 million, or 10.8%, from March 31, 2001. Other short-term debt, consisted principally of borrowings from commercial banks, decreased by yen15,931 million, or 2.5%, from March 31, 2001 to March 31, 2002. Long-term debt Long-term debt at March 31, 2002 was yen2,809,861 million, representing 63.1% of total debt, i.e., the sum of long-term debt and short-term debt, compared to the level of 59.9% at March 31, 2001, reflecting a shift to the long-term funding of our liquidity requirements. The balance of long-term debt increased by yen479,702 million, or 20.6%, from March 31, 2001 to March 31, 2002. Most of this long-term debt consisted of borrowings from Japanese banks as well as insurance companies and other institutional lenders in Japan. Long-term debt also included borrowings from foreign institutional lenders, unsecured bonds of yen862,688 million and medium-term notes of yen324,369 million. The balance of asset-backed securities was yen40,731 million at March 31, 2002. Some bank loan agreements provide that we are required to obtain the consent of lenders before effecting any merger or any increase or decrease of our capital, issuing any bonds or selling or transferring any part of our business. As is typical in the Japanese 70 market, loan agreements relating to short-term and long-term debt from Japanese banks and some insurance companies provide that we may be required to pledge our assets as collateral against these borrowings upon request by our lenders if it is reasonably necessary for them to secure their claims. To date, we have not received any requests of this kind from our lenders. In addition, our debt agreements with some banks provide that these banks have the right to offset cash deposited against any short-term or long-term debt that becomes due, and in case of default and some other specified events, against all other debt payable to the bank. Whether these provisions can be enforced will depend upon the factual circumstances. As of March 31, 2002, we paid interest at fixed rates on approximately 61.3% of our long-term debt. The rest of our long-term debt incurred interest at floating rates, principally based on LIBOR. We have entered into various types of interest rate contracts in managing our interest rate risk. Under interest rate swap agreements, we agree with other parties to exchange, at specified intervals, the difference between fixed-rate and floating-rate interest amounts calculated by reference to an agreed notional amount. Interest rate swaps with notional principal amounts of yen482,130 million at March 31, 2002 were used for hedging purposes as part of our asset-liability management. We have also entered into foreign exchange forward contracts and foreign currency swap agreements in managing foreign exchange risk. At March 31, 2002, we used foreign exchange forward contracts and foreign currency swap agreements with notional principal amounts of yen481,169 million which were principally used to hedge the risk of change in foreign currency exchange rates. Some foreign currency swap agreements include a requirement to maintain a certain credit rating. Credit facilities To enhance our liquidity, we have secured committed credit lines with financial institutions. In the year ended March 31, 2002, we established an additional yen39,975 million multicurrency global commitment line for ORIX Corporation and major overseas subsidiaries and the total committed credit lines were yen118,275 million as of March 31, 2002. Total committed lines including global lines as above for ORIX and our subsidiaries were yen795,489 million and yen933,640 million at March 31, 2001 and March 31, 2002, respectively, and of these lines, yen726,888 million and yen849,876 million were available at March 31, 2001 and March 31, 2002, respectively. These committed credit facilities are subject to financial and other covenants and conditions prior to drawdown including, in some credit facilities, a requirement to maintain a certain credit rating. ORIX and other Japanese companies traditionally relied for liquidity upon relationships with institutional lenders, particularly Japanese commercial banks. In order to reduce funding costs and diversify funding sources, we have been cultivating borrowing relationships with a variety of institutional lenders in Japan and with a number of banks overseas, and increasing our capital markets funding both domestically and overseas. Our new capital raising operations overseas are used principally to fund our overseas operations. Use of Special Purpose Entities As one method of raising funds to finance our operations and investment activities, we periodically securitize certain lease receivables, loan receivables and investment securities. These securitizations allow us to access highly liquid and efficient markets, provide us with alternative source of funding, and diversify our investor base to enhance our liquidity position. For the past three fiscal years, securitization averaged approximately 10% of our total funding. Securitization involves the creation of special purpose entities ("SPEs") to hold the pooled assets. Our use of SPEs in securitizations is consistent with conventional practices in the securitization markets. Certain of the SPEs are designed to place the pooled assets beyond the reach of ORIX and its creditors in the event of any bankruptcy of ORIX, and if structured in this manner (and subject to certain other conditions) the pooled assets are removed from our consolidated balance sheets. These SPEs are also designed so that investors have no recourse to ORIX in the event of any failure of payment on the pooled assets. Therefore, when securitizing assets in this manner, we do not have any exposed assets or contingent liabilities other than those recognized as subordinated residual interests on our consolidated balance sheets. From time to time, we may act as an investor, servicer or administrator in SPE transactions. The effects of these transactions are fully reflected in our consolidated financial statements. We do not dispose of troubled leases, loans or other problem assets by means of unconsolidated SPEs. None of our officers, directors or employees holds any equity interests in our SPEs or receives any direct or indirect 71 compensation from the SPEs. The SPEs do not own shares or equity interests of ORIX or any of ORIX's affiliates and there are no contracts to do so. Investment products We provide investment products to our customers that employ a structure, referred to as a kumiai in Japan, which is a type of SPE. As a means to finance the purchase of aircraft or other large-ticket items to be leased to third parties, we arrange and market kumiai products to investors, who invest a portion of the funds necessary into the kumiai. The remainder of the purchase funds are borrowed by the kumiai in the form of a non-recourse loan from one or more financial institutions. The kumiai investors (and any lenders to the kumiai) retain all of the economic risks and rewards in connection with purchase and leasing activities of the kumiai, and all related gains or losses are recorded on the financial statements of investors in the kumiai. We 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 our consolidated financial statements. We do not guarantee or otherwise have any financial commitments or exposure with respect to the kumiai. Other financial transactions We occasionally make loans, leases or equity investments in SPEs in connection with transactions involving aircraft leasing, ship finance, non-recourse loans for real-estate and investment funds. In the event that we retain substantive economic risks and rewards associated with such transactions, the SPEs are fully consolidated into our financial statements, and in any other circumstances our investments such as loans, leases or equity investments are recorded on our consolidated balance sheets. We have adopted the requirements of SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a replacement of FASB Statement No. 125", which applies prospectively to all securitization transactions occurring after March 31, 2001. Adoption of SFAS No. 140 did not have a material impact on our operations or financial position. Critical Accounting Policies Accounting estimates are an integral part of the financial statements prepared by management and are based upon management's current judgments. Note 1 of the notes to the Consolidated Financial Statements includes a summary of the significant accounting policies used in the preparation of our Consolidated Financial Statements. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting the estimate may differ significantly from management's current judgments. We believe the following represents our critical accounting policies. Allowance for doubtful receivables on direct financing leases and possible loan losses The allowance for doubtful receivables on direct financing leases and possible loan losses represents management's estimate of probable losses inherent in the portfolio. This evaluation process is subject to numerous estimates and judgments. In developing the allowance for doubtful receivables on direct financing leases and possible loan losses, the following factors, among other things, are considered: o the nature and characteristics of obligors, o current economic conditions and trends, o prior charge-off experience, o current delinquencies and delinquency trends, o future cash flows expected to be received from the direct financing lease or loan, and o the value of underlying collateral and guarantees. 72 In particular, large balance non-homogeneous loans are evaluated based on the present value of expected future cash flows and the observable market price or the fair value of the collateral securing the loans. Smaller-balance homogeneous loans, including individual housing loans and card loans, and lease receivables are evaluated considering current economic conditions and trends, the value of the collateral underlying the loans and leases, prior charge-off experience, delinquencies and non-accruals. If actual future economic conditions and trends, actual future value of underlying collateral and guarantees, and actual future cash flows are less favorable than those projected by the management or the historical data we use to calculate these estimates do not reflect future loss experience, additional provisions may be required. The allowance is increased by provisions charged to income and is decreased by charge-offs, net of recoveries, when we determine that the likelihood of any future collection is minimal, receivables are charged off. Our charge-off policy is greatly affected by the Japanese tax law, which limits the amount of tax-deductible charge-offs. Japanese tax law allows companies to charge off doubtful receivables on a tax-deductible basis only when specified conditions are met. Japanese tax law does not allow a partial charge-off against the total outstanding receivables to an obligor. Japanese regulations also do not specify a maximum time period after which charge-offs must occur. It is common in the United States for companies to charge-off loans after they are past due for a specific arbitrary period, for example, six months or one year. However, we are required to keep our primary records in accordance with Japanese tax law. Japanese tax law does not allow Japanese companies to adopt a policy similar to that in the United States. If we had prepared our accounting records as if each charge-off had occurred at an arbitrary date, the differences in our financial statements would be a reduction in gross receivables, an identical reduction in the allowance for doubtful receivables and a change in the timing of charge-offs. We believe that the most significant of these differences, when comparing itself to other non-Japanese companies (particularly US companies), may be the delay in when it records a charge-off. In a period of worsening economic conditions and increasing delinquencies, we may reflect a lower charge-off ratio than it would have, had it applied the charge-off policies used by some of the other non-Japanese companies. Impairment of investment in securities When a market decline below cost of an investment in securities is other than temporary we write down the investment to the market value and record the related writedown as an investment loss on our consolidated statement of income. We would, in principle, charge against income losses related to securities: o if the market price for a security has for more than one year remained below our acquisition cost, or below current carrying value if the price of the security has been adjusted in the past, or o if there has been a significant deterioration in a bond issuer's credit rating, an issuer default or similar event. o in certain other situations where, even though the market value has not remained below the carrying value for twelve months, the decline in market value of a security is based on economic conditions and not just general declines in equity markets and where it is considered unlikely that the market value of the security will recover in the next twelve months. However, if we have a significant long-term business relationship with another company, it would also consider the probability of market values recovering within the following twelve months. As part of this review, we would consider: o the other company's operating results, o the other company's net asset value, o the other company's future performance forecast, and o general market conditions. 73 If we believe, based on this review, that the market value of a security may realistically be expected to recover, the loss for that security will continue to be classified as temporary. Temporary declines in market value are recorded in other comprehensive income (loss), net of applicable income taxes. If after an additional twelve months, the market value for that security is still significantly below the acquisition cost or below current carrying value (if the price of the security has been adjusted in the past), we would classify the loss for that security as other than temporary and charge the decline in market value against income. If the financial condition of issuers deteriorates, the forecasted performance of an investee is not met or actual market conditions are less favorable than those projected by management, we may charge to income additional losses on investment in securities. For example, declines in US bond market prices due largely to deteriorating market conditions and significant deterioration of certain issuers resulted in additional impairment charges during the year ended March 31, 2002. Impairment of long-lived assets and goodwill We periodically perform an impairment review for long-lived assets, certain identifiable intangibles and goodwill related to those assets to be held and used by us, whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Factors we consider important which could trigger an impairment review include, but are not limited to, the following: o significant decline in the market value of an asset, o a current period operating cash flow loss, except for the starting period of the operation, o significant underperformance of historical operating cash flows, o significant changes in the manner of the use of an asset, and o significant negative industry or economic trends. When we determine that the value of assets may not be recoverable based upon the existence of one or more of the above factors or other factors, we estimate the future cash flows expected to be generated by the assets. Our estimates of the future cash flows are based upon historical trends adjusted to reflect our best estimate of future market and operating conditions. Also, our estimates include the expected future period in which the future cash flows are expected to be generated by the assets that we review for impairment. As a result of the impairment review, when the sum of the future cash flows expected to be generated by the assets is less than the carrying amount of the assets, we recognize impairment losses based on the fair value of those assets. If actual market and operating conditions under which assets are operated are less favorable than those projected by management, resulting in lower expected future cash flows or shorter expected future period to generate such cash flows, additional impairment charges for the assets not previously written-off may be required. Unguaranteed residual value for direct financing leases and operating leases We estimate unguaranteed residual values of leased equipment when we calculate unearned lease income to be taken into income over the lease term for direct financing leases and when we calculate depreciation amount for operating leases which carry inherently higher obsolescence and resale risks. Our estimates are based upon current market values of used equipment and estimates of when and how much equipment will become obsolete. If actual future demand for re-lease or actual market conditions of used equipment is less favorable than that projected by management, write-downs of unguaranteed residual value may be required. Insurance policy liabilities and deferred policy acquisition costs A subsidiary of ORIX writes life insurance policies to customers. Those policies are characterized as long-duration policies and mainly consist of endowments, term life insurance and whole life insurance. Insurance policy liabilities and reserves are established based on actuarial estimates of the amount of future policyholder benefits. Computation of policy liabilities and reserves necessarily includes assumptions about mortality, lapse rates and future yields on related investments and others factors applicable at the time the policies are written. Management continually evaluates the potential for changes in the estimates and assumptions applied for determining policy liabilities, both positive and negative, and uses the results of these evaluations both to adjust recorded liabilities and 74 to adjust underwriting criteria and product offerings. If actual assumption data, such as mortality, lapse rates, investment returns and other factors, do not properly reflect future policyholder benefits, we may establish a premium deficiency reserve. FASB Statement No. 60 ("Accounting and Reporting by Insurance Enterprises") requires insurance companies to defer certain costs associated with writing insurance ("deferred policy acquisition costs") and amortized over the respective policy periods in proportion to anticipated premium revenue. Deferred policy acquisition costs, not involving the same level of complexity in measurement as those discussed above, are important to an understanding of significant accounting policies for insurance business. We are required to assess deferred acquisition costs for recoverability. Deferred 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. Periodically, deferred policy acquisition costs are reviewed for whether relevant insurance and investment income are expected to recover the unamortized balance of the deferred acquisition costs. When such costs are expected to be unrecoverable, they are charged to income in that period. If the historical data, such as lapse rates, investment returns, mortality experience, expense margins and surrender charges, which we use to calculate these assumptions do not properly reflect future profitability, additional amortization may be required. Recent Developments Economic conditions Conditions in the world economy deteriorated in the fiscal year ended March 31, 2002. In the United States, the sudden worsening of corporate profits and the drop in capital spending in information technology and other sectors of the economy brought an end to the country's record-long economic expansion, while the terrorist attacks in September 2001 further stifled consumer confidence. Against the backdrop of the economic downturn, the Federal Reserve Board made a succession of interest-rate cuts and the Bush Administration legislated an emergency budget. The combination of these measures appears to have helped the economy stabilize and return to growth, however the general environment during the fiscal year ended March 31, 2002 was negative. The European economy was expected to take over from the United States as the driving force of the global economy, but the poor economic conditions in other regions of the world and fears of inflationary pressures in Europe worked to further the pace of economic slowdown there. The Asian economies continued to stagnate in the wake of the weak global demand in IT-related industries. Japan was also affected by the sluggishness in the world economy and experienced a sharp drop in both exports and industrial production. Corporate profits also fell in the wake of this slowdown. The trend in decreasing capital spending became even more pronounced, contributing to greater unemployment and continued downward pressure on wages. The Japanese government made public our strong desire to take measures to prevent Japan from falling into a deflationary spiral, however uncertainty and concerns about the future persist. New accounting pronouncement On April 1, 2001, we adopted FASB Statement No. 133 ("Accounting for Derivative Instruments and Hedging Activities"), as amended by FASB Statement No. 137 ("Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133") and FASB Statement No. 138 ("Accounting for Certain Derivative Instruments and Certain Hedging Activities--an amendment of FASB Statement No. 133") (collectively, the "Statement"). This Statement requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be designated as a hedge. The accounting treatment for changes in the fair value of derivatives depends on the character of the transaction. The cumulative effect of this accounting change as of April 1, 2001, was a charge of yen8,400 million to other comprehensive income, and an increase of yen133 million to earnings. 75 In September 2000, FASB Statement No. 140 ("Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities--a Replacement of FASB Statement No. 125") was issued. It revises the standard for accounting for securitizations and other transfers of financial assets and collateral, and requires certain disclosures, but it carries over most of FASB Statement No. 125's provisions without reconsideration. We adopted the disclosure provisions related to the securitization of financial assets as of March 31, 2001. All transactions entered into after March 31, 2001 were accounted for in accordance with FASB Statement No. 140. This adoption does not have a significant effect on our operations or financial position. In July 2001, FASB Statement No. 141 ("Business Combinations") and FASB Statement No. 142 ("Goodwill and Other Intangible Assets") were issued. FASB Statement No. 141 improves the transparency of the accounting and reporting for business combinations by requiring that all business combinations be accounted for under a single method--the purchase method. Use of the pooling-of-interests method is no longer permitted. FASB Statement No. 141 requires that the purchase method be used for business combinations initiated after June 30, 2001. On April 1, 2002, as a result of the adoption of FASB Statement No. 141, we will record a transition gain, as an effect of a change in accounting principle, due to the write-off of unamortized deferred credits of approximately yen1,937 million existing as of March 31, 2002. The deferred credits relate to an excess over cost arising from business combinations completed and investments accounted for by the equity method acquired before July 1, 2001. FASB Statement No. 142 requires that goodwill no longer be amortized, but be reviewed at least annually for impairment by applying a fair-value-based test. Also, it requires that certain intangible assets be recognized separately from goodwill and amortized over their useful lives. FASB Statement No. 142 is effective for fiscal years beginning after December 15, 2001. We are required to perform an initial impairment review of our goodwill in the year ending March 31, 2003 and an annual impairment review thereafter. We are evaluating but have not yet determined whether the adoption of this statement will result in an impairment of goodwill. We will cease to amortize goodwill, including equity method goodwill, on April 1, 2002. For the year ended March 31, 2002, such goodwill amortization for the Company and its subsidiaries amounted to yen728 million. In August 2001, the FASB issued Statement No. 144 ("Accounting for the Impairment or Disposal of Long-Lived Assets"), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While FASB Statement No. 144 supersedes FASB Statement No. 121 ("Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"), it retains many of the fundamental provisions of that Statement. FASB Statement No. 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30 ("Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions"), for the disposal of a segment of a business. However, it retains the requirement in APB Opinion No. 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. This Statement is effective for fiscal years beginning after December 15, 2001. Management does not expect this adoption to have a significant effect on our operations or financial position. Item 6. Directors, Senior Management and Employees. Board of Directors ORIX's Board of Directors has the ultimate responsibility for the administration of our affairs. The Articles of Incorporation of ORIX provide for not less than three Directors. Directors are elected at general meetings of shareholders. The normal term of office of any Director expires within two years after his or her assumption of office, at the close of the ordinary general meeting of shareholders held to release the last settlement of accounts. The Board of Directors elects from among our members Representative Directors. The Articles of Incorporation of ORIX also provide for not less than three Corporate Auditors, who are elected at general meetings of shareholders. The normal term of office of any Corporate Auditor expires within three years after his or her assumption of office, at the close of the ordinary general meeting of shareholders held to release the last settlement of accounts. Under the Commercial Code of Japan and other related laws, the Corporate Auditors (at least one of whom is required to be independent of ORIX) are not required to be, and are not, certified public accountants. Corporate Auditors have the duties of supervising the administration by the Directors of ORIX's affairs and examining the financial statements and business reports that the Board of Directors submits to the general 76 meeting of shareholders. Corporate Auditors are not entitled to vote. They are required to elect from among themselves at least one Standing Corporate Auditor. Auditors' Independence In addition to Corporate Auditors, ORIX must appoint independent certified public accountants, who have the statutory duties of examining the financial statements prepared in accordance with accounting principles generally accepted in Japan that the Board of Directors submits to the general meeting of shareholders and reporting on the financial statements to the Corporate Auditors and the Directors, and examining the financial statements to be filed with the Prime Minister. Presently, ORIX's independent certified public accountants are Asahi & Co., a member firm of Andersen Worldwide SC. The independence of Asahi & Co. has been considered and confirmed by ORIX's Board of Directors. The Board of Directors also confirmed that there were no management-level individuals that were seconded to or from Asahi & Co., and there are no management-level individuals that previously worked for ORIX or Asahi & Co. and presently work for the other party. In the fiscal year ended March 31, 2002, we paid our auditors (including domestic and foreign affiliates of Asahi & Co.) yen489 million for direct audit fees, yen275 million for audit related services, including M&A due diligence and services related to securities offerings, yen297 million for financial information system consulting services, and yen295 million for other fees which included primarily tax compliance and advisory, and other consulting services. In the opinion of management, the provision of non-audit services did not in any way influence the independence of the audits conducted by Asahi & Co. because management took full responsibility for decisions relating to the activities affected by these services and Asahi & Co. and its affiliates did not assume any of the management authority and duties. The Directors and Corporate Auditors The Directors and Corporate Auditors of ORIX as of June 26, 2002 are as follows: Share-holdings Year first as of Name Title appointed March 31, 2002 ---- ----- --------- -------------- (In thousands) Yoshihiko Miyauchi............... Chairman and Chief Executive Officer, 1970 39 Representative Director Yasuhiko Fujiki.................. President and Chief Operating Officer, 1994 5 Representative Director Yoshiaki Ishida.................. Vice Chairman, Representative Director 1990 2 Shunsuke Takeda.................. Deputy President, Director 1993 2 Katsuo Kawanaka.................. Deputy President, Director 1992 6 Hiroaki Nishina.................. Director 1993 2 Takeshi Sato..................... Director 1997 7 Tatsuya Tamura................... Director; Chairman, A.T. Kearney K. K.; Director 1999 -- (non executive), Suruga Bank Ltd. Akira Miyahara................... Director; Executive Advisor to the Board, Fuji Xerox 1999 -- Co., Ltd. Yoshinori Yokoyama............... Director; Director, McKinsey & Company, Inc. 2002 -- Hiroshi Nakamura................. Standing Corporate Auditor 2000 1 Masaaki Yamamoto................. Standing Corporate Auditor 2001 1 Hirotaka Takeuchi................ Corporate Auditor; Dean, Hitotsubashi 2000 -- University, Graduate School of International Corporate Strategy
