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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, 2000
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:
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
813-5419-5000
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of each class Name of each exchange to 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 annual report.
As of March 31, 2000, 68,630,294 Shares and 1,096,600 ADSs are outstanding.
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No__
Indicate by check mark which financial statement item the registrant has
elected to follow.
Item 17 Item 18 X
*Not for trading, but only in connection with the registration of American
Depositary Shares.
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<PAGE>
TABLE OF CONTENTS
Page
Certain Defined Terms, Conventions and Presentation of Financial
Information..........................................................ii
Forward Looking Statements...................................................ii
Exchange Rates..............................................................iii
PART I
Item 1. Description of Business..............................................1
Item 2. Description of Property.............................................24
Item 3. Legal Proceedings...................................................24
Item 4. Control of Registrant...............................................25
Item 5. Nature of Trading Market............................................25
Item 6. Exchange Controls and Other Limitations Affecting Security Holder...26
Item 7. Taxation............................................................28
Item 8. Selected Financial Data.............................................30
Item 9. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................31
Item 9A. Quantitative and Qualitative Disclosures About Market Risk..........64
Item 10. Directors and Officers of Registrant................................67
Item 11. Compensation of Directors and Officers..............................68
Item 12. Options to Purchase Securities from Registrant or Subsidiaries......69
Item 13. Interest of Management in Certain Transactions......................72
PART II
Item 14. Description of Securities to be Registered..........................72
PART III
Item 15. Defaults upon Senior Securities.....................................72
Item 16. Changes in Securities and Changes in Security for Registered
Securities.............................................................72
PART IV
Item 17. Financial Statements................................................72
Item 18. Financial Statements................................................72
Item 19. Financial Statements and Exhibits...................................73
i
<PAGE>
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 Yen106.15=$1, which was the approximate exchange rate in Japan on March
31, 2000.
The Company's fiscal year ends on March 31. The fiscal year ended March
31, 2000 is referred to throughout this Annual Report as fiscal 2000 or the
2000 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
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 9. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Item 9-A, 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
<PAGE>
EXCHANGE RATES
The following table provides the noon buying rates for Japanese yen
expressed in Japanese yen per $1.00. The noon buying rate on September 20, 2000
was $1 = Yen106.77.
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------------------------------------
1996 1997 1998 1999 2000
---------- ---------- ---------- ---------- ----------
Yen exchange rates per U.S. dollar:
<S> <C> <C> <C> <C> <C>
High.......................................... Yen 107.29 Yen 124.54 Yen 133.99 Yen 147.14 Yen 124.45
Low........................................... 81.12 104.49 111.42 108.83 101.53
Average (of rates available on the last day of
each month during the period)................. 96.95 113.20 123.57 128.10 110.02
At period-end................................. 107.00 123.72 133.29 118.43 102.73
</TABLE>
iii
<PAGE>
Part I
Item 1. Description of Business
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. The following discussion
includes certain forward-looking statements. For a discussion of important
factors that may cause actual results to differ materially from such
forward-looking statements, see "--Risk Factors". See also "Item 9.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Risk Management" for certain factors that have in the past and may
in the future affect the financial performance of ORIX.
Corporate History
ORIX was founded 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. 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
September 1998, we became the 12th Japanese company to list its shares on the
New York Stock Exchange.
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 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. We also 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. In April 1997, we invested in a joint
venture with Bank One Corporation, a major U.S. bank holding company, to
securitize and service commercial property loans in the United States. We
acquired the remaining stake in this joint venture company in July 1999, where
upon it became our wholly-owned subsidiary, ORIX Real Estate Capital Markets,
LCC. We have also continued to expand our leasing presence overseas. In this
third phase of our development, domestic subsidiaries, such as ORIX Rentec and
ORIX Auto Leasing, have also established overseas operations.
In the recent years, we have also sought:
o to enter into Japan's personal financial services markets;
o to add value to our products and services in order to increase
returns; and
o to increase our fee-based business content.
1
<PAGE>
In this regard, in 1997, we established a Personal Financial Services
team, which has since become ORIX's PFS Department, to examine the potential to
enter Japan's retail finance sector. In 1997, we commenced sales of ORIX Direct
Life Insurance, a new range of life insurance products aimed at the consumer
life insurance market.
In 1997, we acquired direct financing lease and installment loan
receivables with a book value of Yen288,619 million and 87 employees from Crown
Leasing, a nonbank associated with the Nippon Credit Bank Ltd., which filed for
bankruptcy in April 1997.
In fiscal 1998, we acquired all the shares of common stock and 60 former
employees of Yamaichi Trust and Banking from Yamaichi Securities Company,
Limited and subsequently changed its name to ORIX Trust and Banking
Corporation. This acquisition provided us with a general banking license, which
includes permission to accept deposits, and a trust business license. The
general banking license facilitated our expansion into the retail financial
services market, as well as improve the level of service we provide to our
corporate customers. The trust business license facilitated our securitization
business as well as the securitization of our own assets.
In fiscal 1999,
o ORIX Real Estate, a new subsidiary which handles our real estate
development, sales and rentals, was established under our new Real
Estate Business Headquarters; and
o we established ORIX Asset Management and Loan Services Corporation to
take advantage of deregulation in the Japanese financial markets to
diversify our services and products.
In fiscal 2000,
o 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 are
presently carried out by ORIX Media Supply Corporation; and
o we acquired a 40% stake in a consumer finance company in Osaka.
In September 1999, we formed a joint venture company with the AIG
companies in Japan to operate in the Japanese nonlife insurance sector. The new
company, ORIX Insurance Planning Corporation, began operations from November
1999 as an agent of the AIU Insurance Company and other AIG member companies.
It provides various types of nonlife insurance products specifically designed
and developed using the expertise of AIG member companies to meet the needs of
the Company's target customers.
In the current fiscal year, 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 Nippon Credit Bank of Japan from the Japanese Deposit
Insurance Corporation on September 1, 2000. We acquired 14.99% stake in the
bank and our investment amounted to approximately Yen15 billion.
As consolidation proceeds within the Japanese leasing industry, we will
continue to evaluate other possible acquisitions in order to expand our
portfolio of operating assets.
Our Portfolio
The following chart shows the breakdown of our portfolio as of June 30,
2000 and illustrates the success of our diversification efforts. Our domestic
companies listed below include only operating companies. ORIX Commercial
Alliance, ORIX Leasing Malaysia, ORIX Australia, ORIX Aviation Systems, ORIX
Asia, ORIX USA, ORIX Real Estate Capital Markets and ORIX Real Estate Equities
are overseas subsidiaries.
2
<PAGE>
<TABLE>
<CAPTION>
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 Commercial Alliance
Automobiles Corporation
Marine vessels ORIX Leasing Malaysia
Aircraft Berhad
ORIX Australia Corporation
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 Australia Corporation
Aircraft Limited
Real estate 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 Commercial Alliance
Corporation
Life insurance Life insurance products sold Middle market ORIX Life Insurance
through agents and directly to corporate customers Corporation
consumers Consumers
Other operations Securities brokerage Consumers ORIX Corporation
Trust banking Middle market ORIX Securities Corporation
Securities investment corporate customers ORIX Commodities
Venture capital investment Corporation
Futures and options trading ORIX Capital Corporation
Commodities funds ORIX Maritime Corporation
Insurance agency services ORIX Estate Corporation
Ship management ORIX Real Estate Corporation
Computer software development ORIX Asset Management and
Sales of interior furnishings Loan Services Corporation
Real estate development and ORIX Investment Corporation
brokerage 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
Hotel management Markets, LLC
Professional baseball team ORIX Real Estate Equities,Inc.
Environmental services
</TABLE>
3
<PAGE>
The Leasing Market in Japan
The Japanese leasing industry is highly fragmented, with 340
companies registered with the Japan Leasing Association as of March 31, 2000.
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 2000, the total annual value of new lease contracts reported by
the Japan Leasing Association was Yen7,402 billion ($70 billion). The value of
new lease contracts in fiscal 2000 based on purchase costs represented 9.86% of
total private fixed investment in Japan as estimated by the Economic Planning
Agency. These leases include only financing leases as defined under Japanese
GAAP, and as a result do not include installment sales contracts classified
under U.S. GAAP, and by us, as direct financing leases.
The largest segment of financing leases in fiscal 2000 was
information-related equipment (including computers and related equipment),
which represented 43.6% of the total value of lease contracts, followed by
industrial equipment (18.4%) and commercial service equipment (13.8%).
Small- and medium-sized companies represented 45.8% of the total customer
base in Japan as measured by value of lease contracts, while large companies
comprised 49.4% of the customer base.
The following tables contain some additional information regarding the
Japanese leasing market. The figures for the year ended March 31, 2000 in the
Annual New Lease Contracts table are preliminary estimates. The figures for
private fixed investments are estimates provided by the Economic Planning
Agency.
Lease Financings by Equipment Type
<TABLE>
<CAPTION>
Years ended March 31,
--------------------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Information-related equipment........ 39.9% 42.5% 42.4% 44.0% 43.6%
Industrial equipment................. 16.8 17.0 18.1 16.7 18.4
Commercial service equipment......... 17.2 15.4 14.6 14.5 13.8
Office equipment..................... 10.5 9.5 8.7 8.1 8.1
Transportation equipment............. 7.1 7.1 7.2 6.6 6.5
Medical equipment.................... 3.4 3.5 3.4 3.8 3.9
Other................................ 5.1 5.1 5.6 6.3 5.8
</TABLE>
Annual New Lease Contracts
<TABLE>
<CAPTION>
Year ended March 31,
-----------------------------------------------------------------
1996 1997 1998 1999 2000
--------- --------- --------- --------- ---------
(Billions of yen)
<S> <C> <C> <C> <C> <C>
Total receivables under new lease
contracts................................... Yen 7,621 Yen 8,287 Yen 7,930 Yen 7,144 Yen 7,402
Annual new lease contracts (cost basis)...... 6,580 7,224 7,018 6,315 6,586
Private fixed investment..................... 73,331 78,571 81,846 72,923 66,800
Annual new lease contracts as a
percentage of private fixed
investment.................................. 8.97% 9.19% 8.57% 8.66% 9.86%
</TABLE>
Overview of Activities
Scope of Domestic Operations
Domestically our group is comprised of ORIX, 30 major subsidiaries, and a
number of investments in affiliates as of March 31, 2000. As of that date, we
employ approximately 6,556 staff in Japan and our domestic operations are
serviced by a network of 573 offices throughout Japan. We use this extensive
nationwide network to provide services to our clients. Approximately 76.9% of
our revenues in fiscal 2000 were generated by our domestic operations. Our
operating subsidiaries have made a substantial contribution to our overall
profits. Activities conducted principally
4
<PAGE>
through subsidiaries include the automobile leasing business conducted by ORIX
Auto Leasing and 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. At March 31, 2000, we operated in 21
countries outside Japan through 43 major subsidiaries and affiliates. Our
overseas operations, including our affiliates, employ approximately 3,000
staff, and include a network of 146 offices.
ORIX USA is our base for operations in the Americas. Stockton Holdings, 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, continues to expand its leasing and installment sales operations.
Singapore has also become an important center for our business in the region.
We have also continued to expand our leasing presence in other countries.
In addition, 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.
Most 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 in order.
This reduces those risks and the risk of equipment remaining idle. 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, 2000.
5
<PAGE>
<TABLE>
<CAPTION>
As of March 31, 2000
----------------------------------------------------------------
Percent of direct
Millions of yen Millions of dollars financing leases
--------------- ------------------- -----------------
<S> <C> <C> <C>
Direct financing leases in:
Japan............................. Yen 1,318,012 $ 12,417 75.5%
Overseas.......................... 426,941 4,022 24.5%
--------- -------- -----
Total............................... Yen 1,744,953 $ 16,439 100.0%
========= ======== =====
</TABLE>
As of March 31, 2000, the total balance of our investment in direct
financing leases represented 36.6 % 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, 2000.
