UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------- FORM 20-F (Mark One) [ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2001 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 its 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: <TABLE> Title of each class Name of each exchange on which registered <S> <C> (1) Common stock, par value Yen50 per share (the "Shares") New York Stock Exchange* (2) American Depository Shares ("ADSs"), each of which represents one- New York Stock Exchange half of one Share (3) 0.375% Convertible Notes due 2005 (the "Notes") New York Stock Exchange (4) American Depository Notes ("ADNs"), each of which represents one New York Stock Exchange Note in the principal amount of Yen2,000,000 </TABLE> 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, 2001, 82,388,025 Shares and 2,106,120 ADSs are outstanding. Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark which financial statement item the Registrant has elected to follow. Item 17 Item 18 X *Not for trading, but only in connection with the registration of American Depositary Shares. ================================================================================
-------------- TABLE OF CONTENTS -------------- Page Certain Defined Terms, Conventions and Presentation of Financial Informationii Forward Looking Statements..................................................ii PART I Item 1. Identity of Directors, Senior Management and Advisers................1 Item 2. Offer Statistics and Expected Timetable..............................1 Item 3. Key Information......................................................1 Item 4. Information on the Company...........................................7 Item 5. Operating and Financial Review and Prospects........................31 Item 6. Directors, Senior Management and Employees..........................67 Item 7. Major Shareholders and Related Party Transactions...................75 Item 8. Financial Information...............................................75 Item 9. The Offer and Listing...............................................76 Item 10. Additional Information.............................................78 Item 11. Quantitative and Qualitative Disclosures About Market Risk.........83 Item 12. Description of Securities Other than Equity Securities.............87 PART II Item 13. Defaults, Dividend Arrearages and Delinquencies....................88 Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds...........................................................88 Item 15. [Reserved].........................................................88 Item 16. [Reserved].........................................................88 PART III Item 17. Financial Statements...............................................89 Item 18. Financial Statements...............................................89 Item 19. Exhibits...........................................................89 i
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 its 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. Merely for the convenience of the reader, this Annual Report contains translations of certain yen amounts into dollars at specified rates. These translations should not be construed as representations that the yen amounts actually represent such dollar amounts or could be converted into dollars at the rate indicated. Unless otherwise stated, the translations of yen into dollars have been made at the rate of Yen123.90=$1, which was the approximate exchange rate in Japan on March 31, 2001. The Company's fiscal year ends on March 31. The fiscal year ended March 31, 2001 is referred to throughout this Annual Report as fiscal 2001 or the 2001 fiscal year, and other fiscal years are referred to in a corresponding manner. References to years not specified as being fiscal years are to calendar years. ------------------------ FORWARD LOOKING STATEMENTS This annual report contains statements that constitute "forward-looking statements" within the meaning of Section 21(E) of the Securities Exchange Act of 1934. When included in this Annual Report, the words, "will", "should", "expects", "intends", "anticipates", "estimates" and similar expressions, among others, identify forward looking statements. Such statements, which include statements contained in "Item 5. Operating and Financial Review and Prospects." and "Item 11. Quantitative and Qualitative Disclosure About Market Risk", inherently are subject to a variety of risks and uncertainties that could cause actual results to differ materially from those set forth in such statements. These forward looking statements are made only as of the date of this Annual Report. The Company expressly disclaims any obligation or undertaking to release any update or revision to any forward looking statement contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based. ii
Part I Item 1. Identity of Directors, Senior Management and Advisers 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 Arthur Andersen, independent accountants. <TABLE> Year ended March 31, ------------------------------------------------------------------------------------------ 1997 1998 1999 2000 2001 2001 ----------- ----------- ----------- ----------- ----------- ---------------- (Millions of dollars except (Millions of yen except per share data) per share data) <S> <C> <C> <C> <C> <C> <C> Income statement data: Total revenues...................... Yen 428,294 Yen 507,143 Yen 593,941 Yen 616,513 Yen 586,149 $ 4,731 Interest expense.................... 130,743 142,177 140,846 115,038 109,289 882 Selling, general and administrative expenses.......................... 70,902 79,671 82,395 90,961 101,156 816 Provision for doubtful receivables and possible loan losses........... 49,727 49,434 51,845 45,573 44,584 360 Operating income.................... 26,562 31,041 31,042 52,886 57,148 461 Equity in net income (loss) of and gain (loss) on sales of affiliates. 10,327 7,371 (3,727) (838) 2,088 17 Income before income taxes.......... 36,889 38,412 27,315 52,048 59,236 478 Net income.......................... 19,044 23,731 25,621 30,642 34,157 276 Basic earnings per share(1)......... 244.64 305.33 330.43 385.27 417.77 3.37 Diluted earnings per share(1)....... 244.64 305.33 330.43 377.02 400.99 3.24 Cash dividends per share............ 15.00 15.00 15.00 15.00 15.00 0.12 </TABLE> (1) Basic earnings per share and Diluted earnings per share are retroactively adjusted for a stock split. <TABLE> As of March 31, ---------------------------------------------------------------------------------------- 1997 1998 1999 2000 2001 2001 ------------- ------------- ------------- ------------- ------------- ------------ (Millions of (Millions of yen) dollars) <S> <C> <C> <C> <C> <C> <C> Balance sheet data: Investment in direct financing leases(1)......................... Yen 2,067,616 Yen 2,186,022 Yen 1,952,842 Yen 1,744,953 Yen 1,657,709 $ 13,379 Installment loans(1)............... 1,700,697 1,794,825 1,761,887 1,791,439 1,846,511 14,903 ------------- ------------- ------------- ------------- ------------- ---------- 3,768,313 3,980,847 3,714,729 3,536,392 3,504,220 28,282 Investment in operating leases..... 465,737 435,066 411,156 397,576 451,171 3,641 Investment in securities........... 434,488 500,449 576,206 758,381 942,158 7,604 Other operating assets............. 58,193 65,838 73,345 72,472 132,006 1,066 ------------- ------------- ------------- ------------- ------------- ---------- Operating assets(2)................ 4,726,731 4,982,200 4,775,436 4,764,821 5,029,555 40,593 </TABLE> 1
<TABLE> As of March 31, ---------------------------------------------------------------------------------------- 1997 1998 1999 2000 2001 2001 ------------- ------------- ------------- ------------- ------------- ------------ (Millions of (Millions of yen) dollars) <S> <C> <C> <C> <C> <C> <C> Allowance for doubtful receivables on direct financing leases and possible loan losses.............. (117,567) (145,741) (132,606) (136,939) (141,077) (1,139) Other assets....................... 480,811 737,850 704,806 713,660 702,833 5,674 ------------- ------------- ------------- ------------- ------------- ---------- Total assets....................... Yen 5,089,975 Yen 5,574,309 Yen 5,347,636 Yen 5,341,542 Yen 5,591,311 $ 45,128 ============= ============= ============= ============= ============= ========== Short-term debt.................... Yen 2,513,421 Yen 2,576,483 Yen 2,184,983 Yen 1,912,761 Yen 1,562,072 $ 12,608 Long-term debt..................... 1,703,913 2,044,570 2,036,028 1,942,784 2,330,159 18,807 Common Stock....................... 20,180 20,180 20,180 41,688 41,820 338 Additional Paid-in Capital......... 37,093 37,303 37,464 59,285 59,885 483 Shareholders' equity............... 308,584 313,821 327,843 425,671 461,323 3,723 Numbers of shares.................. 64,870,299 64,870,299 64,870,299 68,630,294 82,388,025 </TABLE> <TABLE> 1997 1998 1999 2000 2001 ----------- ----------- ------------ ----------- ---------- <S> <C> <C> <C> <C> <C> Selected data and ratios:(3) Shareholders' equity ratio.................... 6.06% 5.63% 6.13% 7.97% 8.25% Return on assets.............................. 0.39% 0.45% 0.47% 0.57% 0.62% Return on equity.............................. 6.51% 7.63% 7.99% 8.13% 7.70% Allowance/investment in direct financing leases and installment loans................. 3.1% 3.7% 3.6% 3.9% 4.0% </TABLE> - --------------- (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 Yen282,377 million as of March 31, 1999, Yen271,177 million as of March 31, 2000 and Yen258,432 million ($2,086 million) as of March 31, 2001. These sums included investment in direct financing leases considered 90 or more days past due of Yen54,051 million as of March 31, 1999, Yen53,743 million as of March 31, 2000 and Yen53,515 million ($432 million) as of March 31, 2001, installment loans (excluding amounts attributable to treatment under FASB Statement 114) considered 90 or more days past due of Yen98,100 million as of March 31, 1999, Yen91,513 million as of March 31, 2000 and Yen84,827 million ($685 million) as of March 31, 2001, and installment loans considered impaired under the definition contained in FASB Statement 114 of Yen130,226 million as of March 31, 1999, Yen125,921 million as of March 31, 2000 and Yen120,090 million ($969 million) as of March 31, 2001. 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 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. The following table provides the noon buying rates for Japanese yen expressed in Japanese yen per $1.00 during the periods indicated. The noon buying rate on June 22, 2001 was $1 = Yen124.25. 2
<TABLE> <CAPTION> Year Ended March 31, ---------------------------------------------------------------------- 1997 1998 1999 2000 2001 ---------- ---------- ---------- ---------- ---------- (Yen per U.S. dollar) <S> <C> <C> <C> <C> <C> High............................................. Yen 124.54 Yen 133.99 Yen 147.14 Yen 124.45 Yen 125.54 Low.............................................. 104.49 111.42 108.83 101.53 104.19 Average (of rates available on the last day of each month during the period).................... 113.20 123.57 128.10 110.02 111.65 At period-end.................................... 123.72 133.29 118.43 102.73 125.54 </TABLE> The following table provides the high and low noon buying rates for Japanese yen per $1.00 during the months indicated. High Low ------ ------ 2001 January...................... 118.35 114.26 February..................... 117.62 114.88 March........................ 125.54 117.33 April........................ 126.75 121.68 May.......................... 123.67 118.88 June (through June 22)....... 124.40 119.13 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. Favorable economic statistics in some recent periods may reflect increased Government spending rather than recovery of economic fundamentals, and may not continue. 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 be limited by adverse economic conditions in Japan. Our credit losses on exposures to Japanese real estate related companies and construction companies may exceed our allowances for these loans At March 31, 2001, we had loans outstanding of Yen255,863 million ($2,065 million) to real estate related companies and construction companies. Of that amount, we maintained an allowance for possible loan losses of Yen29,714 million ($240 million). Our allowance for doubtful receivables 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 3
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 portfolio may be adversely affected if U.S. economy declines A considerable portion of our revenue is derived from our operations in the United States. The US economy has shown slow growth since the second half of fiscal 2001, accompanied by declining stock prices and corporate earnings. Our results of operations may be adversely affected if the economic condition in the US continues to decline. Adverse effects on our US operations might include: o an increase in provision for doubtful receivables and possible loan losses if business results of our US customers deteriorate; o an increase in write-downs of securities if the market values of securities continue to decline and such declines are not expected to be temporary; and o an increase of loss in sale or unrealized loss on real estate if the value of our real estate in US 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 the 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, o the need to give financial support to our Asian subsidiaries or affiliates, or o further write-offs of Asian assets. Changes in interest rates and currency exchange rates could adversely affect our assets and our operating income 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 4
market interest rates could affect the interest income 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 operating income. We may suffer losses on our investment portfolio We hold large investments in debt and equity securities, mainly of Japanese corporations. At March 31, 2001, the book value of our investments in securities was Yen942,158 million ($7,604 million). We may suffer losses on these investments because of changes in market prices, defaults or other reasons. 7.7% of our investment securities at March 31, 2001 were 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 ($88 million) in charges of this kind in fiscal 2001 and 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 in 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 we 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, we may not recover our investment in the equipment and we may suffer losses. Our estimates of the residual value of equipment are based on the current market value 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, our 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, o economic conditions and trends, o charge-off experience, o delinquencies, and o the value of underlying collateral and guarantees. We cannot assure you 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 5
financing leases and possible loan losses is insufficient to cover these changes or events, we could be adversely affected. Our access to liquidity and capital may be restricted by economic conditions in Japan Our primary sources of funds are cash flow from operations, borrowings from banks and other institutional lenders, and funding from capital markets, such as commercial paper, medium-term notes, straight bonds, asset- backed securitizations and other term 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 assure you, 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 funding sources such as capital markets, including commercial paper and corporate bonds. We are taking steps to reduce refinancing risks by diversifying our funding sources and increasing committed credit facilities from Japanese banks. Despite these efforts, the risk that we will be unable to roll over short-term funding remains. 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 us, 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. We expect to be treated a passive foreign investment company We expect, for the purpose of U.S. 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 you are a U.S. person, because we are a passive foreign investment company you will be subject to special U.S. federal income tax rules that may have negative tax consequences 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 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. 6
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, Minatu-ko, 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 conducting our operations on a consolidated basis to make optimal use of corporate resources. We commenced sales of leveraged leases, a field in which we have maintained our position as a market leader. 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 our group's 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 team. 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 includes permission to accept deposits, and a trust business license. In September 1998, we became the 12th Japanese company to list its shares on the New York Stock Exchange. 7
Deregulation in Japan has produced 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, ORIX has reorganized its 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 April 1998, we acquired all the shares of common stock of Yamaichi Trust & Bank, Ltd. from Yamaichi Securities Company, Limited and subsequently changed its name to ORIX Trust and Banking Corporation. Yamaichi Trust & Bank, Ltd., had approximately Yen68 billion in assets and net assets acquired were Yen13.5 billion. 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 U.S., previously our joint venture with Bank One Corporation, a major U.S. bank holding company, to increase our ability of securitization and servicing of 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 Real Estate Capital Markets, LLC. In September 2000, a consortium led by ORIX, 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 14.99% stake in the bank, and our investment amounted to approximately Yen15 billion. In April 2001, we acquired the operating assets and employees of Nihon Jisyo Corporation. The assets include office buildings and residential rental properties owned and operated by Nihon Jisyo, land for residential subdivision development, and shares in subsidiaries involved in building maintenance and real estate appraisal businesses. As of March 31 2000, Nihon Jisho had assets of Yen58 billion ($468 million). 8
Our Portfolio The following chart shows the breakdown of our portfolio of businesses as of March 31, 2001. <TABLE> Business Business Profile Major Customers Major Operating Companies - ---------------------- ------------------------------------ --------------------- ---------------------------- <S> <C> <C> <C> Direct financing Information-related and office Middle market ORIX Corporation leases equipment corporate customers ORIX Auto Leasing Industrial equipment Shipping companies Corporation Construction and civil engineering Airline companies ORIX Alpha Corporation machinery ORIX Asia Limited Commercial services equipment ORIX Financial Services, Inc. Automobiles ORIX Leasing Malaysia Marine vessels Berhad Aircraft PT. ORIX Indonesia Finance ORIX Leasing Pakistan Limited ORIX Australia Corporation Limited ORIX Europe Limited Operating leases Measuring and analytical Middle market ORIX Corporation equipment corporate customers ORIX Rentec Corporation Automobiles Shipping companies ORIX Rent-A-Car Corporation Marine vessels Airline companies ORIX Real Estate Corporation Aircraft ORIX Australia Corporation Real estate Limited ORIX AVIATION SYSTEMS LIMITED Installment loans Corporate finance Middle market ORIX Corporation Housing loans corporate customers ORIX Trust and Banking Card loans Consumers Corporation Other consumer loans ORIX Credit Corporation ORIX Club Corporation ORIX Asia Limited ORIX USA CORPORATION 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 ORIX Life Insurance through agents and directly to corporate customers Corporation consumers Consumers </TABLE> 9
<TABLE> Business Business Profile Major Customers Major Operating Companies - ---------------------- ------------------------------------ --------------------- ---------------------------- <S> <C> <C> <C> Other operations Securities brokerage Consumers ORIX Corporation Trust banking Middle market ORIX Securities Corporation Securities investment corporate customers ORIX COMMODITIES Venture capital investment Corporation Securities and futures trading ORIX Capital Corporation Alternative investment ORIX Estate Corporation Commodities funds ORIX Real Estate Corporation Insurance agency services ORIX Asset Management Ship management Corporation Computer software development ORIX Asset Management and Real estate development and Loan Services Corporation management ORIX Investment Corporation Asset management ORIX Trust and Banking Leisure facility management Corporation Golf course management ORIX USA CORPORATION Training facilities management ORIX Asia Limited Driving school ORIX Real Estate Capital Commercial mortgage servicing Markets, LLC Hotel management ORIX Real Estate Equities, Professional baseball team Inc. Environmental services ORIX Investment and Management Private Limited ORIX Europe Limited ORIX IRELAND Limited </TABLE> The table below shows our significant subsidiaries, including for each such subsidiary the name, country of incorporation or residence, and proportion of ownership interest (direct or indirect) by ORIX. <TABLE> ORIX Company Principal Business Country Ownership ------- ------------------ ------- --------- <S> <C> <C> <C> ORIX Alpha Corporation...................... Leasing and financing furnishing and Japan 100% equipment for retailers, hotels, restaurants, and other users ORIX Auto Leasing Corporation............... Auto Lessor in Japan active mainly in Japan 100% fleet leasing but with growing business in auto leases ORIX Rentec Corporation..................... Rental supplier of high-precision Japan 100% measuring equipment ORIX Credit Corporation..................... Consumer credit company engaged in Japan 100% business centered on shopping credit and consumer finance ORIX Capital Corporation.................... Management of venture capital Japan 100% investment funds ORIX Rent-A-Car Corporation................. Rent-a-car business Japan 100% ORIX Securities Corporation................. Securities house Japan 100% ORIX Estate Corporation..................... Managing real estate and leisure Japan 100% facilities 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 Corporation.......... Trust and banking services Japan 100% ORIX Real Estate Corporation................ Real estate development and Japan 100% management ORIX Asset Management and Loan Services Corporation................................ Commercial mortgage servicing Japan 100% ORIX Investment Corporation................. Alternative investment Japan 100% ORIX Asset Management Corporation........... Asset management Japan 100% </TABLE> 10
<TABLE> ORIX Company Principal Business Country Ownership ------- ------------------ ------- --------- <S> <C> <C> <C> Asia & Oceania ORIX Investment and Management Private Limited.................................... Venture capital investment Singapore 100% ORIX Asia Limited.......................... Leasing and investment banking in China (Hong 100% Hong Kong and throughout Southeast Kong) Asia ORIX Leasing Malaysia Berhad............... Equipment leasing and other financing Malaysia 80% services PT. ORIX Indonesia Finance................. Equipment leasing and other financing Indonesia 83% services ORIX Australia Corporation Limited......... Equipment leasing, vehicle operating Australia 100% leases, and other financing services Middle East & North Africa ORIX Leasing Pakistan Limited.............. Equipment leasing services Pakistan 57% North America ORIX USA CORPORATION....................... Equipment leasing, asset-based lending, U.S.A. 100% real estate leasing, and general corporate financing ORIX Real Estate Equities, Inc............. Commercial real estate development U.S.A. 100% and investment ORIX Financial Services, Inc............... Installment financing U.S.A. 100% ORIX Real Estate Capital Markets, LLC...... Commercial mortgage servicing, U.S.A. 100% issuance of CMBS (Commercial Mortgage Backed Securities), and real estate investment Europe ORIX Europe Limited........................ Corporate and asset-based finance and U.K. 100% investment ORIX IRELAND LIMITED....................... Investment in and trade of securities Ireland 100% and loans; general corporate finance and asset-based finance ORIX AVIATION SYSTEMS LIMITED.............. Operating/finance leases for aircraft Ireland 100% and other related services </TABLE> The Leasing Market in Japan The Japanese leasing industry is highly fragmented, with 328 companies registered with the Japan Leasing Association as of March 31, 2001. 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 2001, the total annual value of new lease contracts reported by the Japan Leasing Association was Yen7,946 billion ($64 billion). The value of new lease contracts in fiscal 2001 based on purchase costs represented 9.15% 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. 11
The largest segment of financing leases in fiscal 2001 was information-related equipment (including computers and related equipment), which represented 39.8% of the total value of lease contracts, followed by industrial equipment (18.6%) and commercial service equipment (15.0%). Small- and medium-sized companies represented 46.2% of the total customer base in Japan as measured by value of lease contracts, while large companies comprised 47.5% of the customer base. The following tables contain some additional information regarding the Japanese leasing market. The figures for the year ended March 31, 2001 in the Annual New Lease Contracts table are preliminary estimates. The figures for private fixed investments are estimates provided by the Cabinet Office. Lease Financings by Equipment Type Years ended March 31, ------------------------------------------ 1997 1998 1999 2000 2001 ---- ---- ---- ---- ---- Information-related equipment.. 42.5% 42.4% 44.0% 43.6% 39.8 % Industrial equipment........... 17.0 18.1 16.7 18.4 18.6 Commercial service equipment... 15.4 14.6 14.5 13.8 15.0 Office equipment............... 9.5 8.7 8.1 8.1 8.0 Transportation equipment....... 7.1 7.2 6.6 6.5 7.4 Medical equipment.............. 3.5 3.4 3.8 3.9 4.1 Other.......................... 5.1 5.6 6.3 5.8 7.1 Annual New Lease Contracts <TABLE> <CAPTION> Year ended March 31, ----------------------------------------------------------------- 1997 1998 1999 2000 2001 --------- --------- --------- --------- --------- (Billions of yen) <S> <C> <C> <C> <C> <C> Total receivables under new lease contracts................................. Yen 8,287 Yen 7,930 Yen 7,145 Yen 7,402 Yen 7,946 Annual new lease contracts (cost basis).... 7,224 7,018 6,315 6,586 6,992 Private fixed investment................... 77,413 83,571 77,834 75,086 76,400 Annual new lease contracts as a percentage of private fixed investment................................ 9.33% 8.40% 8.11% 8.77% 9.15% </TABLE> Overview of Activities Scope of Domestic Operations Domestically our group is comprised as of March 31, 2001 of ORIX, 63 subsidiaries, and a number of investments in affiliates. As of that date, we employ approximately 6,500 staff in Japan excluding our affiliates, and our domestic operations are serviced by a network of 577 offices throughout Japan. Approximately 75% of our revenues in fiscal 2001 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 core leasing business, we continue to expand into new 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, 2001, we 12
operated in 21 countries outside Japan through 92 subsidiaries and affiliates. Our overseas operations, including our affiliates, employ approximately 4,700 staff, and include a network of 201 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 Bank One Mortgage Capital Markets, LLC from 45% to 100% and renamed the operations as ORIX Real Estate Capital Markets, LLC, which securitizes and services commercial mortgage loans. 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. We also engage 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, we have 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, auto leasing 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 a variety of 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 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". 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, 2001. As of March 31, 2001 ------------------------------------- Percent of direct Millions of yen financing leases --------------- ----------------- Direct financing leases in: Japan...................... Yen 1,193,332 72.0% Overseas................... 464,377 28.0% ------------- ------ Total........................ Yen 1,657,709 100.0% ============= ====== 13
As of March 31, 2001, the total balance of our investment in direct financing leases represented 33.0% 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, 2001. Year ended March 31, 2001 -------------------------------------- Percent of direct Millions of yen financing leases --------------- ----------------- Direct financing leases in: Japan....................... Yen 77,365 63.4% Overseas.................... 44,638 36.6% ------------- ------ Total........................ Yen 122,003 100.0% ============= ====== Our revenues from direct financing leases represented 20.8% of our total revenues in fiscal 2001. 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 noncancellable 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. <TABLE> As of March 31, --------------------------------------------------------------------------------- 1997 1998 1999 2000 2001 ------------- ------------- ------------- ------------- ------------- (Millions of yen) <S> <C> <C> <C> <C> <C> Information-related and office equipment........................ Yen 557,439 Yen 623,203 Yen 493,298 Yen 373,281 Yen 334,174 ------------- ------------- ------------- ------------- ------------- Industrial equipment.............. 436,813 473,140 444,261 394,581 372,542 Commercial services equipment..... 226,118 273,730 224,080 194,809 193,624 Transportation equipment.......... 458,572 443,486 414,093 398,521 415,246 Other............................. 388,674 372,463 377,110 383,761 342,123 ------------- ------------- ------------- ------------- ------------- Total............................ Yen 2,067,616 Yen 2,186,022 Yen 1,952,842 Yen 1,744,953 Yen 1,657,709 ============= ============= ============= ============= ============= </TABLE> The decrease in the balance of investment in direct financing leases is due to the securitization of lease assets and a decline in the level of new contracts compared with the previous fiscal year. The sluggish private-sector capital investment in Japan, our highly selective approach to new leasing contracts and our emphasis on profitability over asset growth caused the overall balance of the leasing contracts to decline. The above table does not include securitized lease assets. If securitized assets were included the total balance of direct financing lease assets would be Yen2,098,897 million as of March 31, 2000, and Yen1,968,872 million ($15,891 million) as of March 31, 2001. At March 31, 2001, no single lessee represented more than 1% of our total portfolio of direct finance leases. As of March 31, 2001, approximately 72.0% of our direct financing leases were to lessees located in Japan, and approximately 20.0% 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. 14
<TABLE> As of March 31, --------------------------------------------------------------------------------- 1997 1998 1999 2000 2001 ------------- ------------- ------------- ------------- ------------- (Millions of yen) <S> <C> <C> <C> <C> <C> Minimum lease payments receivable.. Yen 2,229,528 Yen 2,353,294 Yen 2,107,393 Yen 1,889,224 Yen 1,779,295 Estimated residual value........... 76,578 59,119 52,368 49,965 48,896 Initial direct costs............... 23,886 28,294 29,374 26,042 24,616 Unearned lease income.............. (262,376) (254,685) (236,293) (220,278) (195,098) ------------- ------------- ------------- ------------- ------------- Total........................ Yen 2,067,616 Yen 2,186,022 Yen 1,952,842 Yen 1,744,953 Yen 1,657,709 ============= ============= ============= ============= ============= </TABLE> 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. If securitized assets were included, this category would make up the largest single portion of our direct financing lease portfolio. 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 is our main company 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, 15
and other types of risks, we provide comprehensive risk management services and assist customers, from a variety of perspectives, in effectively managing and controlling costs related to automobile usage. We are coordinating 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, 2001, we had a total of approximately 285,000 vehicles under lease. Based on fiscal 2000 data, we had a market share of approximately 11% 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 38,000 vehicles in fiscal 2001. Other Equipment Other equipment that we lease to Japanese clients includes a wide range of medical machinery. 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. <TABLE> As of March 31, -------------------------------------------- 1999 2000 2001 ---------- ---------- ---------- (Millions of yen, except percentage data) <S> <C> <C> <C> 90+ days past due direct financing leases........... Yen 54,051 Yen 53,743 Yen 53,515 90+ days past due direct financing leases as a percentage of the balance of investment in direct financing leases................................... 2.8% 3.1% 3.2% Provisions as a percentage of average balance of investment in direct financing leases.............. 0.8% 1.1% 1.3% Allowance for direct financing leases............... Yen 23,867 Yen 35,783 Yen 40,885 Allowance for direct financing leases as a percentage of the balance of 90+ days past due direct financing leases............................ 44.2% 66.6% 76.4% Allowance for direct financing leases as a percentage of the balance of investment in direct financing leases................................... 1.22% 2.05% 2.47% </TABLE> The allowance for direct financing leases increased at March 31, 2001 mainly due to the deterioration in the quality of US lease receivables. 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, 2001, 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 76.4% as of March 31, 2001. The ratio of charge-offs as a percentage of the balance of the investment in direct financing leases averaged 0.66% for fiscal 1999 through fiscal 2001. 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 16
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, 2001. As of March 31, 2001 -------------------------------------- Percent of direct financing leases from Millions of yen operating leases --------------- ----------------- Operating leases in: Japan.................. Yen 320,638 71.1% Overseas............... 130,533 28.9% ------------ ------ Total................... Yen 451,171 100.0% ============ ====== As of March 31, 2001, our total operating lease assets represented 9.0% of our total operating assets. The table below provides a geographical breakdown of revenues from our operating leases for the year ended March 31, 2001. Year ended March 31, 2001 --------------------------------------- Percentage of total revenue from operating Millions of yen leases --------------- ------------------- Operating leases in: Japan.................. Yen 83,612 73.7% Overseas............... 29,866 26.3% ------------ ------ Total................... Yen 113,478 100.0% ============ ====== In fiscal 2001, our revenues from operating leases represented 19.4% 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. <TABLE> As of March 31, --------------------------------------------------------------------------------- 1997 1998 1999 2000 2001 ------------- ------------- ------------- ------------- ------------- (Millions of yen) <S> <C> <C> <C> <C> <C> Transportation equipment......... Yen 205,277 Yen 195,392 Yen 181,886 Yen 159,548 Yen 165,218 Measuring equipment and personal computers...................... 53,740 59,989 58,552 58,431 77,808 Real estate and other............ 206,720 179,685 170,718 179,597 208,145 ------------- ------------- ------------- ------------- ------------- Total...................... Yen 465,737 Yen 435,066 Yen 411,156 Yen 397,576 Yen 451,171 ============= ============= ============= ============= ============= </TABLE> 17
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. Transportation Equipment Transportation equipment that we lease out under operating leases consists mainly of aircraft, automobiles and oceangoing vessels. Our fleet of aircraft currently stands at 22 owned and 31 managed aircraft. These are leased principally to European and North American carriers. We own 21 Airbus 320s 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 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 60 rental dormitories, which we rent to major domestic corporations for use by their staff. We also own for rental and operate office buildings, approximately 2,200 apartment units, and a number of other real estate properties, located mainly in or near Tokyo and Osaka. This includes a multi-purpose development in Yokohama, the Minato Mirai complex, which has hotel, retail and commercial office space, and which was completed in September 2000. The weighted average useful life for our real estate and other is 40 years. 18
Installment Loans and Investment Securities In fiscal 2001, our revenues from interest on loans and investment securities were Yen109,448 million ($883 million), representing 18.7% of our total revenues. As of March 31, 2001, the balance of installment loans was Yen1,846,511 million ($14,903 million) and the balance of investment in securities was Yen942,158 million ($7,604 million). Installment Loans The table below provides a geographical breakdown of installment loans as of March 31, 2001. As of March 31, 2001 --------------------------------------- Percentage of total installment Millions of yen loans --------------- ------------------- Investment in installment loans Domestic....................... Yen 1,489,065 80.6% Foreign........................ 357,446 -------------- ------ Total........................... Yen 1,846,511 100.0% For a breakdown of investment securities by business segments, see "Item 5. Operating and Financial Review and Prospects--General--Presentation of Income from Investments". The following table shows the balance of installment loans by domicile and type of borrowers. <TABLE> As of March 31, --------------------------------------------------------------------------------- 1997 1998 1999 2000 2001 ------------- ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> <C> (Millions of yen) Domestic Consumer Housing loans..................... Yen 435,388 Yen 426,559 Yen 411,215 Yen 396,748 Yen 392,896 Card loans........................ 78,438 98,187 118,347 121,272 181,215 Other............................. 67,902 55,811 43,663 56,461 43,959 ------------- ------------- ------------- ------------- ------------- Subtotal.......................... 581,728 580,557 573,225 574,481 618,070 Domestic Commercial Real estate related companies..... 193,578 213,911 188,085 203,537 222,818 Commercial and industrial companies....................... 558,232 607,952 614,988 657,355 627,252 ------------- ------------- ------------- ------------- ------------- Subtotal.......................... 751,810 821,863 803,073 860,892 850,070 ------------- ------------- ------------- ------------- ------------- 1,333,538 1,402,420 1,376,298 1,435,373 1,468,140 Foreign commercial, industrial and other borrowers............... 351,053 377,761 368,661 337,754 357,446 Direct loan origination costs, net. 16,106 14,644 16,928 18,312 20,925 ------------- ------------- ------------- ------------- ------------- Total.............................. Yen 1,700,697 Yen 1,794,825 Yen 1,761,887 Yen 1,791,439 Yen 1,846,511 ============= ============= ============= ============= ============= </TABLE> As of March 31, 2001, we had no concentration of loans to borrowers in a single industry, other than loans to real estate related companies. At March 31, 2001, we had loans outstanding of Yen255,863 million ($2,065 million) to real estate related companies and construction companies. Of that amount, a valuation allowance was required for loans with an outstanding balance of Yen29,714 million ($240 million). The remaining outstanding balance represents performing loans or the portion of loans secured by collateral. 19
As of March 31, 2001, approximately 81% of loans were to borrowers in Japan and approximately 10% were to borrowers in the United States. 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 have developed products that differentiate us from our competitors. For example, we provide card loans that offer higher credit-quality individuals lower interest rates than those offered by consumer finance companies. We also undertake 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 retail outlets and direct mail. In fiscal 2000, we transferred our housing loan business from ORIX's 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. 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 our loans 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 real estate investors and developers, except for housing loans to individuals and consumer finance loans in Hong Kong. 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. See "Item 5. Operating and Financial Review and Prospects--Policies relating to Non-performing Assets and Charge-Offs" and note 1(f) of the notes to the consolidated financial statements. 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. 20
<TABLE> <CAPTION> As of March 31, ----------------------------------------------- 1999 2000 2001 ------------- ------------- ------------- (Millions of yen) <S> <C> <C> <C> Impaired loans.................................. Yen 130,226 Yen 125,921 Yen 120,090 Impaired loans requiring a valuation allowance.. 114,525 83,408 73,636 ------------- ------------- ------------- Valuation allowance............................. 62,109 51,791 47,037 ============= ============= ============= </TABLE> 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 fiscal 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 fiscal 2001, a charge-off of impaired loans amounting to Yen11,185 million ($90 million) resulted in a decrease in the outstanding balances of impaired loans as of March 31, 2001 compared to March 31, 2000. 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. <TABLE> As of March 31, ------------- ------------- ------------- 1999 2000 2001 ------------- ------------- ------------- <S> <C> <C> <C> (Millions of yen) Domestic Consumers Housing loans....................................... Yen - Yen - Yen - Card loans.......................................... - - - Others.............................................. 740 646 625 ------------ ------------- ------------- Subtotal.......................................... 740 646 625 Domestic Commercial Real estate related companies....................... 64,536 49,432 48,527 Commercial and industrial companies................. 57,135 64,131 59,288 ------------ ------------- ------------- Subtotal.......................................... 121,671 113,563 107,815 Foreign, commercial, industrial and other borrowers.. 7,815 11,712 11,650 ------------ ------------- ------------- Total................................................ Yen 130,226 Yen 125,921 Yen 120,090 ============ ============= ============= </TABLE> 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. <TABLE> As of March 31, ----------------------------------------------- 1999 2000 2001 ------------- ------------- ------------- (Millions of yen, except percentage data) <S> <C> <C> <C> 90+days past due loans not attributable to treatment under FASB Statement 114 loans...... Yen 98,100 Yen 91,513 Yen 84,827 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.............. 6.0% 5.4% 4.9% Provisions as a percentage of average balance of installment loans............................... 1.7% 1.1% 1.0% Allowance for possible loan losses not attributable to treatment under FASB Statement 114................................... Yen 46,630 Yen 49,365 Yen 53,155 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................................... 47.5% 53.9% 62.7% </TABLE> 21