Except for Mr. Tamura, Mr. Miyahara and Mr. Yokoyama, all of the directors are engaged in our business on a full-time basis. 77 Share ownership. As of March 31, 2002, the Directors and Corporate Auditors of the Company directly held an aggregate of 68,261 Shares, representing 0.08% of the total Shares then in issue. Yoshihiko Miyauchi Representative Director Chairman and Chief Executive Officer Yoshihiko Miyauchi began his career at Nichimen & Co., Ltd. in 1960 and worked there four years before entering ORIX Corporation (then Orient Leasing Co., Ltd.) as one of the founding 13 members in 1964. Mr. Miyauchi became a Director in 1970 and was appointed President and CEO in 1980, a position he held until he assumed his present role as Chairman and CEO in April 2000. In his term as CEO, Mr. Miyauchi has overseen the development of ORIX into a diversified financial services company that has continued to be on the forefront of innovation. Mr. Miyauchi is a strong proponent of deregulation and serves as the President of the Council for Regulatory Reform. His other affiliations include: Vice Chairman, Keizaidoyukai (Japan Association of Corporate Executives); and Councilor, Nippon Keidanren (Japan Federation of Economic Organizations). He also has directorships on the boards of Fuji Xerox Corporation, AOZORA BANK, LTD. and Mercian Corporation. Mr. Miyauchi was born in September 1935 and graduated with a BA from the School of Business Administration of Kwansei Gakuin University in 1958 followed by an MBA from the University of Washington in the USA in 1960. Yasuhiko Fujiki Representative Director President and Chief Operating Officer Yasuhiko Fujiki joined Nikko Securities Co., Ltd. in 1968, before moving to Mitsubishi Development Co., Ltd. in 1971 then to ORIX in 1976. Following appointments as General Manager of the Real Estate Sales Department, Credit Department and General Affairs Department, Mr. Fujiki was appointed Director in Charge of General Affairs in 1994. In 1997, he became Principal and Director in Charge of the Office of the President and Director in Charge of the Personal Financial Services (PFS) Department. In 1999 Mr. Fujiki became Corporate Senior Vice President and was named Chief Branding Officer in the same year. In his role in the Office of the President, Mr. Fujiki was instrumental in the Company's recent M&A activities and strategic plans to position ORIX to continue to be a major player in Japanese and international financial markets. As COO, Mr. Fujiki now oversees the execution of the ORIX Group's business activities and is leading the next generation of ORIX management into the 21st century. Mr. Fujiki also serves as Chairman of the Japan Commodities Fund Association (JCFA); Secretary to the Keizaidoyukai (Japan Association of Corporate Executives); and Vice Chairman of the Japan Leasing Association. Mr. Fujiki was born in November 1945 and graduated from Waseda University's School of Commerce in 1968. Yoshiaki Ishida Representative Director Vice Chairman Responsible for Overseas Activities Yoshiaki Ishida joined Nozawa Asbestos & Cement Co., Ltd. (currently Nozawa Corporation) in 1963, where he worked for five years before entering ORIX in 1968. After a decade of various appointments in Japan, Mr. Ishida was a major figure in ORIX's international activities. He was seconded to ORIX Asia Limited in Hong Kong in 1981 where he was Managing Director. In June 1990, he was made a Director and the Deputy Head of the 78 International Business Headquarters and in November of that year became President & CEO of ORIX USA CORPORATION. After his return to Japan in 1993, Mr. Ishida completed assignments that included the Deputy Head of the International Business Headquarters and General Manager of the Overseas Real Estate Department. He became Managing Director of ORIX in 1994 and Senior Managing Director in 1996, before assuming the position of Deputy President and Representative Director in 1998. He has been Vice Chairman since April 2000, where he oversees ORIX's international activities. Mr. Ishida was born in January 1940 and graduated from the Kobe City University of Foreign Studies in 1963. Shunsuke Takeda Director Deputy President Chief Financial Officer Shunsuke Takeda entered the Nippon Kangyo Bank, Ltd. in 1965 before joining ORIX in 1968. After an assignment to the London Liaison Office and several posts in Japan, Mr. Takeda was appointed General Manager of the International Treasury Department in 1989, General Manager of the International Department in 1990 and then General Manager of the Treasury Department in 1992 before become Director in 1993. Mr. Takeda was appointed Managing Director in 1997 and Corporate Executive Vice President in 1999. He has been Chief Financial Officer since 1997 and has been instrumental in creating an advanced system for efficient fund procurement of ORIX and its subsidiaries. He assumed the present position of Deputy President in April 2000. In addition to his oversight of the Treasury operations and support of ORIX's President, in August 2000 he was appointed to oversee the reorganization of ORIX's Investment Banking Headquarters, and presently serves as the office in charge of the Office of the President. Mr. Takeda was born in September 1941 and graduated from the Law Department of Tokyo University in 1965. Katsuo Kawanaka Director Deputy President Tokyo Sales Headquarters Katsuo Kawanaka joined Japan Rayon Limited (currently Unichika Co., Ltd.) in 1965 and moved to ORIX Corporation in 1971. After serving in a range of marketing positions, he was appointed General Manager of the Tokyo Communications Equipment Department No. 3 in 1988, General Manager of the Office Automation Equipment Department in 1989, and General Manager of the Tokyo Information and Communications Equipment Department in 1991. In 1992, he became a Director and Deputy Senior General Manager of the Tokyo Sales Headquarters. In 1996, he was named Managing Director, and he has been Head of the Tokyo Sales Headquarters from the same year as well as Corporate Executive Vice President since 1999. In April 2002, Mr. Kawanaka was appointed Deputy President. Mr. Kawanaka was born in March 1942 in Osaka and graduated from Osaka City University's School of Commerce in 1965. 79 Hiroaki Nishina Director Corporate Executive Vice President Real Estate Business Headquarters President, ORIX Real Estate Corporation Hiroaki Nishina joined ORIX in 1968. He became a Director and Deputy Head of the Tokyo Sales Headquarters in 1993 and was appointed President of ORIX Auto Leasing in 1996. In 1998, Mr. Nishina became a Corporate Executive Officer and took over responsibility for the Real Estate Business Headquarters before becoming President of ORIX Real Estate Corporation in 1999. He was Corporate Senior Vice President from June 2000 until his promotion to Corporate Executive Vice President in April 2002. Mr. Nisina was born in September 1944 and graduated from Kwansei Gakuin University's School of Economics in 1968. Takeshi Sato Director Corporate Senior Vice President Chairman, ORIX USA CORPORATION Takeshi Sato began his career at the Saitama Bank, Ltd. (currently The Asahi Bank, Ltd.) in 1969 before coming to ORIX in 1972. Mr. Sato began focusing on international activities early at ORIX and was assigned as a Director of PT. ORIX Indonesia Finance in 1975, President of ORIX METRO Leasing and Finance Corporation in the Philippines in 1982, and President of ORIX Australia Corporation Limited in 1987, before returning to Tokyo in 1993 as General Manager of the International Department. Mr. Sato was appointed Director and Deputy Head of the International Headquarters in 1997, which included a posting in Singapore to oversee the Asia and Oceania operations. He was Corporate Senior Vice President from 1999 until his promotion to Corporate Executive Vice President in April 2002 and became Chairman of ORIX USA CORPORATION in April 2001. Mr. Sato was born in September 1946. He graduated from Meiji University's School of Commerce in 1969 and completed a Masters of Commerce Degree from Meiji University's Postgraduate School of Commerce in 1972. Tatsuya Tamura Director Chairman, A.T. Kearney K.K. Director (non executive), The Suruga Bank, Ltd. Tatsuya Tamura joined the Bank of Japan in 1961 and occupied a number of posts before becoming Executive Director in 1992. He became Chairman of A.T. Kearney (Japan) in 1996 and Representative Director & Chairman A.T. Kearney, K.K. from April 1998 until April 2002 (presently he serves as Chairman). He served as President of EDS Japan from January 1997 to March 1999, and the President and CEO of Japan Investor Solutions and Technologies Co., Ltd. from August 1999 to June 2000. He has been a Director (non executive) at The Suruga Bank, Ltd. since June 2000. Mr. Tamura became a member of ORIX's Advisory Board in 1997 and then a Director in 1999. Mr. Tamura is also a member of Keizai Doyukai (Japan Association of Corporate Executives). He was born in October 1938 and graduated from Tokyo University's School of Law in 1961. Akira Miyahara Director Executive Advisor to the Board, Fuji Xerox Co., Ltd. Akira Miyahara joined Fuji Photo Film Co. Ltd. in 1962 and then moved to Fuji Xerox Co., Ltd. in 1971. At Fuji Xerox he occupied a number of posts before becoming a Director in 1984. After promotions to Managing Director in 1987 and Senior Manager Director in 1988, he was appointed Deputy President in 1990 and President 80 and Chief Operating Officer in 1992, and Vice Chairman of the Board in 1998. In 2002, he assumed his current position as Executive Advisor to Fuji Xerox's Board. Mr. Miyahara was invited to the Advisory Board of ORIX in 1997 and was then appointed as an Independent Director in June 1999. Mr. Miyahara has brought with him a wealth of experience to the ORIX Board and provides an important outside perspective on the company's strategy. Mr. Miyahara was born in June 1939 and graduated from Kwansei Gakuin University's Commercial Science Department in 1962. Yoshinori Yokoyama Director Director, McKinsey & Company Yoshinori Yokoyama completed his architectural training at the University of Tokyo in 1966 before taking a position in the Kunio Mackawa architectural office. He earned an MA in urban design at Harvard in 1972 and joined Davis Broady & Associates in 1973. He obtained an MBA from the Sloan School at MIT and joined McKinsey in 1975. He served as a Director at McKinsey from 1987 to 2002. Mr. Yokoyama first became a member of ORIX Corporation's Advisory Board in June 1997 before becoming a Director in June 2002. Mr. Yokoyama was born in 1942 in Hiroshima Prefecture. Hiroshi Nakamura Standing Corporate Auditor Hiroshi Nakamura joined ORIX in 1971. After a number of posts in Japan, he became general manager of the Credit Department No. 1 in 1995 and Corporate Executive Officer in Charge of Compliance and the Legal Affairs Department in 1999, before assuming his present position in June 2000. Mr. Nakamura was born in May 1948 and graduated from Kwansei Gakuin University's School of Business Administration in 1971. Masaaki Yamamoto Standing Corporate Auditor Masaaki Yamamoto joined ORIX in 1972 after working five years at Ube Industries, Ltd. He became General Manager of the Accounting Department in 1996 and was appointed a Director of ORIX MIC Corporation in 1999 before assuming his role as Standing Corporate Auditor in June 2001. Mr. Yamamoto was born in November 1943 and graduated from Kobe University's School of Management in 1967. Hirotaka Takeuchi Corporate Auditor Dean, Hitotsubashi University Graduate School of International Corporate Strategy Hirotaka Takeuchi joined McCann-Erickson Advertising Co., Ltd. in 1969, before taking a position as Research Assistant at the Graduate School of Business Administration at the University of California at Berkeley in 1972. He became a Lecturer at the Graduate School of Business Administration at Harvard University in 1976 and became an Assistant Professor there before returning to Japan in 1983 as an Assistant Professor at Hitotsubashi University's School of Commerce, where he later became Professor in 1987. He has held his present position at the Graduate School of International Corporate Strategy since 1998. Mr. Takeuchi became a Corporate Auditor of ORIX in June 2000. Mr. Takeuchi was born in October 1946 and he graduated from International Christian University in 1969. He then went on to receive an MBA in 1971 from the Graduate School of Business Administration at the University of 81 California at Berkeley and a Ph.D. in 1977 from the Graduate School of Business Administration at Harvard University. Corporate Executive Officers In June 1998, ORIX introduced a corporate executive officer system to help separate strategic decision making functions from day-to-day administrative operations. As a result, the Board of Directors now has responsibility for strategic management decisions, while corporate executive officers are responsible for implementing those decisions. In addition, ORIX created a Group Corporate Executive Officer Committee to promote the sharing of management information. The Corporate Executive Officers of ORIX as of June 26, 2002 are as follows: Name Title and areas of duties Yoshihiko Miyauchi....... Chairman and Chief Executive Officer Yasuhiko Fujiki.......... President and Chief Operating Officer Yoshiaki Ishida.......... Vice Chairman Responsible for Overseas Activities Shunsuke Takeda.......... Deputy President Chief Financial Officer Katsuo Kawanaka.......... Deputy President Tokyo Sales Headquarters Hiroaki Nishina.......... Corporate Executive Vice President Real Estate Business Headquarters; President, ORIX Real Estate Corporation Takeshi Sato............. Corporate Senior Vice President Chairman, ORIX USA CORPORATION Masahiro Matono.......... Corporate Senior Vice President District Sales Headquarters Hiroyuki Harada.......... Corporate Senior Vice President Investment and Credit Evaluation Group, Investment and Credit Information Management Group, Risk Management Group, Legal Affairs Group, Real Estate Appraisal Group Hiroshi Nakajima......... Corporate Senior Vice President Kinki (Osaka) Sales Headquarters Masaru Hattori........... Corporate Senior Vice President Head of Compliance; Accounting Department; General Affairs Department Koichiro Muta............ Corporate Senior Vice President Investment Banking Headquarters Masaaki Tashiro.......... Corporate Senior Vice President Real Estate Finance Headquarters; President, ORIX Asset Management and Loan Services Corporation Yoshio Ono............... Corporate Executive Officer International Headquarters Akira Fukushima.......... Corporate Executive Officer OQL Headquarters Nobuyuki Kobayashi....... Corporate Executive Officer IT Business Headquarters; PFS Department; President, ORIX Computer Systems Corporation and, President, ORIX Call Center Corporation Shintaro Agata........... Corporate Executive Officer Treasury Department Tetsuo Matsumoto......... Corporate Executive Officer Real Estate Business Headquarters; Deputy President, ORIX Real Estate Corporation Yoshiyuki Yoshizumi...... Corporate Executive Officer Real Estate Finance Headquarters Teruo Isogai............. Corporate Executive Officer President, ORIX Auto Leasing Corporation Tamio Umaki.............. Corporate Executive Officer President, ORIX Rentec Corporation Takafumi Kanda........... Corporate Executive Officer President, ORIX Credit Corporation and President, ORIX Club Corporation Yutaka Okazoe............ Corporate Executive Officer President, ORIX Baseball Club Co., Ltd Izumi Mizumori........... Corporate Executive Officer President, ORIX Life Insurance Corporation Tsutomu Matsuzaki........ Corporate Executive Officer President, ORIX Capital Corporation
Employees As of March 31, 2002, we had 11,271 full-time employees, compared to 9,529 as of March 31, 2001 and 9,503 as of March 31, 2000. We employ approximately 8,250 staff in Japan, 2,000 staff in Asia & Oceania, 850 staff in 82 America and 150 staff in Europe as of March 31, 2002. We consider our labor relations to be excellent. None of our employees are represented by a union while employees of some of our subsidiaries and affiliates are represented by unions. The mandatory retirement age for our employees is 60, and varies for our subsidiaries and affiliates. ORIX announced in June 1999 an early voluntary retirement program which is available to ORIX employees who are at least 54 years old. Employees who take advantage of this program receive their accrued retirement package plus an incentive premium. ORIX and some of our subsidiaries have established contributory and non-contributory funded pension plans covering substantially all of their employees other than directors and corporate auditors. 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 these payments are determined on the basis of length of service and remuneration at the time of termination. Our funding policy in respect of these plans is to contribute annually the amounts actuarially determined to be required. Assets of the plans are invested primarily in interest-bearing securities and marketable equity securities. In addition, directors and corporate auditors of ORIX and some subsidiaries receive lump-sum payments upon termination of their services under unfunded termination plans. Total provisions (termination or pension plans for both employees and directors and corporate auditors) charged to income for all benefit plans (including defined benefit plans) were yen3,431 million, yen5,119 million and yen6,238 million in the years ended March 31, 2000, 2001 and 2002, respectively. Compensation To ensure greater management transparency, we established the Executive Nomination and Compensation Committee in June 1999. This committee includes independent directors as well as our internally appointed representative directors. The independent directors will appoint the chairman of the committee. The committee recommends to the Board of Directors candidates for directors, auditors and corporate executive officers. The committee also recommends to the Board an executive remuneration and evaluation system as well as the executive remuneration and other compensation scales. During the year ended March 31, 2002, the executive compensation paid to our Directors and Corporate Auditors excluding stock options and warrants amounted to approximately yen429 million in the aggregate. In accordance with customary Japanese business practices, a retiring Director or Corporate Auditor receives a lump-sum retirement payment, which is subject to the approval of the general meeting of shareholders. At the Shareholders' Meeting held on June 26, 2002, the shareholders approved bonuses for the Directors and Corporate Auditors in the amounts of yen66 million and yen10 million, respectively, and retirement payments for the Directors and Corporate Auditors in the amounts of yen97 million were approved for the year ended March 31, 2002. 83 The following table shows the names of Directors, Corporate Executive Officers and Corporate Auditors who received stock options, and the number of shares for which they were granted options, under the 1997, 1998, 1999, 2000, 2001 and 2002 stock option plans (except warrant plans). Each of our shares has one vote. We have not issued any preferred shares. 1997-2000 2001 2002 stock option stock option stock Name Title plans plan option plan --------------------- --------------------------------------- -------------- -------------- ------------- Yoshihiko Miyauchi Chairman and Chief Executive Officer 90,000 21,000 21,000 Yasuhiko Fujiki President and Chief Operating Officer 32,000 13,000 13,000 Yoshiaki Ishida Vice Chairman 53,000 10,000 10,000 Shunsuke Takeda Deputy President and Chief Financial 36,000 9,000 9,000 Officer Katsuo Kawanaka Deputy President 34,000 7,000 8,500 Hiroaki Nishina Director and Corporate Executive Vice 23,000 6,000 6,500 President Takeshi Sato Director and Corporate Senior Vice 26,000 6,000 6,000 President Tatsuya Tamura Director 1,000 1,500 1,500 Akira Miyahara Director 1,000 1,500 1,500 Yoshinori Yokoyama Director 1,500 Hiroshi Nakamura Standing Corporate Auditor 4,500 Masaaki Yamamoto Standing Corporate Auditor 4,500 Hirotaka Takeuchi Corporate Auditor 1,500 Masahiro Matono Corporate Senior Vice President 22,500 5,500 5,500 Hiroyuki Harada Corporate Senior Vice President 22,500 5,500 5,500 Hiroshi Nakajima Corporate Senior Vice President 22,000 5,500 5,500 Masaru Hattori Corporate Senior Vice President 15,000 5,500 5,500 Koichiro Muta Corporate Senior Vice President 5,000 5,500 Masaaki Tashiro Corporate Senior Vice President 14,000 4,500 5,000 Yoshio Ono Corporate Executive Officer 22,000 4,500 4,500 Akira Fukushima Corporate Executive Officer 10,000 4,500 4,500 Nobuyuki Kobayashi Corporate Executive Officer 15,000 4,500 4,500 Shintaro Agata Corporate Executive Officer 3,500 4,500 4,500 Tetsuo Matsumoto Corporate Executive Officer 4,000 4,500 Yoshiyuki Yoshizumi Corporate Executive Officer 4,000 Teruo Isogai Corporate Executive Officer 4,500 Tamio Umaki Corporate Executive Officer 9,000 4,500 4,500 Takafumi Kanda Corporate Executive Officer 4,500 Yutaka Okazoe Corporate Executive Officer 4,500 Izumi Mizumori Corporate Executive Officer 4,500 Tsutomu Matsuzaki Corporate Executive Officer 4,000
Stock Option and Warrant Plans ORIX has adopted various employee incentive plans. The purpose of ORIX's stock option and warrant plans is to enhance the awareness of the option holders of the link between management, corporate performance and stock price, and, in this way, improve the business results of ORIX. These plans are administered by the General Affairs Department of ORIX. Stock option plans Our shareholders approved Stock Option Plans at the ordinary general meeting of shareholders in the years from 1997 to 2001 inclusive, under which Shares were purchased from the open market and held by ORIX for transfer to Directors and Corporate Executive Officers and some employees of ORIX upon the exercise of their options. Under the 1997 to 1999 Stock Option Plans, the exercise prices of the options were adjusted on April 1, 2000 to reflect the subdivision of each share of common stock into 1.2 Shares, which was implemented on May 19, 2000. Options granted under Stock Option Plans generally expire one year after the termination of the option holder's service with ORIX. 84 At the ordinary general meeting of shareholders in June 2002, ORIX's shareholders approved the 2002 Stock Acquisition Rights Plan, under which Stock Acquisition Rights of a maximum of 4,900, each convertible into 100 new shares, will be granted to Directors, Corporate Auditors and Corporate Executive Officers and some employees of ORIX and directors, corporate auditors and certain employees of subsidiaries. Exercise Shares to price per Option expiration be granted Share date ----------- ------------ -------------------- 1997 Stock Option Plan...................... 168,000 yen7,665 September 30, 2002 1998 Stock Option Plan...................... 146,000 7,784 June 26, 2008 1999 Stock Option Plan...................... 145,000 10,393 June 29, 2009 2000 Stock Option Plan...................... 316,700 16,272 June 29, 2010 2001 Stock Option Plan...................... 300,900 12,329 June 28, 2011 2002 Stock Acquisition Rights Plan.......... 490,000 June 26, 2012
Warrant plans From 1997 to 2001, the Board of Directors of ORIX approved warrant plans under which warrants to purchase Shares were granted or sold to Corporate Auditors and some employees of ORIX, excluding employees who were option holders under the Stock Option Plan of the same year, and to directors, corporate auditors and certain employees of subsidiaries, by repurchasing warrants attached to bonds with warrants issued by ORIX. Under the 1998 to 1999 Warrant Plans, the exercise prices of the options were adjusted on April 1, 2000 to reflect the subdivision of each share of common stock into 1.2 Shares, which was implemented on May 19, 2000. Warrants granted under the Warrant Plans generally expire one year after the termination of the warrant holder's service with ORIX. Exercise Warrants price per Warrant expiration granted Share date ---------- ----------- ------------------- 1998 Warrant Plan................ 315,593 6,877 November 5, 2002 1999 Warrant Plan................ 302,484 11,278 November 4, 2003 2000 Warrant Plan................ 126,143 14,090 September 6, 2004 2001 Warrant Plan................ 124,303 12,329 July 22, 2005 Item 7. Major Shareholders and Related Party Transactions Major Shareholders The following table shows our major shareholders as of March 31, 2002. Each of our shares has one vote. We do not issue any preferred shares. Percentage Number of of total Shares Shares Name held in issue (thousands) (%) --------------------------------------------------------------------- ----------- ---------- Japan Trustee Services Bank, Ltd. (Trust Account).................... 8,114 9.62 The Mitsubishi Trust and Banking Corporation (Trust Account)......... 6,418 7.61 The Chase Manhattan Bank, N.A. London SL Omnibus Account............. 4,004 4.75 State Street Bank and Trust Company.................................. 3,314 3.93 UFJ Trust Bank Limited (Trust Account A)............................. 2,627 3.12 The Chase Manhattan Bank, N.A. London................................ 2,585 3.07 Boston Safe Deposit BSDT, Treaty Clients Omnibus..................... 2,540 3.01 UFJ Trust Bank Limited............................................... 1,737 2.06 Nippon Life Insurance Company........................................ 1,535 1.82 UFJ Bank Limited..................................................... 1,409 1.67