<TABLE>
<CAPTION>
As of March 31, 2000
----------------------------------------------------------------
Percent of direct
Millions of yen Millions of dollars financing leases
--------------- ------------------- -----------------
<S> <C> <C> <C>
Direct financing leases in:
Japan.............................. Yen 86,901 $ 819 66.4%
Overseas........................... 43,897 413 33.6%
------- ------ -----
Total............................... Yen 130,798 $1,232 100.0%
======= ====== =====
</TABLE>
Our revenues from direct financing leases in fiscal 2000 represented 21.2%
of our total revenues. 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>
<CAPTION>
As of March 31,
-------------------------------------------------------------------------------------
1996 1997 1998 1999 2000
------------- ------------- ------------- ------------- -------------
(Millions of yen)
<S> <C> <C> <C> <C> <C>
Information-related and office
equipment........................ Yen 551,595 Yen 557,439 Yen 623,203 Yen 493,298 Yen 373,281
Industrial equipment.............. 394,460 436,813 473,140 444,261 394,581
Commercial services equipment..... 216,754 226,118 273,730 224,080 194,809
Transportation equipment.......... 373,560 458,572 443,486 414,093 398,521
Other............................. 377,467 388,674 372,463 377,110 383,761
--------- --------- --------- --------- ---------
Total............................ Yen 1,913,836 Yen 2,067,616 Yen 2,186,022 Yen 1,952,842 Yen 1,744,953
========= ========= ========= ========= =========
</TABLE>
The above table does not include securitized lease assets. If securitized
assets were included, total balance of direct financing lease assets would be
Yen2,188,091 million as of March 31, 1999, and Yen2,098,897 million ($19,773
million) as of March 31, 2000, respectively.
At March 31, 2000, no single lessee represented more than 1% of our total
portfolio of direct finance leases. As of March 31, 2000, approximately 75.5%
of our direct financing leases were to lessees located in Japan, and
approximately 18.6% 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.
6
<PAGE>
<TABLE>
<CAPTION>
As of March 31,
-------------------------------------------------------------------------------------
1996 1997 1998 1999 2000
------------- ------------- ------------- ------------- -------------
(Millions of yen)
<S> <C> <C> <C> <C> <C>
Minimum lease payments receivable.. Yen 2,086,621 Yen 2,229,528 Yen 2,353,294 Yen 2,107,393 Yen 1,889,224
Estimated residual value........... 75,047 76,578 59,119 52,368 49,965
Initial direct costs............... 21,037 23,886 28,294 29,374 26,042
Unearned lease income.............. (268,869) (262,376) (254,685) (236,293) (220,278)
--------- --------- --------- --------- ---------
Total........................ Yen 1,913,836 Yen 2,067,616 Yen 2,186,022 Yen 1,952,842 Yen 1,744,953
========= ========= ========= ========= =========
</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. 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
Our investment in industrial equipment has remained significant in recent
years, despite a general sluggishness in domestic demand. This is largely due
to asset growth in ORIX Commercial Alliance in the United States. Industrial
equipment primarily consists of construction and heavy equipment, and pulp and
paper milling equipment.
Commercial Services Equipment
Commercial services equipment includes gaming machines, cash registers,
showcases and point-of-sales systems. Expansion in the Japanese leisure and
retail industries has increased the importance of our commercial services
equipment segment.
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 Asian countries. 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 the
country to allow customers to monitor fuel costs on a centralized basis and
obtain other data services. Moreover, to deal with legal, labor-related,
accident, and other types of risks, we provide comprehensive risk management
services and 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, 2000, we
had a total of 261,000 vehicles under lease. Based on fiscal 1999 data, we had
a market share of approximately 12% of the domestic automobile leasing industry,
which we believe made us the largest independent automobile lessor in Japan. We
believe that our value-added services relating to vehicle maintenance and
post-accident procedures enable
7
<PAGE>
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
handle the sale of approximately 28,000 vehicles each year.
Other Equipment
Other equipment that we lease to Japanese clients includes a wide range of
medical and function-specific 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>
<CAPTION>
As of or for the year ended March 31,
-----------------------------------------------------------------
1998 1999 2000 2000
---------- ---------- ---------- ------------
(Millions of
(Millions of yen, except percentage data) dollars)
-------------------------------------------- ------------
<S> <C> <C> <C> <C>
90+ days past due direct financing leases........ Yen 36,688 Yen 54,051 Yen 53,743 $ 506,293
90+ days past due direct financing leases as a
percentage of the balance of investment in direct
financing leases................................ 1.7% 2.8% 3.1% --
Provisions as a percentage of average balance of
investment in direct financing leases........... 0.3% 0.8% 1.1% --
Allowance for direct financing leases Yen 10,510 Yen 23,867 Yen 35,783 $ 337,099
Allowance for direct financing leases as a
percentage of the balance of 90+ days past due
direct financing leases......................... 28.6% 44.2% 66.6% --
Allowance for direct financing leases as a
percentage of the balance of investment in direct
financing leases................................ 0.48% 1.22% 2.05% --
</TABLE>
The 90+ days past due ratio and provision as a percentage of average
balance of investment in direct financing leases increased in fiscal year 2000,
due to the securitization of some direct financing lease assets, which resulted
in a lower balance of investment in direct financing leases. The balance of
allowance for direct financing leases as a percentage of the balance of 90+
days past due direct financing leases in fiscal 2000 increased from fiscal
1999. In fiscal 2000, while our 90+ days past due direct financing leases
decreased, we increased allowance for direct financing leases due to depressed
domestic economic conditions.
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, 2000, 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 then
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 66.6% as of March 31, 2000.
The ratio of charge-offs as a percentage of the balance of the investment
in direct financing leases averaged 0.35% for fiscal 1998 through fiscal 2000.
We recognize that, due to our charge-off policy, historical ratios of
charge-offs as a percentage of the balance of our investment in direct
financing leases may be lower than if we had taken charge-offs on a more timely
basis. Accordingly, in evaluating whether the ratio of allowance for doubtful
receivables as a percentage of the balance of our investment in direct
financing leases is adequate, we do not give as much weight to historical
charge-off ratios as we do to the other factors discussed above.
8
<PAGE>
Operating Leases
Operating leases constitute another one of our principal business
activities. The table below provides a geographical breakdown of our operating
lease assets as of March 31, 2000.
<TABLE>
<CAPTION>
As of March 31, 2000
-------------------------------------------------------------
Percentage of
total revenue
from operating
Millions of yen Millions of dollars leases
--------------- ------------------- --------------
<S> <C> <C> <C>
Operating leases in:
Japan........................ Yen 274,513 $ 2,586 69.0%
Overseas..................... 123,063 1,159 31.0%
------- ------- -----
Total........................... Yen 397,576 $ 3,745 100.0%
======= ======= =====
</TABLE>
As of March 31, 2000, our total operating lease assets represented 8.3% of
our total operating assets.
The table below provides a geographical breakdown of revenues from our
operating leases for the year ended March 31, 2000.
<TABLE>
<CAPTION>
Year ended March 31, 2000
-------------------------------------------------
Percentage of
total revenue
Millions of from operating
Millions of yen dollars leases
--------------- ----------- --------------
Operating leases in:
<S> <C> <C> <C>
Japan.............. Yen 71,050 $ 669 70.7%
Overseas........... 29,453 278 29.3%
------- ----- -----
Total............... Yen 100,503 $ 947 100.0%
======= ===== =====
</TABLE>
In fiscal 2000, our revenues from operating leases represented 16.3% of
our total revenues.
Operating leases differ from direct financing leases in that they are
generally cancellable by the lessee. The lessor does not substantially recoup
the initial cost of the item through lease payments during the initial lease
term. Therefore, the lessor usually leases out the same item sequentially to
more than one customer 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
(dormitories) and other.
The following table provides the balance of operating lease assets by
segment.
<TABLE>
<CAPTION>
As of March 31,
---------------------------------------------------------------------------
1996 1997 1998 1999 2000
----------- ----------- ----------- ----------- -----------
(Millions of yen)
<S> <C> <C> <C> <C> <C>
Transportation equipment..................... Yen 169,425 Yen 205,277 Yen 195,392 Yen 181,886 Yen 159,548
Measuring equipment and personal computers... 46,166 53,740 59,989 58,552 58,431
Real estate and other........................ 197,828 206,720 179,685 170,718 179,597
------- ------- ------- ------- -------
Total.................................. Yen 413,419 Yen 465,737 Yen 435,066 Yen 411,156 Yen 397,576
======= ======= ======= ======= =======
</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.
9
<PAGE>
Transportation Equipment
Transportation equipment that we lease out under operating leases is
mainly aircraft, automobiles and oceangoing vessels. Our fleet of aircraft
currently stands at 23 owned and 22 managed aircraft. These are leased
principally to European and North American carriers. We own 22 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.
The sale of an aircraft reduced the balance of transportation equipment
assets.
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 350,000 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. This reduces the risk of accumulating obsolete
equipment and increases returns from the final sale of 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 over 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 2,500 apartment units, and a number of
other real estate properties, located mainly in or near Tokyo and Osaka. The
weighted average useful life for our real estate and other is 40 years.
Installment Loans and Investment Securities
In fiscal 2000, our revenues from interest on loans and investment
securities were Yen97,390 million ($917 million), representing 15.8% of our
total revenues. As of March 31, 2000, the balance of installment loans was
Yen1,791,439 million ($16,876 million) and the balance of investment in
securities was Yen758,381 million ($7,144 million).
Installment Loans
The table below provides a geographical breakdown of installment loans as
of March 31, 2000.
10
<PAGE>
<TABLE>
<CAPTION>
As of March 31, 2000
---------------------------------------------------------------
Percentage of
total installment
Millions of yen Millions of dollars loans
--------------- ------------------- -----------------
<S> <C> <C> <C>
Investment in installment loans
Domestic............................... Yen 1,453,685 $ 13,694 81%
Foreign................................ 337,754 3,182 19%
--------- -------- ---
Total................................... Yen 1,791,439 $ 16,876 100%
========= ======== ===
</TABLE>
For a breakdown of investment securities by business segments, see "Item
9. Management's Discussion and Analysis of Financial Condition and Results of
Operations--General--Presentation of Income from Investments".
The following table shows the balance of installment loans by domicile and
type of borrowers.
<TABLE>
<CAPTION>
As of March 31,
---------------------------------------------------------------------------------
1996 1997 1998 1999 2000
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(Millions of yen)
Domestic Consumer
Housing loans............................ Yen 462,906 Yen 435,388 Yen 426,559 Yen 411,215 Yen 396,748
Card loans............................... 59,473 78,438 98,187 118,347 121,272
Other.................................... 87,233 67,902 55,811 43,663 56,461
--------- --------- --------- --------- ---------
Subtotal................................. 609,612 581,728 580,557 573,225 574,481
Domestic Commercial
Real estate related companies............ 186,115 193,578 213,911 188,085 203,537
Commercial and industrial companies...... 532,870 558,232 607,952 614,988 657,355
--------- --------- --------- --------- ---------
Subtotal................................. 718,985 751,810 821,863 803,073 860,892
--------- --------- --------- --------- ---------
1,328,597 1,333,538 1,402,420 1,376,298 1,435,373
Foreign commercial, industrial and other
borrowers................................ 283,665 351,053 377,761 368,661 337,754
Direct loan origination costs, net........ 16,654 16,106 14,644 16,928 18,312
--------- --------- --------- --------- ---------
Total..................................... Yen 1,628,916 Yen 1,700,697 Yen 1,794,825 Yen 1,761,887 Yen 1,791,439
========= ========= ========= ========= =========
</TABLE>
As of March 31, 2000, we had no concentration of loans to borrowers in a
single industry, other than loans to real estate related companies. At March
31, 2000, we had loans outstanding of Yen 232,999 million ($2,195 million) to
real estate related companies and construction companies. Of that amount, a
valuation allowance was required for loans with an outstanding balance of Yen
35,188 million ($331 million). The remaining outstanding balance represents
performing loans or the portion of loans secured by collateral.