<TABLE> As of March 31, ----------------------------------------------- 1999 2000 2001 ------------- ------------- ------------- (Millions of yen, except percentage data) <S> <C> <C> <C> 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........................ 2.86% 2.96% 3.08% </TABLE> At March 31, 2001, 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. <TABLE> As of March 31, ----------------------------------------------- 1999 2000 2001 ------------- ------------- ------------- (Millions of yen) <S> <C> <C> <C> Domestic consumer Housing loans................................... Yen 71,157 Yen 67,066 Yen 60,316 Card loans and other............................ 20,021 16,825 14,832 Domestic commercial Real estate related companies................... -- 191 808 Commercial and industrial companies............. 675 2,103 2,050 Foreign.......................................... 6,247 5,328 6,821 ------------- ------------- ------------- Total............................................ Yen 98,100 Yen 91,513 Yen 84,827 ============= ============= ============= </TABLE> 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 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, 2001 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 62.7% as of March 31, 2001. The ratio of charge-offs as a percentage of the balance of installment loans averaged 0.82% for fiscal 1999 through fiscal 2001. 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. 22
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 57.0% of our total investment in securities as of March 31, 2001. These reserves are generally invested in corporate debt. For a breakdown of investment securities by business segments, see "Item 5. Operating and Financial Review and Prospects-General-Presentation of Income from Investments". 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. <TABLE> As of March 31, ----------------------------------------------------------------------------------------------- 1999 2000 2001 ------------------------------ ------------------------------ --------------------------- (Millions of yen) <S> <C> <C> <C> <C> <C> <C> Trading securities.............. Yen 414 0.1% Yen 390 0.1% Yen 581 0.1% Available-for-sale securities... 507,510 88.1 689,638 90.9 841,409 89.3 Held-to-maturity securities..... 16,542 2.8 11,404 1.5 13,005 1.4 Other securities................ 51,740 9.0 56,949 7.5 87,163 9.2 ------------- ------ ------------- ------ ------------- ------ Total...................... Yen 576,206 100.0% Yen 758,381 100.0% Yen 942,158 100.0% ============= ====== ============= ====== ============= ====== </TABLE> Corporate debt securities consist of general obligation and fixed interest rate instruments. Our portfolio included investments by ORIX USA in high yield debt securities with a balance of Yen59,073 million ($477 million) as of March 31, 2001. In June 1998 we reduced the balance of investments in high yield debt securities by Yen50,611 million by means of a securitization in which ORIX USA sold notes collateralized by a portion of its high yield securities portfolio. ORIX USA retained a subordinated interest in this portfolio. Trading securities include securities held in the trading portfolio of ORIX Securities and ORIX Commodities. The following table provides the fair value of available-for-sale and held-to-maturity securities in each major security type. <TABLE> As of March 31, ---------------------------------------------- 1999 2000 2001 ------------ ------------ ------------ <S> <C> <C> <C> (Millions of yen) Available-for-sale securities: Japanese and foreign government bond securities... Yen 20,601 Yen 12,895 Yen 25,431 Japanese prefectural and foreign municipal bond securities..................................... 20,468 33,021 39,692 Corporate debt securities......................... 398,753 482,417 604,145 Mortgage-backed and other asset-backed securities...................................... 6,795 54,475 94,236 Funds in trust.................................... 6,128 2,479 5,508 Equity securities................................. 54,765 104,351 72,397 ------------ ------------ ------------ Yen 507,510 Yen 689,638 Yen 841,409 ============ ============ ============ Held-to-maturity securities: Japanese and foreign government bond securities... Yen -- Yen -- Yen 142 Corporate debt securities......................... 16,515 11,404 12,864 ------------ ------------ ------------ Yen 16,515 Yen 11,404 Yen 13,006 ============ ============ ============ </TABLE> At March 31, 2001, marketable equity securities amounted to approximately 7.7% of ORIX's total investment in securities. We make these equity investments mainly to strengthen business relationships with customers. 23
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 ORIX. Revenues from life insurance premiums and related investment income for fiscal 2001 were Yen158,314 million ($1,278 million), or 27.0% 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, 2001 amounting to Yen3,026 billion ($24.4 billion). ORIX Life Insurance traditionally distributed its 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 range of 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. As a consequence, we are able to offer this insurance at a lower cost than competitors. Also, by setting an upper limit Yen30 million on insurable amounts and Yen15 million on single payment endowment insurance, we have been able to simplify analysis and approval procedures. ORIX Direct is part of our overall initiative to increase our presence in the retail financial services sector. The following table shows a breakdown of the balance of investments by ORIX Life Insurance as of March 31, 2001. <TABLE> As of March 31, 2001 ---------------------------------------- Millions of yen Millions of dollars --------------- -------------------- <S> <C> <C> Investment in securities Fixed income securities......... Yen 519,995 $ 4,197 Marketable equity securities.... 7,167 58 Other securities................ 9,975 80 ------------- -------- Total investment in securities... Yen 537,137 $ 4,335 Other investments................ 29,744 240 ------------- -------- Total............................ Yen 566,881 $ 4,575 ============= ======== </TABLE> Investments by ORIX Life Insurance other than securities consisted principally of real estate for rental and loans. 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, real estate development and management, and several other businesses. As of March 31, 2001, these operations had assets of Yen132,006 million ($1,065 million), representing 2.6% of our total operating assets. In fiscal 2001, we had revenues from other operations of Yen68,331 million ($552 million), representing 11.7% of our total revenues. 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. 24
We actively engage in real estate development. In particular, we have earned substantial profit from the planning and development of condominium buildings in Japan. In fiscal 2001, operating revenues from the condominium business accounted for approximately 54.4% 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 it 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 1,000 residential apartment units in fiscal 2000 and approximately 1,900 units in fiscal 2001. We are also participating in a consortium, led by Japan's largest property developer, Mitsubishi Estate Co., Ltd., that is building a large residential apartment complex in Tokyo. 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 areas, we are drawing on our experience from U.S. 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 develop our service operations. Securities Brokerage ORIX Securities Corporation is engaged primarily in equity and other securities brokerage activities. We attach significant strategic importance to this company. 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 its activities, ORIX Securities in May 1999 began to offer On-Line Trade, 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, 2001, assets under ORIX Capital's management were approximately Yen16,978 million ($137 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. ORIX serves as a sales agent for ORIX Life Insurance. ORIX Life Insurance also contracts with independent specialized insurance sales agents to market its 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. The company, 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. 25
Personal Financial Services In 1997, we established our PFS Department to examine the potential for us to enter the Japanese personal financial services sector. This market sector has been highly regulated with little product differentiation, and, consequently, offered few opportunities for us. 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 we have built to date. We provide financial consulting and financial products tailored to meet the needs of Japan's consumers. The PFS 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 PFS 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 in direct marketing of deposit products. As of March 31, 2001, the balance of these deposits was approximately Yen178 billion ($1.4 billion). Waste Management We established ORIX Eco Services Corporation in 1998 to help leasing service clients deal with their waste management problems. Its 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. Servicing Through our subsidiary, ORIX Real Estate Capital Markets, we engaged in servicing of commercial mortgage loans collateralized primarily by real estate. As of March 31, 2001, ORIX Real Estate Capital Markets serviced commercial loan portfolios on behalf of itself and outside investors with unpaid principal balances of approximately Yen4,882 billion ($39.4 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 less than 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 and repair facilities throughout Japan. 26
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 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 either establish 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 25% of our total revenues in fiscal 2001. Of these overseas revenues, approximately 55.4% are from the Americas, 34.0% from the Asia and Oceania region, and the remaining 10.6% from Europe. Approximately 24.4% of our total assets are overseas operating assets, excluding assets attributable to the corporate segment and assets which belong to affiliate operations. Approximately 58.9% of overseas assets as of March 31, 2001 relate to the Americas, 29.5% to Asia and Oceania, and the remaining 11.6% 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, headquartered in New York and with offices in several major cities in the Unites States, offers a range of financial products and services, including corporate finance, real estate finance, equipment leasing, and investment and financing in the mortgage capital market. ORIX USA owns 100% of the equity of ORIX Real Estate Equities, ORIX Financial Services and ORIX Real Estate Capital Market, LLC. 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 U.S. 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, specialized in leasing heavy equipment. ORIX Financial Services has engaged in vendor programs that targets dealers and distributors to promote sales and marketing. The largest segments of its leasing portfolio are transportation, construction and other heavy equipment. In fiscal 2001, weakening conditions in the U.S. economy adversely affected the leasing business related to transportation, construction and other heavy equipment, resulting in an increase in doubtful receivables on direct 27
financial leases. We are proactively responding to this development. ORIX Financial Services has focused on assets- based loans secured by receivables and inventory as well as fixed assets, or other financing and leasing business. In 1989 we became involved in the field of commodities trading and management, primarily through our investment in Stockton Holdings, a company that trades in futures and provide reinsurance. As of March 31, 2001 we owned 29.7% of the equity of Stockton Holdings, without taking into account outstanding options. ORIX increased its ownership of Banc One Mortgage Capital Markets, LLC., from 45% to 100% in July 1999 and subsequently changed the name of the company to ORIX Real Estate Capital Markets, LLC. (ORIX Real Estate Capital Markets). ORIX Real Estate Capital Markets combines origination, commercial mortgage-backed securities investment, and servicing functions into a single entity focused on commercial mortgage capital markets. ORIX Real Estate 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. Asia, Oceania and Middle East In 1971 we established our first overseas office in Hong Kong, and we had 57 subsidiaries and affiliates at March 31, 2001. These companies do business in 16 countries in the Asia, Oceania and 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 and in Malaysia in 1996. We have also expanded our activities into throughout Asia and Oceania including Middle East and North Africa through our overseas subsidiaries and affiliates such as ORIX Australia, 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, ORIX Ireland, established in 1988 as a finance vehicle for ORIX's 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. Established in 1982, ORIX Europe has grown to now provide leasing, general and corporate lending and other financial services throughout Europe. These include international ship financing, real estate financing and investment in and trading of international securities. 28
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 ORIX Corporation is incorporated under the Commercial Code of Japan, and its 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 is conducted by ORIX is also governed by the Insurance Business Law. ORIX is 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 ORIX's application for the registration. We operate our securities business through ORIX Securities. 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 its 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. 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 29
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 lease 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 is one of our competitive advantages, and sets us 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 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 we operate. 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 ORIX's principal executive offices, apartment buildings and recreational facilities for our employees with an aggregate value as of March 31, 2001 of Yen74,406 million ($601 million). Legal Proceedings We are a defendant in various lawsuits arising in the ordinary course of our business. In the second half of the fiscal year ended March 31, 2001, ORIX reached on out-of-court settlement mediated by the Tokyo High Court with Sumisei Leasing Co. Ltd. ("Sumisei") regarding all the outstanding claims by Sumisei against us in connection with the repayment of loans. Under the terms of this settlement, an accrued expense of Yen4.9 billion that was recorded in our interim financial statements for the six-month period ended September 30, 2000, pursuant to the Tokyo District Court's judgment rendered on August 31, 2000, was reversed. This settlement did not have any material impact on our results of operations for the year ended March 31, 2001. 30
We aggressively manage our pending litigation and assess 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 our management, none of the pending 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 ORIX's 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 lease, 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% of our total revenues in fiscal 2001. 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 fiscal years in the tables below. As of March 31, 1999 ----------------------------------------------- Life Other insurance operations Total ------------- ------------- ------------- (Millions of yen) Fixed income securities...... Yen 284,281 Yen 178,878 Yen 463,159 Marketable equity securities. 8,783 45,982 54,765 Other securities............. 38,101 20,181 58,282 ------------- ------------- ------------- Total................... Yen 331,165 Yen 245,041 Yen 576,206 ============= ============= ============= As of March 31, 2000 ----------------------------------------------- Life Other insurance operations Total ------------- ------------- ------------- (Millions of yen) Fixed income securities...... Yen 390,523 Yen 203,689 Yen 594,212 Marketable equity securities. 13,243 91,108 104,351 Other securities............. 13,379 46,439 59,818 ------------- ------------- -------------- Total................... Yen 417,145 Yen 341,236 Yen 758,381 ============= ============= ============== 31
As of March 31, 2001 ----------------------------------------------- Life Other insurance operations Total ------------- ------------- ------------- (Millions of yen) Fixed income securities...... Yen 519,995 Yen 256,514 Yen 776,509 Marketable equity securities. 7,167 65,230 72,397 Other securities............. 9,975 83,277 93,252 ------------- ------------- -------------- Total................... Yen 537,137 Yen 405,021 Yen 942,158 ============= ============= ============== 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 are 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 Credit Department. We stop accruing revenues on direct financing leases and installment loans when principal or interest is past due 180 days or more. We also stop accruing revenues when our management determines that it is doubtful that we 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 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 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 U.S. 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 us to other non-Japanese companies (particularly U.S. 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 fiscal 1999, 2000 and 2001, 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 32
recognized for each fiscal year 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 ORIX's independent Credit Department make thorough evaluations of customer-, industry-, and country-related risks. The Credit Department 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 determine 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 we 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 Credit Department. 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 ORIX employees, including the Credit Department. If the transaction exceeds the limits which the Credit Department is authorized to approve, the 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; 33
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. 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 ORIX'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 the Credit Department, or to the Investment and Credit Committee, for ultimate determination. For some of these companies, we carry out periodic country and region evaluations 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 and products within our portfolio. For each industry segment we carry out periodic, typically quarterly, industry sector evaluations to minimize exposure to potentially high risk market segments. We review delinquencies or other transactions which are not in compliance with our accepted practices as frequently as every two weeks 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 imposing more stringent requirements is necessary due to the nature of the transaction, such as transactions for 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. 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 ORIX's International Credit Department. The International Credit Department then compiles these into a report that is sent to ORIX's management. 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. 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 34
no residual value in the 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 depend on the evaluation of each corporate borrower's creditworthiness and the underlying collateral. Except for a program for an experimental range of low-limit personal card loans begun in 1998, all of our consumer lending is done only after interviewing the applicant and receiving all relevant financial data. In order to minimize 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 ORIX's Credit Department, 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 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 its 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 Credit Department staff, the specialized Real Estate Appraisal Department has approximately 40 staff 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. 35
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. Twice a year, 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 floating-rate assets to floating-rate liabilities. 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 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, from April 1, 1999, we began using a new asset-liability management system that enables prompt access to quantitative indicators of interest rate risks. Aiming to further increase the sophistication of our interest rate risk management, we are currently implementing a project that will, when completed, establish a system for rapidly obtaining a greater volume of quantitative data on interest rate risks. 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 differently than the interest rates paid on interest-bearing liabilities, which can result in an increase in interest expense relative to finance income. The Treasury Department manages 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. Interest rate risks are managed as part of asset-liability management activities. 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 minimize any mismatching. 36
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. 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 we operate, competitive circumstances and regulatory considerations. We cannot assure you 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, in June 1999 ORIX established the Legal Affairs Department by combining the compliance functions previously performed by the Credit Department and Office of Corporate Auditors. This new 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. We are currently in the process of developing a compliance manual to guide our employees. Results of Operations Year Ended March 31, 2001 Compared to Year Ended March 31, 2000 37
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 ($40.6 billion). This reflected a sizeable increase in investment securities, as well as increases in installment loans, operating leases and other operating assets. Revenues reflected increases in operating lease revenues, interest on loans and investment securities, and other operating revenues, including 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 our total revenues to decrease by 4.9%, or Yen30,364 million, to Yen586,149 million ($4,731 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 ($4,270 million). As a result, income before income taxes increased by 13.8% to Yen59,236 million ($478 million). Net income increased for the sixth consecutive fiscal year, rising 11.5% to a historical high of Yen34,157 million ($276 million). The tables below contain some financial data for fiscal 2000 and 2001, as well as the amounts and percentages of the changes from fiscal 2000 to fiscal 2001. Income Statement Data <TABLE> Year ended March 31, Change ------------------------------ ---------------------------- 2000 2001 Amount Percent ------------- ------------- ------------- ----------- (Millions of yen) <S> <C> <C> <C> <C> 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 </TABLE> Balance Sheet Data <TABLE> Year ended March 31, Change ------------------------------ ---------------------------- 2000 2001 Amount Percent ------------- ------------- ------------- ----------- (Millions of yen) <S> <C> <C> <C> <C> 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 </TABLE> 38
<TABLE> Year ended March 31, Change ------------------------------ ---------------------------- 2000 2001 Amount Percent ------------- ------------- ------------- ----------- (Millions of yen) <S> <C> <C> <C> <C> 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) -- 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 ============= ============= ============= </TABLE> The table below shows the volume of new transactions for fiscal 2000 and 2001, as well as the amounts and percentages of change in these data from fiscal 2000 to fiscal 2001. Figures for new equipment acquisitions for direct financing leases and operating leases are based on purchase cost of the equipment. Volume of New Assets <TABLE> Year ended March 31, Change ------------------------------ ---------------------------- 2000 2001 Amount Percent ------------- ------------- ------------- ----------- (Millions of yen) <S> <C> <C> <C> <C> 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 </TABLE> Total Revenues Our total revenues decreased by 4.9%, or Yen30,364 million, to Yen586,149 million in fiscal 2001 compared to Yen616,513 million in fiscal 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 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 ($985 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 ($13,379 million). The average interest rates on domestic direct financing leases, calculated on the basis of quarterly balances, slightly decreased to 5.77% in fiscal 2001 from 5.79% in fiscal 2000. The average interest rates on overseas direct financing leases, calculated on the basis of quarterly balances, increased to 9.92% in fiscal 2001 from 9.67% in fiscal 2000, reflecting an increase in the amount of high-yield contracts. Securitization of direct financing leases during fiscal 2001 affected revenues from direct financing leases both because we recognized gains from securitizations and because securitization decreased interest income from securitized assets. Revenues from direct financing leases in fiscal 2001 included Yen3,722 million ($30 million) of gains from securitization of direct financing leases. 39
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. Investment in Direct Financing Leases <TABLE> As of March 31, Change ----------------------------- --------------------------- 2000 2001 Amount Percent ------------- ------------- ------------- ----------- (Millions of yen) <S> <C> <C> <C> <C> 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) ============= ============= ============= </TABLE> Investment in direct financing leases decreased by 5.0% from March 31, 2000 to March 31, 2001. New investment in leased equipment in fiscal 2001 amounted to Yen723,330 million ($5,838 million), a decrease of 20.2% from fiscal 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 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 fiscal 2001, we securitized Yen167,802 million of domestic and Yen17,064 million of overseas leasing assets. 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 ($2,511 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 ($583 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 ($916 million) from fiscal 2000 to fiscal 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 ($916 million). The balance of investment in operating leases increased 13.5%, to Yen451,171 million ($3,641 million). Gains from the disposition of operating lease assets included in revenues from operating leases were Yen7,883 million ($64 million) in fiscal 2001, compared to Yen4,144 million in fiscal 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. <TABLE> As of March 31, Change ----------------------------- --------------------------- 2000 2001 Amount Percent ------------- ------------- ------------- ----------- (Millions of yen) <S> <C> <C> <C> <C> 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 ------------- ------------- ------------- </TABLE> 40
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. The balance of new contracts increased due to the steady performance of the measuring equipment and OA equipment rental businesses. Regarding our real estate leasing business, we also progressively acquired office building and commercial use real estate, such as 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 fiscal 2000 to fiscal 2001, due to an increase in the balance of high-yield card loans. An increase in investment 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 fiscal 2001 from 3.97% in fiscal 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 fiscal 2001 from 2.86% in fiscal 2000, reflecting a decline in domestic market interest rates. The average interest rate earned on overseas loans, calculated on the basis of quarterly balances, decreased to 9.29% in fiscal 2001 from 9.35% in fiscal 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 fiscal 2001 from 8.84% in fiscal 2000, primarily reflecting increased investment in high-yielding CMBS 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. Installment Loans <TABLE> As of March 31, Change ----------------------------- --------------------------- 2000 2001 Amount Percent ------------- ------------- ------------- ----------- (Millions of yen) <S> <C> <C> <C> <C> 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 ============= ============= ============= </TABLE> The total balance of installment loans increased by 3.1%, to Yen1,846,511 million ($14,903 million), from March 31, 2000 to March 31, 2001. In the domestic retail market, loan balance increased as a result of expansion of our card loan business. 41
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 ($3,269 million) at March 31, 2001. Fixed income securities increased by Yen52,825 million, principally reflecting increased investment in CMBS 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 fiscal 2001 to Yen12,055 million ($97 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 fiscal 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 ($549 million). Gross unrealized gains on equity securities decreased by Yen36,932 million from fiscal 2000 to fiscal 2001. Due to the weakness of the domestic equities market, unrealized gains on IT-related equity securities at March 31, 2000 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 ($89 million). Life Insurance Premiums and Related Investment Income Life insurance premiums and related investment income decreased Yen47,515 million, or 23.1%, to Yen158,314 million ($1,278 million) and life insurance costs fell approximately Yen50.0 billion in fiscal 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 fiscal 2001 decreased by Yen1,364 million, or 35.1%, from fiscal 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 ($80 million), or 17.0%, from fiscal 2000 to fiscal 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 ($4,270 million), from fiscal 2000 to fiscal 2001. Interest expense decreased in fiscal 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 fiscal 2000 to fiscal 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 ($88 million) in fiscal 2001. 42
Interest Expense Interest expense was Yen109,289 million ($882 million) in fiscal 2001, a decrease of 5.0% from fiscal 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 our 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 medium-term notes program increased by Yen21,157 million from Yen328,221 million at March 31, 2000 to Yen349,378 million ($2,820 million) at March 31, 2001, Commercial paper decreased from Yen977,436 million at March 31, 2000 to Yen914,611 million ($7,382 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 ($583 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 fiscal 2000 to 1.64% in fiscal 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 fiscal 2000 to 6.81% in fiscal 2001. Depreciation on Operating Leases Depreciation on operating leases increased to Yen68,316 million ($551 million) in fiscal 2001, an increase of 12.5% from the level in fiscal 2000. This increase was principally due to assets aquisitions. 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 ($1,160 million) from fiscal 2000 to fiscal 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 fiscal 2000 and 3.0% in fiscal 2001. Other Operating Expenses Other operating expenses principally comprise the cost of sales for condominium marketing operations. Other operating expenses increased 13.8%, to Yen5,278 million ($43 million), in fiscal 2001, 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 fiscal 2001 were Yen101,156 million ($816 million), an increase of 11.2% from fiscal 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 ($360 million), a decrease of 2.2% from the corresponding amount in fiscal 2000. 43
The table below shows the calculation of the provision for doubtful receivables and possible loan losses for fiscal 2000 and fiscal 2001. The "Other" category includes foreign currency translation adjustments and the effect of an acquisition. Year ended March 31, ---------------------------- 2000 2001 ------------ ------------- (Millions of yen) Beginning balance.............. 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 ------------ ------------- Ending balance................. Yen 136,939 Yen 141,077 ------------ ------------- 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. Allowance for Doubtful Receivables on Direct Financing Leases and Possible Loan Losses <TABLE> Year ended March 31, 2001 -------------------------------------------------------------- Installment Loans ----------------------------- Direct FASB Financing Statement Leases General No. 114 Total ------------- ------------- ------------- ------------- (Millions of yen) <S> <C> <C> <C> <C> Beginning balance.............. 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 ------------- ------------- ------------- ------------- Ending balance................. Yen 40,885 Yen 53,155 Yen 47,037 Yen 141,077 ============= ============= ============= ============= </TABLE> For a discussion of past due receivables and allowances for direct financing leases as of March 31, 2000 and March 31, 2001, see "Item 4. Information on the Company--Profile of Businesses--Direct Financing Leases". In fiscal 2001, provisions charged to income were Yen44,584 million ($360 million) and direct financing leases and loans totaling Yen46,306 million ($374 million) were written off. As of March 31, 2001, the allowance was Yen141,077 million ($1,139 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 ($969 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 ($90 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 ($594 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 ($380 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 44
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 fiscal 2000 and Yen123,715 million ($999 million) for fiscal 2001. We recognized interest income on impaired loans of Yen1,429 million for fiscal 2000 and Yen1,414 million ($11 million) for fiscal 2001. For a discussion of delinquencies on installment loans, see "Item 4. Information on the Company--Profile of Businesses--Installment Loans and Investments Securities". Write-downs of long-lived assets During fiscal 2001, in accordance with FASB Statement 121, we wrote down Yen4,090 million ($33 million) for some real estate development projects included in "investment in operating leases", "other operating assets" and "advances" in the consolidated balance sheets. See "--Policies relating to Non-performing Assets and Charge-offs". 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 twelve months 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 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 its 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 a company, 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 company's operating results, o the company's net asset value, o the 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, we would classify the loss for that security as other than temporary and charge the decline in market value against income. 45
Following this policy, in fiscal 2001, we charged Yen10,848 million ($88 million) to income for declines in market value classified as other than temporary. In fiscal 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 ($28 million) in fiscal 2001, compared to a gain of Yen839 million in fiscal 2000. This loss principally resulted from the depreciation of the Indonesia Rupiah against the US dollar, as a subsidiary procured a portion of its 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 fiscal 2001 was a profit of Yen2,088 million ($17 million) compared to a loss of Yen838 million in fiscal 2000. The gain in fiscal 2001 was improved from the loss in fiscal 2000, because loss from the sale of unprofitable affiliates was recognized in the previous year. The income in fiscal 2001 also reflects favorable financial performance of most domestic and foreign affiliates. Provision for Income Taxes Provision for income taxes in fiscal 2001 was Yen25,079 million ($202 million), compared to the provision of Yen21,406 million in fiscal 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 ($461 million), compared to the operating income of Yen52,886 million in fiscal 2000. Income before income taxes increased by 13.8% to Yen59,236 million. Net income increased 11.5%, to Yen34,157 million ($276 million) from fiscal 2000 to fiscal 2001. Basic and diluted earnings per share in fiscal 2001 were Yen418 and Yen401 respectively, compared to Yen385 and Yen377 in fiscal 2000. Cash Flows Net cash provided by operating activities decreased by Yen81,509 million, or 25.6%, from fiscal 2000 to fiscal 2001, to a total of Yen237,122 million ($1,914 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 ($2,306 million) in fiscal 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 REIT related and other real estate acquisitions. Net cash used in financing activities was Yen64,620 million ($522 million) in fiscal 2001, compared to net cash used in financing activities of Yen6,053 million in fiscal 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. 46
The table below shows the amount of our revenues by business segment for fiscal 2000 and 2001, as well as the amounts and percentages of the changes from fiscal 2000 to fiscal 2001. <TABLE> Year ended March 31, Change ----------------------------- ------------------------------ 2000 2001 Amount Percent ------------- ------------- ------------- ------------- (Millions of yen) <S> <C> <C> <C> <C> 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) Adjustments.................... 1,779 1,525 (254) (14.3) ------------- ------------- ------------- Total consolidated revenues. Yen 616,513 Yen 586,149 Yen (30,364) (4.9) ============= ============= ============= </TABLE> The table below shows the amount of our profits by business segment for fiscal 2000 and 2001, as well as the amounts and percentages of the changes from fiscal 2000 to fiscal 2001. <TABLE> Year ended March 31, Change ----------------------------- ------------------------------ 2000 2001 Amount Percent ------------- ------------- ------------- ------------- (Millions of yen) <S> <C> <C> <C> <C> Domestic Business Segments Corporate finance............ Yen 40,918 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 ------------- ------------- ------------- Adjustments................... (11,880) (11,528) 352 -- ------------- ------------- ------------- Total consolidated income before income taxes...... Yen 52,048 Yen 59,236 Yen 7,188 13.8 ============= ============= ============= </TABLE> The table below shows the amount of our assets by business segment for fiscal 2000 and 2001, as well as the amounts and percentages of the changes from fiscal 2000 to fiscal 2001. 47
<TABLE> As of March 31, Change ----------------------------- ------------------------------ 2000 2001 Amount Percent ------------- ------------- ------------- ------------- (Millions of yen) <S> <C> <C> <C> <C> 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 ------------- ------------- ------------- Adjustments.................... (79,092) (105,586) (26,494) -- ------------- ------------- ------------- Total consolidated operating assets.................... Yen 4,764,821 Yen 5,029,555 Yen 264,734 5.6 ============= ============= ============= </TABLE> 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 (other than those extended by ORIX Rentec Corporation), 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 ORIX, ORIX Auto Leasing Corporation, ORIX Alpha Corporation and a few other domestic subsidiaries. In this business segment, segment profit increased 8.6%, or Yen3,509 million, from fiscal 2000 to Yen44,427 million ($359 million) in fiscal 2001. The balance of segment assets declined 4.0%, or Yen79,052 million, from March 31, 2000 to Yen1,889.5 billion ($15.3 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. The balance of domestic direct financing leases declined, reflecting the securitization of Yen267,510 million ($2,159 million) in direct finance lease assets and a decline in the level of new contracts. The balance of domestic loans included in our corporate finance segment decreased, due to the impact of the recession in Japan. The Company has introduced more stringent screening and is more selective in new loan transactions. 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 fiscal 2001, we recorded Yen11,165 million ($90 million) of profit in this segment. This represents an increase of 42.7% from segment profit of Yen7,823 million in fiscal 2000. The balance of segment assets increased by 18.4%, or Yen20,881 million, from March 31, 2000 to Yen134,270 million ($1,084 million) as of March 31, 2001. 48