85 ORIX is not directly or indirectly owned or controlled by any corporations, natural or legal persons severally or jointly. As of March 31, 2002, the percentage of outstanding shares held by foreign corporations and individuals was 40.16%. Related Party Transactions As of March 31, 2002, no person was the beneficial owner of more than 10% of any class of ORIX's shares which might give that individual significant influence over the Company. There is no material transaction of outstanding loans, including guarantees of any kind made by or proposed to be made by the Company with any enterprises and individuals. Item 8. Financial Information All relevant financial statements are attached hereto. See "Item 18. Financial Statements." Legal Proceedings See Item 4. "Information on the Company Legal Proceedings " Dividend Policy and Dividends See Item 10. "Additional Information Dividend Policy and Dividends " Significant Changes None Item 9. The Offer and Listing Tokyo Stock Exchange The primary market for the shares is the Tokyo Stock Exchange. The shares have been traded on the First Section of the Tokyo Stock Exchange since 1973 and are also listed on the First Sections of The Osaka Securities Exchange and The Nagoya Stock Exchange. The Tokyo Stock Exchange is the principal Japanese stock exchange. The most widely followed price index of stocks on the Tokyo Stock Exchange is the Nikkei Stock Average, an index of 225 selected stocks traded on the First Section of the Tokyo Stock Exchange. The following table shows the reported high and low sales prices of the shares on the Tokyo Stock Exchange, excluding off-floor transactions. High and low sales price quotations from the Tokyo Stock Exchange have been translated in each case into dollars per ADS at the Federal Reserve Bank of New York's noon buying rate on the relevant date or the noon buying rate on the next business day if the relevant date is not a business day. Tokyo Stock Exchange Price Share ------------------------------------------------------------------------------- Translated into Price Per Share US$ per ADS -------------------- -------------------- Calendar period High Low High Low ---------------------------------- -------- -------- -------- ------- 1997 ........................... yen9,950 yen4,560 $42 $20 1998 ........................... 10,630 7,560 39 31 1999 ........................... 24,150 7,200 118 33 2000 First quarter ............... 24,100 13,400 117 63 Second quarter .............. 16,980 13,750 81 66 Third quarter ............... 16,850 12,000 79 56 Fourth quarter .............. 13,400 10,280 62 46 86 Tokyo Stock Exchange Price Share ------------------------------------------------------------------------------- Translated into Price Per Share US$ per ADS -------------------- -------------------- Calendar period High Low High Low ---------------------------------- -------- -------- -------- ------- 2001 First quarter ............... 12,030 8,600 51 35 Second quarter .............. 13,330 9,900 56 39 Third quarter ............... 12,740 8,820 51 38 Fourth quarter .............. 12,200 9,700 49 40 2002 January ..................... 12,080 9,860 46 37 February .................... 10,850 9,580 41 36 March ....................... 10,930 9,340 41 35 April ....................... 10,740 9,410 42 35 May ......................... 11,490 10,350 46 40 June (through June 21) ...... 11,070 9,450 45 39 In May 2000, ORIX implemented the subdivision of each of common stock registered on its register of shareholders as of March 31, 2000 into 1.2 shares. The per-share prices set forth above have not been adjusted to reflect that subdivision. New York Stock Exchange The ADSs and ADNs are listed on the New York Stock Exchange under the symbol "IX". Two ADSs represent one share. On March 31, 2002, approximately 855,720 ADSs were outstanding. This is equivalent to 427,860 or approximately 0.5% of the total number of shares outstanding on that date. On that date, ADSs were held by 2 record holders, including 1 record holder in the United States holding 855,480 ADSs. The per ADS prices below were not adjusted as a result of the share subdivision mentioned above. 87 The following table provides the high and low sales prices and the average daily trading volume of the ADSs on the New York Stock Exchange. NYSE Price Per ADS High Low Calendar Period ($) ($) ---------------------------------------------- ------- ------- 1998 (from September 16) 39.25 31.38 1999 95.31 29.89 2000: First quarter.............................. 95.21 52.92 Second quarter............................. 76.38 65.83 Third quarter.............................. 78.50 56.38 Fourth quarter............................. 61.25 46.75 2001: First quarter.............................. 51.13 37.30 Second quarter............................. 55.00 39.90 Third quarter.............................. 51.80 37.90 Fourth quarter............................. 48.75 41.10 2002: January.................................... 45.85 38.50 February................................... 40.30 36.60 March...................................... 41.65 36.30 April...................................... 41.45 35.63 May........................................ 45.31 40.45 June (through June 21)..................... 44.54 38.25 Item 10. Additional Information Memorandum and Article of Incorporation Purposes The purposes of the Company are provided in Article 2 of our articles of incorporation and shall be to engage in the following business. (1) Lease, purchase and sale (including purchase and sale on an installment basis), maintenance and management of movable property of all types. (2) Lease, purchase and sale, ground preparation, development, maintenance and management of real property. (3) Lending of money, purchase and sale of claims of all types, payment on behalf of third parties, guarantee and assumption of obligations and other financial business. (4) Holding, investment in, management, purchase and sale of securities. (5) Holding, management, purchase and sale of mortgage certificates. (6) Business of investment in and sale of commodities, and advisory business in respect of investment in commodities. (7) Acting as an agent for collection of money and for calculation business of enterprises. (8) Manufacture, processing, repair and sale of furniture, interior goods, transport machinery and equipment, etc. (9) Water transport, road transport of cargo and warehousing. (10) Contracting for construction and civil engineering, and design and supervision thereof. (11) Planning of, development of, contracting for, lease of and sale of intangible property rights such as copyrights, industrial property rights, etc. (12) Information services, electric communication, advertising and publishing business. (13) Management of facilities for sports, lodging, medical treatment and social education, etc. Management of restaurants, and tour business. (14) Conducting of cultural projects, sports, etc. (15) Business of dispatching workers to enterprises. (16) Purchase and sale of antiques. (17) Business relating to the collection, transportation and disposal of ordinary waste products and industrial waste products. (18) Generation of electric power and supply of electricity. (19) Brokerage, agency, investigation and consulting of business relating to any of the preceding items. (20) Non-life insurance agency business, insurance agency business under the Automobile Accident Compensation Security Law, and business related to soliciting life 88 insurance. (21) Investment advisory business relating to real estate, securities and other financial assets. (22) Conducting trust, banking and Credit Management and Collection Business operations, as a result of the acquisition of shares in a company engaged in those activities. (23) Any and all business related to any of the preceding items. Directors and Board of Directors There shall be no less than three Directors of the Company (Article 17). Directors shall be elected at a General Meeting of Shareholders. In the case of the above election, shareholders representing not less than one third (1/3) of the total number of voting rights of all shareholders shall attend such Meeting. In the case of election of Directors, cumulative voting shall not be used (Article 18). The term of office of Directors shall expire upon conclusion of the Ordinary General Meeting of Shareholders relating to the last fiscal year ending within two years from his assumption of office. (Article 19) Resolutions of the Board of Directors shall be adopted by a majority of the Directors present at a Meeting that a majority of the Directors shall attend (Article 23). Remuneration of Directors shall be determined by resolution of the General Meeting of Shareholders (Article 25). Shares The Company does not issue any preferred stock. Cash dividends shall be paid to shareholders or registered pledgees last of record on the Register of Shareholders and the Register of Substantial Shareholders as of the closing of accounts for each business year. With respect to the first cash dividends on shares issued upon requests for conversion of convertible bonds, such conversions shall be deemed to have been made at the beginning of the business year during which such requests for conversion have been made, and the cash dividends shall be paid accordingly. Cash dividends shall bear no interest and if they have not been received within three years from the day of commencement of payments, they shall belong to the Company. (Article 35) Unless otherwise provided for by laws and ordinances, resolutions of General Meetings of Shareholders shall be adopted by a majority of votes of shareholders present at the Meetings. Unless otherwise provided for by laws and ordinances, each shareholder shall have one vote for each share (Article 14). General Meeting of Shareholders The Ordinary General Meeting of Shareholders shall be held in June of each year and an Extraordinary General Meeting of Shareholders shall be held whenever necessary. Notices for calling of an Ordinary General Meeting of Shareholders and an Extraordinary General Meeting of Shareholders shall be dispatched at least two weeks prior to the date set for such Meetings (Article 11). A General Meeting of Shareholders shall be called by a Representative Director pursuant to resolution of the Board of Directors (Article 12). Material Contracts We have no material contracts aside from those entered in our ordinary course of business. Foreign Exchange and Other Regulations. The Foreign Exchange and Foreign Trade Law of Japan, as amended, and the cabinet orders and ministerial ordinances thereunder (the "Foreign Exchange Regulations") govern certain aspects relating to the issue and sale of Shares by us or the sale of Shares by us and the acquisition and holding of Shares by "exchange non-residents" and by "foreign investors" (as hereinafter defined). The Foreign Exchange Regulations as currently in effect do not affect transactions between exchange non-residents to purchase or sell Shares outside Japan for non-Japanese currencies. "Exchange non-residents" are defined as individuals who are not resident in Japan and corporations whose principal offices are located outside Japan. Generally, branch and other offices located within Japan of non-resident corporations are regarded as exchange residents of Japan and branch and other offices of Japanese corporations located outside Japan are regarded as exchange non-residents of Japan. "Foreign investors" are defined to be (i) individuals not resident in Japan, (ii) corporations which are organized under the laws of foreign countries or whose principal offices are located outside Japan, and (iii) corporations not less than 50% of the shares of which are held by (i) and/or (ii) or a majority of the officers (or officers having the power of representation) of which are non-resident individuals. 89 Under the Foreign Exchange Regulations, the sale of Shares by us is, in principle, not subject to a prior notification requirement, but subject to a post reporting requirement of the Minister of Finance. Under the Foreign Exchange Regulations as currently in effect, payments of dividends in respect of Shares and any additional amounts payable pursuant to the terms thereof may in general be paid when made without any restrictions under the Foreign Exchange Regulations. In general, the acquisition of shares of stock of a Japanese company listed on any Japanese stock exchange or traded in any over-the-counter market in Japan by an exchange non-resident of Japan from an exchange resident of Japan may be made without any restriction, except as mentioned below. However, a report by the relevant exchange resident of Japan to the Minister of Finance must be filed following the transfer of shares to an exchange non-resident of Japan, unless the consideration for such transfer is yen100 million or less or such transfer if made through a bank, securities company or financial future trader licensed under the relevant Japanese laws. If a foreign investor acquires shares of a Japanese company listed on a Japanese stock exchange or traded on an over-the-counter market in Japan and as a result of such acquisition (regardless of the person from or through whom it acquires the shares), aggregated with existing holdings (if any), the foreign investor directly or indirectly holds 10% or more of the issued shares of the relevant company, the foreign investor is, in general, required to report such acquisition to the Minister of Finance and any other competent Ministers within 15 days from and including the date of such acquisition. In certain exceptional cases, a prior notification is required in respect of such an acquisition. The acquisition of Shares by exchange non-residents by way of stock split is not subject to any of the foregoing notification requirements. Under the Foreign Exchange Regulations, dividends paid on, and the proceeds of sales in Japan of, Shares held by exchange non-residents may in general be converted into any foreign currency and repatriated abroad. Other Regulations The Securities and Exchange Law requires any person who has become, beneficially and solely or jointly, a holder of more than 5% of the total issued voting shares of capital stock of a company listed on any Japanese stock exchange or whose shares are traded on the over-the-counter markets in Japan, to file with the Minister of Finance within five business days a report concerning such shareholdings. A similar report must also be made in respect of any subsequent change of 1% or more in any such holding or any change in material matters set out in reports previously filed, with certain exceptions. For this purpose, shares issuable to such person upon his exchange of exchangeable securities or exercise of Stock Acquisition Rights are taken into account in determining both the size of his holding and the issuer's total issued share capital. Copies of each report must be furnished to the issuer of such shares and to all Japanese stock exchange on which the shares are listed or, in the case of shares traded over-the-counter, the Japan Securities Dealers Association. Dividend Policy and Dividends ORIX has paid cash dividends on the shares on an annual basis in each year since 1967. The Board of Directors recommends the annual dividends. The shareholders approve the annual dividend at the ordinary general meeting of shareholders customarily held in June of each year. Immediately following this approval at the meeting, dividends are paid to holders of record as of the preceding March 31. The following table shows the amount of dividends paid by ORIX in each of the fiscal years indicated, which amounts are translated into US dollars per ADS at the noon buying rate on each of the dates of the ordinary general meetings of shareholders. Since the share division was implemented in May 2000 after the record date for annual dividends, the amount of dividends for the fiscal year ending March 31, 2000 was not adjusted to reflect the share division. 90 Dividend Translated into Year ending per Share dollar per ADS --------------------------- ---------- -------------- March 31, 1998 yen15.00 $0.06 March 31, 1999 15.00 0.07 March 31, 2000 15.00 0.07 March 31, 2001 15.00 0.06 March 31, 2002 15.00 0.06 We currently intend to continue to pay annual cash dividends on the shares. In the future, however, we may decide not to pay dividends for any of the following reasons: o in response to a decline in our earnings or financial condition; o to permit us to increase our assets; o to maintain our debt-to-equity ratios at a desired level; or o if any of our lenders with the right to review our dividend plan and approve our payment of dividends objects to a planned dividend. Dividends paid to U.S. holders of shares or ADSs are generally reduced by a Japanese withholding tax at the maximum rate of 15%. Taxation Japanese Taxation The following is a summary of the principal Japanese tax consequences for owners of the Notes, ADNs, Shares or ADSs who are non-resident individuals of Japan or non-Japanese corporations without a permanent establishment in Japan to which the relevant income is attributable ("non-resident Holders"). The statements regarding Japanese tax laws set forth below are based on the laws in force and as interpreted by the Japanese taxation authorities as of the date hereof and are subject to changes in the applicable Japanese laws or double taxation conventions occurring after that date. This summary is not exhaustive of all possible tax considerations which may apply to a particular investor and potential investors are advised to satisfy themselves as: o to the overall tax consequences of the acquisition, ownership and disposition of Notes, ADNs, Shares or ADSs, including specifically the tax consequences under Japanese law, o the laws of the jurisdiction of which they are resident, and o any tax treaty between Japan and their country of residence, by consulting their own tax advisers. Notes Payment of interest on the notes outside Japan by our paying agents to non-resident Holders will not be subject to Japanese withholding tax. Each non-resident Holder must comply with procedures for establishing its status in accordance with the requirements of Japanese law. Interest on the Notes will continue to be exempt from Japanese withholding tax until March 31, 2004. You should be aware that the exemption for non-resident Holders may be affected if Japan adopts new rules that apply to interest on outstanding securities and does not provide for grandfathering. If that happens, 91 o non-resident Holders generally would be entitled to receive additional amounts, and o we would be entitled to redeem the debt securities. Under current Japanese practice, we and our paying agents may determine our withholding obligations in respect of notes held through a qualified clearing organization in reliance on certifications we receive from the qualified clearing organization. In these cases, we do not need to obtain certifications from the ultimate beneficial owners of the notes. As part of the procedures under which these certifications are given, a beneficial owner may be required to establish that it is a non-resident Holder to the person or entity through which it holds the notes. If a non-resident Holder does not hold its notes through a qualified clearing organization, the non-resident Holder will be required to deliver to our paying agents a claim for exemption from Japanese withholding tax and documentation concerning its identity and residence in order to receive interest payments on the notes free of Japanese withholding tax. We and our paying agents may adopt modified or supplemental certification procedures to the extent necessary to comply with changes in Japanese law or administrative practice. There are generally no Japanese taxes payable on conversion of Notes, including if we pay holders cash for shares that we are prohibited from delivering to them. If holders sell our Notes or ADNs outside of Japan, the proceeds will generally not be subject to Japanese income or corporation taxes. If holders acquire our Notes or ADNs as a legatee, heir or donee, holders may be subject to Japanese inheritance and gift taxes at progressive rates. We will pay the Japanese stamp duty tax imposed upon the issuance of shares of common stock registered in the name of the custodian and the delivery of the shares to the custodian's agent. Shares Generally, a non-resident Holder is subject to Japanese withholding tax on dividends on Shares paid by us. Stock splits, subject as set out below, are not subject to Japanese income or corporation tax. However, a transfer of retained earnings or legal reserve (but not additional paid-in capital) to stated capital (whether made in connection with a stock split or otherwise) on a non-consolidated basis is treated as a dividend payment to shareholders for Japanese tax purposes and is, in general, subject to Japanese income or corporation tax. In the absence of any applicable tax treaty, convention or agreement reducing the maximum rate of withholding tax, the rate of Japanese withholding tax applicable to dividends on Shares paid by us to non-resident Holders is 20%. Japan has income tax treaties, conventions and agreements whereby the above-mentioned withholding tax rate is reduced to, in most cases, 15% or a lower percentage for portfolio investors, with, inter alia, Australia, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, The Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland and the United Kingdom. By the income tax convention between Japan and the United States, the above-mentioned withholding tax rate is reduced to 15% for portfolio investors. Non-resident Holders in the United States and other countries who are entitled to the reduced rate of Japanese withholding tax on payments of dividends on Shares by us are required to submit an Application Form for the Income Tax Convention regarding Relief from Japanese Income Tax on Dividends in advance through us to the relevant tax authority before the payment of dividends. A standing proxy for a non-resident Holder may provide such application service. Non-resident Holders who do not submit an application in advance will be entitled to claim the refund of withholding taxes withheld in excess of the rate of an applicable tax treaty from the relevant Japanese tax authority. Gains derived from the sale outside Japan of Shares, or from the sale of Shares within Japan by a non-resident Holder, are, in general, not subject to Japanese income or corporation taxes. Japanese inheritance and gift taxes, at progressive rates, may be payable by an individual who has acquired Shares as legatee, heir or donee. 92 US Taxation The following discussion describes the material United States federal tax consequences of ownership and disposition of Notes, ADNs, Shares or ADSs held as capital assets by United States Holders (as defined below). This discussion does not describe all of the tax consequences that may be relevant to a holder in light of their particular circumstances or to holders subject to special rules, such as: o certain financial institutions; o insurance companies; o dealers in securities or foreign currencies; o persons holding Notes, ADNs, Shares or ADSs as part of a hedge; o persons whose functional currency is not the U.S. dollar; o partnerships or other entities classified as partnerships for U.S. federal income tax purposes; o persons subject to the alternative minimum tax; o persons owning 10% or more of the common stock of the Company; or o persons carrying on a trade or business in Japan through a permanent establishment. This summary is based on the Internal Revenue Code of 1986, as amended to the date hereof, administrative pronouncements, judicial decisions and final, temporary and proposed Treasury Regulations, changes to any of which subsequent to the date of this Annual Report may affect the tax consequences described herein. As used herein, the term "United States Holder" means a beneficial owner of Notes, ADNs, Shares or ADSs that is for United States federal income tax purposes: o a citizen or resident of the United States; o a corporation, or other entity taxable as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the United States or of any political subdivision thereof; or o an estate or trust the income of which is subject to United States federal income taxation regardless of our source. We believe that we will be considered a passive foreign investment company (a "PFIC") for United States federal income tax purposes in the year to which this Annual Report relates and for the foreseeable future by reason of the composition of our assets and the nature of our income. Persons considering the purchase of Notes, ADNs, Shares or ADSs should consult their tax advisors with regard to the PFIC rules described below as well as the application of other United States federal income tax laws relevant to their particular situations and any tax consequences arising under the laws of any state, local or foreign taxing jurisdiction. Notes or ADNs A United States Holder who uses the cash method of accounting and who receives a payment of stated interest on a Note or ADN in Japanese yen will be required to include in income the U.S. dollar value of the yen payment (determined based on a spot rate on the date the payment is received by the holder or the depositary in the case of ADNs) regardless of whether the payment is in fact converted to U.S. dollars at that time, and this U.S. dollar value will be the United States Holder's tax basis in the yen. 93 In the case of an accrual method taxpayer, a United States Holder will be required to include in income the U.S. dollar value of the amount of interest income that has accrued during an accrual period. The U.S. dollar value of the accrued income will be determined by translating the income at the average rate of exchange for the accrual period or, with respect to an accrual period that spans two taxable years, at the average rate for the partial period within the taxable year. The United States Holder will recognize ordinary income or loss with respect to accrued interest income on the date the income is actually received by the holder (or the depositary in the case of ADNs). The amount of ordinary income or loss recognized will equal the difference between the U.S. dollar value of the yen payment received (determined based on a spot rate on the date the payment is received by the holder, in the case of Notes, or the depositary, in the case of ADNs) in respect of the accrual period (or, where a holder receives U.S. dollars, the amount of the payment in respect of the accrual period) and the U.S. dollar value of interest income that has accrued during the accrual period (as determined above). A United States Holder may elect to translate interest income into U.S. dollars at the spot rate on the last day of the interest accrual period (or, in the case of a partial accrual period, the spot rate on the last day of the taxable year) or, if the date of receipt is within five business days of the last day of the interest accrual period, the spot rate on the date of receipt. A United States Holder that makes this election must apply it consistently to all debt instruments from year to year and cannot change the election without the consent of the Internal Revenue Service. Interest income will be foreign source income for foreign tax credit purposes. The limitation on foreign tax eligible for credit is calculated separately for specific classes of income. For this purpose, interest income will generally be "passive income" or, for certain holders, "financial services income". A United States Holder's tax basis in a Note or ADN will be the U.S. dollar value of the yen amount paid for the Note or ADN determined on the date of purchase. A United States Holder who purchases a Note or ADN with previously owned foreign currency will recognize ordinary income or loss in an amount equal to the difference, if any, between such United States Holder's tax basis in the foreign currency and the U.S. dollar fair market value of the Note or ADN on the date of purchase. Gain or loss realized upon the sale, exchange or retirement of a Note or ADN that is attributable to fluctuations in currency exchange rates will be ordinary income or loss which will not be treated as interest income or expense. Gain or loss attributable to fluctuations in exchange rates will equal the difference between (i) the U.S. dollar value of the yen principal amount of the Note or ADN, determined on the date the payment is received or the Note or ADN is disposed of, and (ii) the U.S. dollar value of the yen principal amount of the Note or ADN, determined on the date the United States Holder acquired the Note or ADN. Payments received attributable to accrued interest will be treated in accordance with the rules applicable to payments of interest on Notes or ADNs described above. The foreign currency gain or loss will be recognized only to the extent of the total gain or loss realized by a United States Holder on the sale, exchange or retirement of the Note or ADN. Foreign currency gain or loss will generally be U.S. source gain or loss for a United States Holder. Any gain or loss realized by these Holders in excess of the foreign currency gain or loss will be treated in the manner described below under "PFIC Rules". A United States Holder's conversion of a Note or ADN into Shares or ADSs will generally not be a taxable event, except that the receipt of cash in lieu of a fractional share will result in gain or loss (measured by the difference between the cash received in lieu of the fractional share and the United States Holder's tax basis in the fractional share) and except for foreign currency gain or loss to the extent of the amount of the total gain or loss otherwise realized on the conversion. Gain or loss recognized with respect to cash paid in lieu of fractional shares will be treated in the manner described below under "PFIC Rules". A United States Holder's tax basis in Shares or ADSs received upon a conversion of a Note or ADN will be the same as the United States Holder's basis in the Note or ADN at the time of conversion, reduced by any basis allocated to a fractional share and increased or reduced by any foreign currency gain or loss recognized on the conversion. The United States Holder's holding period for the Shares or ADSs received will include the holder's holding period for the Note or ADN converted. 