As of March 31, 2000, approximately 81% of loans were to borrowers in
Japan and approximately 9% 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 competition. 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.
11
<PAGE>
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 and construction
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 9. Management's Discussion and Analysis of
Financial Condition and Results of Operations--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.
<TABLE>
<CAPTION>
As of March 31,
-----------------------------------------------------------
1998 1999 2000 2000
----------- ----------- ----------- -----------
(Millions of yen) (Millions
of dollars)
<S> <C> <C> <C> <C>
Impaired loans..................................... Yen 182,976 Yen 130,226 Yen 125,921 $1,186
Impaired loans requiring a valuation allowance..... 153,529 114,525 83,408 786
Valuation allowance 104,921 62,109 51,791 488
</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 2000, a charge-off of
impaired loans amounting to Yen16,328 million ($154 million) resulted in a
decrease in the outstanding balances of impaired loans as of March 31, 2000
compared to March 31, 1999.
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.
12
<PAGE>
<TABLE>
<CAPTION>
As of March 31,
-----------------------------------------------
1998 1999 2000
------------- ------------- -------------
<S> <C> <C> <C>
(Millions of yen)
Domestic Consumers
Housing loans.............................................. Yen -- Yen -- Yen --
Card loans................................................. -- -- --
Others..................................................... 3,462 740 646
------- ------- -------
Subtotal................................................. 3,462 740 646
Domestic Commercial
Real estate related companies.............................. 113,703 64,536 49,432
Commercial and industrial companies........................ 62,756 57,135 64,131
------- ------- -------
Subtotal................................................. 176,459 121,671 113,563
Foreign, commercial, industrial and other borrowers......... 3,055 7,815 11,712
------- ------- -------
Total....................................................... Yen 182,976 Yen 130,226 Yen 125,921
======= ======= =======
</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>
<CAPTION>
As of March 31,
---------------------------------------------------------
1998 1999 2000 2000
----------- ---------- ---------- -----------
(Millions
(Millions of yen, except percentage data) of dollars)
<S> <C> <C> <C> <C>
90+days past due loans excluding FASB Statement 114
loans................................................... Yen 101,527 Yen 98,100 Yen 91,513 $ 862
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.................................... 6.3% 6.0% 5.4% --
Provisions as a percentage of average balance of
installment loans...................................... 1.6% 1.7% 1.1% --
Allowance for possible loan losses not attributable to
treatment under FASB Statement 114..................... Yen 30,310 Yen 46,630 Yen 49,365 $ 465
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..................... 29.9% 47.5% 53.9% --
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.................................................. 1.88% 2.86% 2.96% --
</TABLE>
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>
<CAPTION>
As of March 31,
-------------------------------------
1998 1999 2000
----------- ----------- -----------
(Millions of yen)
<S> <C> <C> <C>
Domestic consumer
Housing loans................... Yen 70,313 Yen 71,157 Yen 67,066
Card loans and other............ 20,574 20,021 16,825
Domestic commercial
Real estate related companies... 2,319 -- 191
Commercial and industrial companies 3,275 675 2,103
Foreign............................... 5,046 6,247 5,328
------- ------ ------
Total................................. Yen 101,527 Yen 98,100 Yen 91,513
======= ====== ======
</TABLE>
13
<PAGE>
The majority of these past-due loans were domestic housing loans to
consumers secured by collateral (mostly first mortgages) where we received
partial payments or restructured repayment schedules. 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 fiscal 1998, we increased the allowance for loans as a result of concerns
over general economic conditions in Japan. In fiscal 1999 and 2000, we kept the
allowance for these loans at the fiscal 1998 level. 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, 2000 was
adequate because
o we expect a higher collection rate for 90+ days past due loans
(excluding FASB Statement 114 loans) than that of installment loans
considered impaired under the definition contained in FASB Statement
114, 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 53.9% as of March 31, 2000.
The ratio of charge-offs as a percentage of the balance of installment
loans averaged 0.79% for fiscal 1998 through fiscal 2000. 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 installment loans is adequate, we do not give as much
weight to historical charge-off ratios as we do to the other factors discussed
above.
Investment Securities
We maintain a sizable investment in various securities. The largest
segment of this portfolio is the investment of the reserves in our life
insurance operations. This is approximately 55.0% of our total investment in
securities. These reserves are generally invested in corporate debt. For a
breakdown of investment securities by business segments, see "Item 9.
Management's Discussion and Analysis of Financial Condition and Results of
Operations-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>
<CAPTION>
As of March 31,
---------------------------------------------------------------------------------
1998 1999 2000
----------------------- ----------------------- --------------------
(Millions of yen)
<S> <C> <C> <C> <C> <C> <C>
Trading securities.............. Yen 46 0.0% Yen 414 0.1% Yen 390 0.1%
Available-for-sale securities... 451,074 90.2 507,510 88.1 689,638 90.9
Held-to-maturity securities..... 3,127 0.6 16,542 2.8 11,404 1.5
Other securities................ 46,202 9.2 51,740 9.0 56,949 7.5
------- ----- ------- ----- ------- ---
Total...................... Yen 500,449 100.0% Yen 576,206 100.0% Yen 758,381 100%
======= ===== ======= ===== ======= ===
</TABLE>
14
<PAGE>
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 Yen45,752 million ($431 million) as of March
31, 2000. 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.
The following table provides the fair value of available-for-sale and
held-to-maturity securities in each major security type.
<TABLE>
<CAPTION>
As of March 31,
------------------------------------------------------------
1998 1999 2000 2000
----------- ----------- ----------- ------------
(Millions of yen) (Millions of
dollars)
<S> <C> <C> <C> <C>
Available-for-sale securities:
Japanese and foreign government bond securities....... Yen 5,779 Yen 20,601 Yen 12,895 $ 122
Japanese prefectural and foreign municipal bond
securities.......................................... 20,039 20,468 33,021 311
Corporate debt securities............................. 336,164 398,753 482,417 4,545
Mortgage-backed and other asset-backed securities..... 24,321 6,795 54,475 513
Funds in trust........................................ 4,270 6,128 2,479 23
Equity securities..................................... 60,501 54,765 104,351 983
----- ------ ------- -------
Yen 451,074 Yen 507,510 Yen 689,638 $ 6,497
======= ====== ======= =======
Held-to-maturity securities:
Corporate debt securities........................ Yen 3,098 Yen 16,515 Yen 11,404 $ 107
------- ------ ------- -------
Yen 3,098 Yen 16,515 Yen 11,404 107
======= ====== ======= =======
</TABLE>
At March 31, 2000, marketable equity securities amounted to approximately
13.8% of ORIX's total investment in securities. We make these equity
investments mainly to strengthen business relationships with customers.
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 2000 were Yen205,829 million ($1,939 million), or 33.4% 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, 2000 amounting to Yen2,699
billion ($25.4 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, 2000.
15
<PAGE>
<TABLE>
<CAPTION>
As of March 31, 2000
---------------------------------------
Millions of yen Millions of dollars
--------------- -------------------
<S> <C> <C>
Investment in securities
Fixed income securities.... Yen 390,523 $ 3,679
Marketable securities...... 13,243 125
Other securities........... 13,379 126
------- -------
Total investment in securities... Yen 417,145 $ 3,930
Other investments................ 20,909 197
------- -------
Total............................ Yen 438,054 $ 4,127
======= =======
</TABLE>
Investments by ORIX Life Insurance other than securities consisted
principally of real estate for rental and loans.
Insurance Agency Sales
We engage in life insurance agency sales through our network of
approximately 1,900 registered sales agents. ORIX serves as sales agents 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 new 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.
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, 2000,
these operations had assets of Yen72,472 million ($683 million), representing
1.5% of our total operating assets. In fiscal 2000, we had revenues from other
operations of Yen58,409 million ($550 million), representing 9.5% 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, three golf courses and hotels.
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 2000, operating revenues from the condominium
business was approximately 60.4% of the 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 575 residential apartment units in fiscal 1999 and 1,004 units in
fiscal 2000. We are also participating in a consortium, led by Japan's largest
property developer, Mitsubishi Estate Co., Ltd., that will construct a large
residential apartment complex in Tokyo. We are also involved in commercial real
estate development. Currently, we are working on a multi-purpose development in
Yokohama's Minato Mirai complex, which will have hotel, retail and commercial
office space. We expect to complete the development by October, 2000. The
expertise that we have accumulated in more than 15 years in the Japanese real
estate market, coupled with our financing capabilities, allow us to create
one-stop development packages.
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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 servicer operations.
Commodities Trading and Management
We have been involved in the commodities trading and management field
since 1989 through our investment in Stockton Holdings which then was engaged
principally in commodities trading in the United States. We have also taken a
leading role in the promotion of commodities funds in Japan, where we are the
largest distributor of commodity funds, accounting for approximately 28% of the
cumulative Yen579 billion of commodities funds sold in Japan between fiscal
1989 and fiscal 2000. Taking advantage of deregulation in Japan which
ultimately eliminated minimum investment requirements, we have expanded our
marketing activities to individuals, while maintaining our corporate marketing
operations at existing levels.
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 began to offer On-Line Trade, an equity trading service available
via telephone and the Internet in May 1999.
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, 2000, assets under ORIX Capital's
management were approximately Yen10,300 million ($97 million), consisting
entirely of equity securities.
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.
The PFS Department has also begun to offer small-lot commodity fund
investment products to individuals via direct channels. The minimum investment
unit for these funds has been reduced to Yen500,000. In the past, the principal
customers for commodity funds were corporations, but as a result of this
reduction in the minimum investment unit, these funds have become accessible to
individuals.
General and Trust Banking
ORIX Trust and Banking provides us with a general banking license and a
trust business license. We have initiated the direct marketing of deposit
products. As of July 31, 2000, the balance of these deposits was approximately
Yen150 billion.
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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.
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. These affiliates have consistently contributed to our net income
of affiliates.
Other Operations
We own the ORIX BlueWave, a professional baseball team we acquired in
1988, as part of an overall move 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 the 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.
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 Commercial Alliance 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 are becoming an indispensable part of our
operations, generating approximately 23.1% of our total revenues in fiscal
2000. Of these overseas revenues, approximately 52.3% is in the Americas, 34.9%
in the Asia and Oceania region, and the remaining 12.8% in Europe.
Approximately 22.9% of our total assets are overseas operating assets,
excluding assets attributable to the corporate segment and assets which belong
to affiliate operations. Approximately 56.6% of overseas assets relate to the
Americas, 30.3% to Asia and Oceania, and the remaining 13.1% to Europe.
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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 expanded our activities in the United
States significantly. 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 Commercial Alliance.
ORIX Real Estate Equities is a real estate development and management
company, which was 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 Commercial Alliance, which we acquired in 1989, specializes in
leasing heavy equipment. The largest segments of its leasing portfolio are
trucking, construction and other heavy equipment. ORIX Commercial Alliance
employs vendor programs that target dealers and distributors to promote sales
and marketing. Headquartered in New Jersey, ORIX Commercial Alliance maintains
several divisional operating centers in the United States and Canada and has
focused on asset financing, targeting the middle market. In recent years, ORIX
USA and ORIX Commercial Alliance continued to expand their nationwide asset
finance marketing activities and made a substantial contribution to the overall
performance of our group.