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 its steady growth. 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 the Real Estate Finance Division of ORIX, 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. In fiscal 2001, segment profit amounted to Yen1,944 million ($16 million), compared to a loss of Yen3,415 million in fiscal 2000. Real estate-related finance assets increased 1.6%, or Yen9,527 million, from March 31, 2000 to Yen606,801 million ($4,898 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 nonrecourse loans led to a significant increase in earnings. ORIX Trust and Banking recorded strong performance providing individuals with housing loans. 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. In fiscal 2001, segment loss was Yen4,604 million ($37 million) compared to a loss of Yen8,241 million in fiscal 2000. Because of the continuing decline in land prices in Japan, the Company proceeded with sales of old properties and consequently recorded losses on such sales as well as recorded valuation losses on long-lived assets. However, such losses were offset by steady growth of the condominium development business related to "Sanctus" series and other developments. For a discussion of write-downs of long lived real estate, see "--Write-downs of long lived assets". Owing to the Company's 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 ($2,505 million) as of 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, a wholly-owned subsidiary of ORIX. Segment profits in the domestic life insurance business increased 9.7%, or Yen527 million, from fiscal 2000 to Yen5,982 million ($48 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 ($4,390 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 ($58 million) as of March 31, 2001. Other Domestic Business Segments Our other domestic business segments include: o consumer loans by ORIX Credit Corporation and ORIX Club Corporation; o security brokerage by ORIX Securities Corporation; 49
o commodities trading by ORIX Commodities Corporation; and o venture capital operations conducted by ORIX Capital Corporation. This segment's results improved from segment loss of Yen1,036 million in fiscal 2000 to gain of Yen1,035 million ($8 million) in fiscal 2001. Other domestic business segments have increased due to the entry into new businesses such 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 ($2,299 million) as of March 31, 2001. 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 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 Real Estate Capital Markets LLC, our wholly-owned subsidiaries in the United States. Segment profit in the Americas decreased 52.6%, or Yen9,879 million, from fiscal 2000 to Yen8,896 million ($72 million) in fiscal 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 ($6,490 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 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 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 and PT. ORIX Indonesia Finance. 50
In Asia and Oceania, we recorded a Yen1,203 million ($10 million) segment profit during fiscal 2001, compared with a Yen3,371 million profit in fiscal 2000. Segment assets amounted to Yen402,707 million ($3,250 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 ($2,626 million) as of March 31, 2001 was invested in Asia. These assets included Yen171,484 ($1,384 million) of shipping loans secured by first mortgages. Substantially all non-shipping assets in Asia are denominated in local currencies. 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 profit amounted to Yen716 million ($6 million) in fiscal 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 ($1,280 million) at March 31, 2001, a decrease of Yen962 million, or 0.6%, from March 31, 2000. Fewer new contracts caused a decline in outstanding balance. Year Ended March 31, 2000 Compared to Year Ended March 31, 1999 Overview In fiscal 2000 net income improved despite a decrease in assets. As a result of primarily our securitization of lease assets mostly in Japan and the strength of the yen relative to the U.S. dollar operating assets decreased 0.2% from March 31, 1999, to Yen4,765 billion at March 31, 2000. Investment in direct financing leases, operating leases and other operating assets all decreased, while installment loans and investment in securities increased. Despite a decline in revenues from direct financing leases and investment in securities, our total revenues grew 3.8% from fiscal 1999 to fiscal 2000, to Yen616,513 million. The increase in revenues reflects principally strong growth in life insurance premiums and related investment income and income from our real estate development business and other operations included in other operating revenues as well as an increase in revenues from operating leases. Operating expenses increased slightly, as increases particularly in life insurance costs and other operating expenses were offset by reduction in some other categories. Interest expense decreased substantially in fiscal 2000, reflecting a reduction in the amount of our interest bearing liabilities and a reduction of borrowing rates as a result of expanding direct funding from the capital markets. Life insurance costs increased due primarily to the growth in policies in force. Provision for doubtful receivables and possible loan losses declined compared to fiscal 1999. Other operating expenses increased 21.5% from fiscal 1999 to fiscal 2000, as a result of construction expenses related to condominium sales. We recognized a write-down of securities in the amount of Yen12,297 million in fiscal 2000, reflecting our judgment that declines in prices for securities at the end of the period were other than temporary. Total expenses increased by 0.1%, to Yen563,627 million, from fiscal 1999 to fiscal 2000. While income before income taxes increased 90.5%, to Yen52,048 million, net income increased 19.6%, to Yen30,642 million, reflecting a substantial increase in the provision for deferred income taxes. The provision was unusually low for deferred income taxes in fiscal 1999 due to a drop in the corporate income tax rate in Japan effected in that fiscal year. The tables below contain some financial data for fiscal 1999 and 2000, as well as the amounts and percentages of the changes from fiscal 1999 to fiscal 2000. Income Statement Data <TABLE> Year ended March 31, Change ----------------------------- ------------------------------ 1999 2000 Amount Percent ------------- ------------- ------------- ------------- (Millions of yen) <S> <C> <C> <C> <C> Total revenues................. Yen 593,941 Yen 616,513 Yen 22,572 3.8 Direct financing leases....... 143,170 130,798 (12,372) (8.6) </TABLE> 51
<TABLE> Year ended March 31, Change ----------------------------- ------------------------------ 1999 2000 Amount Percent ------------- ------------- ------------- ------------- (Millions of yen) <S> <C> <C> <C> <C> Operating leases.............. 92,407 100,503 8,096 8.8 Interest on loans and investment securities....... 100,480 97,390 (3,090) (3.1) Brokerage commissions and gains on investment securities.................. 7,381 19,700 12,319 166.9 Life insurance premiums and related investment income... 196,259 205,829 9,570 4.9 Interest income on deposits... 6,695 3,884 (2,811) (42.0) Other operating revenues...... 47,549 58,409 10,860 22.8 Total expenses................. 562,899 563,627 728 0.1 ------------- ------------- ------------- Operating income............... 31,042 52,886 21,844 70.4 Equity in net income (loss) of and gain (loss) on sales of affiliates.................. (3,727) (838) 2,889 -- ------------- ------------- ------------- Income before income taxes..... 27,315 52,048 24,733 90.5 Net income..................... 25,621 30,642 5,021 19.6 </TABLE> Balance Sheet Data <TABLE> Year ended March 31, Change ----------------------------- ------------------------------ 1999 2000 Amount Percent ------------- ------------- ------------- ------------- (Millions of yen) <S> <C> <C> <C> <C> Investment in direct financing leases...................... Yen 1,952,842 Yen 1,744,953 Yen (207,889) (10.6) Investment in operating leases. 411,156 397,576 (13,580) (3.3) Installment loans.............. 1,761,887 1,791,439 29,552 1.7 Investment in securities....... 576,206 758,381 182,175 31.6 Other operating assets......... 73,345 72,472 (873) (1.2) ------------- ------------- ------------- Operating assets............... 4,775,436 4,764,821 (10,615) (0.2) Allowance for doubtful receivables on direct financing leases and possible loan losses........ (132,606) (136,939) (4,333) -- Other assets................... 704,806 713,660 8,854 1.3 ------------- ------------- ------------- Total assets................... Yen 5,347,636 Yen 5,341,542 Yen (6,094) (0.1) ============= ============= ============= </TABLE> The table below contains the volume of new transactions for fiscal 1999 and 2000, as well as the amounts and percentages of change in these data from fiscal 1999 to fiscal 2000. Figures for new equipment acquisitions for direct financing leases and operating leases are based on purchase costs of the equipment. Volume of New Assets <TABLE> Year ended March 31, Change ----------------------------- ---------------------------- 1999 2000 Amount Percent ------------- ------------- ------------- ----------- (Millions of yen) <S> <C> <C> <C> <C> Direct financing leases: New equipment acquisitions.. Yen 913,221 Yen 905,898 Yen (7,323) (0.8) Operating leases: New equipment acquisitions.. 92,272 101,020 8,748 9.5 Installment loans: New loans added....................... 706,758 807,477 100,719 14.3 Investment in securities: New securities added........ 302,035 333,249 31,214 10.3 </TABLE> Total Revenues Our total revenues increased by 3.8%, or Yen 22,572 million, to Yen 616,513 million in fiscal 2000 compared to Yen593,941 million in fiscal 1999, reflecting principally an increase of Yen 12,319 million or 166.9%, in brokerage 52
commissions and gains on investment securities, and an increase of Yen 10,860 million, or 22.8%, in other operating revenues. Direct Financing Leases Revenues from direct financing leases decreased by 8.6%, or Yen 12,372 million, from fiscal 1999 to Yen130,798 million in fiscal 2000. Revenues from direct financing leases decreased primarily due to the appreciation of yen, as well as a decline in the balance of investment in direct financing leases due to the securitization of leasing assets. The balance of such securitization of leasing assets as of March 31, 2000 was Yen353,944 million. This securitization reduced interest income. The average interest rates on domestic direct financing leases, calculated on the basis of quarterly balances, increased to 5.79% in fiscal 2000 from 5.56% in fiscal 1999 primarily due to merger and acquisition activities and the acquisition of operating assets. The average interest rates on overseas direct financing leases, calculated on the basis of quarterly balances, decreased to 9.67% in fiscal 2000 from 9.94% in fiscal 1999, reflecting a decrease in the amount of high-yield assets. While the balance of information-related and office equipment at March 31, 2000 was lower than the balance at March 31, 1999, the decrease is primarily attributable to securitizations. Securitization of direct financing leases during fiscal 2000 affected revenues from direct financing leases both because we recognized gains from securitizations and because securitization decreased interest income from securitized assets. Revenues from direct financing leases in fiscal 2000 included Yen8,591 million of gains from securitization of direct financing leases. 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. Investment in Direct Financing Leases <TABLE> As of March 31, Change ----------------------------- ------------------------------ 1999 2000 Amount Percent ------------- ------------- ------------- ------------- (Millions of yen) <S> <C> <C> <C> <C> Information-related and office equipment................... Yen 493,298 Yen 373,281 Yen (120,017) (24.3) Industrial equipment........... 444,261 394,581 (49,680) (11.2) Commercial services equipment.. 224,080 194,809 (29,271) (13.1) Transportation equipment....... 414,093 398,521 (15,572) (3.8) Other.......................... 377,110 383,761 6,651 1.8 ------------- ------------- ------------- Total......................... Yen 1,952,842 Yen 1,744,953 Yen (207,889) (10.6) ============= ============= ============= </TABLE> Investment in direct financing leases decreased by 10.6% from March 31, 1999 to March 31, 2000. New investment in leased equipment in fiscal 2000 amounted to Yen 905,898 million, a decrease of 0.8% from fiscal 1999. Although in fiscal 2000 we maintained a high level of origination of small-ticket leases for products like information-related and office equipment, investment in that category decreased by 24.3% due primarily to securitization. Investment in other category increased due to acquisitions of two domestic companies. The level of new lease contracts for industrial equipment remained strong, particularly in the United States. However, the depreciation of the local currency against the Japanese yen depressed the balance of investment expressed in yen. During fiscal 2000, we securitized Yen320,666 million principal balance of lease receivables, which were treated as off-balance sheet transactions. The balance of direct financing lease assets which were treated as off-balance sheet transactions amounted to Yen353,944 million as of March 31, 2000. The unpaid principal balance outstanding of securitized receivables is excluded from our consolidated balance sheets. See note 4 of the notes to the consolidated financial statements. In addition, we entered into other lease receivable securitization programs that are not accounted for as sales, and not therefore treated as off balance sheet assets. Under these securitization programs, we had long-term debt payables of Yen56,034 million under securitized lease receivables as of March 31, 2000. 53
Operating Leases Revenues from operating leases increased by 8.8%, or Yen8,096 million, to Yen100,503 million from fiscal 1999 to fiscal 2000, despite a decrease in the balance of operating leases. Increased business from companies in information technology-related industries contributed to growth in the rental of measuring, analysis, and information-related equipments. In addition, the acquisition of new businesses increased revenues from operating leases. Although the investment in measuring equipment and personal computer accounted based on their book value decreased from 1999 to fiscal 2000 as the table below indicates, such investment recorded at purchase cost increased. See note 5 of the notes to consolidated financial statements. Gains from the disposition of operating lease assets included in revenues from operating leases were Yen4,144 million in fiscal 2000, compared to Yen2,356 million in fiscal 1999. 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. <TABLE> As of March 31, Change ----------------------------- ------------------------------ 1999 2000 Amount Percent ------------- ------------- ------------- ------------- (Millions of yen) <S> <C> <C> <C> <C> Transportation equipment....... Yen 181,886 Yen 159,548 Yen (22,338) (12.3) Measuring equipment and personal computers........... 58,552 58,431 (121) (0.2) Real estate and other.......... 170,718 179,597 8,879 5.2 ------------- ------------- ------------- Total......................... Yen 411,156 Yen 397,576 Yen (13,580) (3.3) ============= ============= ============= </TABLE> The balance of our total investment in operating leases decreased by 3.3%, or Yen13,580 million, from March 31, 1999 to March 31, 2000. The sale of an aircraft reduced the balance of transportation equipment assets, bringing the total fleet size to 23. 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 decreased by 3.1%, or Yen3,090 million, from fiscal 1999 to fiscal 2000, reflecting a decline in domestic interest rates and a decrease in yen-denominated revenues from overseas operations due to higher average value of yen during the year. These decreases were partially offset by an increase in the balance of installment loans in Japan. The average interest rate earned on domestic loans, calculated on the basis of quarterly balances, decreased to 3.97% in fiscal 2000 from 4.00% in fiscal 1999, primarily due to a decline in market interest rates offset by improved spreads. The average interest rate earned on domestic investment securities, calculated on the basis of quarterly balances, decreased to 2.86% in fiscal 2000 from 3.13% in fiscal 1999, primarily due to a decline in market rates. The average interest rate earned on overseas loans, calculated on the basis of quarterly balances, decreased to 9.35% in fiscal 2000 from 9.44% in fiscal 1999, primarily due to the maturity of high-yielding loans. The average interest rate earned on overseas investment securities, calculated on the basis of quarterly balances, increased to 8.84% in fiscal 2000 from 8.61% in fiscal 1999, primarily reflecting the investments in commercial mortgage securities by ORIX Real Estate Capital Markets, which was accounted for by the equity method for the previous fiscal year. 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. 54
Installment Loans <TABLE> As of March 31, Change ----------------------------- ------------------------------ 1999 2000 Amount Percent ------------- ------------- ------------- ------------- (Millions of yen) <S> <C> <C> <C> <C> Domestic Consumer Housing loans................. Yen 411,215 Yen 396,748 Yen (14,467) (3.5) Card loans.................... 118,347 121,272 2,925 2.5 Other......................... 43,663 56,461 12,798 29.3 ------------- ------------- ------------- Subtotal.................... 573,225 574,481 1,256 0.2 Domestic Commercial Real estate related companies. 188,085 203,537 15,452 8.2 Commercial and industrial companies................... 614,988 657,355 42,367 6.9 ------------- ------------- ------------- Subtotal.................. 803,073 860,892 57,819 7.2 ------------- ------------- ------------- Foreign commercial, industrial and other borrowers......... 368,661 337,754 (30,907) (8.4) Direct loan origination costs, net......................... 16,928 18,312 1,384 8.2 ------------- ------------- ------------- Total..................... Yen 1,761,887 Yen 1,791,439 Yen 29,552 1.7 ============= ============= ============= </TABLE> The total balance of installment loans increased by 1.7%, to Yen1,791,439 million, from March 31, 1999 to March 31, 2000. Despite a rise in the balance of card loans and loans for margin stock trading included in other domestic consumer loans, the balance of our domestic loans to individuals slightly increased as the balance of housing loans decreased. Primarily reflecting factors such as the reluctance of Japanese banks to extend new loans, we increased new domestic loans to corporate customers. As a result, the net balance of our loans to corporate customers in Japan increased. The strengthening of the yen at the end of the fiscal year contributed to a 8.4% decrease in the balance of overseas installment loan assets. The balance of our investments in securities other than in connection with our life insurance operations increased from Yen245,041 million at March 31, 1999 to Yen341,236 million at March 31, 2000. Fixed income securities increased by Yen24,811 million, principally as a result of consolidation of ORIX Real Estate Capital Market's assets. 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 increased by Yen12,319 million, or 166.9%, from fiscal 1999 to fiscal 2000. ORIX Securities Corporation generates all of the brokerage commissions accounted for in this segment. Brokerage commissions increased in fiscal 2000 due principally to the strength of Japanese stock market. Revenues from gains on investment securities increased in fiscal 2000 due to income on the sale of securities in Japan and overseas. At March 31, 2000, gross unrealized gains of available-for-sale securities, including those held in connection with our life insurance operations, were Yen88,934 million. Gross unrealized gains of equity securities increased by Yen51,624 million from fiscal 1999 to fiscal 2000 due to a rapid rise in prices of equity securities of information-technology companies in Japan. However, since March 31, 2000, such unrealized gains have significantly declined, due principally to a recent drop in prices of equity securities of Japanese information-technology companies. At March 31, 2000, gross unrealized losses on available-for-sale securities, including those held in connection with our life insurance operations, were Yen11,744 million. 55
Life Insurance Premiums and Related Investment Income Reflecting the low level of domestic interest rate, life insurance premiums and related investment income slightly increased by Yen9,570 million, or 4.9%, in fiscal 2000 to Yen205,829 million. Life insurance premiums increased due primarily to continued growth in sales of our directly marketed insurance products, "ORIX Direct", which include single-premium endowment insurance. Single-premium endowment insurance requires up-front payment of premiums, which are included in income when received. Related investment income increased primarily because of the growth of the life insurance investment portfolio, with new investment consisting principally of Japanese corporate bonds. 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 fiscal 2000 decreased by Yen2,811 million, or 42.0%, from fiscal 1999, 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 Yen10,860 million, or 22.8%, from fiscal 1999 to fiscal 2000, principally as a result of a large increase in revenues from sales of residential apartments and the securitization of real estate loans in the United States. Total Expenses Total expenses increased by 0.1%, to Yen563,627 million, from fiscal 1999 to fiscal 2000. Interest expense decreased in fiscal 2000, reflecting the reduction in the amount of our short-term and long-term debts. Life insurance costs increased 3.7% due to the growth in policies in force. Life insurance costs consist of accrual of policy liabilities and operating expenses. We made a smaller provision for doubtful receivables and possible loan losses compared to fiscal 1999 because the deterioration in collateral values in fiscal 2000 was significantly less than in fiscal 1999. Other operating expenses increased 21.5% from fiscal 1999 to fiscal 2000, reflecting an increase in condominium sales. We recognized a write-down of securities in the amount of Yen12,297 million in fiscal 2000. Interest Expense Interest expense was Yen115,038 million in fiscal 2000, a decrease of 18.3% from fiscal 1999. The decrease in interest expense principally reflects a decline in the balance of debt, reflecting a decrease of the balance of operating assets through such measures as securitization of lease assets. Another principal factor behind is our proactive policy to diversify our funding operations and reduce funding costs through the increased use of direct funding methods, such as the issuance of shares, bonds, commercial paper, and medium-term notes. This increased the ratio of our funding directly from capital markets from 48.9% at March 31, 1999 to 56.8% at March 31, 2000. See "- Funding and Liquidity-Diversification of Funding Sources." While notes issued under medium-term notes program increased by Yen 75,642 million from Yen252,579 million at March 31, 1999 to Yen 328,221 million at March 31, 2000, commercial paper decreased from Yen1,013,401 million at March 31, 1999 to Yen977,436 million at March 31, 2000, and long-term asset backed securities decreased from Yen194,243 million at March 31, 1999 to Yen56,034 million at March 31, 2000. Our interest expense related to these capital markets fundings was significantly lower than traditional bank borrowing. The average interest rates on our domestic short-term and long-term debt, calculated on the basis of quarterly balances, decreased from 2.15% in fiscal 1999 to 1.81% in fiscal 2000. The average interest rates on our short-term and long-term overseas debt, calculated on the basis of quarterly balances, decreased from 6.89% in fiscal 1999 to 6.39% in fiscal 2000. 56
Depreciation on Operating Leases Depreciation on operating leases increased to Yen60,750 million in fiscal 2000, an increase of 5.8% from the level in fiscal 1999. This increase principally reflects an increase in new investment in operating leases. Life Insurance Costs Life insurance costs increased by Yen6,889 million, or 3.7 %, to Yen193,664 million from fiscal 1999 to fiscal 2000. The growth in life insurance costs reflected primarily the growth in policies in force. 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 3.7% in fiscal 1999 and 3.3% in fiscal 2000. Other Operating Expenses Other operating expenses principally comprise the cost of sales for condominium marketing operations. Reflecting an increase in condominium sales, other operating expenses increased 21.5%, to Yen38,302 million, in fiscal 2000. 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 fiscal 2000 were Yen90,961 million, an increase of 10.4% from fiscal 1999. This increase in expenses primarily reflects expenses relating to an increase in the number of consolidated companies, and an increase in the number of our employees. 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 2000 was Yen45,573 million, a decrease of 12.1% from the corresponding amount in fiscal 1999. The table below shows the calculation of the provision for doubtful receivables and possible loan losses for fiscal 1999 and fiscal 2000. The "Other" category includes foreign currency translation adjustments and the effect of an acquisition. <TABLE> Year ended March 31, ----------------------------- 1999 2000 ------------- ------------- (Millions of yen) <S> <C> <C> Beginning balance.............. Yen 145,741 Yen 132,606 Provisions charged to income.. 51,845 45,573 Charge-offs (net): Gross charge-offs........... (70,705) (37,697) Recoveries.................. 399 354 ------------- ------------- Charge-offs (net)........... (70,306) (37,343) Other....................... 5,326 (3,897) ------------- ------------- Ending balance................. Yen 132,606 Yen 136,939 ============= ============= </TABLE> 57
A breakdown of the allowance for doubtful receivables and possible loan losses as of March 31, 2000 is shown below. The "Other" category includes foreign currency translation adjustments and the effect of an acquisition. Allowance for Doubtful Receivables on Direct Financing Leases and Possible Loan Losses <TABLE> Year ended March 31, 2000 -------------------------------------------------------------- Installment Loans ----------------------------- Direct FASB Financing Statement Leases General No. 114 Total ------------- ------------- ------------- ------------- (Millions of yen) <S> <C> <C> <C> <C> Beginning balance.............. Yen 23,867 Yen 46,630 Yen 62,109 Yen 132,606 ------------- ------------- ------------- ------------- Provisions charged to income.. 20,646 18,314 6,613 45,573 Charge-offs (net)............. (7,108) (13,907) (16,328) (37,343) Other......................... (1,622) (1,672) (603) (3,897) ------------- ------------- ------------- ------------- Ending balance................. Yen 35,783 Yen 49,365 Yen 51,791 Yen 136,939 ============= ============= ============= ============= </TABLE> In fiscal 2000, provisions charged to income were Yen45,573 million and direct financing leases and loans totaling Yen37,343 million were written off. As of March 31, 2000, the allowance was Yen136,939 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, 2000, compared to 3.6% as of March 31, 1999. The recorded investment in loans considered impaired under the definition contained in FASB Statement 114 was Yen130,226 million as of March 31, 1999 and Yen125,921 million as of March 31, 2000. The principal reason for the decline was a charge-off of impaired loans in the amount of Yen16,328 million. We determined that a valuation allowance was required for impaired loans which had outstanding balances of Yen114,525 million as of March 31, 1999 and Yen83,408 million as of March 31, 2000. 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 Yen62,109 million as of March 31, 1999 and Yen51,791 million as of March 31, 2000. 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 Yen170,838 million for fiscal 1999 and Yen128,658 million for fiscal 2000. We recognized interest income on impaired loans of Yen1,577 million for fiscal 1999 and Yen1,429 million for fiscal 2000. Write-downs of long-lived assets During fiscal 2000, in accordance with FASB Statement 121, we wrote down Yen7,881 million for some real estate development projects included in "investment in operating leases" and "advances" in the consolidated balance sheets. These write-downs were previously included in provision for doubtful receivables and possible loan losses in the consolidated statements of income and subsequently charged-off from allowance for doubtful receivables on direct financing leases and possible loan losses in the consolidated balance sheets. However, for fiscal 2000, these write-downs are not included in provision for doubtful receivables and possible loan losses but in "write-downs of long-lived assets" in the consolidated statement of income. See "--Policies relating to Non-performing Assets and Charge-offs". 58
Write-downs of Securities In fiscal 2000, we charged Yen12,297 million to income for declines in market value classified as other than temporary. Most of this charge relates to debt securities. In fiscal 1999, we charged Yen11,077 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 gain in the amount of Yen839 million in fiscal 2000, compared to a loss of Yen390 million in fiscal 1999. This gain principally resulted from the fluctuation of the Indonesian rupiah against the U.S. dollar, as one of our subsidiaries procured a portion of its funding through dollar-denominated loans. The rupiah appreciated to a comparable degree in fiscal 1999. 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 fiscal 2000 was a loss of Yen838 million compared to a loss of Yen3,727 million in fiscal 1999. The loss in fiscal 2000 was significantly lower than the loss in fiscal 1999 because we completely wrote down our investment in Korea Development Leasing Corporation in fiscal 1999. See note 9 of the notes to the consolidated financial statements. The loss in fiscal 2000 principally reflect: o the conversion of Banc One Mortgage Capital Markets, LLC, which engages in the securitization of loans secured by commercial property, into a subsidiary, the name of which was subsequently changed to ORIX Real Estate Capital Markets, LLC; o a significant decline in the net income of Stockton Holdings Limited, which engages primarily in reinsurance activities and trades commodities and financial futures; and o losses on the sale of certain domestic companies. At March 31, 2000, the investment in affiliates accounted for by the equity method located in Asia (other than Japan and Oceania) decreased to Yen 11,201 million compared to Yen11,576 million as of March 31, 1999. Provision for Income Taxes Provision for income taxes in fiscal 2000 was Yen21,406 million, substantially above the provision of Yen1,694 million in fiscal 1999. The increase of Yen19,712 million was primarily due to the remeasurement of deferred tax liabilities in fiscal 1999, as a result of the reduction of normal Japanese tax rates from approximately 48% to 42%, effective from April 1, 1999. Net Income Operating income was Yen52,886 million, substantially above the operating income of Yen31,042 in fiscal 1999. Income before income taxes increased by 90.5% to Yen52,048 million. Net income increased 19.6%, to Yen30,642 million, from fiscal 1999 to fiscal 2000. Basic and diluted income per share in fiscal 2000 were Yen385 and Yen377 respectively, compared to Yen330 and Yen330 in fiscal 1999. Cash Flows Net cash provided by operating activities increased by Yen31,877 million, or 11.1%, from fiscal 1999 to fiscal 2000, to a total of Yen318,631 million. This increase is 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. These increased cash inflows were partially offset by a decrease in revenues from direct financing. 59
Net cash used in investing activities was Yen292,858 million in fiscal 2000, compared to Yen26,046 million in fiscal 1999. The principal reasons for the change in fiscal 2000 include a significant decline in the amount of principal payments received under direct financing leases and a sizable increase in installment loans to customers in fiscal 2000. Net cash used in financing activities was Yen6,053 million in fiscal 2000, compared to net cash used in financing activities of Yen269,472 million in fiscal 1999. In October 1999, ORIX issued Yen41,346 million shares of common stock and Yen40 billion in yen denominated convertible notes. To diversify our funding sources, we have increased our securitization of lease assets and issuance of domestic commercial paper, bonds, and overseas medium term notes. This increased the share of our funding procured directly from capital markets and from our securitization of lease assets to 60.8%. Cash and cash equivalents increased 5.4% from March 31, 1999 to March 31, 2000. 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 fiscal 1999 and 2000, as well as the amounts and percentages of the changes from fiscal 1999 to 2000. <TABLE> Year ended March 31, Change ----------------------------- ------------------------------ 1999 2000 Amount Percent ------------- ------------- ------------- ------------- (Millions of yen) <S> <C> <C> <C> <C> Domestic Business Segments Corporate finance............. Yen 122,629 Yen 121,415 Yen (1,214) (1.0) Equipment operating leases.... 51,000 53,000 2,000 3.9 Real estate-related finance... 17,731 17,294 (437) (2.5) Real estate................... 39,088 44,873 5,785 14.8 Life insurance................ 195,484 204,746 9,262 4.7 Other......................... 22,684 30,882 8,198 36.1 ------------- ------------- ------------- Subtotal.................... 448,616 472,210 23,594 5.3 ------------- ------------- ------------- Overseas Business Segments The Americas.................. 68,821 74,525 5,704 8.3 Asia and Oceania.............. 51,220 49,739 (1,481) (2.9) Europe........................ 23,811 18,260 (5,551) (23.3) ------------- ------------- ------------- Subtotal.................... 143,852 142,524 (1,328) (0.9) ------------- ------------- ------------- Total....................... 592,468 614,734 22,266 3.8 Adjustments.................... 1,473 1,779 306 20.8 ------------- ------------- ------------- Total consolidated revenues. Yen 593,941 Yen 616,513 Yen 22,572 3.8 ============= ============= ============= </TABLE> 60
The table below shows the amount of our profits by business segment for fiscal 1999 and 2000, as well as the amounts and percentages of the changes from fiscal 1999 to fiscal 2000. <TABLE> <CAPTION> Year ended March 31, Change ----------------------------- ------------------------------ 1999 2000 Amount Percent ------------- ------------- ------------- ------------- (Millions of yen) <S> <C> <C> <C> <C> Domestic Business Segments Corporate finance............. Yen 35,240 Yen 40,918 Yen 5,678 16.1 Equipment operating leases.... 6,923 7,823 900 13.0 Real estate-related finance... (11,013) (3,415) 7,598 -- Real estate................... (2,236) (8,241) (6,005) -- Life insurance................ 3,813 5,455 1,642 43.1 Other......................... (4,266) (1,036) 3,230 -- ------------- ------------- ------------- Subtotal.................... 28,461 41,504 13,043 45.8 ------------- ------------- ------------- Overseas Business Segments The Americas.................. 20,590 18,775 (1,815) (8.8) Asia and Oceania.............. (11,729) 3,371 15,100 -- Europe........................ 264 278 14 5.3 ------------- ------------- ------------- Subtotal.................... 9,125 22,424 13,299 145.7 ------------- ------------- ------------- Total....................... 37,586 63,928 26,342 70.1 ------------- ------------- ------------- Adjustments.................... (10,271) (11,880) (1,609) -- ------------- ------------- ------------- Total consolidated income before income taxes....... Yen 27,315 Yen 52,048 Yen 24,733 90.5 ============= ============= ============= </TABLE> The table below shows the amount of our assets by business segment for fiscal 1999 and 2000, as well as the amounts and percentages of the changes from fiscal 1999 to fiscal 2000. <TABLE> As of March 31, Change ----------------------------- ------------------------------ 1999 2000 Amount Percent ------------- ------------- ------------- ------------- (Millions of yen) <S> <C> <C> <C> <C> Domestic Business Segments Corporate finance............. Yen 2,046,516 Yen 1,968,590 Yen (77,926) (3.8) Equipment operating leases.... 109,772 113,389 3,617 3.3 Real estate-related finance... 573,767 597,274 23,507 4.1 Real estate................... 273,504 276,494 2,990 1.1 Life insurance................ 334,836 425,335 90,499 27.0 Other......................... 248,872 242,280 (6,592) (2.6) ------------- ------------- ------------- Subtotal.................... 3,587,267 3,623,362 36,095 1.0 ------------- ------------- ------------- Overseas Business Segments The Americas.................. 634,101 691,403 57,302 9.0 Asia and Oceania.............. 440,872 369,540 (71,332) (16.2) Europe........................ 178,559 159,608 (18,951) (10.6) ------------- ------------- ------------- Subtotal.................... 1,253,532 1,220,551 (32,981) (2.6) ------------- ------------- ------------- Total....................... 4,840,799 4,843,913 3,114 0.1 ------------- ------------- ------------- Adjustments.................... (65,363) (79,092) (13,729) -- ------------- ------------- ------------- Total consolidated operating assets.......... Yen 4,775,436 Yen 4,764,821 Yen (10,615) (0.2) ============= ============= ============= </TABLE> 61
Domestic Business Segments Corporate Finance In this business segment, segment profit increased 16.1%, or Yen5,678 million, from fiscal 1999 to Yen40,918 million in fiscal 2000. The balance of segment assets declined 3.8%, or Yen77,926 million, from March 31, 1999 to Yen1,968.6 billion, as of March 31, 2000. The increase in segment profits principally reflect decreases in the provision for doubtful receivables and possible loan losses in this segment and in interest expense. The balance of domestic direct financing leases declined, reflecting the securitization of Yen263,523 million in direct finance lease assets. The decline in the balance of domestic direct financing leases also reflects a lower level of new contract execution. In most areas of direct financing leases we restrained asset growth in light of adverse economic conditions. However, we substantially increased the number of automobiles under lease in Japan by 20,000. The balance of domestic loans included in our corporate finance segment increased. While Japanese banks were constrained from extending new loans due to capital adequacy considerations, we increased lending to commercial and industrial companies. Equipment Operating Leases In fiscal 2000, we recorded Yen7,823 million of profit in this segment. This represents an increase of 13.0% from segment profit of Yen6,923 million in fiscal 1999. The balance of segment assets increased by 3.3%, or Yen3,617 million, from March 31, 1999 to Yen113,389 million as of March 31, 2000. In measuring equipment, office automation equipment and personal computer rental operations, we broadened and diversified the range of products we handle and increased technical support. Due to the strength of domestic investment in the information technology industry, segment profitability improved. Real Estate-Related Finance In fiscal 2000, segment loss amounted to Yen3,415 million, compared to a loss of Yen11,013 million in fiscal 1999. Real estate-related finance assets increased 4.1%, or Yen23,507 million, from March 31, 1999 to Yen597,274 million as of March 31, 2000. During both fiscal years, we made a provision for possible loan losses on a large amount of non-performing loans to corporate customers created during Japan's bubble economy period. However, the provision for fiscal 2000 was significantly lower than the amount for fiscal 1999 because the deterioration in collateral values in fiscal 2000 was significantly less than in fiscal 1999. Real Estate In fiscal 2000, segment loss was Yen8,241million, compared to a loss of Yen2,236 million in fiscal 1999. This was principally due to write-downs of long lived real estate assets in accordance with SFAS 121, which offset the increased sales of a series of condominiums, named "Sanctus". For write-downs of long lived real estate, see "--Write-downs of long lived assets". The balance of real estate assets increased 1.1%, or Yen2,990 million, from March 31, 1999 to Yen276,494 million as of March 31, 2000. Life Insurance Business Segment profits in the domestic life insurance business increased 43.1%, or Yen1,642 million, from fiscal 1999 to Yen5,455 million in fiscal 2000. While "ORIX Direct" life insurance policies for individuals grew significantly in fiscal 2000, pricing advantageous to our customers constrained our margins on these policies. In addition, in common with other Japanese insurance companies, older policies issued by ORIX Life Insurance realized lower investment income than committed rates of return on the policies. Finally, net gain on sale of securities increased in fiscal 2000 as losses on sale of equity securities offset part of the gain on bond sales by ORIX Life Insurance. The 62
outstanding balance of segment assets increased 27.0%, or Yen90,499 million, from March 31, 1999 to Yen425,335 million as of March 31, 2000. The growth in segment assets reflected strong demand for our "ORIX Direct" policies. Marketable equity securities held in connection with our life insurance business increased from Yen8,783 million as of March 31, 1999 to Yen13,243 million as of March 31, 2000. Other Domestic Business Segments The strength of the Japanese stock market supported growth in brokerage commissions of ORIX Securities as well as the gains of ORIX Capital Corporation on its sales of securities. Reflecting these factors as well as gains on the sale of affiliates recognized in fiscal 1999, the segment's results improved from segment loss of Yen4,266 million in fiscal 1999 to loss of Yen1,036 million in fiscal 2000. The outstanding balance of segment assets decreased 2.6%, or Yen6,592 million from March 31, 1999 to Yen242,280 million as of March 31, 2000. Overseas Business Segments The Americas Segment profit in the Americas declined 8.8%, or Yen1,815 million, from fiscal 1999 to Yen18,775 million in fiscal 2000. ORIX Real Estate Capital Markets contributed significantly to segment profit, which was offset by reduced profits at ORIX Commercial Alliance and a decrease in gains on the sale of equity securities in affiliates. In addition reflecting the effects of the appreciation of the yen, segment profit was slightly lower than in fiscal 1999. The segment assets amounted to Yen691,403 million as of March 31, 2000, up 9.0% or Yen57,302 million from March 31, 1999. Asia and Oceania. In Asia and Oceania, we recorded a Yen3,371 million segment profit during fiscal 2000, compared with Yen11,729 million loss in fiscal 1999. Segment assets amounted to Yen369,540 million as of March 31, 2000, down 16.2% or Yen71,332 million from March 31, 1999. Economic conditions in Asia and Oceania are recovering from the stagnation of recent years. Under these circumstances, we focused on preventing an expansion of losses and made a highly selective approach to new investment. Of segment assets, Yen271,673 million as of March 31, 2000 was invested in Asia. These assets included Yen151,996 million of shipping loans secured by first mortgages. Substantially all non-shipping assets in Asia are denominated in local currencies. Europe Reflecting considerable improvement in the profitability of our aircraft operating lease business, segment profit in Europe rose to Yen278 million. Mainly due to the sale of one aircraft, segment assets amounted to Yen159,608 million at March 31, 2000, down 10.6% from March 31, 1999. Funding and Liquidity 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. 63