94 If we were to make a distribution of property to shareholders (for example, distributions of evidences of indebtedness or assets, but generally not stock dividends or rights to subscribe for our Shares or ADSs) and the conversion price of the Notes or ADNs were decreased pursuant to the anti-dilution provisions of the Notes and ADNs, such decrease would be deemed to be a distribution to the United States Holder. In addition, any other decrease to the conversion price of the Notes or ADNs may, depending on the circumstances, be deemed to be a distribution to the United States Holder. In certain circumstances, the failure to make an adjustment of the conversion price may result in a taxable distribution to holders of our Shares and ADSs. United States Holders are urged to consult their own tax advisors with respect to the U.S. federal income tax consequences of the ownership and disposition of Notes or ADNs in their particular circumstances, including the possible application of the market discount, acquisition premium and amortizable bond premium rules. PFIC rules If, as expected, we are treated as a PFIC for any year during a United States Holder's holding period of the Shares or ADSs, and the United States Holder has not made the mark-to-market election for the Shares or ADSs as described below, the holder will be subject to special rules generally intended to eliminate any benefits from the deferral of U.S. federal income tax that a holder could derive from investing in a foreign corporation that does not distribute all of its earnings on a current basis. Upon a disposition of Shares or ADSs, including, under proposed Treasury regulations, a disposition pursuant to an otherwise tax-free reorganization, gain recognized by a United States Holder would be allocated ratably over its holding period for the Shares or ADSs. The amounts allocated to the taxable year of the sale or other exchange and to any year before the Company became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations for such year, as appropriate, and an interest charge would be imposed on tax liability allocated to such taxable year. Under proposed Treasury resolution that have a proposed retroactive effective date, comparable rules apply with respect to a disposition of Notes or ADNs (other than a conversion of such Notes or ADNs into Shares or ADSs) including if we pay holders cash in lieu of Shares that we are prohibited from delivering. Further, any distribution in respect of Shares or ADSs in excess of 125 percent of the average of the annual distributions on Shares received during the preceding three years or the United States Holder's holding period, whichever is shorter, would be subject to taxation as described above with respect to the sale or other disposition of Shares. If the Shares or ADSs are considered regularly traded on a "qualified exchange," a United States Holder of Shares or ADSs would be eligible to make a mark-to-market election. A "qualified exchange" includes the NYSE and a foreign exchange that is regulated by a governmental authority in which the exchange is located and with respect to which certain other requirements are met. The Internal Revenue Service ("IRS") has not yet identified specific foreign exchanges that are "qualified" for this purpose. If a United States Holder is eligible and makes the mark-to-market election, the United States Holder will include each year, as ordinary income, the excess, if any, of the fair market value of the Shares or ADSs at the end of the taxable year over their adjusted basis, and will be permitted an ordinary loss in respect of the excess, if any, of the adjusted basis of the Shares or ADSs over their fair market value at the end of the taxable year (but only to the extent of the net amount of previously included income as a result of the mark-to-market election). If a United States Holder validly makes the election, the holder's basis in the Shares or ADSs will be adjusted to reflect any such income or loss amounts. Any gain recognized on the sale or other disposition of Shares or ADSs will be treated as ordinary income. We do not intend to comply with the requirements necessary for a United States Holder to make a different election (the qualified electing fund election), which is sometimes available to shareholders of a PFIC. Special rules apply to determine the foreign tax credit with respect to withholding taxes imposed on distributions on shares in a PFIC. If a United States Holder owns Shares during any year in which we are a PFIC, the holder must file Internal Revenue Service Form 8621 with the IRS. 95 We urge United States Holders to consult their tax advisers concerning our status as a PFIC and the tax considerations relevant to an investment in a PFIC, including the availability and consequences of making the mark-to-market election discussed above. Backup Withholding and Information Reporting Information returns may be filed with the IRS in connection with payments of dividends on the Shares or ADSs and payments of interest on the Notes or ADNs and on the proceeds from a sale or other disposition of Shares, ADSs, Notes or ADNs. A United States Holder, other than exempt recipients such as all corporations, will be subject to United States backup withholding tax on these payments if the United States Holder fails to provide our taxpayer identification number to the paying agent and comply with certain certification procedures or otherwise establish an exemption from backup withholding. The amount of any backup withholding from a payment to a United States Holder will be allowed as a credit against the United States Holder's United States federal income tax liability and may entitle the United States Holder to a refund, provided that the required information is furnished to the IRS. Documents on Display Our annual reports, news releases and interim results are displayed in our home page (URL: www.orix.co.jp). Item 11. Quantitative and Qualitative Disclosures About Market Risk Derivatives and Other Financial Instruments We engage in a number of derivative transactions such as interest rate and currency swaps and, interest rate cap, floor and collar transactions. We engage in these transactions principally for hedging purposes. ORIX establishes market risk management regulations determined by the Investment and Credit Committee, and each of its subsidiaries that engages in derivatives transactions has established market risk management parameters. Based on those parameters, the object of the risks which should be managed and the types of hedging methods are clarified, while an internal check system has been established to separate the functions of departments responsible for execution, hedging efficacy evaluation, and related administration tasks. Departments executing transactions calculate the fair market values of transactions with individual counterparties and transactions with counterparties of given credit ratings, and the types of hedging methods employed. In addition, these departments make other calculations as part of a management system capable of responding rapidly to sharp market changes and other unanticipated developments. We perform hedging efficacy checks to ensure that the types of hedging methods employed are appropriate and, periodically or when necessary, evaluate the efficacy of the hedging methods. Working in cooperation with banks and other outside entities, administrative management undertakes checks of all transactions. In addition, each quarter, they prepare reports on each subsidiary's transactions that include compilations of such information as the notional principal, fair market value, hedging method, and hedging efficacy associated with each type of transaction and each counterparty, and present this report to CFO. Further, the Inspection Office inspects derivatives-related accounts and performs checks to ensure that relevant regulations are observed. Market Risks Our primary market risk exposures are to interest rate fluctuations, foreign exchange rate movements and changes in market prices for equity securities. We seek to manage market risk exposures as described under "Item 5. Operating and Financial Review and Prospects-Risk Management". Our interest income is exposed to the risk of decreases in market interest rates. Decreases in market interest rates reduce interest income from: o floating rate installment loans; o investment securities yielding a floating rate of return; o short-term investments; and 96 o interest rate swaps in which we receive a floating rate of interest. Our most significant exposure of this kind is to installment loans bearing a floating rate of interest, although we also have a significant amount of short-term investments. Most of our floating-rate installment loans and short-term investments are denominated in yen and are therefore exposed to the risk of changes in market rates of interest for financial obligations denominated in yen. Our interest expense is exposed to the risk of increases in market interest rates. Increases in market interest rates increase interest expense from: o short-term debt; o floating rate long-term debt; and o interest rate swaps in which we pay a floating rate of interest. Our most significant exposure of this kind is to short-term debt; we customarily finance a significant portion of our operations through the issuance of commercial paper and short-term borrowings. We also have a significant amount of floating-rate long-term debt. Most of our short-term debt and floating-rate long-term debt is denominated in yen and is therefore exposed to the risk of changes in market rates of interest for financial obligations denominated in yen. In principle, our floating rate assets are funded by floating rate debt such as commercial paper and by way of derivative instruments. We have foreign-currency denominated assets and liabilities, and engage in foreign-currency denominated transactions. Although we generally seek to match the currencies in which our assets and liabilities are denominated, our attempt at matching is not comprehensive. Consequently, our profits from foreign currency denominated transactions and shareholders' equity are exposed to foreign exchange rate risks if that foreign currency denominated investments are not hedged. These risks include: o the effects of changes in payment flows on foreign currency swaps; o changes in the yen equivalent amounts of income or expenses from transactions denominated in foreign currencies; and o revaluation of assets and liabilities denominated in foreign currencies or reflected in the financial statements of subsidiaries whose functional currencies are other than yen. We have a portfolio of equity securities, principally Japanese listed common stocks. Our shareholders' equity and net income are exposed to the risk of changes in market prices for these securities. In addition to the risks described above, we are exposed to market risks in relation to our direct financing leases and operating leases. Interest rate sensitivity and exchange rate sensitivity data for these leases are not required to be presented in the tables below. Substantially all of our direct financing leases and operating leases do not provide for payments that fluctuate based on changes in market rates of interest or changes in rates of currency exchange. However, changes in market rates of interest will affect the fair values of these payments in the future. We are also exposed to market risks in relation to insurance policies issued by ORIX Life Insurance. Interest rate sensitivity and exchange rate sensitivity data for these policies are not required to be presented in the tables below. All insurance policies issued by ORIX Life Insurance are denominated in yen. Those policies do not provide for payments that fluctuate based on market rates of interest. Our obligations under insurance policies include obligations that are based upon the occurrence of loss events. These also include obligations that are based upon essentially financial criteria, such as insurance products that are designed partially or wholly as investment products. Changes in market rates of interest may affect the fair value of our obligations under other investment-type insurance products and may affect the present value of our expected obligations (based on actuarial determinations) under other insurance products. 97 The following quantitative information about the market risk of our financial instruments does not include information about financial instruments to which the requirements under FASB Statement 107 do not apply, such as investment in direct financing leases, investment in operating leases, and insurance contracts. As a result, the following information does not present all the risk of our financial instruments. We choose to present in tabular form our interest risk exposure, and provide sensitivity analysis, which presents potential losses in future earnings resulting from hypothetical changes in exchange rates, to show our foreign currency exchange rate exposure. We omitted the disclosure for trading purpose financial instruments because the amount is immaterial. The table of interest rate sensitivity for non-trading financial instruments summarizes installment loans, interest-bearing bonds and long-and short-term debt. These instruments are further classified as fixed rate and floating rate. For such items, the principal collection and repayment schedules and the weighted average interest rates for collected and repaid portions are disclosed. For interest swaps of derivative financial instruments, the estimated notional principal amounts for each contractual period and the weighted average interest swap rates are disclosed. The average interest rates of financial instruments as of the end of fiscal 2002 are: 5.2% for installment loans, 4.1% for interest-bearing bonds, 1.2% for long-and short-term debt and 0.6% for deposits. The average payment rate of interest rate swaps is 3.4% and the average receipt rate is 1.8%. There is no material change in the balance and the average interest rate of financial instruments. The average interest rates of financial instruments as of the end of fiscal 2001 are: 5.4% for installment loans, 4.1% for interest-bearing bonds, 2.3% for long-and short-term debt and 0.6% for deposits. The average payment rate of interest rate swaps is 3.8% and the average receipt rate is 2.8%. Since we have a foreign currency transaction policy of basically keeping the same balance of foreign currency denominated assets and liabilities, there is a small amount of net exposure to foreign currency exchange risk. We are exposed to exchange risk mainly when our investment is primarily denominated in the local currency of Indonesia or other Asian countries and the source of our funding is US dollar debt. When the currencies depreciate against the US dollar, we incur foreign currency transaction losses. There is no material change in our exchange risk position from fiscal 2001 to fiscal 2002. We identified all positions subject to a change in the value of the foreign currency and calculated the potential loss in future earnings resulting from several hypothetical scenarios of 10% changes in related currencies. For the Indonesian Rupiah, we used a 60% change, taking into consideration the recent fluctuation in the value of the currency. The largest loss results from the scenario that both the US dollar and Japanese yen appreciate against other currencies. Based on this scenario, the exchange losses in future earnings are yen3,962 million at the end of fiscal 2001 and yen2,885 million at the end of fiscal 2002. 98 The following tables contain quantitative information concerning the interest rate risk of ORIX's financial instruments. Interest Rate Sensitivity Non-Trading Financial Instruments Expected maturity date --------------------------------------------------------------------------- March 31, 2002 estimated 2003 2004 2005 2006 2007 Thereafter Total fair value ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- (In millions of yen) Assets Installment loans (fixed rate) .......... yen300,230 yen94,034 yen92,726 yen84,003 yen68,256 yen145,741 yen784,990 yen805,392 Average interest rate ... 6.9% 7.8% 7.9% 8.5% 8.3% 8.3% 7.7% Installment loans (floating rate) ....... yen316,128 yen223,430 yen174,037 yen169,467 yen169,237 yen435,991 yen1,488,290 yen1,488,290 Average interest rate ... 4.8% 3.6% 4.0% 4.1% 3.8% 3.4% 3.9% Investment in securities (fixed rate) .......... yen57,432 yen112,997 yen82,682 yen66,664 yen48,110 yen282,452 yen650,337 yen651,861 Average interest rate ... 2.1% 1.7% 2.7% 2.7% 3.7% 6.1% 4.0% Investment in securities (floating rate) ....... yen7,437 yen5,524 yen1,403 yen1,398 yen115 yen10,019 yen25,896 yen26,268 Average interest rate ... 3.2% 14.7% 2.0% 3.8% 2.2% 3.6% 5.8% Liabilities Short-term debt ......... yen1,644,462 -- -- -- -- -- yen1,644,462 yen1,644,462 Average interest rate .. 1.0% -- -- -- -- 1.0% Deposits ................ yen145,855 yen27,603 yen17,979 yen9,960 yen23,846 -- yen225,243 yen227,768 Average interest rate .. 0.4% 0.8% 0.7% 1.4% 0.9% -- 0.6% Long-term debt (fixed rate) ........... yen468,940 yen375,080 yen327,247 yen297,614 yen161,564 yen93,009 yen1,723,454 yen1,746,712 Average interest rate .. 2.9% 2.3% 2.0% 1.5% 1.0% 3.2% 2.2% Long-term debt (floating rate) ........ yen208,155 yen240,400 yen280,347 yen159,772 yen148,557 yen49,176 yen1,086,407 yen1,086,407 Average interest rate .. 2.0% 1.7% 1.0% 0.8% 0.8% 1.4% 1.3%
Non-Trading Derivative Financial Instruments Expected maturity date --------------------------------------------------------------------------- March 31, 2002 estimated 2003 2004 2005 2006 2007 Thereafter Total fair value ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- (In millions of yen) Interest rate swaps Notional amount (floating to fixed) .............. yen47,635 yen95,446 yen81,393 yen137,125 yen19,311 yen19,505 yen400,415 yen(13,934) Average pay rate ....... 3.9% 3.3% 3.4% 4.6% 3.6% 5.0% 3.9% Average receive rate ... 1.9% 1.5% 1.3% 1.1% 1.5% 2.0% 1.4% Notional amount (fixed to floating) .............. yen17,909 yen15,453 yen34,523 yen10,830 yen2,500 yen500 yen81,715 yen4,608 Average pay rate ....... 0.3% 1.2% 0.6% 0.2% 1.9% 0.5% 0.6% Average receive rate ... 2.1% 4.3% 4.1% 2.9% 1.9% 0.5% 3.5%
99 Weighted March 31, average 2002 Notional strike estimated amount rate fair value --------- --------- ----------- (In millions of yen) ----------- Caps, floors and collars held................................... 31,258 5.5% (28,526)
100 Item 12. Other than Equity Securities Not applicable. PART II Item 13. Defaults, Dividend Arrearages and Delinquencies None. Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds In May 2000, ORIX implemented the subdivision of each share of common stock registered on its register of shareholders as of March 31, 2000 into 1.2 shares. Item 15. [Reserved] Item 16. [Reserved] PART III Item 17. Financial Statements ORIX has elected to provide financial statements and related information pursuant to Item 18. Item 18. Financial Statements The consolidated financial statements of ORIX and the report thereon by its independent auditors listed below are attached hereto as follows: (a) Consolidated Balance Sheets as of March 31, 2001 and 2002 (page F-3) (b) Consolidated Statements of Income for the years ended March 31, 2000, 2001 and 2002 (page F-4) (c) Consolidated Statements of Shareholders' Equity for the years ended March 31, 2000, 2001 and 2002 (page F-5) (d) Consolidated Statements of Cash Flows for the years ended March 31, 2000, 2001 and 2002 (page F-6) (e) Notes to Consolidated Financial Statements (page F-7 to F-53) (f) Schedule II. - Valuation and Qualifying Accounts and Reserves (page F-54) Item 19. Exhibits 1.1 Amended Articles of Incorporation of ORIX Corporation. 10.1 Letter to the Securities and Exchange Commission regarding representations made by Asahi & Co., a member firm of Andersen Worldwide SC 101 ---------- INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ---------- Page ---- Report of Independent Public Accountants ................................. F-2 Consolidated Balance Sheets as of March 31, 2001 and 2002 ................ F-3 Consolidated Statements of Income For the Years Ended March 31, 2000, 2001 and 2002 .......................................................... F-4 Consolidated Statements of Shareholders' Equity For the Years Ended March 31, 2000, 2001 and 2002 .................................... F-5 Consolidated Statements of Cash Flows For the Years Ended March 31, 2000, 2001 and 2002 .......................................... F-6 Notes to Consolidated Financial Statements ............................... F-7 Schedule II - Valuation and Qualifying Accounts and Reserves ............. F-54 F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 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, 2001 and 2002, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended March 31, 2002, expressed in Japanese yen. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 financial statements referred to above present fairly, in all material respects, the financial position of ORIX Corporation and its subsidiaries as of March 31, 2001 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2002, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the consolidated financial statements, the Company and its subsidiaries changed their method of accounting for derivative instruments and hedging activities effective April 1, 2001 and accounting for goodwill and intangible assets resulting from business combinations consummated after June 30, 2001. Also, in our opinion, the translated amounts in the accompanying consolidated financial statements translated into U.S. dollars have been computed on the basis set forth in Note 1 (x). Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to consolidated financial statements is presented for purpose of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen Tokyo, Japan April 25, 2002, except for Note 27 as to which the date is May 31, 2002 F-2 CONSOLIDATED BALANCE SHEETS ORIX Corporation and Subsidiaries As of March 31, 2001 and 2002 ----------------------------------------------------------------------------------------------------------- Millions of yen Millions of U.S. dollars -------------------------------------------------- ASSETS 2001 2002 2002 ----------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents yen 155,411 yen 354,748 $2,662 Restricted Cash and Cash Equivalents 17,072 20,189 152 Time Deposits 8,673 1,050 8 Investment in Direct Financing Leases 1,657,709 1,658,669 12,448 Installment Loans 1,846,511 2,273,280 17,060 Allowance for Doubtful Receivables on Direct Financing Leases and Possible Loan Losses (141,077) (152,887) (1,147) Investment in Operating Leases 451,171 474,491 3,561 Investment in Securities 942,158 861,336 6,464 Other Operating Assets 132,006 260,373 1,954 Investment in Affiliates 63,155 86,346 648 Other Receivables 112,677 124,022 931 Advances 141,148 158,089 1,186 Prepaid Expenses 27,740 37,406 281 Office Facilities 74,406 76,987 578 Other Assets 102,551 116,120 870 ------------- ------------- ----------- yen 5,591,311 yen 6,350,219 $47,656 ============= ============= =========== -----------------------------------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. F-3 CONSOLIDATED BALANCE SHEETS ORIX Corporation and Subsidiaries As of March 31, 2001 and 2002 ------------------------------------------------------------------------------------------------------------ Millions of yen Millions of U.S. dollars -------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2002 2002 ------------------------------------------------------------------------------------------------------------ Short-Term Debt yen 1,562,072 yen 1,644,462 $12,341 Deposits 178,314 225,243 1,690 Trade Notes and Accounts Payable 211,280 244,871 1,838 Accrued Expenses 81,334 92,266 692 Policy Liabilities 561,887 602,664 4,523 Income Taxes: Current 10,173 11,544 87 Deferred 135,430 141,532 1,062 Deposits from Lessees 59,339 75,268 565 Long-Term Debt 2,330,159 2,809,861 21,087 ----------- ----------- ----------- Total liabilities 5,129,988 5,847,711 43,885 ----------- ----------- ----------- Commitments and Contingent Liabilities Shareholders' Equity: Common stock: Authorized 259,000,000 shares Issued 82,388,025 shares in 2001 and 84,303,985 shares in 2002 41,820 51,854 389 Additional paid-in capital 59,885 69,823 524 Legal reserve 2,090 2,220 17 Retained earnings 361,262 400,175 3,003 Accumulated other comprehensive income (loss) 4,552 (13,440) (101) Treasury stock, at cost: 681,745 shares in 2001 and 657,519 shares in 2002 (8,286) (8,124) (61) ------------- ------------- ----------- 461,323 502,508 3,771 ------------- ------------- ----------- yen 5,591,311 yen 6,350,219 $47,656 ============= ============= =========== ------------------------------------------------------------------------------------------------------------
F-3 CONSOLIDATED STATEMENTS OF INCOME ORIX Corporation and Subsidiaries For the Years Ended March 31, 2000, 2001 and 2002 -------------------------------------------------------------------------------------------------------- Millions of U.S. Millions of yen dollars ------------------------------------------------- 2000 2001 2002 2002 -------------------------------------------------------------------------------------------------------- Revenues: Direct financing leases yen 130,798 yen 122,003 yen 121,914 $ 915 Operating leases 100,503 113,478 120,807 907 Interest on loans and investment securities 97,390 109,448 121,962 915 Brokerage commissions and gains on investment securities 19,700 12,055 18,367 138 Life insurance premiums and related investment income 205,829 158,314 152,333 1,143 Interest income on deposits 3,884 2,520 1,374 10 Other operating revenues 58,409 68,331 121,705 914 ---------- ---------- ---------- -------- Total revenues 616,513 586,149 658,462 4,942 ---------- ---------- ---------- -------- Expenses: Interest expense 115,038 109,289 90,348 678 Depreciation--operating leases 60,750 68,316 77,047 578 Life insurance costs 193,664 143,709 139,786 1,049 Other operating expenses 38,302 43,580 79,131 594 Selling, general and administrative expenses 90,961 101,156 126,316 948 Provision for doubtful receivables and possible loan losses 45,573 44,584 51,367 385 Write-downs of long-lived assets 7,881 4,090 2,716 20 Write-downs of securities 12,297 10,848 19,742 148 Foreign currency transaction loss (gain), net (839) 3,429 (1,360) (9) ---------- ---------- ---------- -------- Total expenses 563,627 529,001 585,093 4,391 ---------- ---------- ---------- -------- Operating Income 52,886 57,148 73,369 551 Equity in Net Income (Loss) of and Gain (Loss) on Sales of Affiliates (yen 1,503 million loss in 2000, yen 2,059 million gain in 2001 and yen 119 million ($1 million) gain in 2002) (838) 2,088 (330) (3) ---------- ---------- ---------- -------- Income before Income Taxes 52,048 59,236 73,039 548 Provision for Income Taxes 21,406 25,079 32,903 247 ---------- ---------- ---------- -------- Income before Cumulative Effect of a Change in Accounting Principle 30,642 34,157 40,136 301 ---------- ---------- ---------- -------- Cumulative Effect of a Change in Accounting Principle -- -- 133 1 ---------- ---------- ---------- -------- Net Income yen 30,642 yen 34,157 yen 40,269 $ 302 ========== ========== ========== ======== -------------------------------------------------------------------------------------------------------- U.S. yen dollars ------------------------------------ -------- Amounts Per Share of Common Stock: Income before Cumulative Effect of a Change in Accounting Principle: Basic yen 385.27 yen 417.77 yen 487.57 $ 3.66 Diluted 377.02 400.99 465.57 3.50 Cumulative Effect of a Change in Accounting Principle: Basic -- -- 1.62 0.01 Diluted -- -- 1.54 0.01 Net Income: Basic 385.27 417.77 489.19 3.67 Diluted 377.02 400.99 467.11 3.51 Cash Dividends 15.00 15.00 15.00 0.11 -------------------------------------------------------------------------------------------------------- The accompanying notes to consolidated financial statements are an integral part of these statements.
F-4 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY ORIX Corporation and Subsidiaries For the Years Ended March 31, 2000, 2001 and 2002 -------------------------------------------------------------------------------------------------------- Millions of U.S. Millions of yen dollars ------------------------------------------------- 2000 2001 2002 2002 -------------------------------------------------------------------------------------------------------- Common Stock: Beginning balance yen 20,180 yen 41,688 yen 41,820 $ 314 Common stock issued in public and private offering 19,856 -- 9,657 72 Exercise of warrants 1,647 132 377 3 Common stock issued for acquisitions of minority interests of subsidiaries 5 -- -- -- ---------- ---------- ---------- -------- Ending balance 41,688 41,820 51,854 389 ---------- ---------- ---------- -------- Additional Paid-in Capital: Beginning balance 37,464 59,285 59,885 449 Value ascribed to warrants attached to 1.22% bonds issued 333 -- -- -- Value ascribed to warrants attached to 1.59% bonds issued -- 178 -- -- Value ascribed to warrants attached to 0.64% bonds issued -- -- 141 1 Common stock issued in public and private offering 18,954 -- 9,223 69 Exercise of warrants and stock options 1,504 130 376 3 Common stock issued for acquisitions of minority interests of subsidiaries 1,030 -- 198 2 Gains on sales of treasury stock -- 297 -- -- Forfeit of stock options -- (5) -- -- ---------- ---------- ---------- -------- Ending balance 59,285 59,885 69,823 524 ---------- ---------- ---------- -------- Legal Reserve: Beginning balance 1,860 1,970 2,090 16 Transfer from retained earnings 110 120 130 1 ---------- ---------- ---------- -------- Ending balance 1,970 2,090 2,220 17 ---------- ---------- ---------- -------- Retained Earnings: Beginning balance 298,684 328,248 361,262 2,711 Cash dividends (968) (1,023) (1,226) (9) Transfer to legal reserve (110) (120) (130) (1) Net income 30,642 34,157 40,269 302 ---------- ---------- ---------- -------- Ending balance 328,248 361,262 400,175 3,003 ---------- ---------- ---------- -------- Accumulated Other Comprehensive Income (Loss): Beginning balance (27,550) (1,417) 4,552 34 Net cumulative effect of adopting FASB Statement No.133 -- -- (8,400) (63) Net increase (decrease) in net unrealized gains on investment in securities 41,551 (11,360) (19,588) (147) Net increase in minimum pension liability adjustments (3,485) (1,199) (2,150) (16) Net increase (decrease) in foreign currency translation adjustments (11,933) 18,528 10,308 77 Net decrease in net unrealized losses on derivative instruments -- -- 1,838 14 ---------- ---------- ---------- -------- Ending balance (1,417) 4,552 (13,440) (101) ---------- ---------- ---------- -------- Treasury Stock: Beginning balance (2,795) (4,103) (8,286) (62) Purchases of treasury stock for stock options (1,809) (5,154) -- -- Exercise of stock options 503 265 219 2 Resales of treasury stock issued in stock split -- 683 -- -- Resales accompanied by forfeit of stock options -- 24 -- -- Other, net (2) (1) (57) (1) ---------- ---------- ---------- -------- Ending balance (4,103) (8,286) (8,124) (61) ---------- ---------- ---------- --------
F-5 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY ORIX Corporation and Subsidiaries For the Years Ended March 31, 2000, 2001 and 2002 (Continued) -------------------------------------------------------------------------------------------------------- Millions of U.S. Millions of yen dollars ------------------------------------------------- 2000 2001 2002 2002 -------------------------------------------------------------------------------------------------------- Total Shareholders' Equity: Beginning balance 327,843 425,671 461,323 3,462 Increase, net 97,828 35,652 41,185 309 ----------- ----------- ----------- -------- Ending balance yen 425,671 yen 461,323 yen 502,508 $ 3,771 =========== =========== =========== ======== Summary of Comprehensive Income: Net income yen 30,642 yen 34,157 yen 40,269 $ 302 Other comprehensive income (loss) 26,133 5,969 (17,992) (135) ----------- ----------- ----------- -------- Comprehensive income yen 56,775 yen 40,126 yen 22,277 $ 167 =========== =========== =========== ======== -------------------------------------------------------------------------------------------------------- The accompanying notes to consolidated financial statements are an integral part of these statements.