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, 2000 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
32 major subsidiaries and affiliates at March 31, 2000. These companies do
business in 16 countries in the Asia, Oceania and Middle East regions. During
the more than 25 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.
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In this decade, our domestic subsidiaries have also started to expand 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 Corporate Finance Limited in London, 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. ORIX Corporate Finance, a subsidiary
of ORIX Europe, provides financial advisory services.
Regulation
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, established on July 1, 2000 by reorganizing the Financial Supervisory
Agency and a part of the Ministry of Finance, 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 Reconstruction Commission. 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 Reconstruction Commission 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.
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Competition
Our markets are highly competitive and are characterized by competitive
factors that vary by product and geographic region. Our competitors include
independent and captive leasing and finance companies and commercial banks.
Some of our competitors have substantial market positions. Many of our
competitors are large companies that have substantial capital and marketing
resources, and some of these competitors are larger than us and may have access
to capital at a lower cost than we do. Competition in Japan and a number of
other geographical markets has increased in recent years because of
deregulation and increased liquidity. The markets for most of our products are
characterized by a large number of competitors. However, in some of our
markets, such as automobile leasing and small-ticket leasing, competition is
relatively more concentrated.
Japan's leasing industry has a small number of independent leasing
companies. Many leasing firms are affiliated with banks, trading houses,
manufacturers and financial organizations. Furthermore, many of these
specialize in specific products, product ranges, or geographical regions. We
have established a nationwide network and distribute a full range of 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.
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 1990s. 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, 2000, we had loans outstanding of Yen 232,999 million ($2,195
million) to real estate related companies and construction companies. Of that
amount, we maintained an allowance for possible loan losses of Yen35,188
million ($331 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.
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Japanese real estate related companies and construction companies have
been severely affected by the collapse of the bubble economy in Japan. Because
of the large declines in real estate prices, these companies have suffered
enormous losses on investments in real estate and loans secured by real estate.
Some of these losses have been recognized in the financial statements of these
companies and some have not. Companies in these sectors are suffering from
other difficult business conditions resulting from the collapse of the bubble
economy, including the lack of liquidity in the real estate market and a
decrease in major development projects. Therefore, these companies may have
difficulty paying amounts due on loans and leases. 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.
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 market changes in interest rates 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 finance receivables and operating leases, and our
ability to grow. On the other hand, a decrease in interest rates could result
in faster prepayments of loans. In addition, changes in market interest rates
could affect the interest rates received on interest-earning assets differently
than the interest rates paid 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, 2000, the book value of our investments in
securities was Yen758,381 million ($7,144 million). We may suffer losses on
these investments because of changes in market prices, defaults or other
reasons.
13.8% of our investment securities at March 31, 2000 were marketable
equity securities, mainly common stock of Japanese listed companies. The market
values of these equity securities are volatile and have declined substantially
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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 Yen12,297 million ($116 million) in charges of this
kind in fiscal 2000 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. Some of these investments are
subordinated bonds of Japanese banks, which are in weak financial condition. We
wrote-down those investments in Japanese banks to their fair value. Those
write-downs are included in the Yen12,297 million in charges indicated above.
We may realize losses on investments in debt securities as a result of credit
losses. We may also realize losses on our investment portfolio if market
interest rates increase from the current low levels.
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 unanticipated adverse changes in the Japanese
economy or other economies in which we compete or discrete events adversely
affect specific customers, industries or markets. If our allowance for
doubtful receivables on direct financing leases and possible loan losses is
insufficient to cover these changes or events, we could be adversely affected.
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. 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.
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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 less 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 less than 100 shares,
or ADRs evidencing less 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.
Item 2. 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, 2000 of approximately Yen74,770 million
($704 million).
Item 3. Legal Proceedings
We are a defendant in various lawsuits arising in the ordinary course of
our business. A judgement was rendered on August 31, 2000 for a lawsuit in
connection with the repayment of participation loans in which ORIX was a
defendant and Sumisei Leasing Co., Ltd. was a plaintiff. The judgment issued by
the Tokyo District Court requires ORIX to pay damages in the amount of Yen10.4
billion. ORIX has appealed to the Tokyo High Court. In our balance sheet as of
March 31, 2000 we had accounted for Yen5.5 billion as liabilities at the time
we made participation loans. Although it is not certain yet whether or not we
will ultimately have to pay damages, we will account the balance of Yen4.9
billion as accrued expense in our interim financial statements for the period
ending September 30, 2000.
We aggressively manage our pending litigation and assess appropriate
responses to our 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
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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 4. Control of Registrant
As of March 31, 2000, ORIX had an aggregate of 68,630,294 shares
outstanding, each with a par value of Yen50 per share. As of March 31, 2000, no
person was the beneficial owner of more than 10% of any class of ORIX's shares.
As of March 31, 2000 the total aggregate amount of ORIX's voting shares owned
by all Directors, Corporate Executive Officers and Corporate Auditors of ORIX
was 90,997 shares or 0.1% of the total number of outstanding shares.
Item 5. Nature of Trading Market
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 and
average daily trading volume of the shares on the Tokyo Stock Exchange,
excluding off-floor transactions. The table also shows for the end of each
period the Nikkei Stock Average and the Tokyo Stock Price Index (TOPIX). High
and low sales price quotations from the Tokyo Stock Exchange have been
translated in each case into dollars per ADS at the Federal Reserve Bank of New
York's noon buying rate on the relevant date or the noon buying rate on the
next business day if the relevant date is not a business day.
Tokyo Stock Exchange
<TABLE>
<CAPTION>
Translated Average daily
into trading
Price Per Share US$ per ADS volume Nikkei Stock
--------------- --------------- (hundreds of Average at
Calendar period High Low High Low shares) period end TOPIX
-------------------- ------ ------ ------ ------ ------------- ------------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
1997
First quarter..... 5,890 4,560 24 20 1,640 18,003 1,373
Second quarter.... 8,820 5,490 39 22 2,184 20,605 1,554
Third quarter..... 9,950 8,150 42 34 1,428 17,888 1,388
Fourth quarter.... 9,820 7,650 41 30 1,378 15,259 1,175
1998
First quarter..... 10,200 8,130 39 33 1,802 16,527 1,252
Second quarter.... 9,600 8,400 37 31 1,391 15,830 1,230
Third quarter..... 10,630 8,430 38 32 1,302 13,406 1,044
Fourth quarter.... 9,500 7,560 35 34 901 13,842 1,087
1999
First quarter..... 9,080 7,200 38 33 1,593 15,837 1,267
Second quarter.... 11,860 8,250 49 34 1,333 17,530 1,416
Third quarter..... 13,930 10,540 65 48 1,916 17,605 1,507
Fourth quarter.... 24,150 12,050 118 57 2,246 18,934 1,722
<
2000
First quarter..... 24,100 16,030 117 76 2,301 20,337 1,706
</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 reported high price of the shares on the Tokyo Stock Exchange since
the share subdivision is Yen15,480 and low price, Yen13,400.
25
<PAGE>
New York Stock Exchange
The ADSs and ADNs are listed on the New York Stock Exchange under the
symbol "IX".
Two ADSs represent one share. On March 31, 2000, approximately 1,096,600
ADSs were outstanding. This is equivalent to 548,300 shares, or approximately
0.8% 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 1,096,400 ADSs. The ADS/share ratio was 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.
NYSE Price Per ADS
<TABLE>
<CAPTION>
Average daily
Calendar Period High Low trading volume
------------------------------------- ------ ----- ----------------
($) ($) (number of ADSs)
<S> <C> <C> <C>
1998
Third quarter (from September 16).. 34.63 31.56 1,143
Fourth quarter..................... 39.25 31.38 1,410
1999:
First quarter....................... 39.00 30.00 1,032
Second quarter...................... 40.00 29.89 1,275
Third quarter....................... 53.39 39.17 7,332
Fourth quarter...................... 95.31 47.50 3,236
2000:
First quarter....................... 95.21 52.92 5,573
</TABLE>
On March 31, 2000, approximately 150 ADNs were outstanding. On that date,
ADNs were held by 1 holder, including 1 record holders in the United States
holding 150 ADNs.
Item 6. Exchange Controls and Other Limitations Affecting Security Holder
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
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 Japanese company
must file a report of a transfer with the Minister of Finance within 20 days
from and including the date of the transfer.
26
<PAGE>
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 dividends, the amount of dividends for the
fiscal year ending March 31, 2000 was not adjusted to reflect the share
division.
<TABLE>
<CAPTION>
Dividend Translated into
Year ending per Share dollar per ADS
----------------------- --------- ---------------
<S> <C> <C>
March 31, 1996......... Yen 15.00 $0.07
March 31, 1997......... 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
</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:
27
<PAGE>
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%.
Item 7. 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.
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.
28
<PAGE>
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, 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.
29
<PAGE>
Item 8. Selected Financial Data
The following selected consolidated financial information has been derived
from the consolidated financial statements of ORIX 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 the
Consolidated Financial Statements of ORIX, including the notes thereto,
included in this Annual Report, which have been audited by Arthur Andersen,
independent accountants.
<TABLE>
<CAPTION>
Year ended March 31,
---------------------------------------------------------------------------------------------
1996 1997 1998 1999 2000 2000
----------- ----------- ----------- ----------- ----------- ---------------
(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 382,603 Yen 428,294 Yen 507,143 Yen 593,941 Yen 616,513 $ 5,808
Interest expense.................... 138,394 130,743 142,177 140,846 115,038 1,084
Selling, general and administrative
expenses.......................... 61,569 70,902 79,671 82,395 90,961 857
Provision for doubtful receivables
and possible loan losses........... 46,536 49,727 49,434 51,845 45,573 429
Operating income.................... 28,374 26,562 31,041 31,042 52,886 498
Equity in net income (loss) of and
gain (loss) on sales of affiliates. 6,653 10,327 7,371 (3,727) (838) (8)
Income before income taxes.......... 35,027 36,889 38,412 27,315 52,048 490
Net income.......................... 18,003 19,044 23,731 25,621 30,642 289
Basic earnings per share............ 231.28 244.64 305.33 330.43 385.27 3.63
Diluted earnings per share.......... 231.28 244.64 305.33 330.43 377.02 3.55
Cash dividends per share............ 15.00 15.00 15.00 15.00 15.00 0.14
</TABLE>
<TABLE>
<CAPTION>
As of March 31,
---------------------------------------------------------------------------------------------
1996 1997 1998 1999 2000 2000
------------- ------------- ------------- ------------- ------------- ------------
(Millions of
(Millions of yen) dollars)
<S> <C> <C> <C> <C> <C> <C>
Balance sheet data:
Investment in direct financing
leases(1)...................... Yen 1,913,836 Yen 2,067,616 Yen 2,186,022 Yen 1,952,842 Yen 1,744,953 $ 16,439
Installment loans(1)........... 1,628,916 1,700,697 1,794,825 1,761,887 1,791,439 16,876
-- --------- --------- --------- --------- --------- --------
3,542,752 3,768,313 3,980,847 3,714,729 3,536,392 33,315
Investment in operating leases. 413,419 465,737 435,066 411,156 397,576 3,745
Investment in securities....... 345,935 434,488 500,449 576,206 758,381 7,144
Other operating assets......... 55,161 58,193 65,838 73,345 72,472 683
-- --------- --------- --------- --------- --------- --------
Operating assets(2)............ 4,357,267 4,726,731 4,982,200 4,775,436 4,764,821 44,887
Allowance for doubtful
receivables on direct
financing leases and
possible loan losses......... (81,886) (117,567) (145,741) (132,606) (136,939) (1,290)
Other assets................... 476,375 480,811 737,850 704,806 713,660 6,724
-- --------- --------- --------- --------- --------- --------
Total assets................... 4,751,756 5,089,975 5,574,309 5,347,636 5,341,542 50,321
========= ========= ========= ========= ========= ======
Short-term debt................ 2,281,511 2,513,421 2,576,483 2,184,983 1,912,761 18,019
Long-term debt................. 1,705,298 1,703,913 2,044,570 2,036,028 1,942,784 18,302
Shareholders' equity........... 276,251 308,584 313,821 327,843 425,671 4,010
</TABLE>
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Selected data and ratios:(3)
