Orix Corp ˇ 20-F ˇ For 12/31/01
Filed On 6/28/02 10:29am ET ˇ SEC File 1-14856 ˇ Accession Number 950103-2-641
As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
6/28/02 Orix Corp 20-F 12/31/01 3:174 Davis Polk & Ward..01/FA
Annual Report of a Foreign Private Issuer ˇ Form 20-F
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 20-F Annual Report of a Foreign Private Issuer 163 938K
2: EX-1.1 Underwriting Agreement 10 33K
3: EX-10.1 Material Contract 1 6K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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.
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TABLE OF CONTENTS
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Page
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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.
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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.
[Enlarge/Download Table]
Year ended March 31,
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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
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(1) Basic earnings per share and Diluted earnings per share have been
retroactively adjusted for a stock split.
1
[Enlarge/Download Table]
As of March 31,
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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
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(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.
[Enlarge/Download Table]
Year Ended March 31,
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1998 1999 2000 2001 2002
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(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
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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.
[Enlarge/Download Table]
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
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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:
[Enlarge/Download Table]
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
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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
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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
[Enlarge/Download Table]
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
[Enlarge/Download Table]
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.
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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:
[Enlarge/Download Table]
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
[Enlarge/Download Table]
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:
[Enlarge/Download Table]
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
[Enlarge/Download Table]
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:
[Enlarge/Download Table]
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:
[Enlarge/Download Table]
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:
[Enlarge/Download Table]
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
[Enlarge/Download Table]
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:
[Enlarge/Download Table]
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.
[Enlarge/Download Table]
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
[Enlarge/Download Table]
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:
[Enlarge/Download Table]
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:
[Enlarge/Download Table]
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:
[Enlarge/Download Table]
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:
[Enlarge/Download Table]
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:
[Enlarge/Download Table]
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.
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[Enlarge/Download Table]
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
========== ========== ==========
[Enlarge/Download Table]
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
========== ========== ==========
[Enlarge/Download Table]
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.
[Enlarge/Download Table]
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.
[Enlarge/Download Table]
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.
[Enlarge/Download Table]
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.
[Enlarge/Download Table]
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.
[Enlarge/Download Table]
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
[Enlarge/Download Table]
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.
[Enlarge/Download Table]
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
[Enlarge/Download Table]
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.
[Enlarge/Download Table]
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
[Enlarge/Download Table]
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.
[Enlarge/Download Table]
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.
[Enlarge/Download Table]
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
[Enlarge/Download Table]
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.
[Enlarge/Download Table]
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
[Enlarge/Download Table]
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.
[Enlarge/Download Table]
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.
[Enlarge/Download Table]
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.
[Enlarge/Download Table]
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.
[Enlarge/Download Table]
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
[Enlarge/Download Table]
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.
[Enlarge/Download Table]
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.
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[Enlarge/Download Table]
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.
[Enlarge/Download Table]
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.
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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.
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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.
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[Enlarge/Download Table]
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
========= ======= ========= ======= =======
[Enlarge/Download Table]
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
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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.
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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
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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.
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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
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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:
[Enlarge/Download Table]
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 Direc