F-5 CONSOLIDATED STATEMENTS OF CASH FLOWS ORIX Corporation and Subsidiaries For the Years Ended March 31, 2000, 2001 and 2002 --------------------------------------------------------------------------------------------------------------------------- Millions of yen Millions of U.S. dollars --------------------------------------------------------------- 2000 2001 2002 2002 --------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net income yen 30,642 yen 34,157 yen 40,269 $302 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 93,203 103,673 117,019 878 Provision for doubtful receivables and possible loan losses 45,573 44,584 51,367 385 Increase in policy liabilities 137,902 67,444 40,777 306 Deferred tax provision 6,464 8,111 17,530 132 Gains on securitization (9,296) (4,728) (9,235) (69) Equity in net (income) loss of and (gain) loss on sales of affiliates 838 (2,088) 330 3 Gains on sales of available-for-sale securities (13,893) (7,698) (13,795) (104) Write-downs of long-lived assets 7,881 4,090 2,716 20 Write-downs of securities 12,297 10,848 19,742 148 Increase in restricted cash and cash equivalents (11,702) (2,831) (2,865) (22) Decrease (increase) in other operating assets held for sales, including advance payments (8,572) (28,285) 2,133 16 Increase in prepaid expenses (423) (4,514) (9,255) (69) Increase in accrued expenses 11,886 4,116 223 2 Increase in deposits from lessees 1,828 13,629 8,464 63 Other, net 14,003 (3,386) (7,785) (58) ---------- ---------- ---------- ---------- Net cash provided by operating activities 318,631 237,122 257,635 1,933 ---------- ---------- ---------- ---------- Cash Flows from Investing Activities: Purchases of lease equipment, including advance payments (1,022,279) (883,061) (838,105) (6,290) Principal payments received under direct financing leases 710,485 640,680 768,923 5,771 Net proceeds from securitization of lease and loan receivables 185,530 215,494 258,926 1,943 Installment loans made to customers (801,959) (740,639) (1,334,532) (10,015) Principal collected on installment loans 681,908 660,652 865,598 6,496 Proceeds from sales of operating lease assets 37,013 38,727 39,921 300 Investment in and dividends received from affiliates, net (8,945) 1,242 (20,457) (154) Proceeds from sales of affiliates 2,881 6,277 815 6 Purchases of available-for-sale securities (263,679) (359,945) (289,055) (2,169) Proceeds from sales of available-for-sale securities 177,157 152,022 325,758 2,445 Maturities of available-for-sale securities 18,403 64,105 67,290 505 Maturities of held-to-maturity securities 3,089 -- -- -- Purchases of other securities (14,382) (37,153) (50,243) (377) Proceeds from sales of other securities 3,759 9,763 6,717 50 Purchases of other operating assets (5,389) (40,049) (119,700) (898) Net decrease (increase) in call loans -- (9,500) 9,500 71 Acquisitions of subsidiaries, net of cash acquired (4,935) (218) 3,846 29 Other, net 8,485 (4,049) (913) (7) ---------- ---------- ---------- ---------- Net cash used in investing activities (292,858) (285,652) (305,711) (2,294) ---------- ---------- ---------- ----------
F-6 CONSOLIDATED STATEMENTS OF CASH FLOWS ORIX Corporation and Subsidiaries For the Years Ended March 31, 2000, 2001 and 2002 --------------------------------------------------------------------------------------------------------------------------- (Continued) Millions of yen Millions of U.S. dollars --------------------------------------------------------------- 2000 2001 2002 2002 --------------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities: Repayment of short-term debt, net (248,386) (324,438) (171,114) (1,284) Proceeds from (repayment of) commercial paper, net (16,426) (68,759) 101,279 760 Proceeds from long-term debt 722,069 794,823 975,220 7,319 Repayment of long-term debt (604,360) (485,371) (729,593) (5,476) Net increase in deposits due to customers 101,654 23,391 46,929 352 Issuance of common stock 41,346 249 19,315 145 Purchases of treasury stock for stock options (1,809) (5,154) -- -- Dividends paid (968) (1,023) (1,226) (9) Net increase in call money -- -- 5,000 38 Other, net 827 1,662 306 2 ----------- ----------- ----------- ---------- Net cash provided by (used in) financing activities (6,053) (64,620) 246,116 1,847 ----------- ----------- ----------- ---------- Effect of Exchange Rate Changes on Cash and Cash Equivalents (6,054) 2,605 1,297 10 ----------- ----------- ----------- ---------- Net Increase (Decrease) in Cash and Cash Equivalents 13,666 (110,545) 199,337 1,496 Cash and Cash Equivalents at Beginning of Year 252,290 265,956 155,411 1,166 ----------- ----------- ----------- ---------- Cash and Cash Equivalents at End of Year yen 265,956 yen 155,411 yen 354,748 $2,662 =========== =========== =========== ========== ---------------------------------------------------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part of these statements. F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ORIX Corporation and 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, modified for the accounting for stock splits (see (m)). 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 (see (e)), 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, derivative instruments and hedging activities, 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 20%-50% owned affiliates are accounted for by using the equity method. 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 five 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 possible loan losses (see (g)), the determination of impairment of investment in securities (see (h)), the determination of impairment of long-lived assets and goodwill (see (u)), 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)). F-7 (d) Foreign currencies translation The Company and its subsidiaries maintain their accounting records in their 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 unamortized balance of initial direct costs is reflected as a component of investment in direct financing leases. Amortization of unearned lease income and direct finance lease origination 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 is past due 180 days or more, or earlier, if management believes their collectibility is doubtful. Operating leases--Operating lease assets are recorded at cost and are depreciated over their estimated useful lives mainly on a straight-line basis. Gains or losses arising from dispositions of operating lease assets are included in operating lease revenues. Estimates of residual values are based on current market values of used F-8 equipment and estimates of when and how much equipment will become obsolete. Brokerage commissions and gains on investment securities--Brokerage commissions and gains on investment securities are recorded on a trade date basis. (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 others factors applicable at the time the policies are written. The average rates of assumed investment yields are 3.3%, 3.0% and 2.8% for fiscal 2000, 2001 and 2002, respectively. The Company continually evaluates the potential for changes in the estimates and assumptions applied for 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. Amortizations charged to income for fiscal 2000, 2001 and 2002 amounted to yen 9,756 million, yen 10,671 million and yen 11,424 million ($86 million), respectively. (g) Allowance for doubtful receivables on direct financing leases and possible loan losses The allowance for doubtful receivables on direct financing leases and possible loan losses is maintained at a level which, in the judgment of management, is adequate to provide for potential losses on lease and loan portfolios that can be reasonably anticipated. 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 possible 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 evaluated based on the present value of expected future cash flows and the fair value of F-9 the collateral securing the loans. Smaller-balance homogeneous loans and lease receivables are evaluated considering current economic conditions and trends, the value of the collateral underlying the loans and leases, prior charge-off experience, 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) 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. In principle, the Company and its subsidiaries recognize losses related to securities for which the market price has been below the acquisition cost (or current carrying value if an adjustment has been made in the past) for more than one year or if 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 below the carrying value for twelve months, the decline in the market value of a security is based on economic conditions and not just general declines in equity markets and where it is considered unlikely that the market value of the security will recover in the next twelve months. However, if the Company and its subsidiaries have a significant long-term business relationship with the investee, management considers the probability of the market value recovering within the following twelve months. As part of this review, the investee'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 twelve 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. Held-to-maturity securities are recorded at amortized cost. (i) 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. 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, based on relative fair values. The Company F-10 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 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. Fair values are estimated based on estimated future cash flows, factoring in expected credit loss, and discounted at a market rate of interest. (j) Derivative financial instruments On April 1, 2001, the Company and its subsidiaries adopted FASB Statement No. 133 ("Accounting for Derivative Instruments and Hedging Activities"), as amended by FASB Statement No. 138, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts used for hedging activities. All derivatives, are required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, all changes in the fair value of the derivative and changes in the fair value of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portion of the change in the fair value of the derivative is recorded in net unrealized losses on derivative instruments, which is a part of accumulated other comprehensive income (loss) and recognized in the income statement when the hedged item affects earnings. The ineffective portions of cash flow hedges are immediately recognized in earnings. Derivative transactions that do not qualify as hedges are carried at fair value with changes in value included currently in earnings. Realized and unrealized gains or losses in instruments that hedge net capital exposures are recorded in shareholders' equity as foreign currency translation adjustments, which is a part of accumulated other comprehensive income (loss). Trading instruments used for trading purposes are recorded at fair value, realized and unrealized gains and losses are recognized in brokerage commissions and gains on investment securities. Prior to the adoption of FASB Statement No. 133, the accounting treatment of derivatives was as follows. Gains and losses in forward foreign exchange contracts and foreign currency swaps designated as hedges were recognized based on changes in the value of the related hedged asset or liability. Realized or unrealized gains or losses in instruments that hedged net capital exposures were recorded in shareholders' equity as foreign currency translation adjustments, which was a part of accumulated other comprehensive income (loss). All other foreign exchange contracts were marked to market and gains or losses were charged to earnings. The Company and its subsidiaries also entered into interest rate swap agreements and purchased interest rate option contracts (caps, floors and F-11 collars) to reduce interest rate risks and to modify the interest rate characteristics of financing transactions. For these hedging instruments, the accrual method of accounting was used where interest income or expense on the hedging instruments was accrued and recorded as an adjustment to the interest income or expense related to the hedged item. Premiums paid for interest rate options were deferred as other assets and amortized to interest income over the terms of the options. If a hedging derivative contract was terminated early, any resulting gain or loss was charged to earnings. And if the assets or liabilities hedged were sold or otherwise disposed of, the related gains and losses on the terminated derivative contracts were recognized as a component of the gain or loss on disposition of the related assets or liabilities. (k) Income taxes Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. Deferred income tax expenses or credits are based on the changes in the asset or liability from period to period. Deferred income tax assets have been recognized on the net operating loss carryforwards of certain subsidiaries. (l) Capitalization of interest costs The Company and its subsidiaries capitalized interest costs of yen 2,132 million, yen 4,730 million and yen 3,260 million ($24 million) in fiscal 2000, 2001 and 2002, respectively, related to specific long-term development projects. (m) 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 amounts equal to the fair market value of the shares issued and by increasing additional paid-in capital by the excess of the market value over par value of the shares issued. Had such stock splits in prior years been accounted for in this manner, additional paid-in capital as of March 31, 2002 would have increased by approximately yen 24,674 million ($185 million), with a corresponding decrease in retained earnings. Total shareholders' equity would have remained 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 generally accepted accounting principles in the United States of America. (n) Cash and cash equivalents Cash and cash equivalents include cash on hand, deposits placed with bank and F-12 short-term highly liquid investments with original maturities of three months or less. (o) Restricted cash and cash equivalents Restricted cash and cash equivalents consist of cash and securities trusts for the segregation of assets under an investor protection fund and deposits related to servicing agreements. (p) Other operating assets Other operating assets consist primarily of business assets, including golf courses, hotels, training facilities and inventories. (q) 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. (r) Advances Advances include advance payments made in relation to purchases of assets to be leased and advance and/or progress payments for acquisition of real estate for sale. (s) 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 yen 18,849 million and yen 21,210 million ($159 million) as of March 31, 2001 and 2002, respectively. (t) Other assets Other assets consist primarily of the unamortized excess of purchase prices over the net assets acquired in acquisitions (goodwill), deferred policy acquisition costs which are amortized over the contract periods, other intangible assets and leasehold deposits. The amount of goodwill is yen 17,069 million and yen 17,491 million ($131 million) as of March 31, 2001 and 2002, respectively. Goodwill acquired in acquisitions for which the acquisition date was before July 1, 2001 is being amortized over periods ranging from 5 to 25 years. With respect to acquisitions that occurred after June 30, 2001, goodwill of yen 738 million ($6 million) is not being amortized under the provisions of FASB Statement No. 142 ("Goodwill and Other Intangible Assets") (see (z)). (u) Impairment of long-lived assets Long-lived assets and certain identifiable intangibles to be held and used by the Company and its subsidiaries are reviewed for impairment, whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. When the sum of undiscounted future cash flows expected to be generated by the assets is less than the carrying amount of the assets, impairment losses are recognized based on the fair value of the assets. During fiscal 2000, 2001 and 2002, the Company and its subsidiaries wrote down certain real estate development projects included in investment in operating leases, other operating assets and advances in the consolidated balance sheets to their fair values. The amount of the impairment loss recognized is determined by F-13 comparing the carrying amount of the asset to its fair value as determined by an independent appraiser. (v) Advertising The costs of advertising are expensed as incurred. The total amounts charged to advertising expense in fiscal 2000, 2001 and 2002 are yen 6,916 million, yen 7,268 million and yen 9,103 million ($68 million), respectively. (w) 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 yen 2,585 million ($19 million) related primarily to the severance costs, non-cash asset impairment charges, and other closure, employee and professional costs. This accrual is recognized in selling, general and administrative expenses in the accompanying consolidated statements of income in fiscal 2002. As of March 31, 2002, the balance of the accrued liability is yen 691 million ($5 million) consisting primarily of remaining severance and lease obligations. (x) 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, 2002, which was yen 133.25 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. (y) Earnings per share Basic earnings per share is computed by dividing 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. (z) New accounting pronouncement On April 1, 2001, the Company and its subsidiaries adopted FASB Statement No. 133 ("Accounting for Derivative Instruments and Hedging Activities"), as amended by FASB Statement No. 137 ("Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133") and FASB Statement No. 138 ("Accounting for Certain Derivative Instruments and Certain Hedging Activities--an amendment of FASB Statement No. 133"). This statement requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a F-14 derivative may be designated as a hedge. The accounting treatment for changes in the fair value of derivatives depends on the character of the transaction. The cumulative effect of this accounting change as of April 1, 2001, was a charge of yen 8,400 million ($63 million) to accumulated other comprehensive income (loss) and an increase of yen 133 million ($1 million) to earnings. In September 2000, FASB Statement No. 140 ("Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities--a replacement of FASB Statement No. 125") was issued. It revises the standard for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of FASB Statement No. 125's provisions without reconsideration. The Company and its subsidiaries adopted the disclosure provisions related to the securitization of financial assets as of March 31, 2001. All transactions entered into after March 31, 2001 were accounted for in accordance with FASB Statement No. 140. This adoption does not have a significant effect on the Company and its subsidiaries' operations or financial position. 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 revises the financial accounting and reporting for business combinations and FASB Statement No. 142 revises the financial accounting and reporting for goodwill and other intangible assets. 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 after June 30, 2001 or business combinations accounted for by the purchase method completed. On April 1, 2002, as a result of the adoption of FASB Statement No. 141, the Company and its subsidiaries will record a transition gain, as an effect of a change in accounting principle, due to the write-off of unamortized deferred credits of approximately yen 1,937 million ($15 million) existing as of March 31, 2002. The deferred credits relate to an excess 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 are required to be adopted in their entirety by the Company and its subsidiaries as of April 1, 2002. Impairment losses that arise due to the initial F-15 application of FASB Statement No. 142 are required to be reported as a change in accounting principle. FASB Statement No. 142 requires the Company and its subsidiaries to complete the transitional goodwill impairment test by September 30, 2002. The Company and its subsidiaries are evaluating but have not yet determined whether the adoption of this statement will result in an impairment of goodwill. The Company and its subsidiaries will cease to amortize goodwill, including equity method goodwill, on April 1, 2002. For the year ended March 31, 2002, such goodwill amortization for the Company and its subsidiaries amounted to yen 728 million ($5 million). In August 2001, the FASB issued Statement No. 144 ("Accounting for the Impairment or Disposal of Long-Lived Assets"), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While Statement No. 144 supersedes FASB Statement No. 121 ("Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"), it retains many of the fundamental provisions of that Statement. Statement No. 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30 ("Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions"), for the disposal of a segment of a business. However, it retains the requirement in Opinion No. 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. This Statement is effective for fiscal years beginning after December 15, 2001. Management does not expect this adoption to have a significant effect on the Company and subsidiaries' operations or financial position. (aa) Reclassifications Certain amounts in the 2000 and 2001 consolidated financial statements have been reclassified to conform with the 2002 presentation. 2. Acquisitions On September 28, 2001, the Company acquired an 80% stake in the truck leasing company IFCO Inc., a subsidiary of Isuzu Motors Limited. The aggregate purchase price was yen 20,310 million ($152 million). The results of IFCO's operations have been included in the consolidated financial statements since the day of acquisition. This acquisition was accounted for under the purchase method. 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. F-16 The fair value of the net assets acquired from this acquisition at the date of acquisition was as follows: -------------------------------------------------------------------------------- Millions of Millions of yen U.S. dollars --------------------------------------------------------- ------------ Investment in direct financing leases (net) yen 252,436 $ 1,894 Other assets 49,472 371 Other intangible assets 5,645 42 Goodwill 461 4 ----------- ---------- Total assets acquired 308,014 2,311 ----------- ---------- Current liabilities 124,404 934 Long-term debt 163,300 1,225 ----------- ---------- Total liabilities assumed 287,704 2,159 ----------- ---------- Net assets acquired yen 20,310 $ 152 =========== ========== -------------------------------------------------------------------------------- Of the yen 5,645 million ($42 million) of acquired intangible assets, yen 3,830 million ($29 million) was assigned to the business model related to logistic/vehicle maintenance know-how that has an amortization period of eight years and yen 1,815 million ($13 million) was assigned to a customer database that has an amortization period of seven years. 3. Cash Flow Information Cash payments for interest and income taxes during fiscal 2000, 2001 and 2002 are as follows: ---------------------------------------------------------------------------------------------------- Millions of Millions of yen U.S. dollars ------------------------------------ -------------- 2000 2001 2002 2002 ---------------------------------------------------------------------------------------------------- Interest yen 119,285 yen 115,058 yen 97,020 $ 728 Income taxes 17,785 12,778 13,021 98 -----------------------------------------------------------------------------------------------------
4. Investment in Direct Financing Leases Investment in direct financing leases at March 31, 2001 and 2002 consists of the following: -------------------------------------------------------------------------------- Millions of Millions of yen U.S. dollars --------------------------- ------------ 2001 2002 2002 --------------------------------------------------- ------------- ------------ Minimum lease payments receivable yen 1,771,625 yen 1,727,729 $ 12,966 Estimated residual value 56,566 80,206 602 Initial direct costs 24,616 23,224 174 Unearned lease income (195,098) (172,490) (1,294) ------------- ------------- ------------ yen 1,657,709 yen 1,658,669 $ 12,448 ============= ============= ========== -------------------------------------------------------------------------------- In connection with the securitization of direct financing lease receivables, as described in Note 9, the Company and its subsidiaries retained subordinated interests of yen 144,162 million and yen 142,896 million ($1,072 million) as of March 31, 2001 and 2002, respectively, which are included in the above table. F-17 Minimum lease payments receivable (including guaranteed residual values and subordinated interests retained) are due in periodic installments through 2023. At March 31, 2002, the amounts due in each of the next five years and thereafter are as follows: -------------------------------------------------------------------------------- Millions of Year ending March 31, Millions of yen U.S. dollars ----------------------------------------------------------- ------------ 2003 yen 681,535 $ 5,115 2004 439,424 3,298 2005 276,219 2,073 2006 161,721 1,213 2007 80,488 604 Thereafter 88,342 663 -------------- -------- Total yen 1,727,729 $12,966 ============== ======== -------------------------------------------------------------------------------- Gains and losses from the disposition of direct financing lease assets are not significant for fiscal 2000, 2001 and 2002. 5. Investment in Operating Leases Investment in operating leases at March 31, 2001 and 2002 consists of the following: ------------------------------------------------------------------------------------------------- Weighted average Millions of useful life Millions of yen U.S. dollars ------------ --------------------------- ------------ Years 2001 2002 2002 ------------------------------------------------------------------------------------------------- Transportation equipment 12 yen 251,650 yen 297,346 $2,232 Measuring equipment and personal computers 3 138,088 143,791 1,079 Real estate and other 40 236,708 242,131 1,817 ----------- ----------- ------- 626,446 683,268 5,128 Accumulated depreciation (190,732) (224,756) (1,687) ----------- ----------- ------- Net 435,714 458,512 3,441 Rental receivables 15,457 15,979 120 ----------- ----------- ------- yen 451,171 yen 474,491 $3,561 =========== =========== ======= -----------------------------------------------------------------------------------------------
For fiscal 2000, 2001 and 2002, gains from the disposition of operating lease assets are yen 4,144 million, yen 7,883 million and yen 3,467 million ($26 million), respectively, and are included in operating lease revenues in the consolidated statements of income. The operating lease contracts include non-cancelable lease terms ranging from one month to 18 years. The minimum future rentals on non-cancelable operating leases are as follows: -------------------------------------------------------------------------------- Millions of Year ending March 31, Millions of yen U.S. dollars ----------------------------------------------------------- ------------ 2003 yen 47,907 $ 359 2004 32,919 247 2005 21,828 164 2006 13,223 99 2007 5,314 40 Thereafter 12,124 91 ----------- ------- Total yen 133,315 $ 1,000 =========== ======= ------------------------------------------------------------------------------ F-18 6. Installment Loans The composition of installment loans by domicile and type of borrower at March 31, 2001 and 2002 is as follows: ----------------------------------------------------------------------------------------- Millions of Millions of yen U.S. dollars --------------------------- ------------ 2001 2002 2002 ------------------------------------------------------------------------- ------------ Domestic borrowers: Consumers-- Housing loans yen 392,896 yen 557,461 $4,184 Card loans 181,215 230,358 1,729 Other 43,959 44,829 336 ------------- ------------- ------- 618,070 832,648 6,249 ------------- ------------- ------- Commercial-- Real estate related companies 222,818 278,367 2,089 Commercial and industrial companies 627,252 708,031 5,313 ------------- ------------- ------- 850,070 986,398 7,402 ------------- ------------- ------- 1,468,140 1,819,046 13,651 Foreign commercial, industrial and other borrowers 357,446 432,771 3,248 Loan origination costs, net 20,925 21,463 161 ------------- ------------- ------- yen 1,846,511 yen 2,273,280 $17,060 ============= ============= ======= ----------------------------------------------------------------------------------------
In principle, all domestic installment loans, except card loans, are made under agreements which require the borrower to provide collateral or guarantors. At March 31, 2002, the contractual maturities of installment loans for each of the next five years and thereafter are as follows: -------------------------------------------------------------------------------- Year ending March 31, Millions of Millions of yen U.S. dollars -------------------------------------------------------------- ------------ 2003 yen 610,174 $ 4,579 2004 312,747 2,347 2005 263,187 1,975 2006 250,954 1,884 2007 235,881 1,770 Thereafter 578,874 4,344 ------------- -------- Total yen 2,251,817 $16,899 ============= ======== ------------------------------------------------------------------------------ Included in interest on loans and investment securities in the consolidated statements of income is interest income on loans of yen 83,321 million, yen 85,441 million and yen 99,732 million ($748 million) for fiscal 2000, 2001 and 2002, respectively. 7. Allowance for Doubtful Receivables on Direct Financing Leases and Possible Loan Losses Changes in the allowance for doubtful receivables on direct financing leases and possible loan losses for fiscal 2000, 2001 and 2002 are as follows: ----------------------------------------------------------------------------------------------------- Millions of Millions of yen U.S. dollars ----------------------------------------- ------------ 2000 2001 2002 2002 ----------------------------------------------------------------------------------------------------- Beginning balance yen 132,606 yen 136,939 yen 141,077 $ 1,059 Provisions charged to income 45,573 44,584 51,367 385 Charge-offs (37,697) (46,845) (50,690) (380) Recoveries 354 539 1,350 10 Other* (3,897) 5,860 9,783 73 ----------- ----------- ----------- --------- Ending balance yen 136,939 yen 141,077 yen 152,887 $ 1,147 =========== =========== =========== ========= ----------------------------------------------------------------------------------------------------