Shareholders' equity ratio.................... 5.81% 6.06% 5.63% 6.13% 7.97%
Return on assets.............................. 0.39% 0.39% 0.45% 0.47% 0.57%
Return on equity.............................. 7.00% 6.51% 7.63% 7.99% 8.13%
Allowance/investment in direct financing
leases and installment loans............ 2.3% 3.1% 3.7% 3.6% 3.9%
</TABLE>
--------------
30
<PAGE>
(1) The sum of assets considered 90 or more days past due and total impaired
assets measured pursuant to FASB Statement 114 amounted to Yen321,191
million as of March 31, 1998, Yen282,377 million as of March 31, 1999 and
Yen271,177 million ($2,555 million) as of March 31, 2000. These sums
included investment in direct financing leases considered 90 or more days
past due of Yen36,688 million as of March 31, 1998, Yen54,051 million as
of March 31, 1999 and Yen53,743 million ($506 million) as of March 31,
2000, installment loans (excluding amounts attributable to treatment under
FASB Statement 114) considered 90 or more days past due of Yen101,527
million as of March 31, 1998, Yen98,100 million as of March 31, 1999 and
Yen91,513 million ($862 million) as of March 31, 2000, and installment
loans considered impaired under the definition contained in FASB Statement
114 of Yen182,976 million as of March 31, 1998, Yen130,226 million as of
March 31, 1999 and Yen125,921 million ($1,186 million) as of March 31,
2000. See "Item 1. Description of Business--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.
Item 9. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 23.1% of our total
revenues in fiscal 2000.
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.
<TABLE>
<CAPTION>
As of March 31, 1998
----------------------------------------------
Life insurance Other operations Total
-------------- ---------------- -----------
(Millions of yen)
<S> <C> <C> <C>
Fixed income securities...... Yen 150,687 Yen 238,743 Yen 389,430
Marketable equity securities. 16,804 43,697 60,501
Other securities............. 26,001 24,517 50,518
------- ------- -------
Total................... Yen 193,492 Yen 306,957 Yen 500,449
======= ======= =======
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
As of March 31, 1999
----------------------------------------------
Life insurance Other operations Total
-------------- ---------------- -----------
(Millions of yen)
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
As of March 31, 2000
----------------------------------------------
Life insurance Other operations Total
-------------- ---------------- -----------
(Millions of yen)
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
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) 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) 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. We classify accounts 90 days or more past due as
non-performing and our management reviews these accounts. 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
32
<PAGE>
flows expected to be generated by the assets. During fiscal 1998, 1999 and
2000, ORIX and certain subsidiaries wrote down certain real estate development
projects included in "investment in operating leases" and "advances" in the
consolidated balance sheets to their fair values. An impairment loss was
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 80 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;
o selected target markets and products;
33
<PAGE>
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 operated a number of subsidiaries and affiliates in 21 countries
outside Japan as of March 31, 2000. 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 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.
34
<PAGE>
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 a new 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 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.
Assets/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.
35
<PAGE>
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.
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:
36
<PAGE>
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 eliminate
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 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, 1999 Compared to Year Ended March 31, 2000
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 ($45 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 ($5,088 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 ($116 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 ($5,310
million), from fiscal 1999 to fiscal 2000. While income before income taxes
increased 90.5%, to Yen52,048 million ($490 million), net income increased
19.6%, to Yen30,642 million ($289 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.
37
<PAGE>
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>
<CAPTION>
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)
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>
<CAPTION>
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) (3.3)
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>
<CAPTION>
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>
38
<PAGE>
Total Revenues
Our total revenues increased by 3.8%, or Yen 22,572 million, to
Yen 616,513 million ($5,808 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 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 ($1,232 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 ($3,334 million). This securitization reduced interest
income. The average interest rates on domestic direct financing leases,
calculated on the basis of quarterly balances, increased to 5.79% in fiscal
2000 from 5.56% in fiscal 1999 primarily due to merger and acquisition
activities and the acquisition of operating assets. The average interest rates
on overseas direct financing leases, calculated on the basis of quarterly
balances, decreased to 9.67% in fiscal 2000 from 9.94% in fiscal 1999,
reflecting a decrease in the amount of high-yield assets. While the balance of
information-related and office equipment at March 31, 2000 was lower than the
balance at March 31, 1999, the decrease is primarily attributable to
securitizations.
Securitization of direct financing leases during fiscal 2000 affected
revenues from direct financing leases both because we recognized gains from
securitizations and because securitization decreased interest income from
securitized assets. Revenues from direct financing leases in fiscal 2000
included Yen8,591 million ($ 81 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>
<CAPTION>
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 ($8,534 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 ($3,021 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 ($3,334
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
had long-term debt payables of Yen56,034 million ($528 million) under
securitized lease receivables as of March 31, 2000.
39
<PAGE>
Operating Leases
Revenues from operating leases increased by 8.8%, or Yen8,096 million to
Yen100,503 million ($947 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 ($39 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>
<CAPTION>
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.
Installment Loans
<TABLE>
<CAPTION>
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
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
As of March 31, Change
------------------------------ ------------------------
1999 2000 Amount Percent
------------- ------------- ------------ -------
(Millions of yen)
<S> <C> <C> <C> <C>
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 ($16,876 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 ($3,215 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 ($838 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 ($111 million).
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 ($1,939 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.
41
<PAGE>
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 ($5,310 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 ($116 million) in fiscal 2000.
Interest Expense
Interest expense was Yen115,038 million ($1,084 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
($3,092 million) at March 31, 2000, commercial paper decreased from
Yen1,013,401 million at March 31, 1999 to Yen977,436 million ($9,208 million)
at March 31, 2000, and long-term asset backed securities decreased from
Yen194,243 million at March 31, 1999 to Yen56,034 million ($528 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.
Depreciation on Operating Leases
Depreciation on operating leases increased to Yen60,750 million ($572
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 ($1,824 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.
42
<PAGE>
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 ($361 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 ($857 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 ($429
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>
<CAPTION>
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>
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.
<TABLE>
<CAPTION>
Allowance for Doubtful Receivables on Direct Financing Leases and Possible Loan Losses
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>
For a discussion of past due receivables and allowances for direct
financing leases as of March 31, 1999 and March 31, 2000, see "Item 1.
Description of Business--Profile of Businesses--Direct Financing Leases".
43
<PAGE>
In fiscal 2000, provisions charged to income were Yen45,573 million ($429
million) and direct financing leases and loans totaling Yen37,343 million ($352
million) were written off. As of March 31, 2000, the allowance was Yen136,939
million ($1,290 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.
Risk dispersal strategies have enabled us to maintain a low incidence of
delinquency in direct financing leases. See "Item 1. Description of
Business--Profile of Businesses--Direct Financing Leases".
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 ($1,186 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 ($154 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 ($786 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 ($488 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 ($1,212 million) for fiscal 2000. We
recognized interest income on impaired loans of Yen1,577 million for fiscal
1999 and Yen1,429 million ($13 million) for fiscal 2000. For a discussion of
delinquencies on installment loans, see "Item 1. Description of
Business--Profile of Businesses--Installment Loans and Investments Securities".
Write-downs of long-lived assets
During fiscal 2000, in accordance with FASB Statement 121, we wrote down
Yen7,881 million ($74 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".
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, 2000. 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.
44
<PAGE>
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.
Following this policy, in fiscal 2000, we charged Yen12,297 million ($116
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 ($8 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 ($8 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 ($106 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 ($202
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 ($498 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
45
<PAGE>
million ($289 million), from fiscal 1999 to fiscal 2000. Basic and
diluted income per share in fiscal 2000 were Yen385 ($3.63) and Yen377 ($3.55)
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
($3,002 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.
Net cash used in investing activities was Yen292,858 million ($2,759
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 ($57 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>
<CAPTION>
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>
46
<PAGE>
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>
<CAPTION>
Year ended 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>
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, (other than
those extended by ORIX Rentec Corporation) and installment loans to commercial
and industrial companies (other than for
47
<PAGE>
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 16.1%, or
Yen5,678 million, from fiscal 1999 to Yen40,918 million ($385 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 ($18.6 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 ($2,483 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
Our domestic equipment operating lease segment includes primarily
operating leases of equipment, including measuring equipment 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 2000, we recorded Yen7,823 million ($74 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 ($1,068 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
Our domestic real estate-related finance business includes principally
construction and other real estate development loans to construction companies
and real estate developers, as well as housing loans to individuals. 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.
The activities of this segment are conducted by the Real Estate Finance
Division of ORIX.
To respond to a broad range of needs related to housing loans for
individuals, including owner-occupiers as well as investors, we transferred our
housing loan operations to ORIX Trust and Banking.
In fiscal 2000, segment loss amounted to Yen3,415 million ($32 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 ($5,627 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
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 2000,
segment loss was Yen8,241million ($78 million), 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 ($2,605 million) as of March 31, 2000.
48
<PAGE>
Life Insurance Business
Our life insurance segment 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 43.1%,
or Yen1,642 million, from fiscal 1999 to Yen5,455 million ($51 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 outstanding balance of segment assets increased 27.0%, or
Yen90,499 million, from March 31, 1999 to Yen425,335 million ($4,007 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 ($125 million) as of March 31, 2000.
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;
o commodities trading by ORIX Commodities Corporation; and
o venture capital operations conducted by ORIX Capital Corporation.
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 ($10 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
($2,282 million) as of March 31, 2000.
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 Commercial Alliance Corporation and ORIX Real Estate
Equities, Inc, our wholly-owned subsidiaries in the United States. In July
1999, we increased our ownership of Banc One Mortgage Capital Markets from 45%
to 100% and renamed the operations as ORIX Real Estate Capital Markets, LLC.
ORIX Real Estate Capital Markets combines origination, commercial mortgage
backed securities investment, and servicing functions.
49
<PAGE>
Segment profit in the Americas declined 8.8%, or Yen1,815 million, from
fiscal 1999 to Yen18,775 million ($177 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 ($6,513
million) as of March 31, 2000, up 9.0% or Yen57,302 million from March 31,
1999.
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
P.T. ORIX Indonesia Finance.
In Asia and Oceania, we recorded a Yen3,371 million ($32 million) segment
profit during fiscal 2000, compared with Yen11,729 million loss in fiscal 1999.
Segment assets amounted to Yen369,540 million ($3,481 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 ($2,559 million) as of March 31,
2000 was invested in Asia. These assets included Yen151,996 million ($1,432
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. Reflecting considerable
improvement in the profitability of our aircraft operating lease business,
segment profit in Europe rose to Yen278 million ($3 million). Mainly due to the
sale of one aircraft, segment assets amounted to Yen159,608 million ($1,504
million) at March 31, 2000, down 10.6% from March 31, 1999.
Year Ended March 31, 1999 Compared to Year Ended March 31, 1998
Overview
In fiscal 1999 net income improved despite a decrease in assets. As a
result of our securitization of lease assets primarily in Japan, the strength
of the yen relative to the U.S. dollar, and other factors, operating assets
decreased 4.2% from March 31, 1998, to Yen4,775 billion at March 31, 1999.