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 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 has increased from 48.9% at March 31, 1999 to 56.8% at March 31, 2000 and maintained the high level of 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, ORIX became the first finance company to issue domestic commercial paper. From April 1, 1998, ORIX has 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 loan operations, in May 1999 new legislation eliminated this restriction for some qualifying lenders. Because ORIX is a qualifying lender, it is 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, 2001, our outstanding balance of unsecured bonds was Yen795,500 million ($6,421 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 and a number of its overseas subsidiaries. This multi-issuer program has a limit of US$3 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 ORIX's 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, 2001, the balance of notes issued under these medium term note programs stood at Yen349,378 million ($2,820 million). Short-Term Debt In order to promote stability in borrowings, the Company shifted its debt from short term to long term. The balance of our short-term debt at March 31, 2001 was Yen1,562,072 million ($12,608 million), representing 40.1% of total debt at March 31, 2001, compared to the level of 49.6% at March 31, 2000. The balance of short-term debt decreased by Yen350,689 million or 18.3%, from March 31, 2000 to March 31, 2001. Commercial paper decreased by Yen62,825 million, or 6.4%, reflecting the decrease of commercial paper issued overseas. Other short-term debt, consisted principally of borrowings from commercial banks, decreased by Yen287,864 million or 30.8%, from March 31, 2000 to March 31, 2001. Long-Term Debt Long-term debt at March 31, 2001 was Yen2,330,159 million ($18,807 million), representing 59.9% of total debt, compared to the level of 50.4% at March 31, 2000. The balance of long-term debt increased by Yen387,375 million, or 19.9%, from March 31, 2000 to March 31, 2001. 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 Yen795,500 million ($6,421 million) and medium-term notes of Yen349,378 million ($2,820 million). The balance of asset-backed securities was Yen72,210 million ($583 million) at March 31, 2001. 64
The maturity profile of long-term borrowings at March 31, 2001 is described in Item 11. Some bank loan agreements provide that we are required to obtain consent of the 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 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 the 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, 2001, we paid interest at fixed rates on approximately 61.6% 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 Yen626,380 million ($5,056 million) at March 31, 2001 were designated as hedges against outstanding debt and were principally used to effectively convert the interest rate on variable rate debt to a fixed rate. This sets our fixed rate term debt borrowing cost over the life of the swap and reduces our exposure to rising interest rates but reduces our benefits from lower interest rates. We have also entered into foreign exchange forward contracts and foreign currency swap agreements in managing foreign exchange risk. Foreign exchange forward contracts and foreign currency swap agreements are agreements between two parties to purchase and sell a foreign currency for a price specified at the contract date, with delivery and settlement in the future. At March 31, 2001, we use foreign exchange forward contracts and foreign currency swap agreements with notional principal amounts of Yen497,434 million ($4,015 million) which were principally used to hedge the risk of change in foreign currency exchange rates associated with long-term debt denominated in foreign currencies other than functional currencies. Credit Facilities In common with most other Japanese corporations, we did not maintain a substantial amount of committed bank credit lines in the past, because Japan's Interest Rate Restriction Law, which imposes interest rate ceilings ranging from 15% to 20% per annum, effectively limited our ability to obtain these facilities. Under the Interest Rate Restriction Law, commitment fees payable to banks in connection with committed credit facilities constituted "interest". If there was no, or only a small, balance drawn under committed credit facilities, this "interest" could not exceed the amount permitted under the Interest Rate Restriction Law. This made it difficult for banks to provide committed credit facilities. In March 1999, new legislation eliminated these restrictions imposed by the Interest Rate Restriction Law. In fiscal 2000, we obtained short-term committed credit lines of Yen294,500 million in Japan to enhance liquidity. During fiscal 2001, we established a Yen74,560 million ($602 million) multicurrency global line of credit for ORIX and our principal overseas subsidiaries. Total committed lines for ORIX and its subsidiaries were Yen549,525 million and Yen795,489 million ($6,420 million) at March 31, 2000 and 2001, respectively, and of these lines, Yen509,379 million and Yen726,888 million ($5,867 million) were available at March 31, 2000 and 2001, respectively. These committed facilities are subject to financial and other covenants and conditions to drawdown. We and other Japanese companies traditionally relied for liquidity upon relationships with institutional lenders, particularly Japanese commercial banks. In order to reduce funding costs and improve diversification of 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. As a result of our efforts, the balance of capital market instruments as a percentage of our total debt and deposits has increased from 48.9% at March 31, 1999 to 56.8% at March 31, 2000 and maintained the high level of 56.7% at March 31, 2001. 65
Commitments for Capital Expenditures As mentioned above, we have a commitment line of Yen726,888 million ($5,867 million) that we may use as of March 30, 2001. This amount, however, is only to be used specifically to complement liquidity, and not to be used for the purchase of any assets or specific corporate entities. Research and Development The amount we spent during each of the last three fiscal years on research and development activities is not material. Recent Developments Economic Conditions Deregulation in Japan has resulted in a much more dynamic market environment that is expected to bring on an era of major changes in our principal businesses. We are in an age of accelerating structural economic change due to, in particular, deregulation and the revolution in information technology. While striving to create new value in order to contribute to society in this environment, we are pursuing high profits and growth as we continuously aim to raise shareholder value by enhancing the ORIX brand, improving management efficiency and strengthening our financial position. We also continue to endeavor at raising our business profitability in order to sustain our superior position in the financial services industry. While economic conditions in Japan are expected to remain sluggish in the first half of the fiscal year ending March 31, 2002, in the second half corporate profits are expected to recover moderately as the effect of easier monetary policy makes its way through the economy and as external demand recovers. The United States' economy is also expected to continue to slowdown in the first half, but recover in the second half against the background of lower interest rates and a growth-oriented fiscal policy. We will seek to respond with speed and flexibility to this changing business environment by focusing greater attention on the review of its business strategies and reform of management structures to raise profitability. 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 Certain Derivative Instruments and Certain 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"). The Statement changed the accounting treatment of derivative contracts as well as certain derivative -like instruments embedded in other contracts. It requires that an entity recognizes 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. For a fair value hedge, in which derivatives hedge the exposure to changes in the fair value of fixed rate assets and liabilities, changes in the fair value of derivatives will be reflected in current earnings along with changes in the fair value of the related hedged item that is attributed to the hedged risk. For a cash flow hedge, in which derivatives hedge the variability of cash flows related to floating rate assets, liabilities or forecasted transactions, the accounting treatment will depend on the effectiveness of the hedge. To the extent these derivatives are effective in offsetting the variability of the hedged cash flows, changes in the derivatives' fair value will not be included in current earnings but will be reported as other comprehensive income. It is reclassified into earnings in the period when earnings are also affected by the variability of the hedged cash flows. To the extent these derivatives are not effective, changes in their fair values will be immediately included in current earnings. 66
Non-trading derivatives that do not qualify as hedge under the new rules will be carried at fair value with changes in value included in current earnings. In order to adopt the Statement, the initial revaluation of these derivatives are required to be recorded as cumulative effects of a change in accounting principle, either in net income if the hedging relationship could have been considered a faire value type hedge prior to adoption or in other comprehensive income if the hedging relationship could have been considered a cash flow type hedge prior to adoption. The cumulative effect of this accounting change as of April 1, 2001, was approximately Yen9 billion ($73 million) unfavorable to other comprehensive income, and was not significant to earnings. In September 2000, FASB Statement No. 140 ("Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a replacement of FASB Statement No.125") was issued. It revises the standard for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of FASB Statement No. 125's provisions without reconsideration. We adopted the disclosure provisions related to the securitization of financial assets on March 31, 2001. All transactions entered into after March 31, 2001 will be accounted for in accordance with FASB Statement No.140. Management anticipates this adoption will not 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 its 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 meeting of shareholders. Corporate Auditors are not entitled to vote. They are required to elect from among themselves at least one Standing Corporate Auditor. In addition to Corporate Auditors, ORIX must appoint independent certified public accountants, who have the statutory duties of examining the financial statements 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 Minister of Finance. Presently, ORIX's independent certified public accountants are Arthur Andersen. The Directors and Corporate Auditors of ORIX as of June 28, 2001 are as follows: <TABLE> Shareholdings Year First as of March 31, Name Title Appointed 2001 - ---------------------- ---------------------------------------------------------------- ---------- ---------------- (Thousands) <S> <C> <C> <C> Yoshihiko Miyauchi.... Chairman and Chief Executive Officer, Representative Director 1970 39 Yasuhiko Fujiki....... President and Chief Operating Officer, Representative Director 1994 5 Yoshiaki Ishida....... Vice Chairman, Representative Director 1990 2 </TABLE> 67
<TABLE> Shareholdings Year First as of March 31, Name Title Appointed 2001 - ---------------------- ---------------------------------------------------------------- ---------- ---------------- (Thousands) <S> <C> <C> <C> Shunsuke Takeda....... Deputy President, Director 1993 2 Katsuo Kawanaka....... Director 1992 6 Takeshi Sato.......... Director 1997 7 Hiroaki Nishina....... Director 1993 2 Tatsuya Tamura........ Director; Representative Director and Chairman, A.T. Kearney K. K.; Director (Non executive), The Suruga Bank, Ltd. 1999 Akira Miyahara........ Director; Vice Chairman of the Board, Fuji Xerox Co., Ltd. 1999 Hiroshi Nakamura...... Standing Corporate Auditor 2000 1 Masaaki Yamamoto...... Standing Corporate Auditor 2001 1 Hirotaka Takeuchi..... Corporate Auditor; Dean, Hitotsubashi University, Graduate School of International Corporate Strategy 2000 Hiroko Ota............ Corporate Auditor; Professor, National Graduate Institute for Policy Studies 2001 </TABLE> Mr. Yoshinori Yokoyama, a director of McKinsey & Company, Inc., serves as an advisor to the Board of Directors. Except for Mr. Tamura and Mr. Miyahara, all of our directors are engaged in our business on a full-time basis. Yoshihiko Miyauchi Representative Director Chairman and Chief Executive Officer Yoshihiko Miyauchi began his career at Nichimen & Co., Ltd. in 1960 and worked there four years before entering ORIX Corporation (then Orient Leasing Co., Ltd.) as one of the founding 13 members in 1964. Mr. Miyauchi became a Director in 1970 and was appointed President and CEO in 1980, a position he held until he assumed his present role as Chairman and CEO in April 2000. In his term as CEO, Mr. Miyauchi has overseen the development of ORIX into a diversified financial services company that has continued to be on the forefront of innovation. Mr. Miyauchi is a strong proponent of deregulation and serves as the President of the Japanese government's Council for Regulatory Reform. His other affiliations include: Chairman, Japan Leasing Association; Vice Chairman, Keizaidoyukai (Japan Association of Corporate Executives); and Councilor, Keidanren (Japan Federation of Economic Organizations). He also has directorships on the boards of Fuji Xerox Corporation, AOZORA BANK, Ltd. and Mercian Corporation. Mr. Miyauchi was born in September 1935 and graduated with a BA from the School of Business Administration of Kwansei Gakuin University in 1958 followed by an MBA from the University of Washington in the USA in 1960. Yasuhiko Fujiki Representative Director President and Chief Operating Officer Yasuhiko Fujiki joined Nikko Securities Co., Ltd. in 1968, before moving to Mitsubishi Development Co., Ltd. in 1971 then to ORIX in 1976. Following appointments as General Manager of the Real Estate Sales Department, Credit Department and General Affairs Department, Mr. Fujiki was appointed Director in Charge of General Affairs in 1994. In 1997, he became Principal and Director in Charge of the Office of the Assistant to the President and Director in Charge of the Personal Financial Services (PFS) Department. In 1999 Mr. Fujiki became Corporate Senior Vice President and was named Chief Branding Officer in the same year. In his role in the Office of Assistant to the President, Mr. Fujiki was instrumental in the Company's recent M&A activities and strategic plans to position ORIX to continue to be a major player in Japanese and international financial markets. As COO, Mr. Fujiki now oversees the execution of the ORIX Group's business activities and is leading the next generation of ORIX management. 68
Mr. Fujiki was born in November 1945 and graduated from Waseda University's School of Commerce in 1968. Yoshiaki Ishida Representative Director Vice Chairman Responsible for Overseas Activities Yoshiaki Ishida joined Nozawa Asbestos & Cement Co., Ltd. (currently Nozawa Corporation) in 1963, where he worked for five years before entering ORIX in 1968. After a decade of various appointments in Japan, Mr. Ishida was a major figure in ORIX's international activities. He was seconded to ORIX Asia Limited in Hong Kong in 1981 where he was Managing Director. In June 1990, he was made a Director and the Deputy Head of the International Business Headquarters and in November of that year became President & CEO of ORIX USA CORPORATION. After his return to Japan in 1993, Mr. Ishida completed assignments that included the Deputy Head of International Business Headquarters and General Manager of the Overseas Real Estate Department. He became Managing Director of ORIX in 1994 and Senior Managing Director in 1996, before assuming the position of Deputy President and Representative Director in 1998. He has been Vice Chairman since April 2000, in which role he oversees ORIX's international activities. Mr. Ishida was born in January 1940 and graduated from the Kobe City University of Foreign Studies in 1963. Shunsuke Takeda Director Deputy President Chief Financial Officer Shunsuke Takeda entered the Nippon Kangyo Bank, Ltd. (currently the Dai-Ichi Kangyo Bank, Ltd.) in 1965 before joining ORIX in 1968. After an assignment to the London Liaison Office and several posts in Japan, Mr. Takeda was appointed General Manager of the International Treasury Department in 1989, General Manager of the International Department in 1990 and then General Manager of the Treasury Department in 1992 before become Director in 1993. Mr. Takeda was appointed Managing Director in 1997 and Corporate Executive Vice President in 1999. He has been Chief Financial Officer since 1997 and has been instrumental in creating an advanced system for efficient fund procurement of ORIX and its subsidiaries. He assumed the present position of Deputy President in April 2000. In addition to his oversight of the Treasury operations and support of ORIX's President, in August 2000 he was appointed to oversee the reorganization of ORIX's Investment Banking Headquarters, while he now serves as the officer responsible for the Office of Assistant to the President. Mr. Takeda was born in September 1941 and graduated from the Law Department of Tokyo University in 1965. Katsuo Kawanaka Director Corporate Executive Vice President Tokyo Sales Headquarters Katsuo Kawanaka joined Japan Rayon Limited (currently Unichika Co., Ltd.) in 1965 and moved to ORIX Corporation in 1971. After serving in a range of marketing positions, he was appointed General Manager of the Tokyo Communications Equipment Department No. 3 in 1988, General Manager of the Office Automation Equipment Department in 1989, and General Manager of the Tokyo Information and Communications Equipment Department in 1991. In 1992, he became a Director and Deputy Senior General Manager of the Tokyo Sales Headquarters. In 1996, he was named Managing Director, and he has been Head of the Tokyo Sales Headquarters since the same year as well as Corporate Executive Vice President since 1999. Mr. Kawanaka was born in March 1942 in Osaka and graduated from Osaka City University's School of Commerce in 1965. 69
Takeshi Sato Director Corporate Senior Vice President Chairman, ORIX USA CORPORATION Takeshi Sato began his career at the Saitama Bank, Ltd. (currently The Asahi Bank, Ltd.) in 1969 before coming to ORIX in 1972. Mr. Sato began focusing on international activities early at ORIX and was assigned as a Director of PT. ORIX Indonesia Finance in 1975, President of ORIX METRO Leasing and Finance Corporation in the Philippines in 1982, and President of ORIX Australia Corporation Limited in 1987, before returning to Tokyo in 1993 as General Manager of the International Department. Mr. Sato was appointed to the Director and Deputy Head of the International Headquarters in 1997, which included a posting in Singapore to oversee the Asia and Oceania operations. He has been Corporate Senior Vice President since 1999 and became Chairman of ORIX USA CORPORATION in April 2001. Mr. Sato was born in September 1946. He graduated from Meiji University's School of Commerce in 1969 and completed a Masters of Commerce Degree from Meiji University's Postgraduate School of Commerce in 1972. Hiroaki Nishina Director Corporate Senior Vice President Real Estate Business Headquarters President, ORIX Real Estate Corporation Hiroaki Nishina joined ORIX in 1968. He became a Director and Deputy Head of the Tokyo Sales Headquarters in 1993 and was appointed President of ORIX Auto Leasing in 1996. In 1998, Mr. Nishina became a Corporate Executive Officer and took over responsibility for the Real Estate Business Headquarters before becoming President of ORIX Real Estate Corporation in 1999. He has been Corporate Senior Vice President since June 2000. Mr. Nisina was born in September 1944 and graduated from Kwansei Gakuin University's School of Economics in 1968. Tatsuya Tamura Director Representative Director and Chairman, A.T. Kearney K.K. Diector (Non-executive), The Suruga Bank, Ltd. Tatsuya Tamura joined the Bank of Japan in 1961 and occupied a number of posts before becoming Executive Director in 1992. He became Chairman of A.T. Kearney (Japan) in 1996 and Representative Director & Chairman A.T. Kearney, K.K. in 1998. He served as President of EDS Japan from January 1997 to March 1999, and the President and CEO of Japan Investor Solution and Technology Co., Ltd. from August 1999 to June 2000. He has been a Director (non-executive) at The Suruga Bank, Ltd. since June 2000. Mr. Tamura became a member of ORIX's Advisory Board in 1997 and then a Director in 1999. Mr. Tamura is also a member of Keizai Doyukai (Japan Association of Corporate Executives). He was born in October 1938 and graduated from Tokyo University's School of Law in 1961. Akira Miyahara Director Vice Chairman of the Board, Fuji Xerox Co., Ltd. Akira Miyahara joined Fuji Photo Film Co. Ltd. in 1962 and then moved to Fuji Xerox Co., Ltd. in 1971. At Fuji Xerox he occupied a number of posts before becoming a Director in 1984. After promotions to Managing Director in 1987 and Senior Manager Director in 1988, he was appointed Deputy President in 1990 and President and Chief Operating Officer in 1992, before assuming his present role as Vice Chairman of the Board in 1998. Mr. Miyahara was invited to the Advisory Board of ORIX in 1997 and was then appointed as an Independent Director in June 1999. Mr. Miyahara has brought with him a wealth of experience to the ORIX Board and is able to provide an important outside perspective on the company's strategy. Mr. Miyahara was born in June 1939 and graduated from Kwansei Gakuin University's Commercial Science Department in 1962. 70
Hiroshi Nakamura Standing Corporate Auditor Hiroshi Nakamura joined ORIX in 1971. After a number of posts in Japan, he became general manager of the Credit Department No. 1 in 1995 and Corporate Executive Officer in Charge of Compliance and the Legal Affairs Department in 1999, before assuming his present position in June 2000. In his function as standing corporate auditor, Mr. Nakamura is able to use his extensive experience in compliance and legal issues to monitor ORIX's operations. Mr. Nakamura was born in May 1948 and graduated from Kwansei Gakuin University's School of Business Administration in 1971. Masaaki Yamamoto Standing Corporate Auditor Masaaki Yamamoto joined ORIX in 1972 after working five years at Ube Industries, Ltd. He became general manager of the Accounting Department in 1996 and was appointed a director of ORIX MIC Corporation in 1999 before assuming his role as Standing Corporate Auditor in June 2001. Mr. Yamamoto was born in November 1943 and graduated from Kobe University's School of Management in 1967. Hirotaka Takeuchi Corporate Auditor Dean, Hitotsubashi University Graduate School of International Corporate Strategy Hirotaka Takeuchi joined McCann-Erickson Advertising Co., Ltd. in 1969, before taking a position as Research Assistant at the Graduate School of Business Administration at the University of California at Berkley in 1972. He became a Lecturer at the Graduate School of Business Administration at Harvard University in 1976 and became an Assistant Professor there before returning to Japan in 1983 as an Assistant Professor at Hitosubashi University's School of Commerce, where he became Professor there in 1987. He has held his present position at the Graduate School of International Corporate Strategy since 1998. Mr. Takeuchi became a Corporate Auditor of ORIX in June 2000. Mr. Takeuchi was born in October 1946 and he graduated from International Christian University in 1969. He then went on to receive an MBA in 1971 from the Graduate School of Business Administration at the University of California at Berkley and a Ph.D. in 1977 from the Graduate School of Business Administration at Harvard University. Hiroko Ota Corporate Auditor Professor National Graduate Institute for Policy Studies Hiroko Ota joined Mikimoto Corporation in 1976 before becoming a research associate at the Japan Institute of Life Insurance in 1981. Ms. Ota worked at the institute until 1993, at which time she became a guest lecturer in the Economics Department of Osaka University. In 1996, Ms. Ota was an associate professor at the Saitama University's Graduate School of Policy Science and then moved to National Graduate Institute for Policy Studies in 1997 as associate professor, before becoming a full professor at the institute in May 2001. Ms. Ota was born in February 1954 and graduated from Hitotsubashi University's Department of Sociology in 1976. 71
Corporate Executive Officers In June 1998, ORIX introduced a corporate executive officer system to help separate strategic decision-making functions from day-to-day administrative operations. As a result, the Board of Directors now has responsibility for strategic management decisions, while corporate executive officers are responsible for implementing those decisions. In addition, ORIX created a Group Corporate Executive Officer Committee to promote the sharing of management information. The Corporate Executive Officers of ORIX as of June 28, 2001 are as follows: <TABLE> Name Title and Areas of Duties - ------------------------------ ---------------------------------------------------------------------------- <S> <C> <C> Yoshihiko Miyauchi.......... Chairman and Chief Executive Officer Yasuhiko Fujiki............. President and Chief Operating Officer Yoshiaki Ishida............. Vice Chairman Responsible for overseas activities Shunsuke Takeda............. Deputy President Chief Financial Officer Katsuo Kawanaka............. Corporate Executive Vice President Tokyo Sales Headquarters Takeshi Sato................ Corporate Senior Vice President Chairman, ORIX USA CORPORATION Hiroaki Nishina............. Corporate Senior Vice President Real Estate Business Headquarters; President, ORIX Real Estate Corporation Masahiro Matono............. Corporate Senior Vice President District Sales Headquarters Hiroyuki Harada............. Corporate Senior Vice President Credit Department Hiroshi Nakajima............ Corporate Senior Vice President Kinki (Osaka) Sales Headquarters Masaru Hattori.............. Corporate Senior Vice President Head of Compliance; Office of Corporate Planning; Accounting Department; General Affairs Department Koichiro Muta............... Corporate Senior Vice President Investment Banking Headquarters Yoshio Ono.................. Corporate Executive Officer International Headquarters Akira Fukushima............. Corporate Executive Officer OQL Headquarters Nobuyuki Kobayashi.......... Corporate Executive Officer IT Business Headquarters; PFS Department; President, ORIX Computer Systems Corporation President, ORIX Call Center Corporation Masaaki Tashiro............. Corporate Executive Officer Real Estate Finance Headquarters, President, ORIX Asset Management and Loan Services Corporation Tamio Umaki................. Corporate Executive Officer Tokyo Sales Headquarters Kozo Endo................... Corporate Executive Officer Kinki (Osaka) Sales Headquarters Shintaro Agata.............. Corporate Executive Officer Treasury Department Tetsuo Matsumoto............ Corporate Executive Officer Real Estate Business Headquarters; Deputy President, ORIX Real Estate Corporation Shunji Sasaki............... Corporate Executive Officer President, ORIX Rentec Corporation Shinobu Shiraishi........... Corporate Executive Officer President, ORIX Life Insurance Corporation Teruo Isogai................ Corporate Executive Officer President, ORIX Auto Leasing Corporation Takafumi Kanda.............. Corporate Executive Officer President, ORIX Credit Corporation Yutaka Okazoe............... Corporate Executive Officer President, ORIX Baseball Club Co., Ltd. </TABLE> Employees As of March 31, 2001, we had 9,529 full-time employees, compared to 9,503 as of March 31, 2000 and 9,037 as of March 31, 1999. We employ approximately 6,500 staff in Japan, 2,000 staff in Asia & Oceania, 900 staff in Americas and 100 staff in Europe. We consider our labor relations to be excellent. None of ORIX's employees are represented by a union while employees of some of ORIX's subsidiaries and affiliates are represented by unions. The mandatory retirement age for ORIX's employees is 60, and varies for ORIX's subsidiaries and affiliates. ORIX announced in June 1999 an early voluntary retirement program which is available to ORIX employees who are at 72
least 54 years old. Employees who take advantage of this program receive their accrued retirement package plus an incentive premium. ORIX and some of our subsidiaries have established contributory and non-contributory funded pension plans covering substantially all of their employees other than directors and corporate auditors. Under the plans, employees are entitled to lump-sum payments at the time of termination of their employment or to pension payments. The amounts of these payments are determined on the basis of length of service and remuneration at the time of termination. ORIX's funding policy in respect of these plans is to contribute annually the amounts actuarially determined to be required. Assets of the plans are invested primarily in interest-bearing securities and marketable equity securities. In addition, directors and corporate auditors of ORIX and some subsidiaries receive lump-sum payments upon termination of their services under unfunded termination plans. Total provisions (termination or pension plans for both employees and directors and corporate auditors) charged to income for all benefit plans (including defined benefit plans) were Yen2,942 million, Yen3,431 million and Yen5,119 million ($41 million) in fiscal 1999, 2000 and 2001, respectively. Compensation To ensure greater management transparency, we established an Executive Appointment and Compensation Committee in June 1999. This committee includes independent directors as well as our internally appointed representative directors. The independent directors will appoint the chairman of the committee. The committee recommends to the Board of Directors candidates for directors, auditors and corporate executive officers. The committee also recommends to the Board an executive remuneration and evaluation system as well as the executive remuneration and other compensation scales. During fiscal 2001, the executive compensation paid to ORIX's Directors and Corporate Auditors excluding stock options and warrants amounted to approximately Yen466 million ($3.8 million) in the aggregate. In accordance with customary Japanese business practices, a retiring Directors or Corporate Auditor receives a lump-sum retirement payment, which is subject to the approval of the general meeting of shareholders. At the Shareholders' Meeting held on June 28, 2001, the shareholders approved bonuses for the Directors and Corporate Auditors in the amounts of Yen43 million and Yen3 million, respectively, and retirement payments for the Directors and Corporate Auditors in the amounts of Yen274 million were approved for fiscal 2002. The following table shows the names of Directors and Corporate Executive Officers who received stock options, and the number of shares for which they were granted options, under the 1997, 1998, 1999, 2000 and 2001 stock option plans. Each of our shares has one vote. We have not issued any preferred shares. <TABLE> 1997-1999 2000 2001 ------------ ------------- ------------ stock option stock option stock option Name Title plans plan plan - -------------------- ----------------------------------------------- ------------ ------------- ------------- <S> <C> <C> <C> <C> Yoshihiko Miyauchi Chairman and Chief Executive Officer 60,000 30,000 21,000 Yasuhiko Fujiki President and Chief Operating Officer 17,000 15,000 13,000 Yoshiaki Ishida Vice Chairman 36,000 17,000 10,000 Shunsuke Takeda Deputy President and Chief Financial Officer 23,000 13,000 9,000 Katsuo Kawanaka Director and Corporate Executive Vice President 23,000 11,000 7,000 Takeshi Sato Director and Corporate Senior Vice President 17,000 9,000 6,000 Hiroaki Nishina Director and Corporate Senior Vice President 15,000 8,000 6,000 Tatsuya Tamura Director 1,000 1,500 Akira Miyahara Director 1,000 1,500 Masahiro Matono Corporate Senior Vice President 15,000 7,500 5,500 Hiroyuki Harada Corporate Senior Vice President 15,000 7,500 5,500 Hiroshi Nakajima Corporate Senior Vice President 15,000 7,000 5,500 Masaru Hattori Corporate Senior Vice President 9,000 6,000 5,500 Koichiro Muta Corporate Senior Vice President 5,000 Yoshio Ono Corporate Executive Officer 15,000 7,000 4,500 Akira Fukushima Corporate Executive Officer 10,000 4,500 </TABLE> 73
<TABLE> 1997-1999 2000 2001 ------------ ------------- ------------ stock option stock option stock option Name Title plans plan plan - -------------------- ----------------------------------------------- ------------ ------------- ------------- <S> <C> <C> <C> <C> Nobuyuki Kobayashi Corporate Executive Officer 9,000 6,000 4,500 Masaaki Tashiro Corporate Executive Officer 8,000 6,000 4,500 Tamio Umaki Corporate Executive Officer 4,000 5,000 4,500 Kozo Endo Corporate Executive Officer 3,500 4,500 Shintaro Agata Corporate Executive Officer 3,500 4,500 Tetsuo Matsumoto Corporate Executive Officer 4,000 </TABLE> Stock Option and Warrant Plans ORIX has adopted various employee incentive plans. The purpose of ORIX's stock option and warrant plans is to enhance the awareness of the option holders of the link between management, corporate performance and stock price, and, in this way, improve the business results of ORIX. These plans are administered by the General Affairs Department of ORIX. Stock Option Plans ORIX's shareholders approved Stock Option Plans at the ordinary general meeting of shareholders in the years from 1997 to 2000 inclusive, under which shares were purchased from the open market and held by ORIX reserved for transfer to Directors and Corporate Executive Officers and some employees of ORIX upon the exercise of their options. From 1997 to 1999 Stock Option Plans, the exercise prices of the options were adjusted on April 1, 2000 to reflect the subdivision of each of common stock into 1.2 shares which was implemented on May 19, 2000. Options granted under Stock Option Plans generally expire one year after the termination of the option holder's service with ORIX. <TABLE> Exercise Purchase Option Options Price Price Expiration Granted per Share per Share Date ------------- ------------ ------------- ------------------ <S> <C> <C> <C> <C> 2001 Stock Option Plan..... 300,900 2000 Stock Option Plan..... 316,700 Yen 16,272 Yen 16,274 2010 June 29 1999 Stock Option Plan..... 145,000 10,393 10,396 2009 June 29 1998 Stock Option Plan..... 146,000 7,784 7,521 2008 June 26 1997 Stock Option Plan..... 168,000 7,665 7,320 2002 September 30 </TABLE> At the ordinary general meeting of shareholders in June 2001, ORIX's shareholders approved the 2001 Stock Option Plan, under which stock subscription rights for approximately 300,900 shares shall be granted to Directors and Corporate Executive Officers and some employees of ORIX. Warrant Plans The Board of Directors of ORIX approved warrant plans under which warrants to purchase shares were granted or sold to Corporate Auditors and some employees of ORIX, excluding employees who are option holders under Stock Option Plan of same year, and to directors and auditors and some employees of ORIX's subsidiaries. From 1997 to 1999 Warrant Plans, the exercise prices of the options were adjusted on April 1, 2000 to reflect the subdivision of each of common stock into 1.2 shares which was implemented on May 19, 2000. Warrants granted under Warrant Plan generally expire one year after the termination of the warrant holder's service with ORIX. 74
<TABLE> Exercise Price Option Options Granted per Share Expiration Date --------------- -------------- ------------------ <S> <C> <C> <C> 2001 Warrant Plan......... 123,900 2000 Warrant Plan......... 126,143 Yen 14,090 2004 September 6 1999 Warrant Plan......... 302,484 11,291 2003 November 4 1998 Warrant Plan......... 315,593 6,885 2002 November 5 1997 Warrant Plan......... 311,110 7,939 2001 October 23 </TABLE> Subject to the final approval by the Board of Directors of the Company, the Company intends to introduce the 2001 Warrant Plan. Under the plan, warrants to purchase approximately 123,900 shares will be granted to corporate auditors of the Company, directors, corporate auditors and key employees of its certain subsidiaries by repurchasing warrants attached to bonds with warrants to be issued by the Company during fiscal 2002. Item 7. Major Shareholders and Related Party Transactions Major Shareholders The following table shows our major shareholders as of March 31, 2001. Each of our shares has one vote. We do not issue any preferred shares. <TABLE> Percent of Total Share Holdings Shares Issued -------------- ---------------- (Thousands) <S> <C> <C> Japan Trustee Services Bank, Ltd. (Trust Account) 6,933 8.42% The Mitsubishi Trust and Banking Corporation (Trust Account) 4,892 5.94% State Street Bank and Trust Company 3,996 4.85% The Sanwa Bank, Limited 2,817 3.42% The Toyo Trust & Banking Co., Ltd. 2,537 3.08% The Chase Manhattan Bank, N.A. London 2,341 2.84% The Chase Manhattan Bank, N.A. London SL Omnibus Account 1,814 2.20% Nippon Life Insurance Corporation 1,804 2.19% Boston Safe Deposit BSDT, Treaty Clients Omnibus 1,565 1.90% The Toyo Trust & Banking Co., Ltd. (Trust Account A) 1,352 1.64% </TABLE> ORIX is not directly or indirectly owned or controlled by any corporations, natural or legal persons severally or jointly. As of March 31, 2001, the percentage of outstanding shares held by foreign corporations and individuals was 39.32%. Related Party Transactions As of March 31, 2001, no person was the beneficial owner of more than 10% of any class of ORIX's shares which might give that individual significant influence over the Company. There is no material transaction of outstanding loans, including guarantees of any kind made by or proposed to be made by the Company with any enterprises and individuals. Item 8. Financial Information All relevant financial statements are attached hereto. See "Item 19. Financial Statements and Exhibits." Legal Proceedings See Item 4. "Information on the Company -Legal Proceedings" Dividend Policy and Dividends See Item 10. "-Additional Information -Dividend Policy and Dividends" 75
Significant Changes None Item 9. The Offer and Listing Tokyo Stock Exchange The primary market for the shares is the Tokyo Stock Exchange. The shares have been traded on the First Section of the Tokyo Stock Exchange since 1973 and are also listed on the First Sections of The Osaka Securities Exchange and The Nagoya Stock Exchange. The Tokyo Stock Exchange is the principal Japanese stock exchange. The most widely followed price index of stocks on the Tokyo Stock Exchange is the Nikkei Stock Average, an index of 225 selected stocks traded on the First Section of the Tokyo Stock Exchange. The following table shows the reported high and low sales prices of the shares on the Tokyo Stock Exchange, excluding off-floor transactions. High and low sales price quotations from the Tokyo Stock Exchange have been translated in each case into dollars per ADS at the Federal Reserve Bank of New York's noon buying rate on the relevant date or the noon buying rate on the next business day if the relevant date is not a business day. <TABLE> <CAPTION> Tokyo Stock Exchange Price Share Translated into Price Per Share US$ per ADS ----------------- ------ --------- Calendar period High Low High Low - ------------------------------ ------- ------ ------ ------ <S> <C> <C> <C> <C> 1996...................... 5,000 3,950 22 19 1997...................... 9,950 4,560 42 20 1998...................... 10,630 7,560 39 31 1999 First quarter............ 9,080 7,200 38 33 Second quarter........... 11,860 8,250 49 34 Third quarter............ 13,930 10,540 65 48 Fourth quarter........... 24,150 12,050 118 57 2000 First quarter............ 24,100 16,030 117 76 Second quarter........... 16,980 13,750 81 66 Third quarter............ 16,850 12,000 79 56 Fourth quarter........... 13,400 10,280 62 46 2001 January.................. 12,030 10,450 51 44 February................. 11,650 9,860 51 43 March.................... 11,300 8,600 46 35 April.................... 11,390 9,900 47 39 May...................... 13,330 11,100 56 46 June (through June 22)... 12,390 11,610 52 48 </TABLE> In May 2000, ORIX implemented the subdivision of each of common stock registered on its register of shareholders as of March 31, 2000 into 1.2 shares. The per-share prices set forth above have not been adjusted to reflect that subdivision. New York Stock Exchange The ADSs and ADNs are listed on the New York Stock Exchange under the symbol "IX". 76
Two ADSs represent one share. On March 31, 2001, approximately 2,106,120 ADSs were outstanding. This is equivalent to 1,053,060 or approximately 1.3% of the total number of shares outstanding on that date. On that date, ADSs were held by 3 record holders, including 2 record holders in the United States holding 2,105,880 ADSs. The ADS/share ratio and the per ADS prices below were not adjusted as a result of the share subdivision mentioned above. The following table provides the high and low sales prices and the average daily trading volume of the ADSs on the New York Stock Exchange. 77