*Other includes foreign currency translation adjustments and the effect of acquisitions. F-19 The balance of the allowance broken down into direct financing leases and installment loans at March 31, 2001 and 2002 is as follows: -------------------------------------------------------------------------------- Millions of Millions of yen U.S. dollars ----------------------------- ------------ 2001 2002 2002 -------------------------------------------------------------------------------- Balance of allowance related to: Direct financing leases yen 40,885 yen 50,837 $ 381 Installment loans 100,192 102,050 766 ----------- ----------- ------- Total yen 141,077 yen 152,887 $ 1,147 =========== =========== ======= -------------------------------------------------------------------------------- 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 that are collectively evaluated for impairment (these include individual housing loans and card loans) and lease receivables, are exempt from this measuring of individual loans. 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 yen 120,090 million and yen 113,000 million ($848 million) as of March 31, 2001 and 2002, respectively. Of these amounts, it was determined that a valuation allowance was required with respect to loans which had outstanding balances of yen 73,636 million and yen 71,802 million ($539 million) as of March 31, 2001 and 2002, respectively. The Company and its subsidiaries recorded a valuation allowance of yen 47,037 million and yen 45,862 million ($344 million) as of March 31, 2001 and 2002, respectively. This valuation allowance is included in the allowance for doubtful receivables on direct financing leases and possible loan losses in the accompanying consolidated balance sheets. The average recorded investments in impaired loans for fiscal 2000, 2001 and 2002 were yen 128,658 million, yen 123,715 million and yen 115,265 million ($865 million), respectively. The Company and its subsidiaries recognized interest income on impaired loans of yen 1,429 million, yen 1,414 million and yen 1,200 million ($9 million), and collected in cash interest on impaired loans of yen 1,061 million, yen 1,052 million and yen 1,080 million ($8 million) in fiscal 2000, 2001 and 2002, respectively. As of March 31, 2001 and 2002, the Company and its subsidiaries suspended income recognition pursuant to its non-accrual policy on investment in direct financing leases of yen 39,303 million and yen 50,902 million ($382 million), respectively, and on installment loans other than impaired loans of yen 77,544 million and yen 65,255 million ($490 million), respectively. F-20 8. Investment in Securities Investment in securities at March 31, 2001 and 2002 consists of the following: -------------------------------------------------------------------------------- Millions of Millions of yen U.S. dollars ----------------------------- ------------ 2001 2002 2002 -------------------------------------------------------------------------------- Trading securities yen 581 yen 879 $ 7 Available-for-sale securities 841,409 718,919 5,395 Held-to-maturity securities 13,005 16,008 120 Other securities 87,163 125,530 942 ----------- ----------- ---------- yen 942,158 yen 861,336 $ 6,464 =========== =========== ========== ------------------------------------------------------------------------------ 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 18). For fiscal 2000, 2001 and 2002, net unrealized holding gains and losses on trading securities are losses of yen 3 million, losses of yen 24 million and gains of yen 98 million ($1 million), respectively. During fiscal 2000 and 2001, the Company and its subsidiaries sold available-for-sale securities for aggregate proceeds of yen 177,157 million and yen 152,022 million, respectively, resulting in gross realized gains of yen 17,726 million and yen 9,773 million, respectively, and gross realized losses of yen 3,833 million and yen 2,075 million, respectively. During fiscal 2002, the Company and its subsidiaries sold available-for-sale securities for aggregate proceeds of yen 325,758 million ($2,445 million), resulting in gross realized gains of yen 18,147 million ($136 million) and gross realized losses of yen 4,352 million ($33 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 2000, 2001 and 2002, the Company and its subsidiaries charged losses on securities of yen 12,297 million, yen 10,848 million and yen 19,742 million ($148 million), respectively, to income for declines in market value of available-for-sale securities where the decline was classified as other than temporary. Other securities consist mainly of non-marketable equity securities, preferred subscription certificates carried at cost and investment funds accounted for under the equity method. F-21 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, 2001 and 2002 are as follows: March 31, 2001 --------------------------------------------- -------------------------------------------------------- Millions of yen -------------------------------------------------------- Gross Gross Amortized unrealized unrealized cost gains losses Fair value ------------------------------------------------------------------------------------------------------ Available-for-sale: Japanese and foreign government bond securities yen 24,926 yen 560 yen (55) yen 25,431 Japanese prefectural and foreign municipal bond securities 38,030 1,665 (3) 39,692 Corporate debt securities 587,442 22,489 (5,786) 604,145 Mortgage-backed and other asset-backed securities 88,912 6,721 (1,397) 94,236 Funds in trust 5,995 -- (487) 5,508 Equity securities 39,085 36,602 (3,290) 72,397 ----------- ---------- ----------- ----------- yen 784,390 yen 68,037 yen (11,018) yen 841,409 =========== ========== =========== =========== Held-to-maturity: Japanese and foreign government bond securities yen 141 yen 1 yen -- yen 142 Asset-backed securities 12,864 -- -- 12,864 ----------- ---------- ----------- ----------- yen 13,005 yen 1 yen -- yen 13,006 =========== ========== =========== =========== ------------------------------------------------------------------------------------------------------
March 31, 2002 ------------------------------------------------------------------------------------------------------ Millions of yen -------------------------------------------------------- Gross Gross Amortized unrealized unrealized cost gains losses Fair value ------------------------------------------------------------------------------------------------------ Available-for-sale: Japanese and foreign government bond securities yen 25,061 yen 256 yen (9) yen 25,308 Japanese prefectural and foreign municipal bond securities 24,256 582 (464) 24,374 Corporate debt securities 501,380 7,010 (10,552) 497,838 Mortgage-backed and other asset-backed securities 109,528 6,152 (2,789) 112,891 Funds in trust 5,452 -- (465) 4,987 Equity securities 27,619 27,992 (2,090) 53,521 ----------- ---------- ----------- ----------- yen 693,296 yen 41,992 yen (16,369) yen 718,919 =========== ========== =========== =========== Held-to-maturity: Japanese and foreign government bond securities yen 183 yen 22 yen -- yen 205 Asset-backed securities 15,825 1,990 (302) 17,513 ----------- ---------- ----------- ----------- yen 16,008 yen 2,012 yen (302) yen 17,718 =========== ========== =========== =========== ------------------------------------------------------------------------------------------------------
F-22 March 31, 2002 ------------------------------------------------------------------------------------------------------ Millions of U.S. dollars -------------------------------------------------------- Gross Gross Amortized unrealized unrealized cost gains losses Fair value ------------------------------------------------------------------------------------------------------ Available-for-sale: Japanese and foreign government bond securities $ 188 $ 2 $ (0) $ 190 Japanese prefectural and foreign municipal bond securities 182 4 (3) 183 Corporate debt securities 3,763 53 (80) 3,736 Mortgage-backed and other asset-backed securities 822 46 (21) 847 Funds in trust 41 -- (4) 37 Equity securities 207 210 (15) 402 -------- -------- --------- -------- $ 5,203 $ 315 $ (123) $ 5,395 ======== ======== ========= ======== Held-to-maturity: Japanese and foreign government bond securities $ 1 $ 1 $ -- $ 2 Asset-backed securities 119 15 (3) 131 -------- -------- --------- -------- $ 120 $ 16 $ (3) $ 133 ======== ======== ========= ======== ---------------------------------------------------------------------------------------------------- The following is a summary of the contractual maturities of debt securities classified as available-for-sale and held-to-maturity securities held at March 31, 2002:
------------------------------------------------------------------------------------------------------- Millions of yen Millions of U.S. dollars ------------------------------ ------------- - ------------ Amortized Amortized cost Fair value cost Fair value ------------------------------------------------------------------------------------------------------- Available-for-sale: Due within one year yen 64,718 yen 64,996 $ 486 $ 488 Due after one to five years 318,861 320,756 2,393 2,407 Due after five to ten years 196,533 194,218 1,475 1,458 Due after ten years 80,113 80,441 601 603 ----------- ----------- -------- ------- yen 660,225 yen 660,411 $ 4,955 $ 4,956 =========== =========== ======== ======= Held-to-maturity: Due within one year yen 151 yen 166 $ 1 $ 1 Due after one to five years 32 39 0 0 Due after five to ten years 12,842 14,832 96 111 Due after ten years 2,983 2,681 23 21 ----------- ---------- -------- ------- yen 16,008 yen 17,718 $ 120 $ 133 =========== ========== ======== ======= -------------------------------------------------------------------------------------------------------
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 yen 14,069 million, yen 24,007 million and yen 22,230 million ($167 million) for fiscal 2000, 2001 and 2002, respectively. 9. Securitization During fiscal 2001 and 2002, the Company and its subsidiaries sold direct finance lease receivables of yen 184,866 million and yen 202,767 million ($1,522 million), respectively, with gains of yen 3,722 million and yen 6,159 million ($46 million), respectively, in securitization transactions. In connection with these transactions, the Company and its F-23 subsidiaries retained subordinated interests of yen 45,449 million and yen 48,542 million ($364 million) in fiscal 2001 and 2002, respectively. Revenues from retained interests for fiscal 2000, 2001 and 2002 were yen 10,216 million and yen 11,267 million and yen 11,336 million ($85 million), respectively, and are included in revenues from direct financing leases in the consolidated statements of income. During fiscal 2001 and 2002, the Company and its subsidiary also sold installment loans of yen 27,563 million and yen 46,062 million ($346 million), respectively, at a gain of yen 1,006 million and yen 3,076 million ($23 million), respectively, in securitization transactions. The Company and its subsidiary retained subordinated interests of yen 1,000 million and yen 12,345 million ($93 million) in fiscal 2001 and 2002, respectively. The Company and its subsidiaries' retained interests are subordinate to the investors' interests. Their value is subject to credit risk and interest rate risk on the sold financial assets. The investors and special-purpose entities have no recourse to our other assets for failure of debtors to pay. Servicing assets or liabilities related to securitization transactions initiated during fiscal 2001 and 2002 were not recorded, because the servicing fees adequately compensate the Company and its subsidiaries. At March 31, 2001, a subsidiary held servicing assets totaling yen 99 million, which were from securitization transactions in a prior year, and amortized yen 126 million and yen 99 million ($1 million) during fiscal 2001 and 2002, respectively. The related program had ended by March 31, 2002 and there was no remaining balance in servicing assets. Economic assumptions used in measuring the retained interests related to securitization transactions completed during fiscal 2001 and 2002 are as follows: ----------------------------------------------------------------------------------------------------- 2001 2002 ----------------------------------------------------------------------------------------------------- Direct Installment Direct Installment financing leases loans financing leases loans ------------------------------------------------------------------ --------------------------------- Expected credit loss 0.03%-0.35% 0.75% 0.07%-1.70% 0.72% Discount rate 3.20%-3.48% 2.69% 3.62%-5.36% 1.62% -----------------------------------------------------------------------------------------------------
Retained interests from securitization transactions that occurred in previous years and in fiscal 2002 are recorded in the consolidated balance sheets at March 31, 2002. The impacts of 10% and 20% adverse changes to the key economic assumptions on the fair value of retained interests as of March 31, 2002 are as follows: -------------------------------------------------------------------------------------------------------- Millions of yen Millions of U.S. dollars ----------------------------------- ----------------------------------- Direct Installment Investment Direct Installment Investment financing in financing in leases loans securities leases loans securities -------------------------------------------------------------------------------------------------------- Carrying value of retained interests yen 148,344 yen 20,605 yen 9,768 $ 1,113 $ 155 $ 73 Expected credit loss: +10% 381 99 360 3 1 3 +20% 760 201 715 6 2 5 Discount rate: +10% 1,515 207 265 11 2 2 +20% 3,001 413 516 23 3 4 --------------------------------------------------------------------------------------------------------
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 F-24 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. The summarized certain cash flows received from/(paid) to special-purpose entities for all securitization activities that occurred in fiscal 2001 and 2002 are as follows: ------------------------------------------------------------------------------------- Millions of Millions of yen U.S. dollars ---------------------------------------------------------------------- ------------ 2001 2002 2002 ---------------------------------------------------------------------- ------------ Proceeds from new securitization yen 215,494 yen 258,926 $1,943 Servicing fees received 62 231 2 Cash flows received on interest retained 4,369 10,315 77 Repurchases of delinquent assets (2,681) (1,822) (14) Repurchases of ineligible assets (24,718) (23,425) (176) ------------------------------------------------------------------------------------
Quantitative information about delinquencies, net credit losses, and components of securitized financial assets and other assets managed together in fiscal 2001 and 2002 are as follows: March 31, 2001 ------------------------------------------------------------------------------- Millions of yen ----------------------------------------- Principal amount of receivables Total 90 days or principal more past due Net amount of and impaired credit receivables loans losses ------------------------------------------------------------------------------- Types of assets: Direct financing leases yen 1,968,872 yen 53,515 yen 20,679 Installment loans 1,887,596 204,917 25,627 ------------- ----------- ---------- Total assets managed or securitized 3,856,468 yen 258,432 yen 46,306 =========== ========== Less: assets securitized (352,248) ------------- Assets held in portfolio yen 3,504,220 ============= ------------------------------------------------------------------------------- March 31, 2002 ----------------------------------------------------------------------------------------------------- Millions of yen Millions of U.S. dollars ------------------------------------- --------------------------------- Principal Principal amount of amount of receivables receivables 90 days or 90 days or Total more past Total more past principal due and Net principal due and Net amount of impaired credit amount of impaired credit receivables loans losses receivables loans losses ----------------------------------------------------------------------------------------------------- Types of assets: Direct financing leases yen 2,033,818 yen 67,924 yen 21,364 $ 15,263 $ 510 $ 160 Installment loans 2,349,242 187,199 27,976 17,630 1,405 210 ------------- ----------- ---------- ----------- ------- ------ Total assets managed or securitized 4,383,060 yen 255,123 yen 49,340 32,893 $ 1,915 $ 370 =========== ========== ======= ====== Less: assets securitized (451,111) (3,385) ------------- ----------- Assets held in portfolio yen 3,931,949 $ 29,508 ============= =========== -----------------------------------------------------------------------------------------------------
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 are yen 49,361 million and yen 51,675 million ($388 million) as of March 31, 2001 and 2002, respectively, and are not included in the table above. In fiscal 2001 and 2002, subsidiaries entered into other lease receivable securitization programs that are not accounted for as a sale. The payables under these securitization programs of yen 72,210 million and yen 40,731 million ($306 million) are included in long-term debt, and the minimum lease payments receivable of yen 71,886 million and yen 38,495 million ($289 million) and cash collateral of yen 6,022 million and yen 3,972 million ($30 F-25 million) are included in investment in direct financing leases and other assets in the consolidated balance sheets as of March 31, 2001 and 2002, respectively. 10. Investment in Affiliates Investment in affiliates at March 31, 2001 and 2002 consists of the following: ----------------------------------------------------------------------------- Millions of Millions of yen U.S. dollars --------------------------- ------------- 2001 2002 2002 ----------------------------------------------------------------------------- Common stock, at equity value yen 51,203 yen 73,290 $ 550 Loans 11,952 13,056 98 ---------- ---------- ----- yen 63,155 yen 86,346 $ 648 ========== ========== ===== ----------------------------------------------------------------------------- Certain affiliates are listed on stock exchanges. The aggregate investment in and quoted market value of those affiliates amounted to yen 1,172 million and yen 892 million as of March 31, 2001, respectively, and yen 19,294 million ($145 million) and yen 25,083 million ($188 million) as of March 31, 2002, respectively. In fiscal 2000, 2001 and 2002, the Company and its subsidiaries received dividends from affiliates of yen 1,091 million, yen 421 million and yen 473 million ($4 million), respectively. The unamortized excess of cost over the underlying equity at acquisition dates of investment in affiliates amounted to yen 1,194 million ($9 million) as of March 31, 2002. The major affiliates accounted for by the equity method which are contained in the following combined and condensed financial information are Bradesco Leasing S.A. Arrendamento Mercantil (BL 25% owned in fiscal 2000) and Stockton Holdings Limited (30% owned in fiscal 2000). During fiscal 2001, the Company sold its share of BL. In fiscal 2001 and 2002, the affiliates, either individually or on a combined basis, are not significant to the financial position or results of operations of the Company. ------------------------------------------------------------------------ Millions of yen --------------- 2000 ------------------------------------------------------------------------ Operations: Total revenues yen 54,563 Income before income taxes 2,293 Net income 1,532 Financial position: Total assets 356,742 Total liabilities 276,799 Shareholders' equity 79,943 ------------------------------------------------------------------------ The Company had no significant transactions with these companies. F-26 11. 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, 2001 and 2002 are as follows: March 31, 2001 --------------------------------------------------------------------------------------------- Weighted Millions of yen average rate --------------------------------------------------------------------------------------------- Short-term debt in Japan, mainly from banks yen 331,963 2.5% Short-term debt outside Japan, mainly from banks 315,498 5.2 Commercial paper in Japan 910,751 0.4 Commercial paper outside Japan 3,860 5.8 ------------ yen 1,562,072 1.8 ============ ---------------------------------------------------------------------------------------------
March 31, 2002 ------------------------------------------------------------------------------------------- Weighted Millions of Millions of average yen U.S. dollars rate ------------------------------------------------------------------------------------------- Short-term debt in Japan, mainly from banks yen 279,009 $ 2,094 1.3% Short-term debt outside Japan, mainly from banks 352,521 2,646 3.0 Commercial paper in Japan 1,009,003 7,572 0.2 Commercial paper outside Japan 3,929 29 4.0 ------------- ---------- yen 1,644,462 $ 12,341 1.0 ============= ========== -------------------------------------------------------------------------------------------
In fiscal 2000, the Company obtained short-term committed credit lines of yen 294,500 million in Japan to enhance liquidity as stipulated in the Commitment Line Law that came into effect in March 1999. In fiscal 2001, the Company arranged a yen 74,560 million multicurrency global commitment line for the Company and certain overseas subsidiaries. Total committed lines for the Company and its subsidiaries were yen 795,489 million and yen 933,640 million ($7,007 million) at March 31, 2001 and 2002, respectively, and, of these lines, yen 726,888 million and yen 849,876 million ($6,378 million) were available at March 31, 2001 and 2002, respectively. Of the available committed lines, yen 37,762 million and yen 75,722 million ($568 million) were long-term committed credit lines at March 31, 2001 and 2002, respectively. While yen 521,695 million of the total committed lines at March 31, 2001 was restricted for commercial paper backup purposes, no borrowings have been made under these lines. There were no committed lines which were restricted for commercial paper backup purposes at March 31, 2002. F-27 Long-term debt at March 31, 2001 and 2002 consists of the following: March 31, 2001 ----------------------------------------------------------------------------------------------------- Due Millions of yen ----------------------------------------------------------------------------------------------------- Banks: Fixed rate: 1.5% to 9.3% 2002-2012 yen 211,746 Floating rate: principally based on LIBOR plus 0.0% to 0.8% 2002-2009 323,473 Insurance companies and others: Fixed rate: 0.8% to 9.0% 2002-2009 361,900 Floating rate: principally based on LIBOR plus 0.0% to 0.7% 2002-2008 215,952 Unsecured 0.5% to 3.1% bonds 2002-2013 745,000 Unsecured 0.4% convertible notes 2005 40,000 Unsecured 0.1% to 1.9% bonds with warrants 2002-2005 10,500 Unsecured 0.0% to 8.2% notes under medium-term note program 2002-2011 349,378 1.0% to 7.8% payables under securitized lease receivables 2002-2009 72,210 ------------- yen 2,330,159 ============= -----------------------------------------------------------------------------------------------------
March 31, 2002 ----------------------------------------------------------------------------------------------------- Millions of U.S. Due Millions of yen dollars ----------------------------------------------------------------------------------------------------- Banks: Fixed rate: 1.3% to 7.5% 2003-2014 yen 254,649 $ 1,911 Floating rate: principally based on LIBOR plus 0.0% to 0.9% 2003-2007 683,041 5,126 Insurance companies and others: Fixed rate: 0.5% to 8.8% 2003-2009 376,259 2,824 Floating rate: principally based on LIBOR plus 0.0% to 0.6% 2003-2012 268,124 2,012 Unsecured 0.4% to 3.1% bonds 2003-2013 784,800 5,890 Unsecured 0.0% to 0.4% convertible notes 2005-2007 68,788 516 Unsecured 0.6% to 1.9% bonds with warrants 2003-2006 9,100 68 Unsecured 0.0% to 7.3% notes under medium-term note program 2003-2012 324,369 2,434 3.0% to 7.8% payables under securitized lease receivables 2003-2007 40,731 306 ------------- ----------- yen 2,809,861 $ 21,087 ============= =========== ----------------------------------------------------------------------------------------------------- The repayment schedule for the next five years and thereafter for long-term debt at March 31, 2002 is as follows: ------------------------------------------------------------------------------------------------------ Year ending March 31, Millions of yen Millions of U.S. dollars ------------------------------------------------------------------------------------------------------ 2003 yen 677,095 $ 5,081 2004 615,480 4,619 2005 607,595 4,560 2006 457,385 3,433 2007 310,121 2,327 Thereafter 142,185 1,067 ------------- ----------- Total yen 2,809,861 $ 21,087 ============= =========== ------------------------------------------------------------------------------------------------------
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. F-28 In addition to the minimum lease payments receivable related to the payables under securitized lease receivables described in Note 9, the short-term and long-term debt payable to financial institutions are secured by the following assets as of March 31, 2002: ----------------------------------------------------------------------------------------------------- Millions of Millions of yen U.S. dollars ----------------------------------------------------------------------------------------------------- Time deposits yen 6,635 $ 50 Minimum lease payments, loans and future rentals 134,181 1,007 Investment in securities (include repurchase facilities of yen 77,246 million ($580 million)) 84,189 632 Other operating assets and office facilities, net 158,653 1,190 ----------- ----------- yen 383,658 $ 2,879 =========== =========== -----------------------------------------------------------------------------------------------------
Under agreements with customers on brokerage business, the Company and its subsidiaries received customers' securities with an approximate value of yen 17,786 million ($133 million) as of March 31, 2002, that may be sold or repledged by the Company and its subsidiaries. As of March 31, 2002, yen 12,492 million ($94 million) at market value of the securities are repledged as collateral for the 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. 12. Deposits Deposits at March 31, 2001 and 2002, consist of the following: ------------------------------------------------------------------------------- Millions of yen Millions of U.S. dollars --------------------------- ------------ 2001 2002 2002 ------------------------------------------------------------------------------- Time deposits yen 152,321 yen 182,926 $1,373 Other deposits 25,993 42,317 317 ----------- ----------- ------ Total yen 178,314 yen 225,243 $1,690 =========== =========== ====== ------------------------------------------------------------------------------- The balances of time deposits, including CDs, issued in amounts of yen 10 million ($75 thousand) or more were yen 126,781 million and yen 142,689 million ($1,071 million) at March 31, 2001 and 2002, respectively. The maturity schedule of time deposits at March 31, 2002 is as follows: -------------------------------------------------------------------------------- Year ending March 31, Millions of Millions of yen U.S. dollars -------------------------------------------------------------------------------- 2003 yen 103,538 $ 777 2004 27,604 207 2005 17,979 135 2006 9,959 75 2007 23,846 179 ----------- -------- Total yen 182,926 $ 1,373 =========== ======== -------------------------------------------------------------------------------- F-29 13. Income Taxes Income before income taxes and the provision for income taxes in fiscal 2000, 2001 and 2002 are as follows: ------------------------------------------------------------------------------------------------------- Millions of Millions of yen U.S. dollars ------------------------------------------- -------------- 2000 2001 2002 2002 ------------------------------------------------------------------------------------------------------- Income before income taxes: Domestic yen 33,245 yen 56,076 yen 62,411 $ 468 Foreign 18,803 3,160 10,628 80 ---------- ---------- ---------- -------- yen 52,048 yen 59,236 yen 73,039 $ 548 ========== ========== ========== ======== Provision for income taxes: Current-- Domestic yen 6,803 yen 12,648 yen 14,165 $ 106 Foreign 8,139 4,320 1,208 9 ---------- ---------- ---------- -------- 14,942 16,968 15,373 115 ---------- ---------- ---------- -------- Deferred-- Domestic 7,913 13,080 13,912 105 Foreign (1,449) (4,969) 3,618 27 ---------- ---------- ---------- -------- 6,464 8,111 17,530 132 ---------- ---------- ---------- -------- Provision for income taxes yen 21,406 yen 25,079 yen 32,903 $ 247 ========== ========== ========== ======== --------------------------------------------------------------------------------------------------------