Investment in direct financing leases, installment loans and operating leases
all decreased, while investment in securities and other operating assets
increased. Despite a decline in revenues from direct financing leases and
operating leases, our total revenues grew 17.1% from fiscal 1998 to fiscal
1999, to Yen593,941 million. The increase in revenues reflects principally
strong growth in life insurance premiums and related investment income as well
as income from our real estate development business and other operations
included in other operating revenues. In the three months ended June 30, 1999,
revenues were almost at the same level and net income increased compared to the
corresponding period in the prior fiscal year.
Operating expenses increased substantially, particularly life insurance
costs and other operating expenses. Interest expense and depreciation on
operating leases decreased slightly in fiscal 1999, reflecting the reduction in
the amount
50
<PAGE>
of our assets. Life insurance costs increased significantly due primarily to
the growth in policies in force. Provision for doubtful receivables and
possible loan losses declined compared to fiscal 1998. Other operating expenses
increased 127.7% from fiscal 1998 to fiscal 1999, as a result of construction
expenses related to condominium sales. We recognized a write-down of securities
in the amount of Yen11,077 million in fiscal 1999, reflecting our judgment that
declines in prices for securities, primarily Japanese equity securities, at the
end of the period were other than temporary. Total expenses increased by 18.2%,
to Yen562,899 million, from fiscal 1998 to fiscal 1999. While income before
income taxes decreased 28.9%, to Yen27,315 million, net income increased 8.0%,
to Yen25,621 million, reflecting a substantial decrease in the provision for
deferred income taxes.
The tables below contain some financial data for fiscal 1998 and 1999, as
well as the amounts and percentages of the changes from fiscal 1998 to fiscal
1999.
Income Statement Data
<TABLE>
<CAPTION>
Year ended March 31, Change
------------------------------ ------------------------
1998 1999 Amount Percent
------------- ------------- ------------ -------
(Millions of yen)
<S> <C> <C> <C> <C>
Total revenues............................ Yen 507,143 Yen 593,941 Yen 86,798 17.1
Direct financing leases.................. 149,369 143,170 (6,199) (4.2)
Operating leases......................... 97,668 92,407 (5,261) (5.4)
Interest on loans and investment
securities............................. 95,033 100,480 5,447 5.7
Brokerage commissions and gains on
investment securities.................. 8,071 7,381 (690) (8.5)
Life insurance premiums and related
investment income...................... 126,031 196,259 70,228 55.7
Interest income on deposits.............. 3,429 6,695 3,266 95.2
Other operating revenues................. 27,542 47,549 20,007 72.6
Total expenses............................ 476,102 562,899 86,797 18.2
------- ------- -------
Operating income.......................... 31,041 31,042 1 0.0
Equity in net income (loss) of and gain
(loss) on sales of affiliates.......... 7,371 (3,727) (11,098) --
Income before income taxes................ 38,412 27,315 (11,097) (28.9)
Net income................................ 23,731 25,621 1,890 8.0
</TABLE>
Balance Sheet Data
<TABLE>
<CAPTION>
Year ended March 31, Change
------------------------------ ------------------------
1998 1999 Amount Percent
------------- ------------- ------------ -------
(Millions of yen)
<S> <C> <C> <C> <C>
Investment in direct financing leases..... Yen 2,186,022 Yen 1,952,842 Yen (233,180) (10.7)
Investment in operating leases............ 435,066 411,156 (23,910) (5.5)
Installment loans......................... 1,794,825 1,761,887 (32,938) (1.8)
Investment in securities.................. 500,449 576,206 75,757 15.1
Other operating assets.................... 65,838 73,345 7,507 11.4
--------- --------- --------
Operating assets.......................... 4,982,200 4,775,436 (206,764) (4.2)
Allowance for doubtful receiveables on
direct financing leases and possible
loan losses.............................. (145,741) (132,606) 13,135 9.0
Other assets............................. 737,850 704,806 (33,044) (4.5)
--------- --------- --------
Total assets............................. Yen 5,574,309 Yen 5,347,636 Yen (226,673) (4.1)
========= ========= ========
</TABLE>
The table below contains the volume of new transactions for fiscal 1998
and 1999, as well as the amounts and percentages of change in these data from
fiscal 1998 to fiscal 1999. Figures for new equipment acquisitions for direct
financing leases and operating leases are based on purchase costs of the
equipment.
51
<PAGE>
Volume of New Assets
<TABLE>
<CAPTION>
Year ended March 31, Change
------------------------------ ------------------------
1998 1999 Amount Percent
------------- ------------- ------------ -------
(Millions of yen)
<S> <C> <C> <C> <C>
Direct financing leases: New equipment
acquisitions .......................... Yen 1,093,519 Yen 913,221 Yen (180,298) (16.5)
Operating leases: New equipment
acquisitions........................... 98,566 92,272 (6,294) (6.4)
Installment loans: New loans added....... 715,030 706,758 (8,272) (1.2)
Investment in securities: New securities
added.................................. 217,225 302,035 84,810 39.0
</TABLE>
Total Revenues
Our total revenues increased by 17.1%, or Yen86,798 million, to Yen593,941
million in fiscal 1999 compared to Yen507,143 million in fiscal 1998,
reflecting principally an increase of Yen70,228 million or 55.7%, in life
insurance premiums and related investment income, and an increase of Yen20,007
million, or 72.6%, in other operating revenues.
Direct Financing Leases
Revenues from direct financing leases decreased by 4.2%, or Yen6,199
million, from fiscal 1998 to Yen143,170 million ($1,209 million) in fiscal
1999.
Revenues from direct financing leases decreased primarily because revenues
from operations in Asia declined sharply due to currency exchange rate changes
as well as a decline in asset balances. The average interest rates on domestic
direct financing leases, calculated on the basis of quarterly balances,
decreased to 5.56% in fiscal 1999 from 5.94% in fiscal 1998 primarily due to a
decline in market rates of interest for yen obligations. The average interest
rates on overseas direct financing leases, calculated on the basis of quarterly
balances, decreased to 9.94% in fiscal 1999 from 10.28% in fiscal 1998,
reflecting declines in market interest rates, particularly for U.S. dollar
obligations. The impact of declining market interest rates for yen obligations
was partially offset by increased revenues from an increase in the average
balance of domestic small-ticket leases of office equipment. These leases yield
relatively high margins. These leases are categorized as information-related
and office equipment in the table below. While the balance of information-
related and office equipment at March 31, 1999 was lower than the balance at
March 31, 1998, the decrease is primarily attributable to securitizations that
occurred near the end of the fiscal year.
Securitization of direct financing leases during fiscal 1999 affected
revenues from direct financing leases in two ways. First, revenues from direct
financing leases include Yen6,596 million of gains from securitization of
direct financing leases. Second, securitization of direct financing leases had
the effect of removing from our revenues amounts accrued on the securitized
leases after the securitization transactions. However the impact of the second
effect was more limited than the first, since the securitizations occurred near
the end of the fiscal year.
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>
<CAPTION>
As of March 31, Change
------------------------------ ------------------------
1998 1999 Amount Percent
------------- ------------- ------------ -------
(Millions of yen)
<S> <C> <C> <C> <C>
Information-related and office equipment.. Yen 623,203 Yen 493,298 Yen (129,905) (20.8)
Industrial equipment...................... 473,140 444,261 (28,879) (6.1)
Commercial services equipment............. 273,370 224,080 (49,650) (18.1)
Transportation equipment.................. 443,486 414,093 (29,393) (6.6)
Other..................................... 372,463 377,110 4,647 1.2
--------- --------- --------
Total.................................... Yen 2,186,022 Yen 1,952,842 Yen (233,180) (10.7)
========= ========= ========
</TABLE>
Investment in direct financing leases decreased by 10.7% from March 31,
1998 to March 31, 1999. New investment in leased equipment in fiscal 1999
amounted to Yen913,221 million, a decrease of 16.5 % from fiscal 1998. Although
in fiscal 1999 we maintained a high level of origination of small-ticket leases
for products like information-
52
<PAGE>
related and office equipment, investment in that category decreased by 20.8%
due primarily to securitization. The level of new lease contracts for
industrial equipment remained strong, particularly in the United States.
However, factors including the depreciation of the local currency against the
Japanese yen depressed the balance of investment expressed in yen.
During fiscal 1999, we securitized Yen223,537 million principal balance of
lease receivables, which were treated as off-balance sheet transactions.
Securitization of direct financing lease assets which were treated as
off-balance sheet transactions amounted to Yen50,656 million in fiscal 1998.
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 had long-term debt payables
of Yen194,243 million under securitized lease receivables as of March 31, 1999.
Operating Leases
Revenues from operating leases decreased by 5.4%, or Yen5,261 million,
from fiscal 1998 to fiscal 1999, reflecting a decrease in the balance of
operating leases. While revenues from aircraft leasing increased, disposals of
U.S. real estate and other assets produced an overall decline in revenues.
Gains from the disposition of operating lease assets included in revenues from
operating leases were Yen2,356 million in fiscal 1999, compared to Yen1,298
million in fiscal 1998.
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>
<CAPTION>
As of March 31, Change
------------------------------ ------------------------
1998 1999 Amount Percent
------------- ------------- ------------ -------
(Millions of yen)
<S> <C> <C> <C> <C>
Transportation equipment.................... Yen 195,392 Yen 181,886 Yen (13,506) (6.9)
Measuring equipment and personal computers.. 59,989 58,552 (1,437) (2.4)
Real estate and other....................... 179,685 170,718 (8,967) (5.0)
------- ------- -------
Total...................................... Yen 435,066 Yen 411,156 Yen (23,910) (5.5)
======= ======= =======
</TABLE>
The balance of our total investment in operating leases decreased by 5.5%,
or Yen23,910 million, from March 31, 1998 to March 31, 1999. Our investment in
operating leases was restrained by a decline in demand for information-related
equipment due to the weak performance of domestic electronics companies. We
sold two aircraft during the period, reducing the number of aircraft in our
fleet to 24. We also sold an office building in the United States.
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 5.7%, or Yen5,447 million, from fiscal 1998 to fiscal 1999, reflecting an
increase in loans with higher interest rates such as card loans. These
increases were offset by a decrease in the balance of investment securities.
The average interest rate earned on domestic loans, calculated on the basis of
quarterly balances, decreased to 4.00% in fiscal 1999 from 4.02% in fiscal
1998, primarily due to decline in market interest rates offset by better
spreads. The average interest rate earned on domestic investment securities,
calculated on the basis of quarterly balances, decreased to 3.13% in fiscal
1999 from 3.44% in fiscal 1998, primarily due to decline in market rates. The
average interest rate earned on overseas loans, calculated on the basis of
quarterly balances, increased to 9.44% in fiscal 1999 from 9.09% in fiscal
1998, primarily due to the maturity of low-yielding loans. The average interest
rate earned on overseas investment securities, calculated on the basis of
quarterly balances, increased to 8.61% in fiscal 1999 from 8.58% in fiscal
1998.
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.