NYSE Price Per ADS <TABLE> Calendar Period High Low - ---------------------------------------------- ------ ----- ($) ($) <S> <C> <C> 1998 (from September 16)...................... 39.25 31.38 1999 First quarter................................ 39.00 30.00 Second quarter............................... 40.00 29.89 Third quarter................................ 53.39 39.17 Fourth quarter............................... 95.31 47.50 2000: First quarter................................ 95.21 52.92 Second quarter............................... 76.38 65.83 Third quarter................................ 78.50 56.38 Fourth quarter............................... 61.25 46.75 2001: January...................................... 51.13 44.50 February..................................... 50.50 43.00 March........................................ 46.35 37.30 April........................................ 46.20 39.90 May.......................................... 55.00 44.40 June (through June 21)....................... 51.96 48.22 </TABLE> On March 31, 2001, 150 ADNs were outstanding. On that date, all of the ADNs were held by one record holder in the United States. Item 10. Additional Information Memorandum and Article of Incorporation Purposes The purposes of the Company are provided in Article of two of our articles of incorporation and shall be to engage in the following business. (1) Lease, purchase and sale (including purchase and sale on an installment basis), maintenance and management of movable property of all types. (2) Lease, purchase and sale, ground preparation, development, maintenance and management of real property. (3) Lending of money, purchase and sale of claims of all types, payment on behalf of third parties, guarantee and assumption of obligations and other financial business. (4) Holding, investment in, management, purchase and sale of securities. (5) Holding, management, purchase and sale of mortgage certificates. (6) Business of investment in and sale of commodities, and advisory business in respect of investment in commodities. (7) Acting as an agent for collection of money and for calculation business of enterprises. (8) Manufacture, processing, repair and sale of furniture, interior goods, transport machinery and equipment, etc. (9) Water transport, road transport of cargo and warehousing. (10) Contracting for construction and civil engineering, and design and supervision thereof. (11) Planning of, development of, contracting for, lease of and sale of intangible property rights such as copyrights, industrial property rights, etc. (12) Information services, electric communication, advertising and publishing business. (13) Management of facilities for sports, lodging, medical treatment and social education, etc. Management of restaurants, and tour business. (14) Conducting of cultural projects, sports, etc. (15) Business of dispatching workers to enterprises. (16) Purchase and sale of antiques. (17) Business relating to the collection, transportation and disposal of ordinary waste products and industrial waste products. (18) Generation of electric power and supply of electricity. (19) Brokerage, agency, investigation and consulting of business relating to any of the preceding items. (20) Non-life insurance agency business, insurance agency business under the Automobile Accident Compensation Security Law, and business related to soliciting life insurance. (21) Investment advisory business relating to real estate, securities and other financial assets. (22) Conducting trust, banking and Credit Management and Collection Business operations, as a result of the acquisition of shares in a company engaged in those activities. (23) Any and all business related to any of the preceding items. 78
Directors and Board of Directors There shall be no less than three Directors of the Company (Article 17). Directors shall be elected at a General Meeting of Shareholders. In the case of the above election, shareholders representing not less than one third (1/3) of the total number of shares entitled to vote shall attend such Meeting. In the case of election of Directors, cumulative voting shall not be used (Article 18). The term of office of Directors shall expire upon conclusion of the Ordinary General Meeting of Shareholders relating to the last fiscal year ending within two years from his assumption of office. (Article 19) Resolutions of the Board of Directors shall be adopted by a majority of the Directors present at a Meeting that a majority of the Directors shall attend (Article 23). Remuneration of Directors shall be determined by resolution of the General Meeting of Shareholders (Article 25). Shares The Company do not issue any preferred stock. Cash dividends shall be paid to shareholders or registered pledgees last of record on the Register of Shareholders and the Register of Substantial Shareholders as of the closing of accounts for each business year. With respect to the first cash dividends on shares issued upon requests for conversion of convertible bonds, such conversions shall be deemed to have been made at the beginning of the business year during which such requests for conversion have been made, and the cash dividends shall be paid accordingly. Cash dividends shall bear no interest and if they have not been received within three years from the day of commencement of payments, they shall belong to the Company. (Article 35) Unless otherwise provided for by laws and ordinances, resolutions of General Meetings of Shareholders shall be adopted by a majority of votes of shareholders present at the Meetings. Unless otherwise provided for by laws and ordinances, each shareholder shall have one vote for each share (Article 14). General Meeting of Shareholders The Ordinary General Meeting of Shareholders shall be held in June of each year and an Extraordinary General Meeting of Shareholders shall be held whenever necessary. Notices for calling of an Ordinary General Meeting of Shareholders and an Extraordinary General Meeting of Shareholders shall be dispatched at least two weeks prior to the date set for such Meetings (Article 11). A General Meeting of Shareholders shall be called by a Representative Director pursuant to resolution of the Board of Directors (Article 12). Material Contracts We have no material contracts aside from those entered in our ordinary course of business. Foreign Exchange and Other Regulations The Foreign Exchange and Foreign Trade Law of Japan, as amended, and the cabinet orders and ministerial ordinances issued thereunder govern some matters relating to the acquisition and holding of shares by "non-residents of Japan" and "foreign investors". "Non-residents of Japan" are defined as individuals who are not residents of Japan and corporations whose principal offices are located outside Japan. Generally, branches and other offices located within Japan of non-resident corporations are regarded as residents of Japan, and branches and other offices of Japanese corporations located outside Japan are regarded an non-residents of Japan. "Foreign investors" are defined in the foreign exchange control laws as: o individuals not resident in Japan, o corporations organized under the laws of foreign countries or whose principal offices are located outside Japan, and 79
o corporations organized in Japan not less than 50% of the shares of which are held, directly or indirectly, by individuals or corporations falling within either of the two categories above or a majority of the directors or other officers (or directors or other officers having the power of representation) of which are non-resident individuals. Acquisition of Shares In general, a non-resident of Japan can acquire shares of a Japanese company listed on a Japanese stock exchange or traded on an over-the-counter market in Japan ("listed shares") from a resident of Japan. A resident of Japan must file a report of a transfer with the Minister of Finance within 20 days from and including the date of the transfer. However, if a foreign investor intends to acquire listed shares and as a result of any acquisition the foreign investor would, directly or indirectly, hold 10% or more of the total outstanding shares of the relevant company, the foreign investor must file a report of the acquisition. The report must be filed with the Minister of Finance and any other competent Minister within 15 days from and including the date of the acquisition. In some limited circumstances a prior notification of the acquisition must be filed with the Minister of Finance and any other competent Minister, which may modify or prohibit the proposed acquisition. Dividends and Proceeds of Sale Under the Foreign Exchange and Foreign Trade Law, dividends paid on, and the proceeds of sales in Japan of, shares held by non-residents of Japan may in general be converted into any foreign currency and repatriated abroad. The acquisition of shares by non-resident shareholders by way of stock split is not subject to any notification or reporting requirements. Exercise or Transfer of Subscription Rights Granted to Shareholders An acquisition by a non-resident holder of shares upon exercise of subscription rights granted to shareholders is subject to the same conditions as are referred to under "--Acquisition of Shares" above. If certificates representing these subscription rights are made available by ORIX, a non-resident shareholder can acquire a certificate subject to the same conditions as are referred to under "--Acquisition of Shares" above. Non-resident (or any non-resident transferee of a certificate) may acquire shares upon exercise of the subscription rights represented by a certificate subject only to the restrictions referred to under the same heading. Other Regulations The Securities and Exchange Law generally requires any person who has become a beneficial holder, including joint holders, of more than five percent of the total issued share capital of a company listed on any Japanese stock exchange or traded on the over-the-counter markets in Japan to file a report concerning its share holdings. This report must be filed with the Minister of Finance within five business days. A similar report must also be made (with some exceptions) if the percentage of this holding subsequently changes by one percent or more. Copies of any report must also be furnished to the issuer of these shares and to all Japanese stock exchanges on which the shares are listed or the Japan Securities Dealers Association in the case of over-the-counter shares. For this purpose, shares issuable on conversion of convertible securities or exercise of warrants are taken into account in determining both the number of shares held by a holder and the issuer's total issued share capital. Dividend Policy and Dividends ORIX has paid cash dividends on the shares on an annual basis in each year since 1967. The Board of Directors recommends the annual dividends. The shareholders approve the annual dividend at the ordinary general meeting of shareholders customarily held in June of each year. Immediately following this approval at the meeting, dividends are paid to holders of record as of the preceding March 31. The following table shows the amount of dividends paid by ORIX in each of the fiscal years indicated, which amounts are translated into US dollars per ADS at the noon buying rate on each of the dates of the ordinary general meetings of shareholders. Since the share division was implemented in May 2000 after the record date for annual 80
dividends, the amount of dividends for the fiscal year ending March 31, 2000 was not adjusted to reflect the share division. <TABLE> Dividend Translated into Year ending per Share dollar per ADS ------------------------------ ------------- --------------- <S> <C> <C> March 31, 1997......... Yen 15.00 $ 0.06 March 31, 1998......... 15.00 0.06 March 31, 1999......... 15.00 0.07 March 31, 2000......... 15.00 0.07 March 31, 2001......... 15.00 0.06 </TABLE> We currently intend to continue to pay annual cash dividends on the shares. In the future, however, we may decide not to pay dividends for any of the following reasons: o in response to a decline in our earnings or financial condition; o to permit us to increase our assets; o to maintain our debt-to-equity ratios at a desired level; or o if any of our lenders with the right to review our dividend plan and approve our payment of dividends objects to a planned dividend. Dividends paid to U.S. holders of shares or ADSs are generally reduced by a Japanese withholding tax at the maximum rate of 15%. Taxation The following is a summary of the principal Japanese tax consequences to an owner of Notes, ADNs, Shares or ADSs who is an individual not resident in Japan or a non-Japanese corporation (a "Non-resident holder"). The statements regarding Japanese tax laws set forth below are based on the laws in force and as interpreted by the Japanese taxation authorities as of the date hereof and are subject to changes in the applicable Japanese laws or double taxation conventions occurring after that date. This summary is not exhaustive of all possible tax considerations which may apply to a particular investor and potential investors are advised to satisfy themselves as to: o the overall tax consequences of owning the Notes, ADNs, Shares or ADSs described herein, including specifically the tax consequences under Japanese law, o the laws of the jurisdiction in which they are resident, and o any tax treaty between Japan and their country of residence. Notes Payment of interest on the notes outside Japan by our paying agents to some beneficial owners will not be subject to Japanese withholding tax. The two groups of beneficial owners that are exempt from the withholding tax are: o an individual who is not a resident of Japan or corporation that is not a Japanese corporation for Japanese tax purposes. These individuals and corporations are referred to as "non-resident holders". o a Japanese financial institution designated in Article 6, Paragraph 8 of the Special Taxation Measures Law of Japan (Law No. 26 of 1957) and in the related cabinet order. Each of these financial institutions is referred to as a "DFI". Each non-resident holder and DFI must comply with procedures for establishing its status in accordance with the requirements of Japanese law. 81
Interest on the Notes will continue to be exempt from Japanese withholding tax until March 31, 2002. You should be aware that the exemption for non-resident holders and DFI's may be affected if Japan adopts new rules that apply to interest on outstanding securities and does not provide for grandfathering. If that happens, o non-resident holders and DFIs generally would be entitled to receive additional amounts, and o we would be entitled to redeem the debt securities. Under current Japanese practice, we and our paying agents may determine our withholding obligations in respect of notes held through a qualified clearing organization in reliance on certifications we receive from the qualified clearing organization. In these cases, we do not need to obtain certifications from the ultimate beneficial owners of the notes. As part of the procedures under which these certifications are given, a beneficial owner may be required to establish that it is a non-resident holder or DFI to the person or entity through which is holds the notes. If a non-resident holder or DFI does not hold its notes through a qualified clearing organization, the non-resident holder or DFI, as the case may be, will be required to deliver to our paying agents a claim for exemption from Japanese withholding tax and documentation concerning its identity and residence in order to receive interest payments on the notes free of Japanese withholding tax. We and our paying agents may adopt modified or supplemental certification procedures to the extent necessary to comply with changes in Japanese law or administrative practice. Holders of Notes other than non-resident holders or DFIs will be subject to Japanese income tax: o on the full amount of interest to be received, or o in the case of a public entity, financial institution, securities company or other corporation designated in Article 3-3, Paragraph 6 of the Special Taxation Measures Law that receives interest through a receiving agent in Japan in accordance with Paragraph 6, on the full amount of interest to be received less the amount of interest corresponding to the period during which it holds the notes as provided in the related cabinet order. There are generally no Japanese taxes payable on conversion of Notes which may be payable if we pay holders cash for shares that we are prohibited from delivering to them. If holders sell our Notes or ADNs outside of Japan, the proceeds will generally not be subject to Japanese income or corporation taxes. If holders acquire our Notes or ADNs as a legatee, heir or donee, holders may be subject to Japanese inheritance and gift taxes at progressive rates. We will pay the Japanese stamp duty tax imposed upon the issuance of shares of common stock registered in the name of the custodian and the delivery of the shares to the custodian's agent. Shares Generally, we will be required to withhold amounts from dividends we pay to non-resident holders. Non-resident holders will not generally be required to pay Japanese income tax if our stock splits. However, if we transfer retained earnings or legal reserve to stated capital non-resident holders will be treated as having received a dividend for Japanese tax purposes and will, in general, be required to pay Japanese income tax. This is true whether or not we make the transfer in connection with a stock split or otherwise. In general, non-resident holders will not be treated as having been paid a dividend in connection with additional paid-in capital. We would not be required to transfer retained earnings or legal reserve to stated capital in connection with a stock split if the total par value of shares in issue after the stock split does not exceed the stated capital. We will be required to withhold 20% from dividends we pay non-resident holders unless a relevant tax treaty, convention or agreement provides for a lower rate of withholding. Japan has entered into income tax treaties, conventions or agreements with a number of countries that reduce the general 20% withholding tax rate to 15%. These countries include, among others, Australia, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, 82
The Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States. If non-resident holders are entitled to a reduced rate of Japanese withholding tax on payment of dividends by us, they must submit the "Application Form for Income Tax Convention regarding Relief from Japanese Income Tax on Dividends" to the relevant Japanese tax authority through us. A standing proxy for non-resident holders may provide this application service for you. A reduced rate is applicable to ADSs if Citibank, N.A., as depositary, or its agent submits two Application Forms for Income Tax Convention. One form must be submitted before payment of dividends, and the other form must be submitted within eight months after our fiscal year-end. Citibank, N.A. has indicated to us that it shall undertake reasonable efforts to file the applicable forms to obtain a reduced rate of Japanese withholding taxes. If non-resident holders hold ADSs and want to claim a reduced rate, they will be required to file proof of taxpayer status, residence and beneficial ownership, as applicable. Non-resident holders will also be required to provide any other information or documents required by the depositary. Non-resident holders will not generally be required to pay Japanese income or corporation tax on any gains they derive from selling our shares or ADSs. If non-resident holders acquired our shares or ADSs as a distributee, legatee or donee they may have to pay Japanese inheritance or gift taxes at progressive rates. We have paid or will pay any stamp, registration or similar tax imposed by Japan in connection with the issue of the shares, other than any tax payable in connection with the transfer or sale of the shares by non-resident holders. Documents on Display Our annual reports, news releases and interim results are displayed in our home page (URL: www.orix.co.jp). Item 11. Quantitative and Qualitative Disclosures About Market Risk Derivatives and Other Financial Instruments We engage in a number of derivative transactions such as interest rate and currency swaps and, interest rate cap, floor and collar transactions. We engage in these transactions principally for hedging purposes. ORIX establishes market risk management regulations determined by the Investment and Credit Committee, and each subsidiaries that engages in derivatives transactions has established market risk management parameters. Based on those parameters, the object of the risks which should be managed and the types of hedging methods are clarified, while an internal check system has been established to separate the functions of departments responsible for execution, hedging efficacy evaluation, and related administration tasks. Departments executing transactions calculate the fair market values of transactions with individual counterparties and transactions with counterparties of given credit ratings, and the types of hedging methods employed. In addition, these departments make other calculations as part of a management system capable of responding rapidly to sharp market changes and other unanticipated developments. We perform hedging efficacy check to ensure that the types of hedging methods employed are appropriate and, periodically or when necessary, evaluate the efficacy of the hedging methods. Working in cooperation with banks and other outside entities, administrative management undertake checks of all transactions. In addition, each quarter, they prepare reports on each subsidiaries' transactions that include compilations of such information as the notional principal, fair market value, hedging method, and hedging efficacy associated with each type of transaction and each counterparty, and present this report to CFO. Further, the Inspection Office inspects derivatives-related accounts and performs checks to ensure that relevant regulations are observed. Market Risks Our primary market risk exposures are to interest rate fluctuations, foreign exchange rate movements and changes in market prices for equity securities. We seek to manage market risk exposures as described under "Item 5. Operating and Financial Review and Prospects--Risk Management". Our interest income is exposed to the risk of decreases in market interest rates. Decreases in market interest rates reduce interest income from: 83
o floating rate installment loans; o investment securities yielding a floating rate of return; o short-term investments; and o interest rate swaps in which we receive a floating rate of interest. Our most significant exposure of this kind is to installment loans bearing a floating rate of interest, although we also have a significant amount of short-term investments. Most of our floating-rate installment loans and short-term investments are denominated in yen and are therefore exposed to the risk of changes in market rates of interest for financial obligations denominated in yen. Our interest expense is exposed to the risk of increases in market interest rates. Increases in market interest rates increase interest expense from: o short-term debt; o floating rate long-term debt; and o interest rate swaps in which we pay a floating rate of interest. Our most significant exposure of this kind is to short-term debt; we customarily finance a significant portion of our operations through the issuance of commercial paper and short-term borrowings. We also have a significant amount of floating-rate long-term debt. Most of our short-term debt and floating-rate long-term debt is denominated in yen and is therefore exposed to the risk of changes in market rates of interest for financial obligations denominated in yen. In principle, our floating rate assets are funded by floating rate debt such as commercial paper and by way of derivative instruments. We have foreign-currency denominated assets and liabilities, and engage in foreign-currency denominated transactions. Although we generally seek to match the currencies in which our assets and liabilities are denominated, our attempt at matching is not comprehensive. Consequently, our profits from foreign currency denominated transactions and shareholders' equity are exposed to foreign exchange rate risks if that foreign currency denominated investments are not hedged. These risks include: o the effects of changes in payment flows on foreign currency swaps; o changes in the yen equivalent amounts of income or expenses from transactions denominated in foreign currencies; and o revaluation of assets and liabilities denominated in foreign currencies or reflected in the financial statements of subsidiaries whose functional currencies are other than yen. We have a portfolio of equity securities, principally Japanese listed common stocks. Our shareholders' equity and net income are exposed to the risk of changes in market prices for these securities. In addition to the risks described above, we are exposed to market risks in relation to our direct financing leases and operating leases. Interest rate sensitivity and exchange rate sensitivity data for these leases are not required to be presented in the tables below. Substantially all of our direct financing leases and operating leases do not provide for payments that fluctuate based on changes in market rates of interest or changes in rates of currency exchange. However, changes in market rates of interest will affect the fair values of these payments in the future. We are also exposed to market risks in relation to insurance policies issued by ORIX Life Insurance. Interest rate sensitivity and exchange rate sensitivity data for these policies are not required to be presented in the tables below. All 84
insurance policies issued by ORIX Life Insurance are denominated in yen. Those policies do not provide for payments that fluctuate based on market rates of interest. Our obligations under insurance policies include obligations that are based upon the occurrence of loss events. These also include obligations that are based upon essentially financial criteria, such as insurance products that are designed partially or wholly as investment products. Changes in market rates of interest may affect the fair value of our obligations under other investment-type insurance products and may affect the present value of our expected obligations (based on actuarial determinations) under other insurance products. The following quantitative information about the market risk of our financial instruments does not include information about financial instruments to which the requirements under FASB Statement 107 do not apply, such as investment in direct financing leases, investment in operating leases, and insurance contracts. As a result, the following information does not present all the risk of our financial instruments. We choose to present in tabular form our interest risk exposure, and provide sensitivity analysis, which presents potential losses in future earnings resulting from hypothetical changes in exchange rates, to show our foreign currency exchange rate exposure. We omitted the disclosure for trading purpose financial instruments because the amount is immaterial. The table of interest rate sensitivity for non-trading on-balance sheet financial instruments summarizes installment loans, interest-bearing bonds and long-and short-term debt. These instruments are further classified as fixed rate and floating rate. For on-balance sheet items, the principal collection and repayment schedules and the weighted average interest rates for collected and repaid portions are disclosed. For interest swaps of off-balance sheet items, the estimated notional principal amounts for each contractual period and the weighted average interest swap rates are disclosed. The average interest rates of financial instruments as of the end of fiscal 2001 are: 5.4% for installment loans, 4.1% for interest-bearing bonds, 2.3% for long-and short-term debt and 0.6% for deposits. The average payment rate of interest rate swaps is 3.8% and the average receipt rate is 2.8%. There is no material change in the balance and the average interest rate of financial instruments. The average interest rates of financial instruments as of the end of fiscal 2000 are: 5.7% for installment loans, 3.8% for interest-bearing bonds, 2.6% for long-and short-term debt and 0.5% for deposits. The average payment rate on interest rate swaps is 3.1% and the average receipt rate is 2.7%. Since we have a foreign currency transaction policy of basically keeping the same balance of foreign currency denominated assets and liabilities, there is a small amount of net exposure to foreign currency exchange risk. We are exposed to exchange risk mainly when our investment is primarily denominated in the local currency of Indonesia or other Asian countries and the source of our funding is US dollar debt. When the currencies depreciate against the US dollar, we incur foreign currency transaction losses. There is no material change in our exchange risk position from fiscal 2000 to fiscal 2001. We identified all positions subject to a change in the value of the foreign currency and calculated the potential loss in future earnings resulting from several hypothetical scenarios of 10% changes in related currencies. For the Indonesian Rupiah, we used a 60% change, taking into consideration the recent fluctuation in the value of the currency. The largest loss results from the scenario that both the US dollar and Japanese yen appreciate against other currencies. Based on this scenario, the exchange losses in future earnings are Yen2,905 million at the end of fiscal 2000 and Yen3,962 million ($32 million) at the end of fiscal 2001. The following tables contain quantitative information concerning the interest rate risk of ORIX's financial instruments. Interest Rate Sensitivity Non-Trading On-Balance Sheet Financial Instruments <TABLE> Expected maturity date March 31, 2001 -------------------------------------------------------------------------------- estimated fair 2002 2003 2004 2005 2006 Thereafter Total value ------------- ----------- ----------- ----------- ----------- ----------- ------------- -------------- (Yen amounts in millions) <S> <C> <C> <C> <C> <C> <C> <C> <C> Assets Installment loans (fixed rate)..... Yen 248,716 Yen 79,115 Yen 83,668 Yen 74,393 Yen 41,829 Yen 97,396 Yen 625,117 Yen 645,680 Average interest rate........... 5.6% 7.9% 7.6% 7.8% 9.7% 8.3% 7.1% </TABLE> 85
<TABLE> Expected maturity date March 31, 2001 -------------------------------------------------------------------------------- estimated fair 2002 2003 2004 2005 2006 Thereafter Total value ------------- ----------- ----------- ----------- ----------- ----------- ------------- -------------- (Yen amounts in millions) <S> <C> <C> <C> <C> <C> <C> <C> <C> Installment loans (floating rate).. Yen 297,564 Yen 173,044 Yen 142,316 Yen 118,575 Yen 137,463 Yen 352,432 Yen 1,221,394 Yen 1,221,394 Average interest rate............. 4.4% 3.8% 4.4% 4.9% 5.0% 5.1% 4.6% Investment in securities (fixed rate)............ Yen 39,213 Yen 65,692 Yen 108,010 Yen 128,951 Yen 89,134 Yen 264,696 Yen 695,696 Yen 717,075 Average interest rate........... 2.7% 2.4% 2.1% 2.3% 1.8% 8.1% 4.2% Investment in securities (floating rate)............ Yen 5,974 Yen 12,613 Yen 6,158 Yen 1,187 Yen 1,407 Yen 29,280 Yen 56,619 Yen 59,435 Average interest rate........... 7.7% 12.4% 15.3% 4.7% 7.2% 3.6% 7.4% Liabilities Short-term debt... Yen 1,562,072 -- -- -- -- -- Yen 1,562,072 Yen 1,562,072 Average interest rate........... 1.8% -- -- -- -- -- 1.8% Deposits.......... Yen 145,283 Yen 9,134 Yen 14,361 -- Yen 9,536 -- Yen 178,314 Yen 179,376 Average interest rate........... 0.6% 0.9% 1.0% -- 1.4% -- 0.6% Long-term debt (fixed rate)..... Yen 328,314 Yen 314,536 Yen 307,651 Yen 282,184 Yen 126,826 Yen 75,750 Yen 1,435,261 Yen 1,466,903 Average interest rate........... 2.9% 2.4% 2.1% 1.9% 1.9% 3.2% 2.3% Long-term debt (floating rate).. Yen 296,524 Yen 159,967 Yen 172,282 Yen 110,508 Yen 92,504 Yen 63,113 Yen 894,898 Yen 894,898 Average interest rate........... 4.6% 3.8% 2.3% 1.6% 2.0% 2.8% 3.2% </TABLE> <TABLE> Non-Trading Off-Balance Sheet Financial Instruments Expected maturity date March 31, 2001 -------------------------------------------------------------------------------- estimated fair 2002 2003 2004 2005 2006 Thereafter Total value ------------- ----------- ----------- ----------- ----------- ----------- ------------- -------------- (Yen amounts in millions) <S> <C> <C> <C> <C> <C> <C> <C> <C> Interest rate swaps Notional amount (Floating to fixed)......... Yen 168,298 Yen 50,849 Yen 82,613 Yen 44,969 Yen 120,654 Yen 37,651 Yen 505,034 Yen (14,796) Average pay rate........... 3.7% 4.4% 3.4% 3.0% 4.7% 5.5% 4.0% Average receive rate........... 1.6% 3.2% 2.4% 1.8% 2.5% 4.1% 2.3% Notional amount (Fixed to floating)...... Yen 25,760 Yen 19,289 Yen 15,071 Yen 29,478 Yen 8,830 Yen 22,919 Yen 121,347 Yen 4,624 Average pay rate.......... 4.2% 1.0% 1.8% 1.2% 1.2% 5.4% 2.7% Average receive rate.......... 6.1% 2.8% 4.6% 4.4% 2.8% 6.2% 4.8% </TABLE> <TABLE> Weighted March 31,2001 Notional average estimated amount strike rate fair value ----------- ----------- ------------- (Yen amounts in millions) <S> <C> <C> <C> Caps, floors and collars-held........................................... Yen 96,153 6.3% Yen (46) </TABLE> 86
Item 12. Other than Equity Securities Not applicable. 87
PART II Item 13. Defaults, Dividend Arrearages and Delinquencies None. Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds In May 2000, ORIX implemented the subdivision of each share of common stock registered on its register of shareholders as of March 31, 2000 into 1.2 shares. Item 15. [Reserved] Item 16. [Reserved] 88
PART III Item 17. Financial Statements ORIX has elected to provide financial statements and related information pursuant to Item 18. Item 18. Financial Statements The consolidated financial statements of ORIX and the report thereon by its independent auditors listed below are attached hereto as follows: (a) Report of Independent Accountants (page F-2) (b) Consolidated Balance Sheets as of March 31, 2000 and 2001 (page F-3) (c) Consolidated Statements of Income for the years ended March 31, 1999, 2000, and 2001 (page F-4) (d) Consolidated Statements of Shareholders' Equity for the years ended March 31, 1999, 2000 and 2001 (page F-5) (e) Consolidated Statements of Cash Flows for the years ended March 31, 1999, 200 and 2001 (page F-6) (f) Notes to Consolidated Financial Statements (pages F-7 to F-42) Item 19. Financial Statements and Exhibits Financial Statements The following financial statements are attached hereto. (a) Consolidated Balance Sheets as of March 31, 2000 and 2001 (page F-3) (b) Consolidated Statements of Income for the years ended March 31, 1999, 2000 and 2001 (page F-4) (c) Consolidated Statements of Shareholders' Equity for the years ended March 31, 1999, 2000 and 2001 (pages F-5) (d) Consolidated Statements of Cash Flows for the years ended March 31, 1999, 2000 and 2001 (pages F-6) (e) Notes to Consolidated Financial Statements (pages F-7 to F-42) Exhibits None. 89
SIGNATURES The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf. ORIX CORPORATION By: /s/ Masaru Hattori -------------------------- Title: Attorney-in-Fact Date: June 29, 2001
--------------- INDEX TO CONSOLIDATED FINANCIAL STATEMENTS --------------- Page ---- Report of Independent Public Accountants............................... F-2 Consolidated Balance Sheets as of March 31, 2000 and 2001.............. F-3 Consolidated Statements of Income For the Years Ended March 31, 1999, 2000 and 2001........................................ F-4 Consolidated Statements of Shareholders' Equity For the Years Ended March 31, 1999, 2000 and 2001....................................... F-5 Consolidated Statements of Cash Flows For the Years Ended March 31, 1999, 2000 and 2001........................................ F-6 Notes to Consolidated Financial Statements............................. F-7 F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and the Board of Directors of ORIX Corporation: We have audited the accompanying consolidated balance sheets of ORIX Corporation (a Japanese corporation) and its subsidiaries as of March 31, 2000 and 2001, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended March 31, 2001, expressed in Japanese yen. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ORIX Corporation and its subsidiaries as of March 31, 2000 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2001, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the translated amounts in the accompanying consolidated financial statements translated into U.S. dollars have been computed on the basis set forth in Note 1 (w). Arthur Andersen Tokyo Japan April 27, 2001 F-2
CONSOLIDATED BALANCE SHEETS ORIX Corporation and Subsidiaries March 31, 2000 and 2001 <TABLE> Millions of Millions of yen U.S. dollars -------------------------------- ------------ ASSETS 2000 2001 2001 - --------------------------------------------------------- ------------- ------------- ------------ <S> <C> <C> <C> Cash and Cash Equivalents................................ Yen 265,956 Yen 155,411 $ 1,254 Restricted Cash and Cash Equivalents..................... 13,666 17,072 138 Time Deposits............................................ 7,698 8,673 70 Investment in Direct Financing Leases.................... 1,744,953 1,657,709 13,379 Installment Loans........................................ 1,791,439 1,846,511 14,903 Allowance for Doubtful Receivables on Direct Financing Leases and Possible Loan Losses........................ (136,939) (141,077) (1,139) Investment in Operating Leases........................... 397,576 451,171 3,641 Investment in Securities................................. 758,381 942,158 7,604 Other Operating Assets................................... 72,472 132,006 1,066 Investment in Affiliates................................. 63,312 63,155 510 Other Receivables........................................ 70,345 112,677 910 Advances................................................. 89,676 141,148 1,139 Prepaid Expenses......................................... 24,813 27,740 224 Office Facilities........................................ 74,770 74,406 601 Other Assets............................................. 103,424 102,551 828 ------------- ------------- -------- Yen 5,341,542 Yen 5,591,311 $ 45,128 ============= ============= ======== </TABLE> <TABLE> Millions of Millions of yen U.S. dollars -------------------------------- ------------ LIABILITIES AND SHAREHOLDERS' EQUITY 2000 2001 2001 - --------------------------------------------------------- ------------- ------------- ------------ <S> <C> <C> <C> Short-Term Debt.......................................... Yen 1,912,761 Yen 1,562,072 $ 12,608 Deposits................................................. 154,923 178,314 1,439 Trade Notes and Accounts Payable......................... 151,477 211,280 1,705 Accrued Expenses......................................... 72,733 81,334 657 Policy Liabilities....................................... 494,443 561,887 4,535 Income Taxes: Current............................................ 5,688 10,173 82 Deferred........................................... 135,218 135,430 1,093 Deposits from Lessees.................................... 45,844 59,339 479 Long-Term Debt........................................... 1,942,784 2,330,159 18,807 ------------- ------------- -------- Total liabilities.................................. 4,915,871 5,129,988 41,405 ------------- ------------- -------- Commitments and Contingent Liabilities Shareholders' Equity: Common stock, par value Yen 50 per share: authorized 259,000,000 shares issued 68,630,294 shares in 2000 and 82,388,025 shares in 2001................. 41,688 41,820 338 Additional paid-in capital............................. 59,285 59,885 483 Legal reserve.......................................... 1,970 2,090 16 Retained earnings...................................... 328,248 361,262 2,916 Accumulated other comprehensive income (loss).......... (1,417) 4,552 37 Treasury stock, at cost: 402,223 shares in 2000 and 681,745 shares in 2001.... (4,103) (8,286) (67) ------------- ------------- -------- 425,671 461,323 3,723 ------------- ------------- -------- Yen 5,341,542 Yen 5,591,311 $ 45,128 ============= ============= ======== </TABLE> The accompanying notes to consolidated financial statements are an integral part of these balance sheets. F-3