The normal income tax rate in Japan was approximately 42% in fiscal 2000, 2001 and 2002. The effective income tax rate is different from the normal income tax rate primarily because of certain permanent non-deductible expenses and inclusion in income of equity in net income of affiliates. Reconciliation of the differences between tax provision computed at the normal rate and consolidated provisions for income taxes in fiscal 2000, 2001 and 2002 are as follows: ------------------------------------------------------------------------------------------------------ Millions of Millions of yen U.S. dollars --------------------------------------- ------------ 2000 2001 2002 2002 ------------------------------------------------------------------------------------------------------ Income before income taxes yen 52,048 yen 59,236 yen 73,039 $ 548 ========= ========== ========== ======= Tax provision computed at normal rate yen 21,860 yen 24,879 yen 30,676 $ 230 Increases (reductions) in taxes due to: Application of the equity method 150 (383) (204) (2) Permanent non-deductible expenses 677 575 641 5 Amortization of goodwill (115) 147 176 1 Effect of lower tax rate than normal on a domestic subsidiary (373) (407) (230) (2) Effect of gain on sales of domestic subsidiaries -- -- 1,648 13 Other, net (793) 268 196 2 ---------- ---------- ---------- ------- Provision for income taxes yen 21,406 yen 25,079 yen 32,903 $ 247 ========== ========== ========== ======= ------------------------------------------------------------------------------------------------------ Total income taxes recognized in fiscal 2000, 2001 and 2002 are as follows:
------------------------------------------------------------------------------------------------------ Millions of yen Millions of U.S. dollars --------------------------------------- ------------ 2000 2001 2002 2002 ------------------------------------------------------------------------------------------------------ Provision for income taxes yen 21,406 yen 25,079 yen 32,903 $ 247 Income tax on other comprehensive income (loss): Net cumulative effect of adopting FASB statement No. 133 -- -- (5,698) (43) Net unrealized gains (losses) on investment in securities 28,435 (8,809) (11,694) (88) Minimum pension liability adjustments (2,515) (859) (1,517) (11) Foreign currency translation adjustments (958) 1,556 680 5 Net unrealized losses on derivative instruments -- -- 1,204 9 ---------- ---------- ---------- ------- Total income taxes yen 46,368 yen 16,967 yen 15,878 $ 119 ========== ========== ========== ======= ------------------------------------------------------------------------------------------------------
F-30 The tax effects of temporary differences giving rise to the deferred tax assets and liabilities at March 31, 2001 and 2002 are as follows: ------------------------------------------------------------------------------------------------------ Millions of yen Millions of U.S. dollars -------------------------- ------------ 2001 2002 2002 ------------------------------------------------------------------------------------------------------ Assets: Net operating loss carryforwards yen 13,219 yen 17,034 $ 128 Allowance for doubtful receivables on direct financing leases and possible loan losses 30,904 32,568 244 Installment loans 2,863 1,301 10 Policy liabilities 799 1,459 11 Accrued expenses 11,247 9,341 70 Other 2,866 3,373 25 ----------- ----------- ------ 61,898 65,076 488 ----------- ----------- ------ Liabilities: Investment in direct financing leases 121,903 137,896 1,035 Investment in operating leases 17,382 21,369 160 Investment in securities 22,463 6,682 50 Deferred life insurance acquisition costs 10,074 11,364 85 Undistributed earnings 12,333 15,350 115 Other 11,167 9,057 68 ----------- ----------- ------ 195,322 201,718 1,513 ----------- ----------- ------ Net deferred tax liability yen 133,424 yen 136,642 $1,025 ========== =========== ====== ---------------------------------------------------------------------------------------------------
Certain subsidiaries have recognized deferred tax assets from net operating loss carryforwards totaling yen 46,405 million ($348 million) as of March 31, 2002, which expire as follows: -------------------------------------------------------------------------------------------------------- Millions of Year ending March 31, Millions of yen U.S. dollars -------------------------------------------------------------------------------------------------------- 2003 yen 2,854 $ 21 2004 2,914 22 2005 5,689 43 2006 2,907 22 2007 4,549 34 Thereafter 27,492 206 ---------- ------- Total yen 46,405 $ 348 ========== ====== --------------------------------------------------------------------------------------------------------
Undistributed earnings of certain foreign subsidiaries for which deferred income taxes were not provided amounted to yen 69,521 million ($522 million) as of March 31, 2002. Since management has decided that the undistributed earnings are permanently reinvested, no provision for income taxes has been provided. Net deferred tax assets and liabilities at March 31, 2001 and 2002 are reflected in the accompanying consolidated balance sheets under the following captions: -------------------------------------------------------------------------------- Millions of Millions of yen U.S. dollars ------------------------------ ------------- 2001 2002 2002 --------------------------------------------------------------- ------------- Other assets yen 2,006 yen 4,890 $ 37 Income taxes: Deferred 135,430 141,532 1,062 ----------- ----------- ------ Net deferred tax liability yen 133,424 yen 136,642 $1,025 =========== =========== ====== -------------------------------------------------------------------------------- F-31 14. Pension Plans The Company and certain subsidiaries have trusted contributory and non-contributory funded pension plans covering substantially all of their employees other than directors and corporate auditors. 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, 2001 and 2002 is as follows: ---------------------------------------------------------------------------------------------- Millions of yen Millions of U.S. dollars -------------------------- ------------ 2001 2002 2002 ---------------------------------------------------------------------------------------------- Change in benefit obligation: Benefit obligation at beginning of year yen 46,065 yen 53,153 $ 399 Service cost 3,329 3,799 29 Interest cost 1,496 1,757 13 Plan participants' contributions 567 503 4 Plan amendments (560) 247 2 Actuarial loss 2,997 6,655 50 Foreign currency exchange rate change 460 242 2 Benefits paid (1,201) (1,231) (9) Plan curtailment -- (327) (3) Settlements -- (148) (1) Special termination benefits -- 18 0 Acquisition and other -- 2,047 15 ---------- ----------- ------- Benefit obligation at end of year yen 53,153 yen 66,715 $ 501 ========== =========== ======= Change in plan assets: Fair value of plan assets at beginning of year yen 38,823 yen 44,279 $ 332 Actual return on plan assets (2,576) (975) (7) Employer contribution 8,157 11,472 86 Plan participants' contributions 567 503 4 Benefits paid (1,050) (1,117) (8) Foreign currency exchange rate change 358 190 1 Settlements -- (148) (1) Acquisition and other -- 1,214 9 ---------- ----------- ------- Fair value of plan assets at end of year yen 44,279 yen 55,418 $ 416 ========== =========== ======= The funded status of the plans: Funded status yen (8,874) yen (11,297) $ (85) Unrecognized prior service cost (248) 23 0 Unrecognized net actuarial loss 23,310 31,079 233 Unrecognized net transition obligation 432 317 3 ---------- ----------- ------- Net amount recognized yen 14,620 yen 20,122 $ 151 ========== =========== ======= Amount recognized in the consolidated balance sheets consists of: Prepaid benefit cost yen 14,601 yen 21,771 $ 163 Accrued benefit liability (8,226) (13,504) (101) Intangible asset 187 130 1 Accumulated other comprehensive income, gross of tax 8,058 11,725 88 ---------- ----------- ------- Net amount recognized yen 14,620 yen 20,122 $ 151 ========== =========== ======= --------------------------------------------------------------------------------------------
The aggregate projected benefit obligations, aggregate accumulated benefit obligations and aggregate fair values of plan assets for the plans with the accumulated F-32 benefit obligations in excess of plan assets were yen 23,681 million, yen 19,621 million and yen 11,522 million, respectively, at March 31, 2001, and yen 27,622 million ($207 million), yen 24,964 million ($187 million) and yen 11,620 million ($87 million), respectively, at March 31, 2002. Net pension cost of the plans for fiscal 2000, 2001 and 2002 consists of the following: ---------------------------------------------------------------------------------------------------- Millions of Millions of yen U.S. dollars ------------------------------------------ ------------- 2000 2001 2002 2002 ---------------------------------------------------------------------------------------------------- Service cost yen 2,360 yen 3,329 yen 3,799 $ 28 Interest cost 1,460 1,496 1,757 13 Expected return on plan assets (1,565) (1,323) (1,496) (11) Amortization of unrecognized transition obligation 35 29 34 0 Amortization of unrecognized net actuarial loss 237 818 1,137 9 Amortization of unrecognized prior service cost 10 (26) (13) (0) Plan curtailment and settlements (43) -- 146 1 --------- ---------- --------- ------ Net periodic pension cost yen 2,494 yen 4,323 yen 5,364 $ 40 ========= ========== ========= ====== ----------------------------------------------------------------------------------------------------
Significant assumptions of domestic and foreign pension plans used to determine these amounts for fiscal 2000, 2001 and 2002 are as follows: ------------------------------------------------------------------------------ Domestic 2000 2001 2002 ------------------------------------------------------------------------------ Discount rate 3.0% 3.0% 2.5% Rate of increase in compensation levels 2.6% 2.1% 2.2% Expected long-term rate of return on plan assets 3.0% 3.0% 2.5% ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ Foreign 2000 2001 2002 ------------------------------------------------------------------------------ Discount rate 7.8% 7.3% 7.0% Rate of increase in compensation levels 5.0% 4.5% 4.3% Expected long-term rate of return on plan assets 9.3% 9.3% 9.3% ------------------------------------------------------------------------------ In addition, directors and corporate auditors of the Company and certain subsidiaries, and executive officers of the Company, receive lump-sum payments upon termination of their services under unfunded termination plans. The payments to directors and corporate auditors are subject to shareholders' approval. The amount required based on length of services and remuneration to date under these plans is fully accrued. Total provisions charged to income for all the plans including the defined benefit plans are yen 3,431 million, yen 5,119 million and yen 6,238 million ($47 million) in fiscal 2000, 2001 and 2002, respectively. 15. Stock-Based Compensation The Company has introduced stock option plans for directors and some employees. Under the plans, the right is granted to purchase the treasury shares of the Company at a certain price. The exercise prices are equal to or greater than fair market value and were determined based on a formula linked to the stock price of the shares on the Tokyo Stock Exchange. Under the stock option plans prior to fiscal 2001, the options vest 100% on the grant date. Under the stock option plan in fiscal 2001 and 2002, the options vest 100% over three and two years' service periods. Exercisable periods are 9.7 F-33 years, 10 years and 10 years from the grant date in 2000, 2001 and 2002, respectively. The Company acquired 145,000 and 316,700 shares of its common stock for the plan during fiscal 2000 and 2001, respectively, and granted stock subscription rights of 300,900 shares for the plan during fiscal 2002. The Board of Directors intends to obtain approval from the shareholders, at the next general meeting, to be held on June 26, 2002, for an additional grant of stock acquisition rights for 490,000 shares to directors, corporate auditors and some employees of the Company, subsidiaries and affiliated companies during fiscal 2003. FASB Statement No.123 ("Accounting for Stock-Based Compensation") defines a fair value based method of accounting for a stock option. This statement gives entities a choice of recognizing related compensation expense by adopting the new fair value method or to continue to measure compensation using the intrinsic value approach under APB Opinion No. 25 ("Accounting for Stock Issued to Employees"), the former standard. The Company chose to use the measurement prescribed by APB Opinion No. 25 and recognized no compensation expense in fiscal 2000, 2001 and 2002. 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 2000, 2001 and 2002 would have been as follows: ------------------------------------------------------------------------------------------- Millions of Millions of yen U.S. dollars ----------------------------------------------------------------------------- ------------ 2000 2001 2002 2002 ------------------------------------------------------------------------------------------- Income before cumulative effect of a change in accounting principle yen 29,761 yen 33,694 yen 38,953 $ 292 Net income 29,761 33,694 39,086 293 -------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------- yen U.S. dollars ------------------------------------- ------------- 2000 2001 2002 2002 ---------------------------------------------------------------------------------------------- Income before cumulative effect of a change in accounting principle -- Basic EPS yen 374.19 yen 412.11 yen 473.20 $3.55 Diluted EPS 365.66 395.57 451.88 3.39 Net income -- Basic EPS 374.19 412.11 474.82 3.56 Diluted EPS 365.66 395.57 453.42 3.40 ----------------------------------------------------------------------------------------------
The fair value of these stock options was estimated using the Black-Scholes option pricing model under the following assumptions: 2000 2001 2002 ---------------------------------------- Grant-date fair value yen 6,078 yen 5,847 yen 5,014 ($37.63) Expected life 8.55 Years 9.25 Years 9.65 Years Risk-free rate 1.72% 1.15% 1.21% Expected volatility 35.53% 30.79% 32.31% Expected dividend yield 0.149% 0.096% 0.123% F-34 The following table summarizes information about stock option activity for fiscal 2000, 2001 and 2002: ----------------------------------------------------------------------------------------------------------- 2000 2001 2002 ----------------------------------------------------------------------------------------------------------- Weighted Weighted average average exercise exercise Weighted average price price exercise price -------- -------- -------------------- Number Number Number U.S. of shares yen of shares yen of shares yen dollars ------------------------------------------------ ---------------------- --------------------------------- Outstanding at beginning of year 314,000 yen 7,720 402,000 yen 8,689 681,500 yen 12,250 $91.93 Granted 145,000 10,393 316,700 16,272 300,900 12,329 92.53 Exercised (57,000) (7,686) (35,900) (7,706) (29,700) (7,702) (57.80) Forfeited or expired -- -- (1,300) (16,272) (2,000) (14,695) (110.28) ------- ------- ------- Outstanding at end of year 402,000 8,689 681,500 12,250 950,700 12,412 93.15 ======= ======= ======= ----------------------------------------------------------------------------------------------------------- Exercisable at end of year 402,000 8,689 366,100 8,786 336,400 8,881 66.65 -----------------------------------------------------------------------------------------------------------
The exercise prices of all 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, 2002 is as follows: ----------------------------------------------------------------------------------------------------- Outstanding Exercisable ------------------------------------------ ------------------------------ Weighted Weighted Weighted average average average Range of exercise remaining exercise exercise price life price price --------------------- ---------- -------- -------- Number of Number of yen shares Years yen shares yen ------------------------------------------------------------------------------------------------------ yen 7,665 - yen 10,000 191,400 3.94 yen 7,736 191,400 yen 7,736 10,001 - 13,000 445,100 8.60 11,698 145,000 10,393 13,001 - 16,272 314,200 8.25 16,272 -- -- ------------------------------------------------------------------------------------------------------ 7,665-16,272 950,700 7.54 12,412 336,400 8,881 -------------------------------------------------------------------------------------------------- Outstanding Exercisable ------------------------------------------ ------------- ------------- Weighted Weighted Weighted average average average Range of exercise remaining exercise exercise price life price price --------------------- --------- ------------ ----------- Number of Number of U.S. dollars shares Years U.S. dollars shares U.S. dollars --------------------------------------------------------------------------------------------------- $57.52 - $ 75.05 191,400 3.94 $ 58.06 191,400 $58.06 75.06 - 97.56 445,100 8.60 87.79 145,000 78.00 97.57 - 122.12 314,200 8.25 122.12 -- -- -------------------------------------------------------------------------------------------------- 57.52-122.12 950,700 7.54 93.15 336,400 66.65 --------------------------------------------------------------------------------------------------
The Company has also introduced warrant plans to corporate auditors and some employees (excluding employees who were option holders under the stock option plan) of the Company and directors, corporate auditors and some employees of its certain subsidiaries. Under the plans, the Company granted warrants to purchase 302,484 shares, 126,143 shares and 124,303 shares, respectively, by repurchasing warrants attached to bonds with warrants issued by the Company during fiscal 2000, 2001 and 2002. The grant-date fair value was yen 1,100, yen 1,410 and yen 1,135 ($8.52), respectively, and the exercise price was yen 11,278, yen 14,090 and yen 12,329 ($92.53), respectively, in fiscal 2000, 2001 and 2002. The exercise prices of the granted warrants were adjusted on April 1, 2000, for a 1.2-for-1 stock split implemented on May 19, 2000. F-35 16. Accumulated Other Comprehensive Income (Loss) Changes in each component of accumulated other comprehensive income (loss) in fiscal 2000, 2001 and 2002 are as follows. Comprehensive income (loss) and its components have been reported, net of tax, in the consolidated statements of shareholders' equity. --------------------------------------- ------------------------------------------------------------------------ Millions of yen ------------------------------------------------------------------------ Net unrealized Net gains on Minimum Foreign unrealized Accumulated investment pension currency losses on other in liability translation derivative comprehensive securities adjustments adjustments instruments income (loss) ---------------------------------------------------------------------------------------------------------------- Balance at March 31, 1999 yen 4,153 yen -- yen (31,703) yen -- yen (27,550) Net unrealized gains on investment in securities, net of tax of yen (28,919) million 42,699 42,699 Reclassification adjustment for gains included in net income, net of tax of yen 484 million (1,148) (1,148) Minimum pension liability adjustments, net of tax of yen 2,515 million (3,485) (3,485) Foreign currency translation adjustments, net of tax of yen 1,219 million (12,184) (12,184) Reclassification adjustment for losses included in net income, net of tax of yen (261) million 251 251 ---------- ---------- ----------- ----------- ----------- Current period change 41,551 (3,485) (11,933) -- 26,133 ---------- ---------- ----------- ----------- ----------- Balance at March 31, 2000 45,704 (3,485) (43,636) -- (1,417) Net unrealized losses on investment in securities, net of tax of yen 9,750 million (12,334) (12,334) Reclassification adjustment for losses included in net income, net of tax of yen (941) million 974 974 Minimum pension liability adjustments, net of tax of yen 859 million (1,199) (1,199) Foreign currency translation adjustments, net of tax of yen (1,556) million 20,532 20,532 Reclassification adjustment for gains included in net income, net of tax of yen - million (2,004) (2,004) ---------- ---------- ----------- ----------- ----------- Current period change (11,360) (1,199) 18,528 -- 5,969 ---------- ---------- ----------- ----------- ----------- 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 yen 5,698 million (8,400) (8,400) Net unrealized losses on investment in securities, net of tax of yen 11,796 million (19,555) (19,555) Reclassification adjustment for gains included in net income, net of tax of yen (102) million (33) (33) Minimum pension liability adjustments, net of tax of yen 1,517 million (2,150) (2,150) Foreign currency translation adjustments, net of tax of yen (680) million 10,324 10,324 Reclassification adjustment for gains included in net income, net of tax of yen - million (16) (16) Net unrealized losses on derivative instruments, net of tax of yen 51 million (76) (76) Reclassification adjustment for losses included in net income, net of tax of yen (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 yen 14,756 yen (6,834) yen (14,800) yen (6,562) yen (13,440) =========== ========== =========== ============ =========== ---------------------------------------------------------------------------------------------------------------
F-36 --------------------------------------- ------------------------------------------------------------------------ Millions of U.S. dollars ------------------------------------------------------------------------ Net unrealized Net gains on Minimum Foreign unrealized Accumulated investment pension currency losses on other in liability translation derivative comprehensive securities adjustments adjustments instruments income (loss) ---------------------------------------------------------------------------------------------------------------- Balance at March 31, 2001 $ 257 $ (35) $ (188) $ -- $ 34 Net cumulative effect of adopting FASB Statement No. 133, net of tax of $43 million (63) (63) Net unrealized losses on investment in securities, net of tax of $89 million (147) (147) Reclassification adjustment for gains included in net income, net of tax of $(1) million (0) (0) Minimum pension liability adjustments, net of tax of $11 million (16) (16) Foreign currency translation adjustments, net of tax of $(5) million 77 77 Reclassification adjustment for gains included in net income, net of tax of $- million (0) (0) Net unrealized losses on derivative instruments, net of tax of $0 million (0) (0) Reclassification adjustment for losses included in net income, net of tax of $(9) million 14 14 --------- ---------- ----------- ----------- ----------- Current period change (147) (16) 77 (49) (135) --------- ---------- ----------- ----------- ----------- Balance at March 31, 2002 $ 110 $ (51) $ (111) $ (49) $ (101) ========= ========== =========== =========== =========== ----------------------------------------------------------------------------------------------------------------
17. Shareholders' Equity Changes in the number of shares issued and outstanding in fiscal 2000, 2001 and 2002 are as follows: ---------------------------------------------------------------------------------------------- Number of shares -------------------------------------- 2000 2001 2002 ---------------------------------------------------------------------------------------------- Beginning balance 64,870,299 68,630,294 82,388,025 Common stock issued in public and private offering 3,300,000 -- 1,800,000 Exercise of warrants 357,175 31,673 95,383 Common stock issued for acquisitions of minority interests of subsidiaries 102,820 -- 20,577 Common stock issued in stock split on May 19, 2000 -- 13,726,058 -- ---------- ---------- ----------- Ending balance 68,630,294 82,388,025 84,303,985 ========== ========== ========== ------------------------------------------------------------------- - ------------- ----------
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 F-37 amount of the bonds converted into common stock and the 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 intends to recommend to the shareholders, at the next general meeting, to be held on June 26, 2002, the declaration of a cash dividend totaling yen 1,255 million ($9 million), which will be paid in that month to the shareholders of record as of March 31, 2002, covering fiscal 2002. The amount of retained earnings available for dividends under the Code is based on the amount recorded in the Company's nonconsolidated books of account in accordance with accounting principles generally accepted in Japan, and amounted to yen 103,288 million ($775 million) as of March 31, 2002. However, there are restrictions on the payment of dividends relating to net unrealized gains on investment in securities and the earnings impact of derivatives under accounting principles generally accepted in Japan, amounting to yen 12,466 million ($94 million) as of March 31, 2002. Retained earnings at March 31, 2002 includes yen 23,151 million ($174 million) relating to equity in undistributed earnings of 50% or less owned companies accounted for by the equity method. The Company implemented a 1.2-for-1 stock split on May 19, 2000 for shareholders of record as of March 31, 2000. 18. Brokerage Commissions and Gains on Investment Securities Brokerage commissions and gains on investment securities in fiscal 2000, 2001 and 2002 consist of the following: --------------------------------------------------------------------------------------------- Millions of Millions of yen U.S. dollars ------------------------------------- ------------ 2000 2001 2002 2002 --------------------------------------------------------------------------------------------- Brokerage commissions yen 3,089 yen 3,252 yen 2,940 $ 22 Gains on investment securities, net 16,611 8,803 15,427 116 ---------- ---------- ---------- ----- yen 19,700 yen 12,055 yen 18,367 $ 138 ========== ========== ========== ===== ---------------------------------------------------------------------------------------------
Trading activities-- Gains on investment securities, net, include net trading revenue on trading securities amounting to yen 1,390 million, yen 552 million and yen 442 million ($3 million) for fiscal 2000, 2001 and 2002, respectively. A loss of yen 15 million, a gain of yen 444 million and a gain of yen 225 million ($2 million) on derivative trading instruments are also included in gains on investment securities, net, for fiscal 2000, 2001 and 2002, respectively. F-38 19. Life Insurance Operations Life insurance premiums and related investment income in fiscal 2000, 2001 and 2002 consist of the following: --------------------------------------------------------------------------------------------- Millions of Millions of yen U.S. dollars ------------------------------------- ------------ 2000 2001 2002 2002 --------------------------------------------------------------------------------------------- Life insurance premiums yen 190,758 yen 141,528 yen 135,479 $1,017 Life insurance related investment income 15,071 16,786 16,854 126 ----------- ----------- ----------- ------ yen 205,829 yen 158,314 yen 152,333 $1,143 =========== =========== =========== ====== ----------------------------------------------------------------------------------------------
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 in proportion to premium revenue recognized. Amortizations charged to income for fiscal 2000, 2001 and 2002 amounted to yen 9,756 million, yen 10,671 million and yen 11,424 million ($86 million), respectively. 20. Other Operations Other operating revenues and expenses include revenues and costs from sales of residential apartments, fee income and costs from the servicing of receivables, commission income and costs from sales of commodities funds and revenues and expenses from other operations. Other operating revenues in fiscal 2000, 2001 and 2002 consist of following: ----------------------------------------------------------------------------------------- Millions of Millions of yen U.S. dollars -------------------------------------- ------------ 2000 2001 2002 2002 ----------------------------------------------------------------------------------------- Proceeds on sales of residential apartments yen 35,291 yen 36,928 yen 58,078 $436 Other 23,118 31,403 63,627 478 ---------- ---------- ----------- ---- yen 58,409 yen 68,331 yen 121,705 $914 ========== ========== =========== ==== ------------------------------------------------------------------------------------------