53
<PAGE>
Installment Loans
<TABLE>
<CAPTION>
As of March 31, Change
------------------------------ ------------------------
1998 1999 Amount Percent
------------- ------------- ------------ -------
(Millions of yen)
<S> <C> <C> <C> <C>
Domestic Consumer
Housing loans..............................Yen 426,559 Yen 411,215 Yen (15,344) (3.6)
Card loans................................. 98,187 118,347 20,160 20.5
Other...................................... 55,811 43,663 (12,148) (21.8)
--------- --------- -------
Subtotal................................. 580,557 573,225 (7,332) (1.3)
Domestic Commercial
Real estate related companies.............. 213,911 188,085 (25,826) (12.1)
Commercial and industrial companies........ 607,952 614,988 7,036 1.2
--------- --------- -------
Subtotal................................. 821,863 803,073 (18,790) (2.3)
--------- --------- -------
Foreign commercial, industrial and other
borrowers................................. 377,761 368,661 (9,100) (2.4)
Direct loan origination costs, net.......... 14,644 16,928 2,284 15.6
--------- --------- -------
Total....................................Yen 1,794,825 Yen 1,761,887 Yen (32,938) (1.8)
========= ========= =======
</TABLE>
The total balance of installment loans decreased by 1.8%, to Yen1,761,887
million, from March 31, 1998 to March 31, 1999. Despite a rise in the balance
of card loans, the balance of our domestic loans to individuals decreased as we
refrained from extending new housing loans. Reflecting factors such as the
reluctance of Japanese banks to extend new loans, we increased new domestic
loans to corporate customers, while we used our reserves for possible loan
losses to charge off a substantial volume of impaired loans. As a result, the
net balance of our loans to corporate customers in Japan decreased. These
charge-offs related primarily to loans to domestic real estate related
companies. The strengthening of the yen at the end of the fiscal year
contributed to a 2.4% 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 declined from Yen306,957 million at March 31,
1998 to Yen245,041 million at March 31, 1999. Fixed income securities declined
by Yen59,865 million, principally as a result of the sale of Yen50,611 million
of U.S. high-yield securities in a securitization transaction.
Brokerage Commissions and Gains on Investment Securities
Brokerage commissions and gains on investment securities decreased by
Yen690 million, or 8.5%, from fiscal 1998 to fiscal 1999. ORIX Securities
Corporation generates all of the brokerage commissions accounted for in this
segment. Brokerage commissions decreased in fiscal 1999 due principally to a
reduction in the volume of trades, reflecting the weakness of the Japanese
stock market. Revenues from gains on investment securities decreased in fiscal
1999 due to a decline in profits on securities sold in the United States.
At March 31, 1999, gross unrealized gains of available-for-sale
securities, including those held in connection with our life insurance
operations, were Yen32,356 million. At March 31, 1999, gross unrealized losses
on available-for-sale securities, including those held in connection with our
life insurance operations, were Yen25,153 million.
Life Insurance Premiums and Related Investment Income
Life insurance premiums and related investment income increased by
Yen70,228 million, or 55.7%, in fiscal 1999 to Yen196,259 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. However, the low level of domestic interest rates
adversely affected investment income.
54
<PAGE>
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
increased by Yen3,266 million, or 95.2%, from fiscal 1998 to fiscal 1999,
principally as a result of a higher average balance of bank deposits.
Other Operating Revenues
Other operating revenues increased by Yen20,007 million, or 72.6%, from
fiscal 1998 to fiscal 1999, principally as a result of a large increase in
revenues from sales of residential apartments as well as growth in commission
income from sales of commodity funds and leveraged leases.
Total Expenses
Total expenses increased by 18.2%, to Yen562,899 million, from fiscal 1998
to fiscal 1999. Interest expense and depreciation on operating leases decreased
slightly in fiscal 1999, reflecting the reduction in amount of our assets. Life
insurance costs increased 61.2% 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 1998 because the deterioration in collateral
values in fiscal 1999 was significantly less than in fiscal 1998. Other
operating expenses increased 127.7% from fiscal 1998 to fiscal 1999, reflecting
an increase in condominium sales. We recognized a write-down of securities in
the amount of Yen11,077 million in fiscal 1999.
Interest Expense
Interest expense was Yen140,846 million in fiscal 1999, a decrease of 0.9%
from fiscal 1998. The decrease in interest expense principally reflects a
decline in the balance of short-term debt, reflecting the reduction in our
operating assets. In addition, we reduced our average funding costs by
diversifying our funding sources, through increased use of asset-backed
securities and commercial paper and other direct funding methods. See
"--Funding and Liquidity--Diversification of Funding Sources." Commercial paper
decreased by Yen95,629 million, or 8.6 %, as of March 31, 1999, short-term
asset-backed securities decreased from Yen28,400 million as of March 31, 1998
to Yen0 as of March 31, 1999, and long-term asset-backed securities decreased
from Yen305,520 million as of March 31, 1998 to Yen194,243 million as of March
31, 1999. Our interest expense related to these capital markets fundings was
generally lower than traditional bank borrowings. The average interest rates on
our domestic short-term and long-term debt, calculated on the basis of
quarterly balances, decreased to 2.10% in fiscal 1999 from 2.15% in fiscal
1998. The average interest rates on our short-term and long-term overseas debt,
calculated on the basis of quarterly balances, decreased to 6.89% in fiscal
1999 from 6.95% in fiscal 1998, primarily due to decreases in market interest
rates for dollar-denominated obligations.
Depreciation on Operating Leases
Depreciation on operating leases decreased to Yen57,405 million in fiscal
1999, a decrease of 3.1% from the level in fiscal 1998. This decrease
principally reflects the sale of aircraft and U.S. real estate assets.
Life Insurance Costs
Life insurance costs increased by Yen70,899 million, or 61.2%, to
Yen186,775 million from fiscal 1998 to fiscal 1999. The growth in life
insurance costs reflected primarily the growth in policies in force.
Other Operating Expenses
Reflecting an increase in condominium sales, other operating expenses
increased 127.7%, to Yen31,522 million ($266 million), in fiscal 1999. While
condominium sales produced profits, expenses related to commercial real estate
held since the bubble era in Japan continued to depress earnings.
Selling, General and Administrative Expenses
Selling, general and administrative expenses in fiscal 1999 were Yen82,395
million, an increase of 3.4% from fiscal 1998. This increase in expenses
primarily reflects expenses relating to our bank and trust business, which we
acquired at the end of fiscal 1998, and an increase in the number of our
employees at our sales branches primarily and also at our headquarters.
55
<PAGE>
Provision for Doubtful Receivables and Possible Loan Losses
We have 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 1999 was Yen51,845 million, an
increase of 4.9% from the corresponding amount in fiscal 1998.
The table below shows the calculation of the provision for doubtful
receivables and possible loan losses for fiscal 1998 and fiscal 1999. The
"Other" category includes foreign currency translation adjustments and the
effect of an acquisition.
<TABLE>
<CAPTION>
Year ended March 31,
----------- -----------
1998 1999
----------- -----------
(Millions of yen)
<S> <C> <C>
Beginning balance................... Yen 117,567 Yen 145,741
Provisions charged to income.. 49,434 51,845
Charge-offs (net):
Gross charge-offs............ (24,019) (70,705)
Recoveries................... 680 399
------- -------
Charge-offs (net)............ (23,339) (70,306)
Other........................ 2,079 5,326
------- -------
Ending balance...................... Yen 145,741 Yen 132,606
======= =======
</TABLE>
A breakdown of the allowance for doubtful receivables and possible loan
losses as of March 31, 1999 is shown below. The "Other" category includes
foreign currency translation adjustments and the effect of an acquisition.
<TABLE>
<CAPTION>
Allowance for Doubtful Receivables on Direct Financing Leases and Possible Loan Losses
Year end March 31, 1999
-------------------------------------------------------------
Installment Loans
---------------------------
Direct FASB
Financing Statement
Leases General No.114 Total
---------- ---------- ----------- -----------
(Millions of yen)
<S> <C> <C> <C> <C>
Beginning balance...................... Yen 10,510 Yen 30,310 Yen 104,921 Yen 145,741
====== ====== ======= =======
Provisions charged to income.......... 16,853 28,054 6,938 51,845
Charge-offs (net)..................... (6,938) (12,520) (50,848) (70,306)
Other................................. 3,442 786 1,098 5,326
------ ------ ------ -------
Ending balance......................... Yen 23,867 Yen 46,630 Yen 62,109 Yen 132,606
====== ====== ====== =======
</TABLE>
For a discussion of past due receivables and allowances for direct
financing leases as of March 31, 1998 and March 31, 1999, see "Item 1.
Description of Business--Profile of Businesses--Direct Financing Leases".
Provisions charged to income for fiscal 1999 were Yen51,845 million.
Direct financing leases and loans totaling Yen70,306 million, were written off.
As of March 31, 1999, the allowance was Yen132,606 million, and the ratio of
this figure to the balance of investment in direct financing leases and
installment loans was 3.6%, compared to 3.7% as of March 31, 1998.
Risk dispersal strategies have enabled us to maintain a low incidence of
delinquency in direct financing leases. See "Item 1. Description of
Business--Profile of Businesses--Direct Financing Leases".
The recorded investment in loans considered impaired under the definition
contained in FASB Statement 114 was Yen182,976 million as of March 31, 1998 and
Yen130,226 million as of March 31, 1999. The principal reason for the decline
was a charge-off of impaired loans in the amount of Yen50,848 million. We
determined that a valuation allowance was required for impaired loans which had
outstanding balances of Yen153,529 million as of March 31, 1998 and Yen114,525
million as of March 31, 1999. We recorded a valuation allowance, which is the
required valuation allowance less the
56
<PAGE>
value of the collateral from impaired loans, calculated under FASB Statement
114, in the amount of Yen104,921 million as of March 31, 1998 and Yen62,109
million as of March 31, 1999. 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 Yen181,074 million
for fiscal 1998 and Yen170,838 million for fiscal 1999. We recognized interest
income on impaired loans of Yen1,551 million for fiscal 1998 and Yen1,577
million for fiscal 1999. For a discussion of delinquencies on installment
loans, see "Item 1. Description of Business--Profile of Businesses--Installment
Loans and Investments Securities".
Write-downs of long-lived assets
During fiscal 1999, in accordance with FASB Statement 121, we wrote down
Yen644 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, write-downs of long-lived assets have been reclassified as a separate
expense item to conform with the fiscal 2000 presentation. See "--Policies
relating to Non-performing Assets and Charge-offs".
Write-downs of Securities
We charged Yen11,077 million to income for declines in market value
classified as other than temporary. Most of this charge relates to equity
securities. In fiscal 1998, we charged Yen858 million to income for declines in
market value classified as other than temporary.
Foreign Currency Transaction Loss
We recognized a foreign currency transaction loss in the amount of Yen390
million in fiscal 1999, compared to a loss of Yen6,271 million in fiscal 1998.
These losses principally resulted from the depreciation of the Indonesian
rupiah and other Asian currencies against the U.S. dollar, as our Asian-based
subsidiaries procured a portion of their funding through dollar-denominated
loans. The rupiah did not depreciate 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 was
Yen7,371 million in fiscal 1998 but amounted to a loss of Yen3,727 million in
fiscal 1999. Some of our affiliates had particularly strong performances in
fiscal 1999, including:
o Banc One Mortgage Capital Markets, LLC, previously our joint venture
with Bank One Corporation, which engages in the securitization of
loans secured by commercial property;
o our investment in Stockton Holdings Limited, which engages in
reinsurance activities and trades commodities and financial futures;
and
o Latin American leasing joint ventures.
However, due to the generally weak performance of affiliates in Asia and
the complete write-down of our investment in Korea Development Leasing
Corporation, our equity in the net income of affiliates for the period amounted
to a substantial loss. See note 9 of the notes to the consolidated financial
statements. At March 31, 1999, the investment in affiliates accounted for by
the equity method located in Asia (other than Japan and Oceania) decreased to
Yen11,576 million compared to Yen23,815 million as of March 31, 1998.
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<PAGE>
Provision for Income Taxes
Provision for income taxes in fiscal 1999 was Yen1,694 million,
substantially below the provision of Yen14,681 million in fiscal 1998. The
decrease of Yen12,987 million was primarily due to the remeasurement of
deferred tax liabilities, as a result of the reduction of normal Japanese tax
rates from approximately 48% to 42%, effective from April 1, 1999. The decrease
also reflects the decline in income before income taxes.