CONSOLIDATED STATEMENTS OF INCOME ORIX Corporation and Subsidiaries For the Years Ended March 31, 1999, 2000 and 2001 <TABLE> Millions of Millions of yen U.S. dollars ----------------------------------------------- ------------ 1999 2000 2001 2001 ----------- ----------- ----------- ------------ <S> <C> <C> <C> <C> Revenues: Direct financing leases....................... Yen 143,170 Yen 130,798 Yen 122,003 $ 985 Operating leases.............................. 92,407 100,503 113,478 916 Interest on loans and investment securities... 100,480 97,390 109,448 883 Brokerage commissions and gains on investment securities............................ 7,381 19,700 12,055 97 Life insurance premiums and related investment income........................................... 196,259 205,829 158,314 1,278 Interest income on deposits................... 6,695 3,884 2,520 20 Other operating revenues...................... 47,549 58,409 68,331 552 ----------- ----------- ----------- ------- Total revenues.............................. 593,941 616,513 586,149 4,731 ----------- ----------- ----------- ------- Expenses: Interest expense.............................. 140,846 115,038 109,289 882 Depreciation-operating leases................. 57,405 60,750 68,316 551 Life insurance costs.......................... 186,775 193,664 143,709 1,160 Other operating expenses...................... 31,522 38,302 43,580 352 Selling, general and administrative expenses.. 82,395 90,961 101,156 816 Provision for doubtful receivables and possible loan losses........................ 51,845 45,573 44,584 360 Write-downs of long-lived assets.............. 644 7,881 4,090 33 Write-downs of securities..................... 11,077 12,297 10,848 88 Foreign currency transaction loss (gain), net. 390 (839) 3,429 28 ----------- ----------- ----------- ------- Total expenses.............................. 562,899 563,627 529,001 4,270 ----------- ----------- ----------- ------- Operating Income.................................... 31,042 52,886 57,148 461 Equity in Net Income (Loss) of and Gain (Loss) on Sales of Affiliates (Yen 3,978 million gain in 1999, Yen 1,503 million loss in 2000 and Yen 2,059 million ($17 million) gain in 2001)........................ (3,727) (838) 2,088 17 ----------- ----------- ----------- ------- Income before Income Taxes.......................... 27,315 52,048 59,236 478 Provision for Income Taxes.......................... 1,694 21,406 25,079 202 ----------- ----------- ----------- ------- Net Income.......................................... Yen 25,621 Yen 30,642 Yen 34,157 $ 276 =========== =========== =========== ======= Yen U.S. dollars ----------------------------------------------- ------------ Amounts per Share of Common Stock: Net income Basic (Notes 1 (y) and 17)......... Yen 330.43 Yen 385.27 Yen 417.77 $ 3.37 Diluted (Notes 1 (y) and 17)....... 330.43 377.02 400.99 3.24 Cash dividends................................ 15.00 15.00 15.00 0.12 </TABLE> The accompanying notes to consolidated financial statements are an integral part of these statements. F-4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY ORIX Corporation and Subsidiaries For the Years Ended March 31, 1999, 2000 and 2001 <TABLE> Millions of Millions of yen U.S. dollars ----------------------------------------------- ------------ 1999 2000 2001 2001 ----------- ----------- ----------- ------------ <S> <C> <C> <C> <C> Common Stock: Beginning balance..................................... Yen 20,180 Yen 20,180 Yen 41,688 $ 337 Common stock issued in public offering................ - 19,856 - - Exercise of warrants.................................. - 1,647 132 1 Common stock issued for acquisitions of minority interests of subsidiaries............................ - 5 - - ----------- ----------- ----------- ------- Ending balance........................................ Yen 20,180 Yen 41,688 Yen 41,820 $ 338 ----------- ----------- ----------- ------- Additional Paid-in Capital: Beginning balance..................................... Yen 37,303 Yen 37,464 Yen 59,285 $ 479 Value ascribed to warrants attached to 1.925% bonds issued......................................... 161 - - - Value ascribed to warrants attached to 1.22% bonds issued............................................... - 333 - - Value ascribed to warrants attached to 1.59% bonds issued............................................... - - 178 1 Common stock issued in public offering................ - 18,954 - - Exercise of warrants and stock options................ - 1,504 130 1 Common stock issued for acquisitions of minority interests of subsidiaries............................ - 1,030 - - Gains on sales of treasury stock...................... - - 297 2 Forfeit of stock options.............................. - - (5) (0) ----------- ----------- ----------- ------- Ending balance........................................ Yen 37,464 Yen 59,285 Yen 59,885 $ 483 ----------- ----------- ----------- ------- Legal Reserve: Beginning balance..................................... Yen 1,750 Yen 1,860 Yen 1,970 $ 15 Transfer from retained earnings....................... 110 110 120 1 ----------- ----------- ----------- ------- Ending balance........................................ Yen 1,860 Yen 1,970 Yen 2,090 $ 16 ----------- ----------- ----------- ------- Retained Earnings: Beginning balance..................................... Yen 274,144 Yen 298,684 Yen 328,248 $ 2,649 Cash dividends........................................ (971) (968) (1,023) (8) Transfer to legal reserve............................. (110) (110) (120) (1) Net income............................................ 25,621 30,642 34,157 276 ----------- ----------- ----------- ------- Ending balance........................................ Yen 298,684 Yen 328,248 Yen 361,262 $ 2,916 ----------- ----------- ----------- ------- Accumulated Other Comprehensive Income (Loss): Beginning balance..................................... Yen (18,079) Yen (27,550) Yen (1,417) $ (11) Net increase (decrease) in net unrealized gains on investment in securities.......................... 1,442 41,551 (11,360) (92) Net increase in minimum pension liability adjustments.......................................... - (3,485) (1,199) (10) Net increase (decrease) in cumulative translation adjustments.......................................... (10,913) (11,933) 18,528 150 ----------- ----------- ----------- ------- Ending balance........................................ Yen (27,550) Yen (1,417) Yen 4,552 $ 37 ----------- ----------- ----------- ------- Treasury Stock: Beginning balance..................................... Yen (1,477) Yen (2,795) Yen (4,103) $ (33) Purchases of treasury stock........................... (1,318) (1,811) (5,155) (42) Exercise of stock options............................. - 503 265 2 Resales of treasury stock issued in stock split....... - - 683 6 Resales accompanied by forfeit of stock options....... - - 24 0 ----------- ----------- ----------- ------- Ending balance........................................ Yen (2,795) Yen (4,103) Yen (8,286) $ (67) ----------- ----------- ----------- ------- Total Shareholders' Equity: Beginning balance..................................... Yen 313,821 Yen 327,843 Yen 425,671 $ 3,435 Increase, net......................................... 14,022 97,828 35,652 288 ----------- ----------- ----------- ------- Ending balance........................................ Yen 327,843 Yen 425,671 Yen 461,323 $ 3,723 =========== =========== =========== ======= Summary of Comprehensive Income: Net income............................................ Yen 25,621 Yen 30,642 Yen 34,157 $ 276 Other comprehensive income (loss)..................... (9,471) 26,133 5,969 48 ----------- ----------- ----------- ------- Comprehensive income.................................. Yen 16,150 Yen 56,775 Yen 40,126 $ 324 =========== =========== =========== ======= </TABLE> The accompanying notes to consolidated financial statements are an integral part of these statements. F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS ORIX Corporation and Subsidiaries For the Years Ended March 31, 1999, 2000 and 2001 <TABLE> Millions of Millions of yen U.S. dollars ----------------------------------------------- ------------ 1999 2000 2001 2001 ----------- ----------- ----------- ------------ <S> <C> <C> <C> <C> Cash Flows from Operating Activities: Net Income............................................ Yen 25,621 Yen 30,642 Yen 34,157 $ 276 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization....................... 88,914 93,203 103,673 837 Provision for doubtful receivables and possible loan losses....................................... 51,845 45,573 44,584 360 Increase in policy liabilities...................... 135,086 137,902 67,444 544 Deferred tax provision (benefit).................... (10,346) 6,464 8,111 65 Equity in net (income) loss of and (gain) loss on sales of affiliates............................ 3,727 838 (2,088) (17) Gains on sales of available-for-sale securities..... (5,276) (13,893) (7,698) (62) Write-downs of long-lived assets.................... 644 7,881 4,090 33 Write-downs of securities........................... 11,077 12,297 10,848 88 Increase in restricted cash and cash equivalents.... (2,250) (11,702) (2,831) (23) (Increase) decrease in other operating assets held for sales, including advance payments............. 667 (8,572) (28,285) (228) Increase in prepaid expenses........................ (3,523) (423) (4,514) (37) Increase (decrease) in accrued expenses............. (898) 11,886 4,116 33 Increase (decrease) in deposits from lessee......... (4,477) 1,828 13,629 110 Other, net.......................................... (4,057) 4,707 (8,114) (65) ----------- ----------- ----------- ------- Net cash provided by operating activities......... 286,754 318,631 237,122 1,914 ----------- ----------- ----------- ------- Cash Flows from Investing Activities: Purchases of lease equipment, including advance payments............................................ (1,034,091) (1,022,279) (883,061) (7,127) Principal payments received under direct financing leases.............................................. 894,692 710,485 640,680 5,171 Net proceeds from securitization of lease and loan receivables......................................... 224,960 185,530 215,494 1,739 Installment loans made to customers................... (706,758) (801,959) (740,639) (5,978) Principal collected on installment loans.............. 635,022 681,908 660,652 5,332 Proceeds from sales of operating lease assets......... 45,150 37,013 38,727 313 Investment in and dividends received from affiliates, net................................................. (1,592) (8,945) 1,242 10 Proceeds from sales of affiliates..................... 10,877 2,881 6,277 51 Purchases of available-for-sale securities............ (301,575) (263,679) (359,945) (2,905) Proceeds from sales of available-for-sale securities.. 182,338 177,157 152,022 1,227 Maturities of available-for-sale securities........... 38,345 18,403 64,105 517 Maturities of held-to-maturity securities............. - 3,089 - - Purchases of other securities......................... (54,902) (14,382) (37,153) (300) Proceeds from sales of other securities............... 46,242 3,759 9,763 79 Purchases of other operating assets................... (758) (5,389) (40,049) (323) Net increase in call loans............................ - - (9,500) (77) Other, net............................................ (3,186) 3,550 (4,267) (34) ----------- ----------- ----------- ------- Net cash used in investing activities............... (26,046) (292,858) (285,652) (2,305) ----------- ----------- ----------- ------- Cash Flows from Financing Activities: Repayment of short-term debt, net..................... (278,186) (248,386) (324,438) (2,619) Repayment of commercial paper, net.................... (76,143) (16,426) (68,759) (555) Proceeds from long-term debt.......................... 567,166 722,069 794,823 6,415 Repayment of long-term debt........................... (525,534) (604,360) (485,371) (3,917) Net increase in deposits due to customers............. 45,353 101,654 23,391 189 Issuance of common stock.............................. - 41,346 249 2 Purchases of treasury stock........................... (1,318) (1,811) (5,155) (42) Dividends paid........................................ (971) (968) (1,023) (8) Other, net............................................ 161 829 1,663 13 ----------- ----------- ----------- ------- Net cash used in financing activities............... (269,472) (6,053) (64,620) (522) ----------- ----------- ----------- ------- Effect of Exchange Rate Changes on Cash and Cash Equivalents.......................................... (7,161) (6,054) 2,605 21 ----------- ----------- ----------- ------- Net Increase (Decrease) in Cash and Cash Equivalents... (15,925) 13,666 (110,545) (892) Cash and Cash Equivalents at Beginning of Year......... 268,215 252,290 265,956 2,146 ----------- ----------- ----------- ------- Cash and Cash Equivalents at End of Year............... Yen 252,290 Yen 265,956 Yen 155,411 $ 1,254 =========== =========== =========== ======= </TABLE> The accompanying notes to consolidated financial statements are an integral part of these statements. F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENT ORIX Corporation and Subsidiaries 1. Significant Accounting and Reporting Policies In preparing the accompanying consolidated financial statements, ORIX Corporation (the Company) and its subsidiaries have complied with accounting principles generally accepted in the United States of America, modified for the accounting for stock splits (see (m)). Significant accounting and reporting policies are summarized as follows: (a) Basis of presenting financial statements The Company and its domestic subsidiaries maintain their books in conformity with Japanese income tax laws and accounting practices, which differ in certain respects from accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and reflect certain adjustments. The principal adjustments relate to accounting for direct financing leases (see (e)), impairment of long-lived assets and long-lived assets to be disposed of, adoption of the straight-line method of depreciation for operating lease equipment, deferral of life insurance policy acquisition cost and calculation of policy liabilities, and a reflection of the income tax effect on such adjustments. (b) Principles of consolidation The consolidated financial statements include the accounts of the Company and all of its subsidiaries. Investments in 20%-50% owned affiliates are accounted for by using the equity method. All significant intercompany accounts and transactions have been eliminated in consolidation. The excess of cost over the underlying equity at acquisition dates of investments in subsidiaries and affiliates is being amortized over periods ranging from 5 to 25 years. (c) Use of estimates The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (d) Foreign currencies translation The Company and its subsidiaries maintain their accounting records in their functional currency. Transactions in foreign currencies are recorded in the entity's functional currency based on the prevailing exchange rates on the transaction date. The financial statements of foreign subsidiaries and affiliates are translated into Japanese yen by applying the exchange rates in effect at the end of each fiscal year to all assets and liabilities. Income and expenses are translated at the average rates of exchange prevailing during the fiscal year. The currencies in which the operations of the foreign subsidiaries and affiliates are conducted are regarded as the functional currencies of these companies. Cumulative translation adjustments reflected in accumulated other comprehensive income (loss) in shareholders' equity are from translation of foreign currency financial statements into Japanese yen. (e) Recognition of revenues F-7
Direct financing leases--Direct financing leases consist of full-payout leases of various equipment, including office equipment, industrial machinery and transportation equipment (aircraft, vessels and automobiles). The excess of aggregate lease rentals plus the estimated residual value over the cost of the leased equipment constitutes the unearned lease income to be taken into income over the lease term. The estimated residual values represent estimated proceeds from the disposition of equipment at the time the lease is terminated. Certain direct lease origination costs ("initial direct costs") are being deferred and amortized over the lease term as a yield adjustment. The unamortized balance of initial direct costs is reflected as a component of investment in direct financing leases. Amortization of unearned lease income and direct finance lease origination cost is computed using the interest method. Installment loans--Interest income on installment loans is recognized on an accrual basis. Certain direct loan origination costs, offset by loan origination fees ("loan origination costs, net"), are being deferred and amortized over the contractual term of the loan as an adjustment of the related loan's yield using the interest method. Interest payments received on impaired loans are recorded as interest income unless the collection of the remaining investment is doubtful at which time payments received are recorded as reductions of principal (see Note 7). Non-accrual policy--Revenues on direct financing leases and installment loans are no longer accrued at the time when principal or interest is past due 180 days or more, or earlier, if management believes their collectibility is doubtful. Operating leases--Operating lease assets are recorded at cost and are depreciated over their estimated useful lives mainly on a straight-line basis. Gains or losses arising from dispositions of operating lease assets are included in operating lease revenues. Brokerage commissions and gains on investment securities--Brokerage commissions and gains on investment securities are recorded on a trade date basis. Life insurance--Life insurance premiums are reported as earned when due from policyholders. (f) Allowance for doubtful receivables on direct financing leases and possible loan losses The allowance for doubtful receivables on direct financing leases and possible loan losses is maintained at a level which, in the judgment of management, is adequate to provide for potential losses on lease and loan portfolios that can be reasonably anticipated. The allowance is increased by provisions charged to income and is decreased by charge-offs, net of recoveries. In evaluating the adequacy of the allowance, management considers various factors, including current economic conditions, credit concentrations or deterioration in pledged collateral, historical loss experience, delinquencies and non-accruals. Receivables are charged off when, in the opinion of management, the likelihood of any future collection is believed to be minimal. Under FASB Statement No. 114 ("Accounting by Creditors for Impairment of a Loan"), impaired loans shall be measured based on the present value of expected future cash flows discounted at the loan's original effective interest rate. As a practical expedient, impairment is measured based on the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. Certain loans, such as large groups of smaller-balance homogeneous loans (these include individual housing loans and card loans) and lease receivables, are exempt from this measuring. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance. (g) Investment in securities Trading securities are reported at fair value with unrealized gains and losses included in income. Available-for-sale securities are reported at fair value, and unrealized gains or losses are recorded through other comprehensive income (loss), net of applicable income taxes. In principle, the Company and its subsidiaries recognize losses related to securities for which the market price has been below the acquisition cost (or current carrying value if an adjustment has been made in the past) for more than one year or if there has been a significant F-8
deterioration in a bond issuer's credit rating, an issuer's default or similar event. However, if the Company and its subsidiaries have a significant long-term business relationship with the investee, management considers the probability of the market value recovering within the following 12 months. As part of this review, the investee's operating results, net asset value and future performance forecasts as well as general market conditions are taken into consideration. If management believes, based on this review, that the market value of an equity security may realistically be expected to recover, the loss will continue to be classified as temporary. Temporary declines in market value are recorded through other comprehensive income (loss), net of applicable income taxes. If after an additional 12 months the market value is still significantly below the acquisition cost, the loss will be considered other than temporary and the decline in market value charged to income. Held-to-maturity securities are recorded at amortized cost. (h) Securitized assets The Company and its subsidiaries have securitized and sold to investors certain lease receivables, loan receivables and investment in securities. In the securitization process, assets for securitization (the assets) are sold to Special-Purpose Entities which issue asset-backed securities to the investors. When the Company and its subsidiaries sell the assets in a securitization transaction, the carrying value of the assets is allocated to the portion retained and the portion sold, based on relative fair values. The Company and its subsidiaries recognize a gain or loss for the difference between the net proceeds received and the allocated carrying value of the assets sold. Any gain or loss from a securitization transaction is recorded as revenue of direct financing leases, interest on loans and investment securities, or brokerage commissions and gains on investment securities. Retained interests include subordinated interests, servicing assets, excess spread assets and cash collateral. Retained interests are initially recorded at allocated carrying value of the assets based on their fair value and are periodically reviewed for impairment. Fair values are estimated based on estimated future cash flows, factoring in expected credit loss, and discounted at a market rate of interest. (i) Derivative financial instruments Hedge criteria include demonstrating how the hedge will reduce risk, identifying the asset or liability being hedged and citing the time horizon being hedged. Trading instruments--The Company and its subsidiaries use futures, forward and option contracts and other similar types of contracts based on interest rates, foreign exchange rates, equity indices and other. Trading instruments used for trading purposes are recorded in the consolidated balance sheets at fair value at the reporting date. Gains, losses and unrealized changes in fair values from trading instruments are recognized in brokerage commissions and gains on investment securities in the fiscal year in which they occur. Risk management instruments--The Company and its subsidiaries primarily utilize foreign currency swaps and forward exchange contracts to hedge the exposure to foreign currency fluctuations associated with certain foreign currency assets and liabilities. Gains and losses in the forward exchange contracts and foreign currency swaps designated as hedges are recognized based on changes in the value of the related hedged asset or liability. Realized or unrealized gains or losses in instruments that hedge net capital exposures are recorded in shareholders' equity as foreign currency translation adjustments, which is a part of accumulated other comprehensive income (loss). All other foreign exchange contracts are marked to market and gains or losses are charged to earnings. The Company and its subsidiaries also enter into principally interest rate swap agreements and purchase interest rate option contracts (caps, floors and collars) to reduce interest rate risks and to modify the interest rate characteristics of financing transactions. For these hedging instruments, the accrual method of accounting is used where interest income or expense on the hedging instruments is accrued and recorded as an adjustment to the interest income or expense related to the hedged item. Premiums paid for interest rate options are deferred as other assets and amortized to interest income over the term of the options. F-9
If a hedging derivative contract is terminated early, any resulting gain or loss is charged to earnings. And if the assets or liabilities hedged are sold or otherwise disposed of, the related gains and losses on the terminated derivative contracts are recognized as a component of the gain or loss on disposition of the related assets or liabilities. Notional amounts and credit exposures of derivatives--The notional amounts of derivatives do not represent amounts exchanged by the parties and, thus, are not a measure of the exposure. The amounts exchanged are calculated on the basis of the notional amounts and the other terms of the derivatives contracts. The Company and its subsidiaries are exposed to credit-related losses in the event of non-performance by counterparties. (j) Income taxes Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. Deferred income tax expenses or credits are based on the changes in the asset or liability from period to period. Deferred income tax assets have been recognized on the net operating loss carryforwards of certain subsidiaries. (k) Policy liabilities Policy liabilities of the life insurance operations for future policy benefits are computed by the net level premium method, based upon estimated future investment yields, withdrawals, mortality and other assumptions appropriate at the time the policies were issued. The average rates of assumed investment yields are 3.7%, 3.3% and 3.0% for fiscal 1999, 2000 and 2001, respectively. (l) Capitalization of interest costs The Company and its subsidiaries capitalized interest costs of Yen 966 million, Yen 2,132 million and Yen 4,730 million ($38 million) in fiscal 1999, 2000 and 2001, respectively, related to specific long-term development projects. (m) Stock splits Stock splits have been accounted for by transferring an amount equivalent to the par value of the shares from additional paid-in capital to common stock as required by the Japanese Commercial Code. No accounting recognition is made for stock splits when common stock already includes a portion of the proceeds from shares issued at a price in excess of par value. This method of accounting is in conformity with accounting principles generally accepted in Japan. In the United States, stock splits in comparable circumstances are considered to be stock dividends and are accounted for by transferring from retained earnings amounts equal to the fair market value of the shares issued and by increasing additional paid-in capital by the excess of the market value over par value of the shares issued. Had such stock splits in prior years been accounted for in this manner, additional paid-in capital as of March 31, 2001 would have increased by approximately Yen 24,674 million, with a corresponding decrease in retained earnings; total shareholders' equity would have remained unchanged. A stock split implemented on May 19, 2000 was excluded from the above pro forma information because the stock split is not considered to be stock dividends under generally accepted accounting principles in the United States of America. (n) Cash and cash equivalents Cash and cash equivalents include cash on hand, deposits placed with bank and short-term highly liquid investments with original maturities of three months or less. (o) Restricted cash and cash equivalents Restricted cash and cash equivalents consist of cash and securities trusts for the segregation of assets under an investor protection fund and deposits related to servicing agreements. (p) Other operating assets F-10
Other operating assets consist primarily of business assets, including golf courses, hotels, training facilities and inventories. (q) Other receivables Other receivables consist primarily of payments made on behalf of lessees for property tax, maintenance fees and insurance premiums in relation to direct financing lease contracts and receivables from the sale of lease assets. (r) Advances Advances include advance payments made in relation to purchases of assets to be leased, advance and/or progress payments for acquisition of real estate for sale. (s) Office facilities Office facilities are stated at cost less accumulated depreciation. Depreciation is calculated on a declining-balance basis or straight-line basis over the estimated useful lives of the assets. Accumulated depreciation is Yen 17,666 million and Yen 18,849 million ($152 million) as of March 31, 2000 and 2001, respectively. (t) Other assets Other assets consist primarily of the unamortized excess of purchase prices over the net assets acquired in acquisitions of Yen 14,388 million and Yen 17,069 million ($138 million) as of March 31, 2000 and 2001, respectively, deferred insurance acquisition costs, which are amortized over the contract periods, and leasehold deposits. (u) Impairment of long-lived assets Long-lived assets and certain identifiable intangibles to be held and used by the Company and its subsidiaries are reviewed for impairment, whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. When the sum of undiscounted future cash flows expected to be generated by the assets is less than the carrying amount of the assets, impairment losses are recognized based on the fair value of the assets. During fiscal 1999, 2000 and 2001, the Company and its subsidiaries wrote down certain real estate development projects included in investment in operating leases, other operating assets and advances in the consolidated balance sheets to their fair values. And an impairment loss is recognized by using the amount by which the carrying amount of the asset exceeds the fair value of assets determined by external appraisal. (v) Advertising The costs of advertising are expensed as incurred. The total amounts charged to advertising expense in fiscal 1999, 2000 and 2001 are Yen 4,860 million, Yen 6,916 million and Yen 7,268 million ($59 million), respectively. (w) Financial statements presentation in U.S. dollars The translations of the Japanese yen amounts into U.S. dollars are included solely for the convenience of the readers, using the prevailing exchange rate at March 31, 2001, which was Yen 123.90 to $1.00. The convenience translations should not be construed as representations that the Japanese yen amounts have been, could have been, or could in the future be, converted into U.S. dollars at this or any other rate of exchange. (x) New accounting pronouncement On April 1, 2001, the Company and its subsidiaries adopted FASB Statement No. 133 ("Accounting for Derivative Instruments and Hedging Activities"), as amended by FASB Statement No. 137 ("Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133") and FASB Statement No. 138 ("Accounting for Certain Derivative Instruments and Certain Hedging Activities--an amendment of FASB Statement No. 133"). It 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 F-11
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 approximately Yen 9 billion ($73 million) unfavorable to accumulated other comprehensive income (loss), and was not significant to earnings. In September 2000, FASB Statement No. 140 ("Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities--a replacement of FASB Statement No. 125") was issued. It revises the standard for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of FASB Statement No. 125's provisions without reconsideration. The Company and its subsidiaries adopted the disclosure provisions related to the securitization of financial assets on March 31, 2001. All transactions entered into after March 31, 2001 will be accounted for in accordance with FASB Statement No. 140. Management anticipates this adoption will not have a significant effect on the Company and its subsidiaries' operations or financial position. (y) Earnings per share Basic earnings per share (EPS) is computed by dividing net income by the weighted average number of shares of common stock outstanding in each period and diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. EPS is adjusted for any stock split and stock dividend retroactively. (z) Reclassifications Certain amounts in the 1999 and 2000 consolidated financial statements have been reclassified to conform with the 2001 presentation. 2. Acquisitions On March 31, 1998, the Company agreed in principle to acquire all the shares of common stock of Yamaichi Trust & Bank, Ltd., the name of which was subsequently changed to ORIX Trust and Banking Corporation, from Yamaichi Securities Co., Ltd. on the closing date of April 28, 1998. On April 28, 1998, as scheduled, the Company completed the share acquisition of Yamaichi Trust & Bank, Ltd., which had approximately Yen 68 billion in assets. This acquisition was accounted for under the purchase method, and net assets acquired were Yen 13.5 billion. The balance sheet of Yamaichi Trust & Bank, Ltd. as of March 31, 1998 was included in the consolidated financial statements, as the acquisition was substantially completed by that date. The excess of the net assets acquired over the purchase price was approximately Yen 4.4 billion, which is being amortized over five years on a straight-line basis. 3. Cash Flow Information Cash payments for interest and income taxes during fiscal 1999, 2000 and 2001 are as follows: Millions of Millions of yen U.S. dollars ----------------------------------------- ------------ 1999 2000 2001 2001 ----------- ----------- ----------- ------------ Interest...... Yen 146,073 Yen 119,285 Yen 115,058 $ 929 Income taxes.. 6,904 17,785 12,778 103 4. Investment in Direct Financing Leases Investment in direct financing leases at March 31, 2000 and 2001 consists of the following: F-12
<TABLE> Millions of Millions of yen U.S. dollars -------------------------------- ------------ 2000 2001 2001 ------------- ------------- ------------ <S> <C> <C> <C> Minimum lease payments receivable............ Yen 1,889,224 Yen 1,779,295 $ 14,361 Estimated residual value..................... 49,965 48,896 394 Initial direct costs......................... 26,042 24,616 199 Unearned lease income........................ (220,278) (195,098) (1,575) ------------- ------------- -------- Yen 1,744,953 Yen 1,657,709 $ 13,379 ============= ============= ======== </TABLE> Minimum lease payments receivable (including guaranteed residual values) are due in periodic installments through 2022. At March 31, 2001, the amounts due in each of the next five years and thereafter are as follows: Millions of Year ending March 31 Millions of yen U.S. dollars - ---------------------------- --------------- ------------ 2002........................ Yen 676,196 $ 5,457 2003........................ 445,888 3,599 2004........................ 307,248 2,480 2005........................ 168,770 1,362 2006........................ 74,664 603 Thereafter.................. 106,529 860 ------------- -------- Total...................... Yen 1,779,295 $ 14,361 ============= ======== Gains and losses from the disposition of direct financing lease assets are not significant for fiscal 1999, 2000 and 2001. 5. Investment in Operating Leases Investment in operating leases at March 31, 2000 and 2001 consists of the following: <TABLE> Weighted average Millions of useful life Millions of yen U.S. dollars ----------- ---------------------------- ------------ Years 2000 2001 2001 ----------- ----------- ----------- ------------ <S> <C> <C> <C> <C> Transportation equipment....................... 12 Yen 234,831 Yen 251,650 $2,031 Measuring equipment and personal computers..... 3 109,533 138,088 1,115 Real estate and other.......................... 40 204,503 236,708 1,910 ----------- ----------- ------ 548,867 626,446 5,056 Accumulated depreciation....................... (165,018) (190,732) (1,539) ----------- ----------- ------ Net........................................... 383,849 435,714 3,517 Rental receivables............................. 13,727 15,457 124 ----------- ----------- ------ Yen 397,576 Yen 451,171 $3,641 =========== =========== ====== </TABLE> For fiscal 1999, 2000 and 2001, gains from the disposition of operating lease assets are Yen 2,356 million, Yen 4,144 million and Yen 7,883 million ($64 million), respectively, and are included in operating lease revenues in the consolidated statements of income. The operating lease contracts include non-cancelable lease terms ranging from one month to 20 years. The minimum future rentals on non-cancelable operating leases are as follows: F-13
Millions of Year Ending March 31 Millions of yen U.S. dollars - -------------------- --------------- ------------ 2002........................ Yen 42,601 $ 344 2003........................ 29,640 239 2004........................ 19,318 156 2005........................ 12,998 105 2006........................ 7,422 60 Thereafter.................. 11,595 93 ----------- ----- Total...................... Yen 123,574 $ 997 =========== ===== 6. Installment Loans The composition of installment loans by domicile and type of borrowers at March 31, 2000 and 2001 is as follows: <TABLE> Millions of Millions of yen U.S. dollars ------------------------------- ------------ 2000 2001 2001 ------------- ------------- ----------- <S> <C> <C> <C> Domestic borrowers: Consumers-- Housing loans............................. Yen 396,748 Yen 392,896 $ 3,171 Card loans................................ 121,272 181,215 1,462 Other..................................... 56,461 43,959 355 ------------- ------------- ------- 574,481 618,070 4,988 ------------- ------------- ------- Commercial-- Real estate related companies............. 203,537 222,818 1,798 Commercial and industrial companies....... 657,355 627,252 5,063 ------------- ------------- ------- 860,892 850,070 6,861 ------------- ------------- ------- 1,435,373 1,468,140 11,849 Foreign commercial, industrial and other borrowers.................................. 337,754 357,446 2,885 Loan origination costs, net.................. 18,312 20,925 169 ------------- ------------- ------- Yen 1,791,439 Yen 1,846,511 $14,903 ============= ============= ======= </TABLE> In principle, all domestic installment loans, except card loans, are made under agreements which require the borrower to provide collateral or guarantors. At March 31, 2001, the contractual maturities of installment loans for each of the next five years and thereafter are as follows: Millions of Year ending March 31 Millions of yen U.S. dollars - -------------------- --------------- ------------ 2002........................ Yen 540,411 $ 4,362 2003........................ 247,878 2,000 2004........................ 222,729 1,798 2005........................ 190,682 1,539 2006........................ 177,851 1,435 Thereafter.................. 446,035 3,600 ------------- ------- Total...................... Yen 1,825,586 $14,734 ============= ======= F-14
Included in interest on loans and investment securities in the consolidated statements of income is interest income on loans of Yen 88,003 million, Yen 83,321 million and Yen 85,441 million ($690 million) for fiscal 1999, 2000 and 2001, respectively. 7. Allowance for Doubtful Receivables on Direct Financing Leases and Possible Loan Losses Changes in the allowance for doubtful receivables on direct financing leases and possible loan losses for fiscal 1999, 2000 and 2001 are as follows: <TABLE> Millions of Millions of yen U.S. dollars --------------------------------------------- ------------ 1999 2000 2001 2001 ----------- ----------- ----------- ------------ <S> <C> <C> <C> <C> Beginning balance.................... Yen 145,741 Yen 132,606 Yen 136,939 $1,105 Provisions charged to income......... 51,845 45,573 44,584 360 Charge-offs.......................... (70,705) (37,697) (46,845) (378) Recoveries........................... 399 354 539 5 Other*............................... 5,326 (3,897) 5,860 47 ----------- ----------- ----------- ------ Ending balance....................... Yen 132,606 Yen 136,939 Yen 141,077 $1,139 =========== =========== =========== ====== </TABLE> *Other includes foreign currency translation adjustments and the effect of acquisitions. The balance of the allowance broken down into direct financing leases and installment loans at March 31, 2000 and 2001 are as follows: Millions of Millions of yen U.S. dollars ------------------------- ------------ 2000 2001 2001 ----------- ----------- ------------ Balance of allowance related to: Direct financing leases........ Yen 35,783 Yen 40,885 $ 330 Installment loans.............. 101,156 100,192 809 ----------- ----------- ------ Total........................ Yen 136,939 Yen 141,077 $1,139 =========== =========== ====== The recorded investments in loans considered impaired are Yen 125,921 million and Yen 120,090 million ($969 million) as of March 31, 2000 and 2001, respectively. Of these amounts, it was determined that a valuation allowance was required with respect to loans which had outstanding balances of Yen 83,408 million and Yen 73,636 million ($594 million) as of March 31, 2000 and 2001, respectively. The Company and its subsidiaries recorded a valuation allowance of Yen 51,791 million and Yen 47,037 million ($380 million) as of March 31, 2000 and 2001, respectively. This valuation allowance is included in the allowance for doubtful receivables on direct financing leases and possible loan losses in the accompanying consolidated balance sheets. The average recorded investments in impaired loans for fiscal 1999, 2000 and 2001 were Yen 170,838 million, Yen 128,658 million and Yen 123,715 million ($999 million), respectively. The Company and its subsidiaries recognized interest income on impaired loans of Yen 1,577 million, Yen 1,429 million and Yen 1,414 million ($11 million), and collected in cash interest on impaired loans of Yen 1,297 million, Yen 1,061 million and Yen 1,052 million ($8 million) in fiscal 1999, 2000 and 2001, respectively. As of March 31, 2000 and 2001, the Company and its subsidiaries suspended income recognition pursuant to its non-accrual policy on investment in direct financing leases of Yen 43,047 million and Yen 39,303 million ($317 million), and on installment loans other than impaired loans of Yen 84,550 million and Yen 77,544 million ($626 million), respectively. F-15
8. Investment in Securities Investment in securities at March 31, 2000 and 2001 consists of the following: Millions of Millions of yen U.S. dollars ------------------------- ------------ 2000 2001 2001 ----------- ----------- ------------ Trading securities............ Yen 390 Yen 581 $ 5 Available-for-sale securities. 689,638 841,409 6,791 Held-to-maturity securities... 11,404 13,005 105 Other securities.............. 56,949 87,163 703 ----------- ----------- ------ Yen 758,381 Yen 942,158 $7,604 =========== =========== ====== Gains and losses realized from the sale of trading securities and net unrealized holding gains or losses on trading securities are included in gains on investment securities (see Note 18). For fiscal 1999, 2000 and 2001, net unrealized holding losses on trading securities are Yen 1 million, Yen 3 million and Yen 24 million ($0 million), respectively. During fiscal 1999 and 2000, the Company and its subsidiaries sold available-for-sale securities for aggregate proceeds of Yen 182,338 million and Yen 177,157 million, resulting in gross realized gains of Yen 6,801 million and Yen 17,726 million and gross realized losses of Yen 1,525 million and Yen 3,833 million, respectively. During fiscal 2001, the Company and its subsidiaries sold available-for-sale securities for aggregate proceeds of Yen 152,022 million ($1,227 million), resulting in gross realized gains of Yen 9,773 million ($79 million) and gross realized losses of Yen 2,075 million ($17 million). The cost of the securities sold was based on the average cost of each such security held at the time of the sale. During fiscal 1999, 2000 and 2001, the Company and its subsidiaries charged losses on securities of Yen 11,077 million, Yen 12,297 million and Yen 10,848 million ($88 million), respectively, to income for declines in market value of available-for-sale securities where the decline was classified as other than temporary. Other securities consist mainly of non-marketable equity securities carried at cost and investment funds accounted for under the equity method. The amortized cost basis amounts, gross unrealized holding gains, gross unrealized holding losses and fair values of available-for-sale and held-to-maturity securities in each major security type at March 31, 2000 and 2001 are as follows: <TABLE> March 31, 2000 - -------------- Millions of yen -------------------------------------------------------- Gross Gross Amortized unrealized unrealized cost gains losses Fair value ----------- ----------- ------------ ----------- <S> <C> <C> <C> <C> Available-for-sale: Japanese and foreign government bond securities............ Yen 12,970 Yen 87 Yen (162) Yen 12,895 Japanese prefectural and foreign municipal bond securities. 32,304 781 (64) 33,021 Corporate debt securities.................................. 474,559 12,410 (4,552) 482,417 Mortgage-backed and other asset-backed securities.......... 54,271 1,643 (1,439) 54,475 Funds in trust............................................. 2,000 479 -- 2,479 Equity securities.......................................... 36,344 73,534 (5,527) 104,351 ----------- ---------- ----------- ----------- Yen 612,448 Yen 88,934 Yen (11,744) Yen 689,638 =========== ========== =========== =========== Held-to-maturity: Corporate debt securities.................................. Yen 11,404 Yen -- Yen -- Yen 11,404 ----------- ---------- ----------- ----------- Yen 11,404 Yen -- Yen -- Yen 11,404 =========== ========== =========== =========== </TABLE> F-16