21. Per Share Data In Japan, dividends which are payable to shareholders of record at the end of a fiscal year are subsequently approved by shareholders, and, accordingly, the declaration of these dividends is not reflected in the financial statements at such fiscal year-end. However, dividends per share shown in the consolidated statements of income have been presented on an accrual basis and include, in each fiscal year, dividends to be approved by shareholders after such fiscal year. F-39 A reconciliation of the differences between basic and diluted earnings per share (EPS) in fiscal 2000, 2001 and 2002 is as follows: --------------------------------------------------------------------------------------------- Millions of Millions of yen U.S. dollars ------------------------------------- ------------ 2000 2001 2002 2002 --------------------------------------------------------------------------------------------- Net income yen 30,642 yen 34,157 yen 40,269 $302 Effect of dilutive securities-- Convertible notes 43 87 87 1 ---------- ---------- ---------- ---- Net income for diluted EPS computation yen 30,685 yen 34,244 yen 40,356 $303 ========== ========== ========== ==== ---------------------------------------------------------------------------------------------- Thousands of shares ---------------------------------------- 2000 2001 2002 -------------------------------------------------------------------------------- Weighted- average shares 79,534 81,760 82,318 Effect of dilutive securities-- Warrants 160 127 41 Convertible notes 1,560 3,381 3,962 Treasury stock 133 132 74 ----------- ---------- ----------- Weighted- average shares for diluted EPS computation 81,387 85,400 86,395 ========== ========= =========== --------------------------------------------------------------------------------
yen U.S. dollars ---------------------------------------- ------------ 2000 2001 2002 2002 -------------------------------------------------------------------------------- ------------ Basic EPS yen 385.27 yen 417.77 yen 489.19 $3.67 Diluted EPS 377.02 400.99 467.11 3.51 ----------------------------------------- ------------ -------------- ---------- ------------
The computation of diluted income before cumulative effect of a change in accounting principle per share for fiscal 2000, 2001 and 2002 uses the same weighted-average shares used for the computation of diluted EPS, and reflects the effects of assumed conversion of convertible notes in diluted income before cumulative effect of a change in accounting principle. EPS has been adjusted for stock splits retroactively. 22. Derivative Financial Instruments and Hedging The Company and its subsidiaries are party to derivative financial instruments that use in the normal course of business to reduce exposure to fluctuations in interest and foreign currency rates. (a) Cash flow hedges The Company and its subsidiaries designate interest rate swap agreements as cash flow hedges for variability of cash flows originated from floating rate borrowings. The interest rate swap agreements mature at various dates through 2009. Adoption of FASB Statement No. 133 resulted in a reduction of other comprehensive income (loss) of yen 8,400 million ($63 million) at April 1, 2001. Of that amount, yen 1,914 million ($14 million) was transferred to earnings in fiscal 2002. For fiscal 2002, a net loss of yen 224 million ($2 million) of hedge ineffectiveness associated with instruments designated as cash flow was recorded in earnings. Derivative gains and losses included in net unrealized losses on derivative instruments, which is a part of accumulated other comprehensive income (loss) are reclassified into earnings at the time that the associated hedged transactions impact the income statement. Approximately yen 1,449 million ($11 million) of net derivative losses included in accumulated other comprehensive income (loss), net of applicable income F-40 taxes at March 31, 2002 will be reclassified into earnings within twelve months from that date. (b) 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. A subsidiary hedges a portion of the interest rate exposure of the fair values of certain asset-backed securities using sales of future contracts on treasury securities. The Company's subsidiaries, which issued medium-term notes, use interest rate swap contracts to hedge interest rate exposure of the fair values of these medium-term notes. In case that 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, a gain of yen 780 million ($6 million) of hedge ineffectiveness associated with instruments designated as fair value hedges was recorded in earnings. (c) 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 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 loss of translation adjustments for fiscal 2002 was yen 4,212 million ($32 million). (d) Trading and other derivatives Certain of the Company's subsidiaries engage in trading activities with various future contracts. For risk management purposes, the Company and certain subsidiaries entered into interest rate swap agreements, caps and collars, which are 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, in the total face amount of yen 127,572 million ($957 million), and are recorded as stand-alone derivative contracts. F-41 The following table provides notional amount information about derivative instruments as of March 31, 2001 and 2002. 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 yen Millions of U.S. dollars -------------------------- ------------ 2001 2002 2002 ---------- ---------- ------------ Notional Notional Notional amount amount amount ---------------------------------------------------------- -- ------------- -------------- Interest rate risk management: Interest rate swap agreements yen 626,380 yen 482,130 $ 3,618 Options, caps, floors and collars held 96,153 31,258 235 Futures 71,754 89,371 671 Foreign exchange risk management: Foreign exchange forward contracts yen 104,350 yen 95,410 $ 716 Foreign currency swap agreements 393,084 385,759 2,895 Trading activities: Futures yen 72,160 yen 143,518 $ 1,077 Interest rate swap agreements 43,154 2,000 15 Options, caps, floors and collars held 15,380 10,188 76 Options, caps, floors and collars written 70,474 7,598 57 Foreign exchange forward contracts 1,651 2,015 15 ------------------------------------------------------------------------------------------
23. 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, 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 minimal. The Company and its subsidiaries have access to collateral in case of bankruptcy and other losses. At March 31, 2001 and 2002, 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 yen 3,609 billion, or 74%, at March 31, 2001 and approximately yen 4,267 billion ($32,023 million), or 79%, at March 31, 2002 of the credit risks arising from all financial instruments are attributable to customers located in Japan. The largest concentration of credit risks as to foreign countries is exposure attributable to the United States of America. 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, 2001 and 2002, 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 10.4% and 12.5% as of March 31, 2001 and 2002, respectively. 24. Estimated Fair Value of Financial Instruments The following information is provided to help users 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 F-42 investment in direct financing leases, investment in subsidiaries and affiliates, pension obligations and insurance contracts. March 31, 2001 ------------------------------------------------------------------------------- Millions of yen ------------------------ Carrying Estimated amount fair value ------------------------------------------------------------------------------- Trading instruments Trading securities yen 581 yen 581 Futures: Assets 1,181 1,181 Liabilities 228 228 Options and other derivatives: Assets 882 882 Liabilities 84 84 Non-trading instruments Assets: Cash and cash equivalents 155,411 155,411 Restricted cash and cash equivalents 17,072 17,072 Time deposits 8,673 8,673 Installment loans 1,846,511 1,867,074 Allowance for doubtful receivables on possible loan losses (100,192) (100,192) Investment in securities: Practicable to estimate fair value 854,414 854,415 Not practicable to estimate fair value 87,163 87,163 Liabilities: Short-term debt 1,562,072 1,562,072 Deposits 178,314 179,376 Long-term debt 2,330,159 2,361,801 Foreign exchange forward contracts: Assets 2,273 2,273 Liabilities 1,557 1,557 Foreign currency swap agreements: Assets -- 5,044 Liabilities -- 32,822 Interest rate swap agreements: Assets -- 7,126 Liabilities -- 17,298 Options and other derivatives: Assets 323 (46) Liabilities -- 657 -------------------------------------------------------------------------------- F-43 March 31, 2002 ----------------------------------------------------------------------------------------------------- Millions of yen Millions of U.S. dollars ------------ ----------- ------------ ----------- Carrying Estimated Carrying Estimated amount fair value amount fair value ----------------------------------------------------------------------------------------------------- Trading instruments Trading securities yen 879 yen 879 $ 7 $ 7 Futures: Assets 222 222 2 2 Liabilities 26 26 0 0 Options and other derivatives: Assets 63 63 0 0 Liabilities 47 47 0 0 Non-trading instruments Assets: Cash and cash equivalents 354,748 354,748 2,662 2,662 Restricted cash and cash equivalents 20,189 20,189 152 152 Time deposits 1,050 1,050 8 8 Installment loans 2,273,280 2,293,682 17,060 17,213 Allowance for doubtful receivables on possible loan losses (102,050) (102,050) (766) (766) Investment in securities: Practicable to estimate fair value 734,927 736,637 5,515 5,528 Not practicable to estimate fair value 125,530 125,530 942 942 Liabilities: Short-term debt 1,644,462 1,644,462 12,341 12,341 Deposits 225,243 227,768 1,690 1,709 Long-term debt 2,809,861 2,833,119 21,087 21,262 Foreign exchange forward contracts: Assets 211 211 2 2 Liabilities 2,126 2,126 16 16 Foreign currency swap agreements: Assets 4,206 4,206 32 32 Liabilities 34,735 34,735 261 261 Interest rate swap agreements: Assets 5,073 5,073 38 38 Liabilities 14,399 14,399 108 108 Options and other derivatives: Assets 4,526 4,526 34 34 Liabilities 35 35 0 0 ---------------------------------------------------------------------------------------------------
The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. 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. 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 and cash equivalents, time deposits and short-term debt--For cash and cash equivalents, restricted cash and cash equivalents, time deposits F-44 and short-term debt, the carrying amounts recognized in the balance sheets were determined to be reasonable estimates of their fair values due to 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 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 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. F-45 25. Commitments and Contingent Liabilities Commitments, guarantees and contingencies--As of March 31, 2002, the Company and its subsidiaries had commitments for the purchase of equipment to be leased, having a cost of approximately yen 6,032 million ($45 million). The minimum future rentals on non-cancelable operating leases are as follows: -------------------------------------------------------------------------------- Millions of Year ending March 31, Millions of yen U.S. dollars --------------- ------------ 2003 yen 1,192 $ 9 2004 1,057 8 2005 949 7 2006 843 6 2007 788 6 Thereafter 813 6 --------- ---- Total yen 5,642 $ 42 ========= ==== -------------------------------------------------------------------------------- The Company and its subsidiaries lease office space under operating lease agreements, which are primarily cancelable, and made rental payments totaling yen 5,674 million, yen 5,722 million and yen 6,301 million ($47 million) in fiscal 2000, 2001 and 2002, respectively. 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 yen 19,023 million ($143 million) as of March 31, 2002. As of March 31, 2002, the Company and its subsidiaries were contingently liable as guarantor for borrowings of yen 42,775 million ($321 million) by customers, principally on consumer loans, and by employees. The Company and its subsidiaries have agreements under which they are committed to execute loans as long as the agreed-upon terms are met. As of March 31, 2002, the total unused credit available amount is yen 123,748 million ($929 million). 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 has a material impact on the Company's financial position or results of operations. F-46 26. 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 domestic operations and on geographic area for foreign operations. As to the segments of corporate finance, equipment operating leases and real estate related finance in domestic operations, 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 finance operations are primarily corporate direct financing leases and lending operations other than real estate related lending. Equipment operating lease operations comprised 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, hotels and training facilities. Life insurance operations include direct and agency life insurance sales and related activities. The three foreign operating segments, the Americas, Asia and Oceania, and Europe, include direct financing lease operations, investment in securities, collateralized real estate lending and aircraft and ship financing operations. Other operations, which are not deemed by management to be sufficiently material to disclose as separate items and do not fall into the above segment categories, are reported under domestic operations, other. They primarily include securities transactions, venture capital operations and card loans. F-47 Financial information of the segments for fiscal 2000, 2001 and 2002 is as follows: Year ended March 31, 2000 ---------------------------------------------------------------------------------------------------------------- Millions of yen ------------------------------------------------------------------------- Domestic operations ------------------------------------------------------------------------- Real Equitment estate Corporate operating related Real Life finance leases finance estate insurance Other ---------------------------------------------------------------------------------------------------------------- Revenues yen 121,415 yen 53,000 yen 17,294 yen 44,873 yen 204,746 yen 30,882 Interest revenue 16,326 3 16,268 741 -- 18,385 Interest expense 31,322 1,267 7,775 4,271 -- 2,624 Depreciation and amortization 31,196 31,097 1,499 3,213 550 2,045 Other significant non-cash items: Provision for doubtful receivables and possible loan losses 21,798 6 9,964 5 -- 6,173 Write-downs of long-lived assets -- -- 149 7,398 -- -- Increase in policy liabilities -- -- -- -- 137,902 -- Equity in net income (loss) of and gain (loss) on sales of affiliates 37 11 28 -- -- (1,679) Segment profit (loss) 40,918 7,823 (3,415) (8,241) 5,455 (1,036) Segment assets 1,968,590 113,389 597,274 276,494 425,335 242,280 Long-lived assets 39,561 63,122 3,617 252,128 3,258 5,352 Expenditures for long-lived assets 19,316 35,003 3,617 34,183 3,295 87 Investment in affiliates 165 22 95 -- -- 12,539 ----------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------- ---------------------------------------------- Foreign operations --------------------------------- The Asia and Americas Oceania Europe Total ------------------------------------------------------------------------------------------ Revenues yen 74,525 yen 49,739 yen 18,260 yen 614,734 Interest revenue 26,985 14,882 6,730 100,320 Interest expense 33,852 22,003 9,584 112,698 Depreciation and amortization 4,405 13,354 5,844 93,203 Other significant non-cash items: Provision for doubtful receivables and possible loan losses 4,505 2,627 495 45,573 Write-downs of long-lived assets 334 -- -- 7,881 Increase in policy liabilities -- -- -- 137,902 Equity in net income (loss) of and gain (loss) on sales of affiliates 38 1,081 19 (465) Segment profit (loss) 18,775 3,371 278 63,928 Segment assets 691,403 369,540 159,608 4,843,913 Long-lived assets 55,312 76,674 60,485 559,509 Expenditures for long-lived assets 41,903 29,510 1 166,915 Investment in affiliates 29,729 9,156 163 51,869 ------------------------------------------------------------------------------------------
F-48 Year ended March 31, 2001 ------------------------------------------------------------------------------------------------------------------ Millions of yen --------------------------------------------------------------------------- Domestic operations --------------------------------------------------------------------------- Real Equitment estate Corporate operating related Real Life finance leases finance estate insurance Other ------------------------------------------------------------------------------------------------------------------ Revenues yen 113,113 yen 61,677 yen 24,262 yen 48,438 yen 157,636 yen 36,215 Interest revenue 17,368 2 17,746 482 -- 24,110 Interest expense 25,573 1,058 6,341 3,732 -- 3,570 Depreciation and amortization 35,679 35,291 413 5,670 523 1,964 Other significant non-cash items: Provision for doubtful receivables and possible loan losses 14,726 292 8,650 10 -- 8,610 Write-downs of long-lived assets -- -- -- 4,090 -- -- Increase in policy liabilities -- -- -- -- 67,444 -- Equity in net income (loss) of and gain (loss) on sales of affiliates 122 8 5 -- -- 852 Segment profit (loss) 44,427 11,165 1,944 (4,604) 5,982 1,035 Segment assets 1,889,538 134,270 606,801 310,340 543,886 284,835 Long-lived assets 48,233 85,523 984 242,464 3,208 247 Expenditures for long-lived assets 24,729 59,957 931 29,277 -- -- Investment in affiliates 60 27 372 -- -- 13,511 ------------------------------------------------------------------------------------------------------------------
Year ended March 31, 2001 ------------------------------------------------------------------------------------- ---------------------------------------------- Foreign operations --------------------------------- The Asia and Americas Oceania Europe Total ------------------------------------------------------------------------------------------ Revenues yen 79,397 yen 48,735 yen 15,151 yen 584,624 Interest revenue 30,563 12,047 6,020 108,338 Interest expense 39,235 20,119 7,235 106,863 Depreciation and amortization 3,894 14,293 5,462 103,189 Other significant non-cash items: Provision for doubtful receivables and possible loan losses 11,170 1,079 47 44,584 Write-downs of long-lived assets -- -- -- 4,090 Increase in policy liabilities -- -- -- 67,444 Equity in net income (loss) of and gain (loss) on sales of affiliates 337 1,321 -- 2,645 Segment profit (loss) 8,896 1,203 716 70,764 Segment assets 804,118 402,707 158,646 5,135,141 Long-lived assets 90,621 76,071 61,091 608,442 Expenditures for long-lived assets 33,701 25,969 -- 174,564 Investment in affiliates 25,835 11,398 -- 51,203 ------------------------------------------------------------------------------------------
F-49 Year ended March 31, 2002 -------------------------------------------------------------------------------------------------------------------- Millions of yen ----------------------------------------------------------------------------- Domestic operations ----------------------------------------------------------------------------- Real Equitment estate Corporate operating related Real Life finance leases finance estate insurance Other -------------------------------------------------------------------------------------------------------------------- Revenues yen 118,794 yen 67,319 yen 31,582 yen 85,516 yen 154,296 yen 49,139 Interest revenue 16,983 23 20,399 235 -- 34,015 Interest expense 17,295 1,157 5,572 2,843 1 3,614 Depreciation and amortization 37,031 41,885 1,039 6,103 373 3,565 Other significant non-cash items: Provision for doubtful receivables and possible loan losses 18,069 24 7,563 5 -- 12,578 Write-downs of long-lived assets -- -- -- 2,716 -- -- Increase in policy liabilities -- -- -- -- 40,777 -- Equity in net income (loss) of and gain (loss) on sales of affiliates 74 (2) 8 3 -- 1,865 Segment profit (loss) 48,066 9,906 5,654 5,842 5,764 4,941 Segment assets 1,960,380 147,444 1,012,896 326,473 543,738 352,433 Long-lived assets 47,894 99,090 33,013 251,186 990 244 Expenditures for long-lived assets 21,971 55,038 10,560 23,905 -- -- Investment in affiliates 143 24 381 -- -- 33,335 --------------------------------------------------------------------------------------------------------------------
Year ended March 31, 2002 ------------------------------------------------------------------------------------------ --------------------------------------------------- Foreign operations --------------------------------- The Asia and Americas Oceania Europe Total ------------------------------------------------------------------------------------------ Revenues yen 75,195 yen 56,677 yen 14,716 yen 653,234 Interest revenue 33,804 11,686 4,002 121,147 Interest expense 28,229 17,472 7,931 84,114 Depreciation and amortization 3,836 15,386 6,166 115,384 Other significant non-cash items: Provision for doubtful receivables and possible loan losses 10,434 2,519 175 51,367 Write-downs of long-lived assets -- -- -- 2,716 Increase in policy liabilities -- -- -- 40,777 Equity in net income (loss) of and gain (loss) on sales of affiliates (1,851) 1,330 (310) 1,117 Segment profit (loss) 810 5,433 600 87,016 Segment assets 794,330 435,093 113,844 5,686,631 Long-lived assets 86,891 77,610 59,097 656,015 Expenditures for long-lived assets -- 30,316 -- 141,790 Investment in affiliates 25,739 13,398 -- 73,020 ------------------------------------------------------------------------------------------
F-50 Year ended March 31, 2002 ---------------------------------------------------------------------------------------------------------------- Millions of U.S. dollars ------------------------------------------------------------------------- Domestic operations ------------------------------------------------------------------------- Real Equitment estate Corporate operating related Real Life finance leases finance estate insurance Other ---------------------------------------------------------------------------------------------------------------- Revenues $ 892 $ 505 $ 237 $ 642 $1,158 $368 Interest revenue 127 0 153 2 -- 255 Interest expense 130 9 42 21 0 26 Depreciation and amortization 278 314 8 46 3 27 Other significant non-cash items: Provision for doubtful receivables and possible loan losses 136 0 57 0 -- 94 Write-downs of long-lived assets -- -- -- 20 -- -- Increase in policy liabilities -- -- -- -- 306 -- Equity in net income (loss) of and gain (loss) on sales of affiliates 1 (0) 0 0 -- 13 Segment profit (loss) 361 74 42 44 43 38 Segment assets 14,712 1,107 7,601 2,450 4,081 2,645 Long-lived assets 359 744 248 1,885 7 2 Expenditures for long-lived assets 165 413 79 179 -- -- Investment in affiliates 1 0 3 -- -- 250 ----------------------------------------------------------------------------------------------------------------
Year ended March 31, 2002 --------------------------------------------------------------------------------------- ------------------------------------------------ Foreign operations ----------------------------------- The Asia and Americas Oceania Europe Total --------------------------------------------------------------------------------------- Revenues $ 564 $ 425 $ 111 $4,902 Interest revenue 254 88 30 909 Interest expense 212 131 60 631 Depreciation and amortization 29 115 46 866 Other significant non-cash items: Provision for doubtful receivables and possible loan losses 78 19 1 385 Write-downs of long-lived assets -- -- -- 20 Increase in policy liabilities -- -- -- 306 Equity in net income (loss) of and gain (loss) on sales of affiliates (14) 10 (2) 8 Segment profit (loss) 6 41 4 653 Segment assets 5,961 3,265 854 42,676 Long-lived assets 652 582 444 4,923 Expenditures for long-lived assets -- 228 -- 1,064 Investment in affiliates 193 101 -- 548 ---------------------------------------------------------------------------------------
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 of affiliates and minority interest income, which are recognized as net of tax on a consolidated basis, 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 and certain foreign exchange gains or losses, are excluded from the segment profit or loss. Assets attributed to each segment are consolidated operating assets (investment in direct finance leases, installment loans, investment in operating leases, investment in securities and other operating assets), advances and investment in affiliates (not including F-51 loans). This has resulted in depreciation of office facilities and goodwill amortization expenses 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 stemmed from the allocation is immaterial. 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 material difference between segment amounts and consolidated amounts. -------------------------------------------------------------------------------------------------------------- Millions of yen Millions of U.S. dollars ---------------------------------------- ------------ 2000 2001 2002 2002 -------------------------------------------------------------------------------------------------------------- Revenues: Total revenues for segments yen 614,734 yen 584,624 yen 653,234 $ 4,902 Revenue related to corporate assets 1,779 1,525 5,228 40 ------------- ------------- ------------- ------- Total consolidated revenues yen 616,513 yen 586,149 yen 658,462 $ 4,942 ============= ============= ============= ======= Segment profit: Total profit for segments yen 63,928 yen 70,764 yen 87,016 $ 653 Unallocated interest expenses, general and administrative expenses (3,374) (5,228) (4,215) (32) Adjustment of income tax expenses to equity in net income and minority income (537) (676) (1,324) (10) Unallocated write-downs of securities (9,772) (5,688) (7,556) (57) Unallocated other gain or loss 1,803 64 (882) (6) ------------- ------------- ------------- ------- Total consolidated income before income taxes yen 52,048 yen 59,236 yen 73,039 $ 548 ============= ============= ============= ======= Segment assets: Total assets for segments yen 4,843,913 yen 5,135,141 yen 5,686,631 $42,676 Advances (89,676) (141,148) (158,089) (1,186) Investment in affiliates (not including loans) (51,869) (51,203) (73,290) (550) Corporate assets 62,453 86,765 72,897 547 ------------- ------------- ------------ ------- Total consolidated operating assets yen 4,764,821 yen 5,029,555 yen 5,528,149 $41,487 ============= ============= ============= ======= ------------------------------------------------------------------------------------------------------------
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 domestic F-52 operations and on geographic area for foreign operations, the information required as an enterprise-wide one is incorporated into the table. Japan and the United States of America are the countries whose revenues from external customers are material. 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 business includes the required information. No single customer accounted for 10% or more of the total revenues for fiscal 2000, 2001 and 2002. 27. Subsequent Events On May 7, 2002, ORIX JREIT Inc., a wholly owned subsidiary of the Company, submitted a filing to the Tokyo Stock Exchange indicating its intention to make an initial public offering of investment units in ORIX JREIT Inc. On May 31, 2002, the Company entered into an underwriting agreement with the underwriters whereby the underwriters, subject to final closing of the transaction, agreed to acquire 98,700 units or approximately 80% of the issued and outstanding units of ORIX JREIT Inc. from the Company. The Company expects to receive the proceeds of approximately yen 50 billion on June 12, 2002. On May 24, 2002, the Company announced that it had reached a basic understanding with Nippon Steel Corporation and Nippon Steel Trading Co., Ltd. to purchase 90% of the outstanding shares of Nittetsu Lease Co., Ltd. from Nippon Steel Trading Co., Ltd. The purchase is anticipated to be completed in July 2002. Nittetsu Lease Co., Ltd. had a book value in total assets of approximately yen 137 billion as of March 31, 2002. On May 28, 2002, the board of directors of the Company resolved to issue $894.2 million of zero coupon-senior notes with stock acquisition rights due on June 14, 2022. On May 29, 2002, the Company entered into a subscription agreement with the underwriter of the notes. The Company expects to receive the proceeds of approximately $350 million on June 14, 2002 and intends to use the proceeds for general corporate purposes, including financing the activities of the Company's subsidiaries, working capital and repayment of existing debt. If the underwriter exercises an over-allotment option in full, the principal amount at maturity and the proceeds of the notes will increase to $1,022 million and $400 million, respectively. F-53 ORIX Corporation and Subsidiaries Schedule II -- Valuation and Qualifying Accounts and Reserves For the year ended March 31, 2002 -------------------------------------------------------------------------------------------------------------------- Millions of yen ------------------------------------------------------------------------------------ Addition: Balance at Charged to Deduction: Deduction: Balance at beginning of costs and Cash Asset Translation end of Description period expenses Payment Impairment Adjustment period -------------------------------------------------------------------------------------------------------------------- Restructuring cost: Closed office lease obligations yen -- yen 341 yen (3) yen -- yen 27 yen 365 Disposal of equipment -- 458 -- (458) -- -- Severance and other benefits to terminated employees -- 931 (731) -- 16 216 Other closure, employee and professional costs -- 855 (753) -- 8 110 ---------- ---------- ---------- --------- ---------- ---------- Total yen -- yen 2,585 yen (1,487) yen (458) yen 51 yen 691 ========== ========== ========== ========= ========== ========== --------------------------------------------------------------------------------------------------------------------
F-54 SIGNATURES The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf. ORIX CORPORATION By: Masaru Hattori ---------------------- Title: Attorney-in-Fact Corporate Senior Vice President Date: June 28, 2002 EXHIBIT INDEX Exhibit Number Description -------------- ----------- Exhibit 1.1 Amended Articles of Incorporation of ORIX Corporation Exhibit 10.1 Letter to the Securities and Exchange Commission regarding representations made by Asahi & Co., a member firm of Anderson Worldwide SC