<TABLE> March 31, 2001 - -------------- Millions of yen -------------------------------------------------------- Gross Gross Amortized unrealized unrealized cost gains losses Fair value ----------- ----------- ------------ ----------- <S> <C> <C> <C> <C> Available-for-sale: Japanese and foreign government bond securities.... Yen 24,926 Yen 560 Yen (55) Yen 25,431 Japanese prefectural and foreign municipal bond securities....................................... 38,030 1,665 (3) 39,692 Corporate debt securities.......................... 587,442 22,489 (5,786) 604,145 Mortgage-backed and other asset-backed securities.. 88,912 6,721 (1,397) 94,236 Funds in trust..................................... 5,995 -- (487) 5,508 Equity securities.................................. 39,085 36,602 (3,290) 72,397 ----------- ----------- ----------- ----------- Yen 784,390 Yen 68,037 Yen (11,018) Yen 841,409 =========== =========== =========== =========== Held-to-maturity: Japanese and foreign government bond securities.... Yen 141 Yen 1 Yen -- Yen 142 Corporate debt securities.......................... 12,864 -- -- 12,864 ----------- ----------- ----------- ----------- Yen 13,005 Yen 1 Yen -- Yen 13,006 =========== =========== =========== =========== <CAPTION> Millions of U.S. dollars -------------------------------------------------------- Gross Gross Amortized unrealized unrealized cost gains losses Fair value ----------- ----------- ------------ ----------- <S> <C> <C> <C> <C> Available-for-sale: Japanese and foreign government bond securities..... $ 201 $ 5 $ (0) $ 206 Japanese prefectural and foreign municipal bond securities........................................ 307 13 (0) 320 Corporate debt securities........................... 4,741 182 (47) 4,876 Mortgage-backed and other asset-backed securities... 718 54 (11) 761 Funds in trust...................................... 48 -- (4) 44 Equity securities................................... 316 295 (27) 584 ----------- ----------- ----------- ----------- $ 6,331 $ 549 $ (89) $ 6,791 =========== =========== =========== =========== Held-to-maturity: Japanese and foreign government bond securities..... $ 1 $ 0 $ -- $ 1 Corporate debt securities........................... 104 -- -- 104 ----------- ----------- ----------- ----------- $ 105 $ 0 $ -- $ 105 =========== =========== =========== =========== </TABLE> The following is a summary of the contractual maturities of debt securities classified as available-for-sale and held-to-maturity securities held at March 31, 2001: <TABLE> Millions of Yen Millions of U.S. dollars ------------------------------ ------------------------------- Amortized cost Fair value Amortized cost Fair value -------------- ---------- -------------- ---------- <S> <C> <C> <C> <C> Available-for-sale: Due within one year................ Yen 45,079 Yen 45,932 $ 364 $ 371 Due after one to five years........ 413,119 424,498 3,334 3,426 Due after five to ten years........ 181,519 187,407 1,465 1,513 Due after ten years................ 99,593 105,667 804 853 ----------- ----------- ------ ------- Yen 739,310 Yen 763,504 $5,967 $ 6,163 =========== =========== ====== ======= Held-to-maturity: Due within one year................ Yen 108 Yen 108 $ 1 $ 1 Due after one to five years........ 33 34 0 0 Due after ten years................ 12,864 12,864 104 104 ----------- ----------- ------ ------- Yen 13,005 Yen 13,006 $ 105 $ 105 =========== =========== ====== ======= </TABLE> F-17
Securities not due at a single maturity date, such as mortgage-backed securities, are included in the above table based on their final maturities. Certain borrowers may have the right to call or prepay obligations. This right may cause actual maturities to differ from the contractual maturities summarized above. Included in interest on loans and investment securities in the consolidated statements of income is interest income on investment securities of Yen 12,477 million, Yen 14,069 million and Yen 24,007 million ($194 million) for fiscal 1999, 2000 and 2001, respectively. 9. Securitization During fiscal 2001, the Company and its subsidiaries sold direct financing lease receivables and installment loans with pretax a gain of Yen 4,728 million ($38 million) through securitization transactions. The Company and its subsidiaries retained subordinated interests and cash collateral. Servicing assets or liabilities related to securitization transactions initiated during fiscal 2001 were not recorded, because the servicing fees adequately compensate the Company and its subsidiaries. The Company and its subsidiaries' retained interest are subordinate to the investor's interests. Their value is subject to credit, interest rate risk on the sold financial assets. The investors and Special-Purpose Entities have no recourse to our other assets for failure of debtors to pay. At March 31, 2001, a subsidiary held servicing assets amounted to Yen 99 million ($1 million) derived from previous years' securitization transactions, and amortized Yen 126 million ($1 million) during fiscal 2001. Economic assumptions used in measuring the retained interests related to securitization transactions completed during fiscal 2001 are as follows: Direct financing Installment leases loans ---------------- ----------- Expected credit loss....... 0.03%-0.35% 0.75% Discount rate.............. 3.20%-3.48% 2.69% Retained interests from securitization transactions that occurred in previous years and in fiscal 2001 are recorded in the consolidated balance sheet at March 31, 2001. The impacts of 10% and 20% adverse changes to the key economic assumptions on the fair value of retained interests as of March 31, 2001 are as follows: <TABLE> Millions of yen Millions of U.S. dollars -------------------------------------------- ------------------------------------------- Direct Direct financing Installment Investment in financing Installment Investment in leases loans securities leases loans securities ----------- ------------ ------------- --------- ----------- ------------- <S> <C> <C> <C> <C> <C> <C> Carrying value of retained interests.................. Yen 145,723 Yen 5,926 Yen 8,181 $ 1,176 $48 $66 Expected credit loss: +10%...................... 193 5 211 2 0 2 +20%...................... 384 10 436 3 0 4 Discount rate: +10%...................... 1,499 35 323 12 0 3 +20%...................... 2,968 68 625 24 1 5 </TABLE> These sensitivities are hypothetical and should be used with caution. As the amounts indicate, changes in fair value based on a 10 percent variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in the above table, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities. The summarized certain cash flows received from/(paid to) Special-Purpose Entities for all securitization activity that occurred in fiscal 2001 are as follows: F-18
Millions of Millions of yen U.S. dollars ----------- ------------ Proceeds from new securitization............... Yen 215,494 $1,739 Servicing fees received........................ 62 1 Repurchases of delinquent or ineligible assets. (27,399) (221) Quantitative information about delinquencies, net credit losses, and components of securitized financial assets and other assets managed together in fiscal 2001 and as of March 31, 2001 are as follows: <TABLE> Millions of yen ----------------------------------------------- Principal amount of Total principal receivables 90 amount of days or more Net credit receivables past due losses --------------- -------------- ---------- <S> <C> <C> <C> Type of assets: Direct financing leases.................... Yen 1,968,872 Yen 53,515 Yen 20,679 Installment loans.......................... 1,887,596 84,827 25,627 ------------- ----------- ----------- Total assets managed or securitized......... 3,856,468 Yen 138,342 Yen 46,306 ============= =========== =========== Less: assets securitized................... (352,248) ------------- Assets held in portfolio.................... Yen 3,504,220 ============= </TABLE> <TABLE> Millions of U.S. dollars ----------------------------------------------- Principal amount of Total principal receivables 90 amount of days or more Net credit receivables past due losses --------------- -------------- ---------- <S> <C> <C> <C> Type of assets: Direct financing leases...................... $ 15,891 $ 432 $167 Installment loans............................ 15,234 685 206 -------- ------- ---- Total assets managed or securitized........... 31,125 $ 1,117 $373 ======== ======= ==== Less: assets securitized..................... (2,843) -------- Assets held in portfolio...................... $ 28,282 ======== </TABLE> The portion accounted for as off-balance-sheet assets by securitizing investment in securities is Yen 49,361 million ($398 million) as of March 31, 2001 which are not included in above table. In fiscal 1999, 2000 and 2001, subsidiaries entered into other lease receivable securitization programs that are not accounted for as a sale. The payables under these securitization programs of Yen 72,210 million ($583 million) are included in long-term debt, the minimum lease payments receivable of Yen 71,886 million ($580 million) and cash collateral of Yen 6,022 million ($49 million) are included in investment in direct financing leases and other assets in the consolidated balance sheets as of March 31, 2001, respectively. 10. Investments in Affiliates Investment in affiliates at March 31, 2000 and 2001 consists of the following: Millions of Millions of yen U.S.dollars ------------------------ ----------- 2000 2001 2001 ---------- ---------- ----------- Common stock, at equity value. Yen 51,869 Yen 51,203 $ 413 Loans......................... 11,443 11,952 97 ---------- ---------- ----- Yen 63,312 Yen 63,155 $ 510 ========== ========== ===== F-19
Certain Asia and Oceania affiliates are listed on stock exchanges. The aggregate investment in and quoted market value of those affiliates amounted to Yen 1,040 million and Yen 644 million as of March 31, 2000, respectively, and Yen 1,172 million ($9 million) and Yen 892 million ($7 million) as of March 31, 2001, respectively. In fiscal 1999, 2000 and 2001, the Company and its subsidiaries received dividends from affiliates of Yen 825 million, Yen 1,091 million and Yen 421 million ($3 million), respectively. During fiscal 1999, the Company wrote down its investment in Korea Development Leasing Corporation (KDLC) to zero, and unrealized loss of cumulative translation adjustments of Yen 5,205 million was charged to income as KDLC had negative equity and the Company was not in a position to exert influence over KDLC's operations. During fiscal 2000, the Company reduced its shareholding in KDLC from 26% to 1% and increased its shareholding in Banc One Mortgage Capital Markets, LLC from 45% to 100%, the name of which was subsequently changed to ORIX Real Estate Capital Markets, LLC (ORECM). During fiscal 2001, the Company sold its share of Bradesco Leasing S.A. Arrendamento Mercantil (BL 25% owned). Consequently, the major affiliates accounted for by the equity method which are contained in the following combined and condensed financial information are ORECM (in fiscal 1999), BL (in fiscal 1999 and 2000) and Stockton Holdings Limited (30% owned) (in fiscal 1999 and 2000). In fiscal 2001, there is no significant affiliate, either individually or in combined basis, to be disclosed. Millions of yen -------------------------- 1999 2000 ----------- ----------- Operations: Total revenues..................... Yen 50,453 Yen 54,563 Income before income taxes......... 13,235 2,293 Net income......................... 12,177 1,532 Financial position: Total assets....................... 393,589 356,742 Total liabilities.................. 296,210 276,799 Shareholders' equity............... 97,379 79,943 The Company had no significant transactions with these companies. 11. Short-Term and Long-Term Debt Short-term debt consists of notes payable to banks, bank overdrafts and commercial paper. The composition of short-term debt and the weighted average interest rate on short-term debt at March 31, 2000 and 2001 are as follows: <TABLE> March 31, 2000 -------------------------------- Weighted Millions of yen average rate --------------- ------------ <S> <C> <C> Short-term debt in Japan, mainly from banks............ Yen 674,708 1.5% Short-term debt outside Japan, mainly from banks....... 260,617 6.1% Commercial paper in Japan.............................. 851,223 0.2% Commercial paper outside Japan......................... 126,213 6.7% ------------- Yen 1,912,761 1.9% ============= </TABLE> <TABLE> March 31, 2001 ----------------------------------------------------- Millions of Weighted Millions of yen U.S. dollars averaged rate --------------- ------------ ------------- <S> <C> <C> <C> Short-term debt in Japan, mainly from banks............ Yen 331,963 $ 2,679 2.5% Short-term debt outside Japan, mainly from banks....... 315,498 2,547 5.2% Commercial paper in Japan.............................. 910,751 7,351 0.4% F-20
<CAPTION> March 31, 2001 ----------------------------------------------------- Millions of Weighted Millions of yen U.S. dollars averaged rate --------------- ------------ ------------- <S> <C> <C> <C> Commercial paper outside Japan......................... 3,860 31 5.8% ------------- -------- Yen 1,562,072 $ 12,608 1.8% ============= ======== </TABLE> In fiscal 2000, the Company obtained short-term committed credit lines of Yen 294,500 million in Japan to enhance liquidity as stipulated in the Commitment Line Law that came into effect in March 1999. In fiscal 2001, the Company arranged a Yen 74,560 million ($602 million) multicurrency global commitment line for the Company and certain overseas subsidiaries. Total committed lines for the Company and its subsidiaries were Yen 549,525 million and Yen 795,489 million ($6,420 million) at March 31, 2000 and 2001, respectively, and of these lines, Yen 509,379 million and Yen 726,888 million ($5,867 million) were available at March 31, 2000 and 2001, respectively. Of the available committed lines Yen 61,302 million and Yen 37,762 million ($305 million) were long-term committed credit lines at March 31, 2000 and 2001, respectively. While Yen 436,505 million and Yen 521,695 million ($4,211 million) of the total committed lines at March 31, 2000 and 2001 were for commercial paper backup purposes, no borrowings have been made under these lines. Long-term debt at March 31, 2000 and 2001 consists of the following: <TABLE> March 31, 2000 ------------------------------- Due Millions of yen --------- --------------- <S> <C> <C> Banks: Fixed rate: 1.6% to 9.9%............................................ 2001-2007 Yen 151,821 Floating rate: principally based on LIBOR plus 0.0% to 0.6%......... 2001-2009 147,788 Insurance companies and others: Fixed rate: 0.8% to 9.4%............................................ 2001-2009 330,219 Floating rate: principally based on LIBOR plus 0.0% to 0.5%......... 2001-2008 167,448 Unsecured 1.1% to 8.5% bonds......................................... 2001-2013 712,553 Unsecured 0.4% convertible notes..................................... 2005 40,000 Unsecured 0.1% to 1.9% bonds with warrants........................... 2002-2004 8,700 Unsecured 0.0% to 8.2% notes under medium-term note program.......... 2001-2010 328,221 0.7% to 7.8% payables under securitized lease receivables............ 2001-2004 56,034 ------------- Yen 1,942,784 ============= </TABLE> F-21
<TABLE> March 31, 2001 ------------------------------------------------ Millions of Due Millions of yen U.S. dollars --------- --------------- ------------ <S> <C> <C> <C> Banks: Fixed rate: 1.5% to 9.3%......................................... 2002-2012 Yen 211,746 $ 1,709 Floating rate: principally based on LIBOR plus 0.0% to 0.8%...... 2002-2009 323,473 2,611 Insurance companies and others: Fixed rate: 0.8% to 9.0%......................................... 2002-2009 361,900 2,920 Floating rate: principally based on LIBOR plus 0.0% to 0.7%...... 2002-2008 215,952 1,743 Unsecured 0.5% to 3.1% bonds...................................... 2002-2013 745,000 6,013 Unsecured 0.4% convertible notes.................................. 2005 40,000 323 Unsecured 0.1% to 1.9% bonds with warrants........................ 2002-2005 10,500 85 Unsecured 0.0% to 8.2% notes under medium-term note program....... 2002-2011 349,378 2,820 1.0% to 7.8% payables under securitized lease receivables......... 2002-2009 72,210 583 ------------- -------- Yen 2,330,159 $ 18,807 ============= ======== </TABLE> The repayment schedule for the next five years and thereafter for long-term debt at March 31, 2001 is as follows: <TABLE> Millions of U.S. Year ending March 31 Millions of yen dollars - -------------------------- --------------- ---------------- <S> <C> <C> 2002...................... Yen 624,838 $ 5,043 2003...................... 474,503 3,830 2004...................... 479,933 3,874 2005...................... 392,692 3,169 2006...................... 219,330 1,770 Thereafter................ 138,863 1,121 ------------- -------- Total.................... Yen 2,330,159 $ 18,807 ============= ======== </TABLE> The agreements related to debt payable to banks provide that the banks under certain circumstances may request additional security for loans and have the rights to offset cash deposited against any short-term or long-term debt that becomes due, and in case of default and certain other specified events, against all other debt payable to the banks. Whether such provisions can be enforced will depend upon the factual circumstances. In addition to the minimum lease payments receivable related to the payables under securitized lease receivables described in Note 9, the short-term and long-term debt payable to financial institutions are secured by the following assets as of March 31, 2001: <TABLE> Millions of Millions of yen U.S. dollars --------------- ------------ <S> <C> <C> Time deposits............................................ Yen 7,895 $ 64 Minimum lease payments, loans and future rentals......... 25,726 207 Investment in securities................................. 53,435 431 Other operating assets and office facilities, net........ 17,555 142 ----------- ----- Yen 104,611 $ 844 =========== ===== </TABLE> In addition, under agreements with customers on brokerage business, customers' securities of Yen 3,023 million ($24 million) at market value are pledged as collateral for the short-term debt as of March 31, 2001. Loan agreements relating to short-term and long-term debt from commercial banks and certain insurance companies provide that minimum lease payments and installment loans are subject to pledges as collateral against these debts at any time if requested by the lenders. To date, the Company has not received any such requests from the lenders. F-22
Long-term debt of Yen 1,539 million ($12 million) is guaranteed by commercial banks and an insurance company as of March 31, 2001. 12. Deposits Deposits at March 31, 2000 and 2001, consist of the following: Millions of Millions of yen U.S. dollars --------------------------- ------------ 2000 2001 2001 ----------- ----------- ------------ Time deposits...... Yen 148,162 Yen 152,321 $1,229 Other deposits..... 6,761 25,993 210 ----------- ----------- ------ Total............. Yen 154,923 Yen 178,314 $1,439 =========== =========== ====== The balances of time deposits, including CDs, issued in amounts of Yen 10 million ($81 thousand) or more were Yen 127,911 million and Yen 126,781 million ($1,023 million) at March 31, 2000 and 2001, respectively. The maturity schedule of time deposits at March 31, 2001 is as follows: Millions of Year ending March 31 Millions of yen U.S. dollars - ---------------------------- --------------- ------------ 2002........................ Yen 119,290 $ 963 2003........................ 9,134 73 2004........................ 14,361 116 2005........................ -- -- 2006........................ 9,536 77 ----------- ------- Total...................... Yen 152,321 $ 1,229 =========== ======= F-23
13. Income Taxes Income before income taxes and the provision for income taxes in fiscal 1999, 2000 and 2001 are as follows: <TABLE> Millions of Millions of yen U.S. dollars ------------------------------------------ ------------ 1999 2000 2001 2001 ---------- ---------- ---------- ------------ <S> <C> <C> <C> <C> Income before income taxes: Domestic........................ Yen 15,728 Yen 33,245 Yen 56,076 $ 452 Foreign......................... 11,587 18,803 3,160 26 ---------- ---------- ---------- ------ Yen 27,315 Yen 52,048 Yen 59,236 $ 478 ========== ========== ========== ====== Provision for income taxes: Current-- Domestic........................ Yen 5,633 Yen 6,803 Yen 12,648 $ 102 Foreign......................... 6,407 8,139 4,320 35 ---------- ---------- ---------- ------ 12,040 14,942 16,968 137 ---------- ---------- ---------- ------ Deferred-- Domestic........................ (14,153) 7,913 13,080 105 Foreign......................... 3,807 (1,449) (4,969) (40) ---------- ---------- ---------- ------ (10,346) 6,464 8,111 65 ---------- ---------- ---------- ------ Provision for income taxes........ Yen 1,694 Yen 21,406 Yen 25,079 $ 202 ========== ========== ========== ====== </TABLE> The normal income tax rate in Japan was approximately 48%, 42% and 42% in fiscal 1999, 2000 and 2001, respectively. The effective income tax rate is different from the normal income tax rate primarily because of certain permanent non-deductible expenses and inclusion in income of equity in net income of affiliates. Under the provisions of FASB Statement No. 109 ("Accounting for Income Taxes"), the effect of a change in tax laws or rates is included in income in the period the change is enacted and includes a cumulative recalculation of deferred tax balances based on the new tax laws or rates. The 1998 tax reform, enacted on March 31, 1998 (effective from April 1, 1998), decreased the normal income tax rate to approximately 48%. And the 1999 tax reform, enacted on March 31, 1999 (effective from April 1, 1999), decreased the normal income tax rate to approximately 42%. Reconciliations of the differences between tax provision computed at the normal rate and consolidated provisions for income taxes in fiscal 1999, 2000 and 2001 are as follows: <TABLE> Millions of Millions of yen U.S. dollars ------------------------------------------ ------------ 1999 2000 2001 2001 ---------- ---------- ---------- ------------ <S> <C> <C> <C> <C> Income before income taxes............. Yen 27,315 Yen 52,048 Yen 59,236 $ 478 ========== ========== ========== ===== Tax provision computed at normal rate.. Yen 13,029 Yen 21,860 Yen 24,879 $ 201 Increases (reductions) in taxes due to: Application of the equity method...... 2,846 150 (383) (3) Permanent non-deductible expenses..... 858 677 575 4 Effect of a change in tax rates....... (14,582) -- -- -- Amortization of goodwill.............. (459) (115) 147 1 Effect of lower tax rate than normal in a domestic subsidiary............ (267) (373) (407) (3) Other, net............................ 269 (793) 268 2 ---------- ---------- ---------- ----- Provision for income taxes............. Yen 1,694 Yen 21,406 Yen 25,079 $ 202 ========== ========== ========== ===== </TABLE> Total income taxes recognized in fiscal 1999, 2000 and 2001 are as follows: F-24
<TABLE> Millions of Millions of yen U.S. dollars ------------------------------------------ ------------ 1999 2000 2001 2001 ---------- ---------- ---------- ------------ <S> <C> <C> <C> <C> Provision for income taxes............ Yen 1,694 Yen 21,406 Yen 25,079 $ 202 Income tax on other comprehensive income (loss): Net unrealized gains (losses) on investment in securities........... 1,414 28,435 (8,809) (71) Minimum pension liability adjustment. -- (2,515) (859) (7) Cumulative translation adjustments... (528) (958) 1,556 13 --------- ---------- ---------- ----- Total income taxes.................... Yen 2,580 Yen 46,368 Yen 16,967 $ 137 ========= ========== ========== ===== </TABLE> The tax effects of temporary differences giving rise to the deferred tax assets and liabilities at March 31, 2000 and 2001 are as follows: <TABLE> Millions of Millions of yen U.S. dollars -------------------------- ------------ 2000 2001 2001 ---------- ---------- ------------ <S> <C> <C> <C> Assets: Net operating loss carryforwards.................... Yen 14,184 Yen 13,219 $ 107 Allowance for doubtful receivables on direct financing leases and possible loan losses......... 30,181 30,904 249 Installment loans................................... 3,360 2,863 23 Policy liabilities.................................. 704 799 6 Accrued expenses.................................... 4,381 11,247 91 Other............................................... 2,218 2,866 23 ----------- ----------- ------- Yen 55,028 Yen 61,898 $ 499 ----------- ----------- ------- Liabilities: Investment in direct financing leases............... Yen 122,591 Yen 121,903 $ 984 Investment in operating leases...................... 12,386 17,382 140 Investment in securities............................ 32,616 22,463 181 Deferred life insurance acquisition costs........... 6,856 10,074 81 Undistributed earnings.............................. 11,623 12,333 100 Other............................................... 2,950 11,167 90 ----------- ----------- ------- Yen 189,022 Yen 195,322 $ 1,576 ----------- ----------- ------- Net deferred tax liability.......................... Yen 133,994 Yen 133,424 $ 1,077 =========== =========== ======= </TABLE> Certain subsidiaries have recognized deferred tax assets from net operating loss carryforwards totaling Yen 36,504 million ($295 million) as of March 31, 2001, which expire as follows: Millions of Year ending March 31 Millions of yen U.S. dollars - -------------------- --------------- ------------ 2002....................... Yen 1,036 $ 8 2003....................... 3,132 25 2004....................... 4,534 37 2005....................... 5,913 48 2006....................... 1,698 14 Thereafter................. 20,191 163 ---------- ----- Total................ Yen 36,504 $ 295 ========== ===== Undistributed earnings of certain foreign subsidiaries for which deferred income taxes were not provided amounted to Yen 65,208 million ($526 million) as of March 31, 2001. Since the management decided that the undistributed earnings are permanently reinvested, no provision for income taxes has been provided. F-25
Net deferred tax assets and liabilities at March 31, 2000 and 2001 are reflected in the accompanying consolidated balance sheets under the following captions: Millions of Millions of yen U.S. dollars -------------------------- ------------ 2000 2001 2001 ----------- ----------- ------------ Other assets................ Yen 1,224 Yen 2,006 $ 16 Income taxes: Deferred...... 135,218 135,430 1,093 ----------- ----------- ------- Net deferred tax liability.. Yen 133,994 Yen 133,424 $ 1,077 =========== =========== ======= 14. Pension Plans The Company and certain subsidiaries have trusted contributory and non-contributory funded pension plans covering substantially all of their employees other than directors and corporate auditors. Under the plans, employees are entitled to lump-sum payments at the time of termination of their employment or to pension payments. The amounts of such payments are determined on the basis of length of service and remuneration at the time of termination. The Company and its subsidiaries' funding policy is to contribute annually the amounts actuarially determined. Assets of the plans are invested primarily in interest-bearing securities and marketable equity securities. The funded status of the defined benefit pension plans, a substantial portion of which consists of domestic pension plans, as of March 31, 2000 and 2001 is as follows: <TABLE> Millions of Millions of yen U.S. dollars -------------------------- ------------ 2000 2001 2001 ---------- ---------- ------------ <S> <C> <C> <C> Change in benefit obligation: Benefit obligation at beginning of year................ Yen 30,805 Yen 46,065 $ 372 Service cost........................................... 2,360 3,329 27 Interest cost.......................................... 1,460 1,496 12 Plan participants' contributions....................... 458 567 5 Plan amendments........................................ 218 (560) (5) Actuarial loss......................................... 12,145 2,997 24 Foreign currency exchange rate change.................. (325) 460 4 Benefits paid.......................................... (986) (1,201) (10) Plan curtailment....................................... (70) -- -- ---------- ---------- ----- Benefit obligation at end of year....................... Yen 46,065 Yen 53,153 $ 429 ========== ========== ===== Change in plan assets: Fair value of plan assets at beginning of year.......... Yen 30,936 Yen 38,823 $ 313 Actual return on plan assets............................ 3,716 (2,576) (21) Employer contribution................................... 4,844 8,157 66 Plan participants' contributions........................ 458 567 4 Benefits paid........................................... (840) (1,050) (8) Foreign currency exchange rate change................... (291) 358 3 ---------- ---------- ----- Fair value of plan assets at end of year................ Yen 38,823 Yen 44,279 $ 357 ========== ========== ===== The funded status of the plans: Funded status.......................................... Yen (7,242) Yen (8,874) $ (71) Unrecognized prior service cost........................ 253 (248) (2) Unrecognized net actuarial loss........................ 17,232 23,310 188 Unrecognized net transition obligation................. 472 432 3 ---------- ---------- ----- Net amount recognized................................ Yen 10,715 Yen 14,620 $ 118 ========== ========== ===== F-26
<CAPTION> Millions of Millions of yen U.S. dollars -------------------------- ------------ 2000 2001 2001 ---------- ---------- ------------ <S> <C> <C> <C> Amount recognized in the consolidated balance sheets consists of: Prepaid benefit cost................................... Yen 10,077 Yen 14,601 $ 118 Accrued benefit liability.............................. (5,564) (8,226) (66) Intangible asset....................................... 202 187 1 Accumulated other comprehensive income, gross of tax... 6,000 8,058 65 ---------- ---------- ----- Net amount recognized................................ Yen 10,715 Yen 14,620 $ 118 ========== ========== ===== </TABLE> The aggregate projected benefit obligations, aggregate accumulated benefit obligations and aggregate fair values of plan assets for the plans with the accumulated benefit obligations in excess of plan assets were Yen 19,829 million, Yen 16,230 million and Yen 10,899 million, respectively, at March 31, 2000, and Yen 23,681 million ($191 million), Yen 19,621 million ($158 million) and Yen 11,522 million ($93 million), respectively, at March 31, 2001. Net pension cost of the plans for fiscal 1999, 2000 and 2001 consists of the following: <TABLE> Millions of Millions of yen U.S. dollars ------------------------------------------ ------------ 1999 2000 2001 2001 ---------- ---------- ---------- ------------ <S> <C> <C> <C> <C> Service cost............................ Yen 2,140 Yen 2,360 Yen 3,329 $ 27 Interest cost........................... 1,297 1,460 1,496 12 Expected return on plan assets.......... (1,369) (1,565) (1,323) (11) Amortization of unrecognized transition obligation............................ 45 35 29 0 Amortization of unrecognized net actuarial loss........................ 175 237 818 7 Amortization of unrecognized prior service cost.......................... 2 10 (26) (0) Plan curtailment........................ -- (43) -- -- --------- --------- --------- ---- Net periodic pension cost.............. Yen 2,290 Yen 2,494 Yen 4,323 $ 35 ========= ========= ========= ==== </TABLE> Significant assumptions of domestic and foreign pension plans used to determine these amounts for fiscal 1999, 2000 and 2001 are as follows: Domestic 1999 2000 2001 - -------- ---- ---- ---- Discount rate.................................... 4.4% 3.0% 3.0% Rate of increase in compensation levels.......... 2.6% 2.6% 2.1% Expected long-term rate of return on plan assets. 4.4% 3.0% 3.0% Foreign 1999 2000 2001 - ------- ---- ---- ---- Discount rate.................................... 6.8% 7.8% 7.3% Rate of increase in compensation levels.......... 4.0% 5.0% 4.5% Expected long-term rate of return on plan assets. 9.3% 9.3% 9.3% In addition, directors and corporate auditors of the Company and certain subsidiaries, and executive officers of the Company, receive lump-sum payments upon termination of their services under unfunded termination plans. The payments to directors and corporate auditors are subject to shareholders' approval. The amount required based on length of services and remuneration to date under these plans is fully accrued. Total provisions charged to income for all the plans including the defined benefit plans are Yen 2,942 million, Yen 3,431 million and Yen 5,119 million ($41 million) in fiscal 1999, 2000 and 2001, respectively. F-27
15. Stock-Based Compensation The Company has introduced stock option plans for directors, executive officers and key employees. Under the plans, the right is granted to purchase the treasury shares of the Company at a certain purchase price. The exercise price was determined based on a formula linked to a stock price of the shares on the Tokyo Stock Exchange. Under the stock option plans in fiscal 1999 and 2000, the options vest 100% on the grant date. Under the stock option plan in fiscal 2001, the option vest 100% over three years' service periods starting July 2000. Exercisable periods are 9.75 years, 9.7 years and 10 years from the grant date in 1999, 2000 and 2001, respectively. The Company acquired 146,000, 145,000 and 316,700 shares of its common stock for the plan during fiscal 1999, 2000 and 2001, respectively. The Board of Directors intends to obtain approval from the shareholders, at the next general meeting, to be held on June 28, 2001, for an additional grant of stock options for 300,900 shares during fiscal 2002. FASB Statement No.123 ("Accounting for Stock-Based Compensation") defines a fair value based method of accounting for a stock option. This statement gives entities a choice of recognizing related compensation expense by adopting the new fair value method or to continue to measure compensation using the intrinsic value approach under APB Opinion No. 25 ("Accounting for Stock Issued to Employees"), the former standard. The Company chose to use the measurement prescribed by APB Opinion No. 25 and recognized no compensation expense in fiscal 1999, 2000 and 2001. Had compensation cost for the Company's stock option plans been determined consistent with FASB Statement No. 123, net income and earnings per share in fiscal 1999, 2000 and 2001 would have been as follows: <TABLE> 1999 2000 2001 2001 ---------- ---------- ---------- ------ <S> <C> <C> <C> <C> Net income (millions of yen and millions of U.S. dollars).. Yen 25,102 Yen 29,761 Yen 33,694 $ 272 Basic earnings per share (yen and U.S. dollars).......................... Yen 323.74 Yen 374.19 Yen 412.11 $ 3.33 Diluted earnings per share (yen and U.S. dollars).......................... Yen 323.74 Yen 365.66 Yen 395.57 $ 3.19 </TABLE> The fair value of these stock options was estimated using the Black-Scholes option pricing model under the following assumptions: 1999 2000 2001 --------- --------- --------- Grant-date fair value... Yen 3,552 Yen 6,078 Yen 5,847 ($47.19) Expected life........... 10Years 8.55Years 9.25Years Risk-free rate.......... 0.81% 1.72% 1.15% Expected volatility..... 29.74% 35.53% 30.79% Expected dividend yield. 0.161% 0.149% 0.096% F-28
The following table summarizes information about stock option activity for fiscal 1999, 2000 and 2001: <TABLE> Weighted average exercise price -------------------------------- Number of shares Yen U.S. dollars ---------------- ---------- ------------ <S> <C> <C> <C> Outstanding at March 31, 1998.......... 168,000 Yen 7,665 Granted................................ 146,000 7,784 Exercised.............................. -- -- Forfeited or expired................... -- -- Outstanding at March 31, 1999.......... 314,000 7,720 Granted................................ 145,000 10,393 Exercised.............................. 57,000 7,686 Forfeited or expired................... -- -- Outstanding at March 31, 2000.......... 402,000 8,689 Granted................................ 316,700 16,272 $ 131.33 Exercised.............................. 35,900 7,706 62.20 Forfeited or expired................... 1,300 16,272 131.33 Outstanding at March 31, 2001.......... 681,500 Yen 12,250 $ 98.87 </TABLE> Exercisable options are 314,000, 402,000 and 366,100 at March 31, 1999, 2000 and 2001, respectively. Exercise prices of all the granted options were adjusted on April 1, 2000 for a 1.2-for-1 stock split implemented on May 19, 2000. Summary information about the Company's stock options outstanding and exercisable at March 31, 2001 is as follows: <TABLE> Outstanding Exercisable -------------------------------------------------------- --------------------------------- Range of Exercise Weighted average Weighted average Weighted average Price remaining life exercise price exercise price - ------------------- Number of ---------------- ---------------- Number of ---------------- Yen shares Years Yen shares Yen - --------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Yen 7,665-Yen 10,000 221,000 4.60 Yen 7,731 221,100 Yen 7,731 10,001- 13,000 145,000 8.25 10,393 145,000 10,393 13,001- 16,272 315,400 9.25 16,272 -- -- - --------------------------------------------------------------------------------------------------------------------- Yen 7,665-Yen 16,272 681,500 7.53 Yen 12,250 366,100 Yen 8,786 - --------------------------------------------------------------------------------------------------------------------- Outstanding Exercisable -------------------------------------------------------- --------------------------------- Range of Exercise Weighted average Weighted average Weighted average Price remaining life exercise price exercise price - ------------------- Number of ---------------- ---------------- Number of ---------------- U.S. dollars shares Years U.S. dollars shares U.S. dollars - --------------------------------------------------------------------------------------------------------------------- $ 61.86 - $ 80.71 221,000 4.60 $ 62.40 221,100 $ 62.40 80.72 - 104.92 145,000 8.25 83.88 145,000 83.88 104.93 - 131.33 315,400 9.25 131.33 -- -- - --------------------------------------------------------------------------------------------------------------------- $ 61.86 - $131.33 681,500 7.53 $ 98.87 366,100 $ 70.91 </TABLE> The Company has also introduced warrant plans to corporate auditors and key employees (not including employees who were option holders under the stock option plan) of the Company and directors of its certain subsidiaries since fiscal 1998. Under the plans, the Company granted warrants to purchase 315,593 shares, 302,484 shares and 126,143 shares by repurchasing warrants attached to bonds with warrants issued by the Company during fiscal 1999, 2000 and 2001, respectively. Grant-date fair value was Yen 510, Yen 1,100 and Yen 1,410 ($11.38), and exercise price was Yen 6,885, Yen 11,291 and Yen 14,090 ($113.72) in fiscal 1999, 2000 and 2001, respectively. Exercise price of the warrants granted in fiscal 1998 has F-29
been adjusted since November 14, 1998, by issuance of bonds with warrants in fiscal 1999 by the Company. Exercise prices of all the granted warrants were adjusted on April 1, 2000, for a 1.2-for-1 stock split implemented on May 19, 2000. Subject to the final approval by the Board of Directors of the Company, the Company intends to introduce a warrant plan in fiscal 2002. Under the plan, warrants to purchase approximately 123,900 shares will be granted to corporate auditors of the Company, directors, corporate auditors and key employees of its certain subsidiaries by repurchasing warrants attached to bonds with warrants to be issued by the Company during fiscal 2002. The exercise price of the warrants will be determined based on a formula linked to a stock price when the terms for issuing the bonds with warrants are determined. 16. Accumulated Other Comprehensive Income (Loss) Effective April 1, 1998, the Company and its subsidiaries adopted FASB Statement No. 130 ("Reporting Comprehensive Income"), which established standards for the reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. Comprehensive income (loss) and its components have been reported, net of tax, in the consolidated statements of shareholders' equity. Changes in each component of accumulated other comprehensive income (loss) in fiscal 1999, 2000 and 2001 are as follows: <TABLE> Millions of yen --------------------------------------------------------------------- Net unrealized Minimum Accumulated gains on pension Cumulative other investment in liability translation comprehensive securities adjustments adjustments income (loss) -------------- ----------- ----------- ------------- <S> <C> <C> <C> <C> Balance at March 31, 1998............................. Yen 2,711 Yen -- Yen (20,790) Yen (18,079) Net unrealized gains (losses) on investment in securities, net of tax of Yen 1,317 million........... (1,096) (1,096) Reclassification adjustment for losses included in net income, net of tax of Yen (2,731) million......... 2,538 2,538 Foreign currency translation adjustments, net of tax of Yen 892 million.................................... (16,118) (16,118) Reclassification adjustment for losses included in net income, net of tax of Yen (364) million .......... 5,205 5,205 ----------- ----------- ----------- ----------- Current period change................................. Yen 1,442 Yen -- Yen (10,913) Yen (9,471) ----------- ----------- ----------- ----------- Balance at March 31, 1999............................. Yen 4,153 Yen -- Yen (31,703) Yen (27,550) Net unrealized gains (losses) on investment in securities, net of tax of Yen (28,919) million........ 42,699 42,699 Reclassification adjustment for losses included in net income, net of tax Yen 484 million................ (1,148) (1,148) Minimum pension liability adjustments, net of tax of Yen 2,515 million..................................... (3,485) (3,485) Foreign currency translation adjustments, net of tax of Yen 1,219 million.................................. (12,184) (12,184) Reclassification adjustment for losses included in net income, net of tax of Yen (261) million........... 251 251 ----------- ----------- ----------- ----------- Current period change................................. Yen 41,551 Yen (3,485) Yen (11,933) Yen 26,133 ----------- ----------- ----------- ----------- Balance at March 31, 2000............................. Yen 45,704 Yen (3,485) Yen (43,636) Yen (1,417) Net unrealized gains (losses) on investment in securities, net of tax of Yen 9,750 million........... (12,334) (12,334) Reclassification adjustment for losses included in net income, net of tax of Yen (941) million........... 974 974 Minimum pension liability adjustments, net of tax of Yen 859 million....................................... (1,199) (1,199) F-30
<CAPTION> Millions of yen --------------------------------------------------------------------- Net unrealized Minimum Accumulated gains on pension Cumulative other investment in liability translation comprehensive securities adjustments adjustments income (loss) -------------- ----------- ----------- ------------- <S> <C> <C> <C> <C> Foreign currency translation adjustments, net of tax of Yen (1,556) million................................ 20,532 20,532 Reclassification adjustment for gains included in net income, net of tax Yen- million...................... (2,004) (2,004) ----------- ----------- ----------- ----------- Current period change................................. Yen (11,360) Yen (1,199) Yen 18,528 Yen 5,969 ----------- ----------- ----------- ----------- Balance at March 31, 2001............................. Yen 34,344 Yen (4,684) Yen (25,108) Yen 4,552 =========== =========== =========== =========== </TABLE> <TABLE> Millions of U.S. dollars --------------------------------------------------------------------- Net unrealized Minimum Accumulated gains on pension Cumulative other investment in liability translation comprehensive securities adjustments adjustments income (loss) -------------- ----------- ----------- ------------- <S> <C> <C> <C> <C> Balance at March 31, 2000.............................. $ 369 $ (28) $ (352) $ (11) Net unrealized gains (losses) on investment in securities, net of tax of $79 million................. (100) (100) Reclassification adjustment to losses included in net income, net of tax of $(8) million.................... 8 8 Minimum pension liability adjustments, net of tax of $7 million............................................ (10) (10) Foreign currency translation adjustments, net of tax of $(13) million...................................... 166 166 Reclassification adjustment for gains included in net income, net of tax of $- million...................... (16) (16) ----------- ----------- ----------- ----------- Current period change.................................. $ (92) $ (10) $ 150 $ 48 ----------- ----------- ----------- ----------- Balance at March 31, 2001.............................. $ 277 $ (38) $ (202) $ 37 =========== =========== =========== =========== </TABLE> 17. Shareholders Equity Changes in the number of shares issued and outstanding in fiscal 1999, 2000 and 2001 are as follows: <TABLE> Number of shares ------------------------------------------ 1999 2000 2001 ---------- ---------- ---------- <S> <C> <C> <C> Beginning balance................................................... 64,870,299 64,870,299 68,630,294 Common stock issued in public offering.............................. -- 3,300,000 -- Exercise of warrants................................................ -- 357,175 31,673 Common Stock issued for acquisitions of minority interests of subsidiaries....................................................... -- 102,820 -- Common stock issued in stock split on May 19, 2000.................. -- -- 13,726,058 ---------- ---------- ---------- Ending balance...................................................... 64,870,299 68,630,294 82,388,025 ========== ========== ========== </TABLE> The Japanese Commercial Code (the "Code") provides that an amount equivalent to at least 10% of cash dividends paid and other cash outlays resulting from appropriation of retained earnings be appropriate to a legal reserve until such reserve equals 25% of the issued capital. The Code also provides that both additional paid-in capital and the legal reserve are not available for cash dividends but may be used to reduce a capital deficit by resolution of the shareholders or may be capitalized by resolution of the Board of Directors. The Code provides that at least one-half of the issue price of new shares, with a minimum of the per value thereof, be included in common stock. In conformity therewith, the Company has divided the principal amount of the bonds converted into common stock and the proceeds received from the issuance of common stock, including the exercise of warrants, equally between common stock and additional paid-in capital by resolution of the Board of Directors. F-31
The Board of Directors intends to recommend to the shareholders, at the next general meeting, to be held on June 28, 2001, the declaration of a cash dividend totaling Yen 1,226 million ($10 million), which will be paid in that month to the shareholders of record as of March 31, 2001, covering fiscal 2001, and the related appropriation of retained earnings to the legal reserve of Yen 130 million ($1 million). The amount of retained earnings available for dividends under the Code is based on the amount recorded in the Company's nonconsolidated books of account in accordance with accounting principles generally accepted in Japan, and amounted to Yen 109,675 million ($885 million) as of March 31, 2001. However, there are restrictions on the payment of dividends relating to the treasury stock acquired for the stock option plan, amounting to Yen 8,284 million ($67 million), and net unrealized gains on investment in securities and earning impact of derivatives under accounting principles generally accepted in Japan, amounting to Yen 16,686 million ($135 million) as of March 31, 2001. Retained earnings at March 31, 2001 includes Yen 23,598 million ($190 million) relating to equity in undistributed earnings of 50% or less owned companies accounted for by the equity method. The Company implemented a 1.2-for-1 stock split on May 19, 2000 and assigned to all shareholders appearing on the final list of shareholders as of March 31, 2000. 18. Brokerage Commissions and Gains on Investments Securities Brokerage commissions and gains on investment securities in fiscal 1999, 2000 and 2001 consist of the following: <TABLE> Millions of Millions of yen U.S. dollars --------------------------------------- ------------ 1999 2000 2001 2001 --------- ---------- ---------- ------------ <S> <C> <C> <C> <C> Brokerage commissions....................... Yen 1,165 Yen 3,089 Yen 3,252 $ 26 Gains on investment securities, net......... 6,216 16,611 8,803 71 --------- ---------- ---------- ---- Yen 7,381 Yen 19,700 Yen 12,055 $ 97 ========= ========== ========== ==== </TABLE> Trading activities -- Gains on investment securities, net, include net trading revenue on trading securities amounting to Yen 679 million, Yen 1,390 million and Yen 552 million ($4 million) for fiscal 1999, 2000 and 2001, respectively. A gain of Yen 561 million, a loss of Yen 15 million and a gain of Yen 444 million ($4 million) of derivative trading instruments are also included in gains on investment securities, net, for fiscal 1999, 2000 and 2001, respectively. 19. Life Insurance Operations Life insurance premiums and related investment income in fiscal 1999, 2000 and 2001 consist of the following <TABLE> Millions of Millions of yen U.S. dollars --------------------------------------- ------------ 1999 2000 2001 2001 --------- ---------- ---------- ------------ <S> <C> <C> <C> <C> Life insurance premiums........................ Yen 186,629 Yen 190,758 Yen 141,528 $ 1,143 Life insurance related investment income....... 9,630 15,071 16,786 135 ----------- ----------- ----------- ------- Yen 196,259 Yen 205,829 Yen 158,314 $ 1,278 =========== =========== =========== ======= </TABLE> Benefits and expenses of the life insurance operations, included in life insurance costs in the consolidated statements of income, are associated with earned premiums so as to result in recognition of profits over the life of contracts. This association is accomplished by means of the provision for future policy benefits and the deferral and subsequent amortization of policy acquisition costs (principally commissions and certain other expenses relating to policy issuance and underwriting). These policy acquisition costs are amortized in proportion to premium revenue recognized. Amortizations charged to income for fiscal 1999, 2000 and 2001 amounted to Yen 8,428 million, Yen 9,756 and Yen 10,671 million ($86 million), respectively. F-32
20. Other Operations Other operations revenues and expenses include revenues and costs from sales of residential apartments, fee income and costs from servicing of receivables, commission income and costs from sales of commodities funds and revenues and expenses from other operations. 21. Per Share Data In Japan, dividends which are payable to shareholders of record at the end of fiscal year are subsequently approved shareholders, and, accordingly, the declaration of these dividends is not reflected in the financial statements at such fiscal year-end. However, dividends per share shown in the consolidated statements of income have been presented on an accrual basis and include, in each fiscal year, dividends to be approved by shareholders after such fiscal year. In fiscal 1999, diluted EPS was equal to basic EPS, and a reconciliation of the differences between basic and diluted EPS in fiscal 2000 and 2001 is as follows: <TABLE> March 31, 2000 - -------------- Millions of yen Thousands Yen --------------- -------------- ---------- Weighted- Net income average shares EPS --------------- -------------- ---------- <S> <C> <C> <C> Basic EPS: Net income available to common stockholders.......... Yen 30,642 79,534 Yen 385.27 Effect of dilutive securities-- Warrants........................................... -- 160 Convertible notes.................................. 43 1,560 Treasury stock..................................... -- 133 ---------- ------ ---------- Diluted EPS: Net income for computation......................... Yen 30,685 81,387 Yen 377.02 ========== ====== ========== </TABLE> <TABLE> March 31, 2001 - -------------- Millions of yen Thousands Yen U.S. dollars --------------- -------------- ---------- ------------ Weighted- Net income average shares EPS EPS --------------- -------------- ---------- ------------ <S> <C> <C> <C> <C> Basic EPS: Net income available to common stockholders.... Yen 34,157 81,760 Yen 417.77 $ 3.37 Effect of dilutive securities-- Warrants..................................... -- 127 Convertible notes............................ 87 3,381 Treasury stock............................... -- 132 ---------- ------ ---------- ------ Diluted EPS: Net income for computation................... Yen 34,244 85,400 Yen 400.99 $ 3.24 ========== ====== ========== ====== </TABLE> EPS has been adjusted for the stock splits retroactively (see notes 1 (y) and 17). 22. Derivative Financial Instruments and Risk Management The Company and its subsidiaries operate internationally, giving rise to significant exposures to market risks from changes in interest rates and foreign exchange rates. Derivative financial instruments are utilized by the Company and its subsidiaries to reduce those risks, as explained in this note. F-33
(a) Interest rate risk management The Company and certain subsidiaries have entered into various types of interest rate contracts in managing their interest rate risk as of March 31, 2000 and 2001, as indicated in the following table: <TABLE> Millions of Millions of yen U.S. dollars ----------------------------------- --------------- 2000 2001 2001 --------------- --------------- --------------- Notional amount Notional amount Notional amount --------------- --------------- --------------- <S> <C> <C> <C> Interest rate swap agreements................ Yen 957,398 Yen 626,380 $ 5,056 Options, caps, floors and collars held....... 57,447 96,153 776 Futures...................................... 14,233 71,754 579 </TABLE> Under interest rate swap agreements, the Company and its subsidiaries 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. Certain agreements are combinations of interest rate and foreign currency swap transactions. The Company and its subsidiaries pay the fixed rate and receive the floating rate under the majority of their swaps which hedge the risk of variability of cash flows originated from floating rate assets, liabilities, or forecasted transactions. The Company and its subsidiaries also entered into some swaps in which they pay the floating rate and receive the fixed rate. Interest rate options grant the purchaser, for a premium payment, the right to either purchase from or sell to the writer a specified financial instrument under agreed terms. Interest rate caps, floors and collars require the writer to pay the purchaser at specified future dates the amount, if any, by which a specified market interest rate exceeds the fixed cap rate or falls below the fixed floor rate, applied to a notional amount. The option, cap, floor or collar writer receives a premium for bearing the risk of unfavorable interest rate changes. The premiums paid for interest rate options, cap, floor and collar agreements purchased are included in other assets in the accompanying consolidated balance sheets and are amortized to interest expense over the terms of the agreements. Amounts receivable under cap, floor and collar agreements and gains realized on option contracts are recognized as a reduction of interest expense. (b) Loan commitments Loan commitments are agreements to make loans as long as the agreed-upon terms are met. The outstanding amounts of those loan commitments as of March 31, 2000 and 2001 are set out in the following table: <TABLE> Millions of Millions of yen U.S. dollars ----------------------------------- --------------- 2000 2001 2001 --------------- --------------- --------------- Outstanding Outstanding Outstanding contract amount contract amount contract amount --------------- --------------- --------------- <S> <C> <C> <C> Loan commitments............ Yen 10,273 Yen 57,786 $ 466 </TABLE> (c) Foreign exchange risk management The Company and its subsidiaries have entered into foreign exchange forward contracts and foreign currency swap agreements in managing their foreign exchange risk as of March 31, 2000 and 2001, as indicated in the following table: <TABLE> Millions of Millions of yen U.S. dollars ----------------------------------- --------------- 2000 2001 2001 --------------- --------------- --------------- Notional amount Notional amount Notional amount --------------- --------------- --------------- <S> <C> <C> <C> Foreign exchange forward contracts....... Yen 36,617 Yen 104,350 $ 842 Foreign currency swap agreements......... 330,491 393,084 3,173 </TABLE> F-34
Foreign exchange forward contracts and foreign currency swap agreements are agreements between two parties to purchase and sell a foreign currency for a price specified at the contract date, with delivery and settlement in the future. The Company and its subsidiaries use such contracts to hedge the risk of change in foreign currency exchange rates associated with certain assets and obligations denominated in foreign currencies. (d) Other derivative instruments The Company and its subsidiaries have entered into various types of contracts for the purpose of trading activities as of March 31, 2000 and 2001, as indicated in the following table: <TABLE> Millions of Millions of yen U.S. dollars ----------------------------------- --------------- 2000 2001 2001 --------------- --------------- --------------- Notional amount Notional amount Notional amount --------------- --------------- --------------- <S> <C> <C> <C> Futures....................................... Yen 15,347 Yen 72,160 $ 582 Interest rate swap agreements ................. 7,060 43,154 348 Options, caps, floors and collars held......... 9,080 15,380 124 Options, caps, floors and collars written...... 12,265 70,474 569 Foreign exchange forward contracts............. 938 1,651 13 </TABLE> 23. Significant Concentrations of Credit Risk The Company and its subsidiaries have established various policies and procedures to manage credit exposure, including initial credit approval, credit limits, collateral and guarantee requirements, rights of offset and continuous oversight. The Company and its subsidiaries' principal financial instrument portfolio consists of direct financing leases and installment loans which are secured by title to the leased assets and assets specifically collateralized in relation to loan agreements. When deemed necessary, guarantees are also obtained. The value and adequacy of the collateral are continually monitored. Consequently, the risk of credit loss from counterparties' failure to perform in connection with collateralized financing activities is minimal. The Company and its subsidiaries have access to collateral in case of bankruptcy and other losses. At March 31, 2000 and 2001, no concentration with a single obligor exceeded 1 % of consolidated total assets. With respect to the Company and its subsidiaries' credit exposures on a geographic basis, approximately Yen 3,490 billion, or 76%, at March 31, 2000 and approximately Yen 3,609 billion ($29,128 million), or 74%, at March 31, 2001 of the credit risks arising from all financial instruments are attributable to customers located in Japan. The largest concentration of credit risks as to foreign countries is exposure attributable to the United States of America. The Company and its subsidiaries make direct financing lease and operating lease contracts mostly with the lessees in commercial industries for their office, industry, commercial service, transport and other equipment. At March 31, 2000 and 2001, the Company and its subsidiaries had concentrations in certain equipment types included in investment in direct financing leases and operating leases which exceeded 10% of the consolidated total assets. The percentage of investment in transportation equipment to consolidated total assets was 10.4% as of March 31, 2000 and 2001. 24. Estimated Fair Value of Financial Instruments The following information is provided to help users gain an understanding of the relationship between amounts reported in the accompanying consolidated financial statements and the related market or fair value. The disclosures include financial instruments and derivatives financial instruments, other than investment in direct financing leases, investment in subsidiaries and affiliates, pension obligations and insurance contracts. F-35
<TABLE> March 31, 2000 ------------------------------ Millions of yen ------------------------------ Carrying Estimated amount fair value ------------- ------------- <S> <C> <C> Trading instruments Trading securities ....................................................... Yen 390 Yen 390 Futures: Assets................................................................... 53 53 Options and other derivatives: Assets................................................................... 90 90 Liabilities.............................................................. 38 38 Non-trading instruments Assets: Cash and cash equivalents................................................ 265,956 265,956 Restricted cash and cash equivalents..................................... 13,666 13,666 Time deposits............................................................ 7,698 7,698 Installment loans........................................................ 1,791,439 1,791,449 Allowance for doubtful receivables on possible loan losses............... (101,156) (101,156) Investment in securities: Practicable to estimate fair value..................................... 701,042 701,042 Not practicable to estimate fair value................................. 56,949 56,949 Liabilities: Short-term debt.......................................................... 1,912,761 1,912,761 Deposits................................................................. 154,923 155,492 Long-term debt........................................................... 1,942,784 1,964,017 Foreign exchange forward contracts: Assets .................................................................. 463 463 Liabilities.............................................................. 20 20 Foreign currency swap agreements: Assets................................................................... - 23,154 Liabilities.............................................................. - 3,140 Interest rate swap agreements: Assets................................................................... - 11,680 Liabilities.............................................................. - 12,815 Options and other derivatives: Assets................................................................... 78 (12) Liabilities.............................................................. 5 101 </TABLE> <TABLE> March 31, 2001 ------------------------------------------------------------------ Millions of yen Millions of U.S. dollars ----------------------------- ---------------------------- Carrying Estimated Carrying Estimated amount fair value amount fair value ------------- ----------- --------- ---------- <S> <C> <C> <C> <C> Trading instruments Trading securities........................................... Yen 581 Yen 581 $ 5 $ 5 Futures: Assets...................................................... 1,181 1,181 10 10 Liabilities................................................. 228 228 2 2 Options and other derivatives: Assets ..................................................... 882 882 7 7 Liabilities................................................. 84 84 1 1 Non-trading instruments Assets: Cash and cash equivalents................................... 155,411 155,411 1,254 1,254 Restricted cash and cash equivalents........................ 17,072 17,072 138 138 F-36
<CAPTION> March 31, 2001 ------------------------------------------------------------------ Millions of yen Millions of U.S. dollars ----------------------------- ---------------------------- Carrying Estimated Carrying Estimated amount fair value amount fair value ------------- ----------- --------- ---------- <S> <C> <C> <C> <C> Time deposits............................................... 8,673 8,673 70 70 Installment loans........................................... 1,846,511 1,867,074 14,903 15,069 Allowance for doubtful receivables on possible loan losses.. (100,192) (100,192) (809) (809) Investment in securities: Practicable to estimate fair value.......................... 854,414 854,415 6,896 6,896 Not practicable to estimate fair value...................... 87,163 87,163 703 703 Liabilities: Short-term debt............................................. 1,562,072 1,562,072 12,608 12,608 Deposits.................................................... 178,314 179,376 1,439 1,448 Long-term debt.............................................. 2,330,159 2,361,801 18,807 19,062 Foreign exchange forward contracts: Assets...................................................... 2,273 2,273 18 18 Liabilities................................................. 1,557 1,557 13 13 Foreign currency swap agreements: Assets...................................................... - 5,044 - 41 Liabilities................................................. - 32,822 - 265 Interest rate swap agreements: Assets...................................................... - 7,126 - 58 Liabilities................................................. - 17,298 - 140 Options and other derivatives: Assets ..................................................... 323 (46) 3 (0) Liabilities................................................. - 657 - 5 </TABLE> The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The estimated fair value amounts were determined using available market information, discounted cash flow information utilized by the Company and its subsidiaries in conducting new business and certain valuation methodologies. If quoted market prices were not readily available, management estimated a fair value. Accordingly, the estimates may not be indicative of the amounts at which the financial instruments could be exchanged in a current or future market transaction. Due to the uncertainty of expected cash flows resulting from financial instruments, the use of different assumptions and valuation methodologies may have a significant effect on the derived estimated fair value amounts. Estimation of fair value The following methods and significant assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate a value: Cash and cash equivalents, restricted cash and cash equivalents, time deposits and short-term debt- For cash and cash equivalents, restricted cash and cash equivalents, time deposits and short-term debt, the carrying amounts recognized in the balance sheets were determined to be reasonable estimates of their fair values due to relatively short maturity. Installment loans- The carrying amounts of floating-rate installment loans with no significant changes in credit risk and which could be repriced within a short-term period were determined to be reasonable estimates of their fair values. For certain homogeneous categories of medium- and long-term fixed-rate loans, such as housing loans and other loans, the estimated fair values were calculated by discounting the future cash flows using the current interest rates charged by the Company and its subsidiaries for new loans made to borrowers with similar credit ratings and remaining maturities. Investment in securities- For trading securities and available-for-sale securities, the estimated fair values, which are also the carrying amounts recorded in the balance sheets, were generally based on quoted market prices or quotations provided by dealers. For held-to-maturity securities, the estimated fair values were based on quoted market prices, if available. If a quoted market price was not available, estimated fair values were determined using quoted market prices F-37
for similar securities or the carrying amounts (where carrying amounts were believed to approximate the estimated fair values). For other securities, for which there were no quoted market prices, reasonable estimates of fair values could not be made without incurring excessive costs. Deposits- The carrying amounts of demand deposits recognized in the balance sheets were determined to be reasonable estimates of their fair value. The estimated fair values of time deposits were calculated by discounting the future cash flows. The current interest rates offered for the deposits with similar terms and remaining average maturities were used as the discount rates. Long-term debt- The carrying amounts of long-term debt with floating rates which could be repriced within short-term periods were determined to be reasonable estimates of their fair values. For medium- and long-term fixed-rate debt, the estimated fair values were calculated by discounting the future cash flows. The borrowing interest rates which were currently available to the Company and its subsidiaries offered by financial institutions for debt with similar terms and remaining average maturities were used as the discount rates. Derivatives- The fair value of derivatives generally reflects the estimated amounts that the Company and its subsidiaries would receive or pay to terminate the contracts at the reporting date, thereby taking into account the current unrealized gains or losses of open contracts. Discounted amounts of future cash flows using the current interest rate are available for most of the Company's and its subsidiaries' derivatives. 25. Commitments and Contingent Liabilities Commitments, guarantees and contingencies. As of March 31, 2001, the Company and its subsidiaries had commitments for the purchase of equipment to be leased, having a cost of approximately Yen 8,272 million ($67 million). The minimum future rentals on non-cancelable operating leases are as follows: Millions of Year ending March 31 Millions of yen U.S. dollars - -------------------- --------------- ------------ 2002........................ Yen 632 $ 5 2003........................ 506 4 2004........................ 455 4 2005........................ 409 3 2006........................ 376 3 Thereafter.................. 1,037 9 --------- --- Total...................... Yen 3,415 $28 ========= === The Company and its subsidiaries lease office space under operating lease agreements, which are primarily cancelable, and made rental payments totaling Yen 6,996 million, Yen 5,674 million and Yen 5,722 million ($46 million) in fiscal 1999, 2000 and 2001, respectively. As of March 31, 2001, the Company and its subsidiaries were contingently liable as guarantor for borrowings of Yen 18,950 million ($153 million) by customers, principally on consumer loans, and by employees. Litigation- The Company and its subsidiaries are also involved in legal proceedings and claims in the ordinary course of their business. In the opinion of management, none of such proceedings and claims has a material impact on the Company's financial position or results of operations. 26. Segment Information Effective April 1, 1998, the Company adopted FASB Statement No. 131 ("Disclosures about Segments of an Enterprise and Related Information"). The following table presents segment financial information on the basis that is regularly used by management for evaluating the segment performance and deciding how to allocate resources to them. F-38
The reportable segments are identified based on the nature of services for domestic operations and on geographic area for foreign operations. As to the segments of corporate finance, equipment operating leases and real estate related finance in domestic operations, the Company and its subsidiaries aggregate some operating segments that are determined by region and type of operating assets for management purposes because they are similar in the nature of the services, the type of customers and the economic environment. Corporate finance operations are primarily corporate direct financing leases and lending operations other than real estate related lending. Equipment operating lease operations are comprised of operating leases over measuring equipment, information-related equipment and automobiles. Real estate related finance operations include corporate real estate financing activities as well as personal housing loan lending operations. Real estate operations primarily comprise residential subdivision developments as well as the rental and management of office buildings, hotels and training facilities. Life insurance operations include direct and agency life insurance sales and related activities. The three foreign operating segments, the Americas, Asia and Oceania, and Europe, include direct financing lease operations, investment in securities, collateralized real property lending and aircraft and ship financing operations. Other operations, which are not deemed by management to be sufficiently material to disclose as separate items and do not fall into the above segment categories, are reported under domestic other operations. They primarily include securities transactions, venture capital operations and card loans. Financial information of the segments for fiscal 1999, 2000 and 2001 is as follows: <TABLE> Year ended March 31, 1999 --------------------------------------------------------------------------------- Millions of yen --------------------------------------------------------------------------------- Domestic operations --------------------------------------------------------------------------------- Equipment Real estate Corporate operating related Real Life finance leases finance estate insurance Other --------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Revenues Yen 122,629 Yen 51,000 Yen 17,731 Yen 39,088 Yen 195,484 Yen 22,684 Interest revenue.................... 17,926 7 16,601 519 - 16,828 Interest expense.................... 41,697 1,538 10,891 4,220 - 4,435 Depreciation and amortization....... 26,427 30,299 2,259 3,994 359 338 Other significant non-cash items: Provision for doubtful receivables and possible loan losses........ 24,420 35 15,857 - - 3,324 Write-downs of long-lived assets.. - - - - - - Increase in policy liabilities.... - - - - 135,086 - Equity in net income (loss) of and gain (loss) on sales of affiliates (16) 4 - - - (99) Segment profit(loss)............... 35,240 6,923 (11,013) (2,236) 3,813 (4,266) Segment assets...................... 2,046,516 109,772 573,767 273,504 334,836 248,872 Long-lived assets.................. 33,338 63,433 3,744 245,963 - 5,877 Expenditures for long-lived assets.. 10,524 34,399 2,175 27,121 - 1,333 Investment in affiliates............ 141 16 - - - 9,313 (table continued) <CAPTION> Year ended March 31, 1999 ---------------------------------------------------------- Millions of yen ---------------------------------------------------------- Foreign operations ------------------------------------------ The Asia and Americas Oceania Europe Total ---------------------------------------------------------- <S> <C> <C> <C> <C> Revenues Yen 68,821 Yen 51,220 Yen 23,811 Yen 592,468 Interest revenue.................... 26,048 18,750 9,674 106,353 Interest expense.................... 34,049 27,707 13,174 137,711 Depreciation and amortization....... 5,507 12,038 7,693 88,914 Other significant non-cash items: Provision for doubtful receivables and possible loan losses........ 5,217 1,775 1,217 51,845 Write-downs of long-lived assets.. 644 - - 644 Increase in policy liabilities.... - - - 135,086 Equity in net income (loss) of and gain (loss) on sales of affiliates 7,564 (10,979) 11 (3,515) Segment profit(loss)............... 20,590 (11,729) 264 37,586 Segment assets...................... 634,101 440,872 178,559 4,840,799 Long-lived assets.................. 32,773 82,204 79,247 546,579 Expenditures for long-lived assets.. 20,312 37,109 136 133,109 Investment in affiliates............ 38,956 8,997 169 57,592 </TABLE> F-39
<TABLE> Year ended March 31, 2000 ------------------------------------------------------------------------------ Millions of yen ------------------------------------------------------------------------------ Domestic operations ------------------------------------------------------------------------------ Equipment Real estate Corporate operating related Real Life finance leases finance estate insurance Other ------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> Revenues............................Yen 121,415 Yen 53,000 Yen 17,294 Yen 44,873 Yen 204,746 Yen 30,882 Interest revenue.................... 16,326 3 16,268 741 - 18,385 Interest expense.................... 31,322 1,267 7,775 4,271 - 2,624 Depreciation and amortization....... 31,196 31,097 1,499 3,213 550 2,045 Other significant non-cash items: Provision for doubtful receivables and possible loan losses......... 21,798 6 9,964 5 - 6,173 Write-downs of long-lived assets .. - - 149 7,398 - - Increase in policy liabilities..... - - - - 137,902 - Equity in net income (loss) of and gain (loss) on sales of affiliates. 37 11 28 - - (1,679) Segment profit (loss)............... 40,918 7,823 (3,415) (8,241) 5,455 (1,036) Segment assets...................... 1,968,590 113,389 597,274 276,494 425,335 242,280 Long-lived assets................... 39,561 63,122 3,617 252,128 3,258 5,352 Expenditures for long-lived assets.. 19,316 35,003 3,617 34,183 3,295 87 Investment in affiliates............ 165 22 95 - - 12,539 (table continued) <CAPTION> Year ended March 31, 2000 ---------------------------------------------------- Millions of yen ---------------------------------------------------- Foreign operations ------------------------------------ The Asia and Americas Oceania Europe Total ---------------------------------------------------- <S> <C> <C> <C> <C> Revenues............................ Yen 74,525 Yen 49,739 Yen 18,260 Yen 614,734 Interest revenue.................... 26,985 14,882 6,730 100,320 Interest expense.................... 33,852 22,003 9,584 112,698 Depreciation and amortization....... 4,405 13,354 5,844 93,203 Other significant non-cash items: Provision for doubtful receivables and possible loan losses......... 4,505 2,627 495 45,573 Write-downs of long-lived assets .. 334 - - 7,881 Increase in policy liabilities..... - - - 137,902 Equity in net income (loss) of and gain (loss) on sales of affiliates. 38 1,081 19 (465) Segment profit (loss)............... 18,775 3,371 278 63,928 Segment assets...................... 691,403 369,540 159,608 4,843,913 Long-lived assets................... 55,312 76,674 60,485 559,509 Expenditures for long-lived assets.. 41,903 29,510 1 166,915 Investment in affiliates............ 29,729 9,156 163 51,869 </TABLE> F-40
<TABLE> Year ended March 31, 2001 --------------------------------------------------------------------------- Millions of yen --------------------------------------------------------------------------- Domestic operations --------------------------------------------------------------------------- Equipment Real estate Corporate operating related Real Life finance leases finance estate insurance Other --------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Revenues ..........................Yen 113,113 Yen 61,677 Yen 24,262 Yen 48,438 Yen 157,636 Yen 36,215 Interest revenue................... 17,368 2 17,746 482 - 24,110 Interest expense................... 25,573 1,058 6,341 3,732 - 3,570 Depreciation and amortization...... 35,679 35,291 413 5,670 523 1,964 Other significant non-cash items: Provision for doubtful receivables and possible loan losses ................... 14,726 292 8,650 10 - 8,610 Write-downs of long-lived assets. - - - 4,090 - - Increase in policy liabilities... - - - - 67,444 - Equity in net income (loss) of and gain (loss) on sales of affiliates ...................... 122 8 5 - - 852 Segment profit (loss).............. 44,427 11,165 1,944 (4,604) 5,982 1,035 Segment assets..................... 1,889,538 134,270 606,801 310,340 543,886 284,835 Long-lived assets.................. 48,233 85,523 984 242,464 3,208 247 Expenditures for long-lived assets .......................... 24,729 59,957 931 29,277 - - Investment in affiliates........... 60 27 372 - - 13,511 (table continued) <CAPTION> Year ended March 31, 2001 --------------------------------------------------- Millions of yen --------------------------------------------------- Foreign operations ----------------------------------- The Asia and Americas Oceania Europe Total --------------------------------------------------- <S> <C> <C> <C> <C> Revenues .......................... Yen 79,397 Yen 48,735 Yen 15,151 Yen 584,624 Interest revenue................... 30,563 12,047 6,020 108,338 Interest expense................... 39,235 20,119 7,235 106,863 Depreciation and amortization...... 3,894 14,293 5,462 103,189 Other significant non-cash items: Provision for doubtful receivables and possible loan losses ................... 11,170 1,079 47 44,584 Write-downs of long-lived assets. - - - 4,090 Increase in policy liabilities... - - - 67,444 Equity in net income (loss) of and gain (loss) on sales of affiliates ...................... 337 1,321 - 2,645 Segment profit (loss).............. 8,896 1,203 716 70,764 Segment assets..................... 804,118 402,707 158,646 5,135,141 Long-lived assets.................. 90,621 76,071 61,091 608,442 Expenditures for long-lived assets .......................... 33,701 25,969 - 174,564 Investment in affiliates........... 25,835 11,398 - 51,203 </TABLE> F-40
<TABLE> Year ended March 31, 2001 -------------------------------------------------------------------------------------------------- Millions of U.S. dollars -------------------------------------------------------------------------------------------------- Domestic operations Foreign operations ---------------------------------------------------------- --------------------------- Real Equipment estate Corporate operating related Real Life The Asia and finance leases finance estate insurance Other Americas Oceania Europe Total -------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Revenues .........................$ 913 $ 498 $ 196 $ 391 $ 1,272 $ 292 $ 641 $ 394 $ 122 $ 4,719 Interest revenue ................. 140 0 143 4 -- 195 247 97 48 874 Interest expense ................. 206 9 51 30 -- 29 317 162 58 862 Depreciation and amortization .... 288 285 3 46 4 16 32 115 44 833 Other significant non-cash items: Provision for doubtful receivables and possible loan losses .................. 119 2 70 0 -- 70 90 9 0 360 Write-downs of long-lived assets ....................... -- -- -- 33 -- -- -- -- -- 33 Increase in policy liabilities .................. -- -- -- -- 544 -- -- -- -- 544 Equity in net income (loss) of and gain (loss) on sales of affiliates ..................... 1 0 0 -- -- 7 3 10 -- 21 Segment profit (loss) ............ 359 90 15 (37) 48 8 72 10 6 571 Segment assets ................... 15,251 1,084 4,897 2,505 4,390 2,299 6,490 3,250 1,280 41,446 Long-lived assets ................ 389 690 8 1,957 26 2 732 614 493 4,911 Expenditures for long-lived assets ......................... 199 484 8 236 -- -- 272 210 -- 1,409 Investment in affiliates ......... 0 0 3 -- -- 109 209 92 -- 413 </TABLE> Accounting policies of the segments are almost the same as those described in Note 1 ("Significant Accounting and Reporting Policies") except for the treatment of income tax expenses. Since the Company and its subsidiaries evaluate performance for the segments based on profit or loss before income taxes, tax expenses are not included in segment profit or loss. Equity in net income of affiliates and minority interest income, which are recognized as net of tax on a consolidated basis, are adjusted to the profit or loss before income tax. Gains and losses that management does not consider for evaluating the performance of the segments, such as write-downs of certain securities and certain foreign exchange gains or losses, are excluded from the segment profit or loss. Assets attributed to each segment are consolidated operating assets (investment in direct finance leases, installment loans, investment in operating leases, investment in securities and other operating assets), advances and investment in affiliates (not including loans). This has resulted in depreciation of office facilities and goodwill amortization expenses being included in each segment's profit or loss while the carrying amounts of corresponding assets are not allocated to each segment's assets. However, the effect stemmed from the allocation is immaterial. Reconciliation of segment totals to consolidated financial statement amounts is as follows. Significant items to be reconciled are revenues, segment profit and segment assets. Other items do not have a material difference between segment amounts and consolidated amounts. F-41
<TABLE> Millions of Millions of yen U.S. dollars ---------------------------------------------- ------------ 1999 2000 2001 2001 -------------- ------------- ------------- ------------ <S> <C> <C> <C> <C> Revenues: Total revenues for segments ................ Yen 592,468 Yen 614,734 Yen 584,624 $ 4,719 Revenue related to corporate assets ....... 1,473 1,779 1,525 12 ------------- ------------- ------------- -------- Total consolidated revenues ................. Yen 593,941 Yen 616,513 Yen 586,149 $ 4,731 ============= ============= ============= ======== Segment profit: Total profit for segments .................. Yen 37,586 Yen 63,928 Yen 70,764 $ 571 Unallocated interest expenses, general and administrative expenses .................. (4,189) (3,374) (5,228) (42) Adjustment of income tax expenses to equity in net income and minority income ....................... (375) (537) (676) (6) Unallocated write-downs of securities ...... (8,383) (9,772) (5,688) (46) Unallocated other gain or loss ............. 2,676 1,803 64 1 ------------- ------------- ------------- -------- Total consolidated income before income taxes Yen 27,315 Yen 52,048 Yen 59,236 $ 478 ============= ============= ============= ======== Segment assets: Total assets for segments .................. Yen 4,840,799 Yen 4,843,913 Yen 5,135,141 $ 41,446 Advances .................................. (62,079) (89,676) (141,148) (1,139) Investment in affiliates (not including loans) ..................... (57,592) (51,869) (51,203) (413) Corporate assets .......................... 54,308 62,453 86,765 699 ------------- ------------- ------------- -------- Total consolidated operating assets ......... Yen 4,775,436 Yen 4,764,821 Yen 5,029,555 $ 40,593 ============= ============= ============= ======== </TABLE> FASB Statement No. 131 requires disclosure of information about geographic areas as enterprise-wide information. Since the segment is identified based on the nature of services for domestic operations and on geographic area for foreign operations, the information required as an enterprise-wide one is incorporated into the table. Japan and the United States of America are the countries whose revenues from external customers are material. Almost all the revenues of the Americas segment are derived from the United States of America. The basis for attributing revenues from external customers to individual countries is principally the location of the foreign subsidiaries and foreign affiliates. FASB Statement No. 131 requires disclosure of revenues from external customers for each product and service as enterprise-wide information. The consolidated statements of income in which the revenues are categorized based on the nature of business includes the required information. No single customer accounted for 10% or more of the total revenues for fiscal 1999, 2000 and 2001. F-42