Net Income
Operating income was Yen31,042 million, a level comparable to that in
fiscal 1998. Income before income taxes decreased by 28.9% to Yen27,315
million. Net income increased 8.0%, to Yen25,621 million, from fiscal 1998 to
fiscal 1999, reflecting the substantial decrease in provision for income taxes
in fiscal 1999. Basic and diluted income per share in fiscal 1999 were Yen330
and Yen330 respectively, compared to Yen305 and Yen305 in fiscal 1998.
Cash Flows
Net cash provided by operating activities increased by Yen40,194 million,
or 16.3%, from fiscal 1998 to fiscal 1999, to a total of Yen286,754 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.
A decrease in income tax payments also contributed to the increase in operating
cash flows. These increased cash inflows were partially offset by a decrease in
revenues from direct financing and operating leases and an increase in interest
payments.
Net cash used in investing activities was Yen26,046 million in fiscal
1999, compared to Yen383,241 million in fiscal 1998. The principal reasons for
the change in fiscal 1999 include a significant decline in the amount of
purchases of lease equipment, including advance payments, and a sizeable
increase in net proceeds from securitization of lease receivables in fiscal
1999. These changes were offset to some extent by an increase in purchases of
available-for-sale securities.
Net cash used by financing activities was Yen269,472 million in fiscal
1999, compared to net cash provided by financing activities of Yen319,212
million in fiscal 1998. We decreased our short-term debt and commercial paper
substantially, reflecting the general reduction of our assets other than in our
insurance business.
To diversify our funding sources, we have increased our securitization of
lease assets and issuance of domestic commercial paper and bonds. This
increased the share of our funding procured directly from capital markets to
48.2%.
Cash and cash equivalents decreased 5.1% from March 31, 1998 to March 31,
1999.
Business Segments
The table below shows the amount of our revenues by business segment for
fiscal 1998 and 1999, as well as the amounts and percentages of the changes
from fiscal 1998 to 1999.
<TABLE>
<CAPTION>
Year ended March 31, Change
------------------------------ ------------------------
1998 1999 Amount Percent
------------- ------------- ------------ -------
(Millions of yen)
<S> <C> <C> <C> <C>
Domestic Business Segments
Corporate finance.................... Yen 120,939 Yen 122,629 Yen 1,690 1.4
Equipment operating leases........... 50,189 51,000 811 1.6
Real estate-related finance.......... 19,102 17,731 (1,371) (7.2)
Real estate.......................... 19,203 39,088 19,885 103.6
Life insurance....................... 125,767 195,484 69,717 55.4
Other................................ 20,631 22,684 2,053 10.0
------- ------- -------
Subtotal........................... 355,831 448,616 92,785 26.1
------- ------- -------
Overseas Business Segments
The Americas......................... 71,485 68,821 (2,664) (3.7)
Asia and Oceania..................... 55,750 51,220 (4,530) (8.1)
Europe............................... 21,966 23,811 1,845 8.4
------- ------- -------
Subtotal........................... 149,201 143,852 (5,349) (3.6)
------- ------- -------
</TABLE>
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<PAGE>
<TABLE>
Year ended March 31, Change
------------------------------ ------------------------
1998 1999 Amount Percent
------------- ------------- ------------ -------
(Millions of yen)
<S> <C> <C> <C> <C>
Total.............................. 505,032 592,468 87,436 17.3
Adjustments........................... 2,111 1,473 (638) (30.2)
------- ------- -------
Total consolidated revenues........ Yen 507,143 Yen 593,941 Yen 86,798 17.1
======= ======= =======
</TABLE>
The table below shows the amount of our profits by business segment for
fiscal 1998 and 1999, as well as the amounts and percentages of the changes
from fiscal 1998 to fiscal 1999.
<TABLE>
<CAPTION>
Year ended March 31, Change
------------------------------ ------------------------
1998 1999 Amount Percent
------------- ------------- ------------ -------
(Millions of yen)
<S> <C> <C> <C> <C>
Domestic Business Segments
Corporate finance........................ Yen 44,097 Yen 35,240 Yen (8,857) (20.1)
Equipment operating leases............... 8,407 6,923 (1,484) (17.7)
Real estate-related finance.............. (23,071) (11,013) 12,058 --
Real estate.............................. (8,392) (2,236) 6,156 --
Life insurance........................... 5,762 3,813 (1,949) (33.8)
Other.................................... 1,891 (4,266) (6,157) --
------ ------- -------
Subtotal............................... 28,694 28,461 (233) (0.8)
------ ------- -------
Overseas Business Segments
The Americas............................. 21,263 20,590 (673) (3.2)
Asia and Oceania......................... (8,441) (11,729) (3,288) --
Europe................................... (2,123) 264 2,387 --
------ ------- -------
Subtotal............................... 10,699 9,125 (1,574) (14.7)
------ ------- -------
Total.................................. 39,393 37,586 (1,807) (4.6)
------ ------- -------
Adjustments............................... (981) (10,271) (9,290) --
------ ------- -------
Total consolidated income before
income taxes......................... Yen 38,412 Yen 27,315 Yen (11,097) (28.9)
====== ====== =======
</TABLE>
The table below shows the amount of our assets by business segment for
fiscal 1998 and 1999, as well as the amounts and percentages of the changes
from fiscal 1998 to fiscal 1999.
<TABLE>
<CAPTION>
As of March 31, Change
------------------------------ ------------------------
1998 1999 Amount Percent
------------- ------------- ------------ -------
(Millions of yen)
<S> <C> <C> <C> <C>
Domestic Business Segments
Corporate finance......................... Yen 2,233,448 Yen 2,046,516 Yen (186,932) (8.4)
Equipment operating leases................ 103,435 109,772 6,337 6.1
Real estate-related finance............... 649,511 573,767 (75,744) (11.7)
Real estate............................... 297,880 273,504 (24,376) (8.2)
Life insurance............................ 196,378 334,836 138,458 70.5
Other..................................... 243,607 248,872 5,265 2.2
--------- --------- --------
Subtotal................................ 3,724,259 3,587,267 (136,992) (3.7)
--------- --------- --------
Overseas Business Segments
The Americas.............................. 668,742 634,101 (34,641) (5.2)
Asia and Oceania.......................... 459,042 440,872 (18,170) (4.0)
Europe.................................... 251,759 178,559 (73,200) (29.1)
--------- --------- --------
Subtotal................................ 1,379,543 1,253,532 (126,011) (9.1)
--------- --------- --------
Total................................... 5,103,802 4,840,799 (263,003) (5.2)
--------- --------- --------
Adjustments................................ (121,602) (65,363) 56,239 --
--------- --------- --------
Total consolidated operating assets..... Yen 4,982,200 Yen 4,775,436 Yen (206,764) (4.2)
========= ========= ========
</TABLE>
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<PAGE>
Domestic Business Segments
Corporate Finance
In our domestic corporate finance segment, segment profit declined 20.1%,
or Yen8,857 million, from fiscal 1998 to Yen35,240 million in fiscal 1999. The
balance of segment assets declined 8.4%, or Yen186,932 million, from March 31,
1998 to Yen2,046.5 billion as of March 31, 1999.
The decline in segment profits principally reflect our recognition of
substantially increased provision for doubtful receivables and possible loan
losses in this segment. Substantial provisions were made for direct financing
lease receivables as well as for installment loans.
The balance of domestic direct financing leases declined, in part
reflecting 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 by 20,000 in Japan. The decline in the balance of domestic direct
financing leases also reflects the securitization of Yen179,309 million in
direct finance lease receivables.
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 1999, we recorded Yen6,923 million of profit in this segment.
This represents a decrease of 17.7% from segment profit of Yen8,407 million in
fiscal 1998. The balance of segment assets increased by 6.1%, or Yen6,337
million, from March 31, 1998 to Yen109,772 million as of March 31, 1999. 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. However, weak demand resulted in a decline in
leases of higher-margin measuring equipment, adversely affecting profitability
in this segment.
Real Estate-Related Finance
In fiscal 1999, segment loss amounted to Yen11,013 million, compared to a
loss of Yen23,071 million in fiscal 1998. Real estate-related finance assets
declined 11.7%, or Yen75,744 million, from March 31, 1998 to Yen573,767 million
as of March 31, 1999. 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 1999 was significantly lower than the amount for fiscal 1998 because
the deterioration in collateral values in fiscal 1999 was significantly less
than in fiscal 1998.
Real Estate
In fiscal 1999, segment loss was Yen2,236 million, compared to a loss of
Yen8,392 million in fiscal 1998. This improvement reflected principally
increased sales of series of condominiums in fiscal 1999. In fiscal 1998 we
revalued real estate assets downward by Yen5,910 million in accordance with
FASB Statement 121. This revaluation resulted from declines in market values
for office buildings, resort properties and other commercial real estate. The
balance of real estate assets decreased 8.2%, or Yen24,376 million, from March
31, 1998 to Yen273,504 million as of March 31, 1999.
Life Insurance Business
Segment profits in the domestic life insurance business declined 33.8%, or
Yen1,949 million, from fiscal 1998 to Yen3,813 million in fiscal 1999. While
"ORIX Direct" life insurance policies for individuals grew significantly in
fiscal 1999, 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 declined in fiscal 1999 as losses on sale of equity securities
offset part of the gain on bond sales by ORIX Life Insurance. The outstanding
balance of segment assets increased 70.5%, or Yen138,458 million, from March
31, 1998 to Yen334,836 million as of March 31, 1999. The growth in segment
assets reflected strong demand for our "ORIX Direct" policies.
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<PAGE>
Marketable equity securities held in connection with our life insurance
business declined from Yen16,804 million as of March 31, 1998 to Yen8,783
million as of March 31, 1999, as we sold Japanese equity securities.
Other Domestic Business Segments
The segment's results changed from a profit in fiscal 1998 of Yen1,891
million to a loss before income taxes of Yen4,266 million in fiscal 1999. Due
to growing demand for ORIX Trust and Banking's "Direct Deposits" products, the
outstanding balance of segment assets increased 2.2%, or Yen5,265 million from
March 31, 1998 to Yen248,872 million as of March 31, 1999.
Overseas Business Segments
The Americas
Segment profit in the Americas declined 3.2%, or Yen673 million, from
fiscal 1998 to Yen 20,590 million in fiscal 1999. ORIX's investment in the Banc
One Mortgage Capital Markets, LLC. contributed significantly to segment profit,
which was offset by reduced profits at ORIX Commercial Alliance. Segment assets
amounted to Yen634,101 million as of March 31, 1999, down 5.2% or Yen34,641
million from March 31, 1998. Segment profit was slightly lower than in fiscal
1998 due to the decrease in gains on the sale of equity securities in
affiliates.
Asia and Oceania.
In Asia and Oceania, we recorded a Yen11,729 million segment loss during
fiscal 1999, Yen3,288 million more than in fiscal 1998. Segment assets amounted
to Yen440,872 million as of March 31, 1999, down 4.0% or Yen18,170 million from
March 31, 1998. Due to the effects of the Asian currency crises in the previous
year, economic conditions in Asia and Oceania continue to stagnate. Amid these
circumstances, we focused on preventing an expansion of losses and restrained
new investment. We wrote off the remainder of our investment in Korea
Development Leasing in fiscal 1999.
Of segment assets, Yen314,172 million as of March 31, 1999 was invested in
Asia. These assets included Yen130,664 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 Yen264 million. Due
to the sale of two aircraft and other factors, segment assets amounted to
Yen178, 559 million at March 31, 1999, down 29.1% from March 31, 1998.
Funding and Liquidity
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. The 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.
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
43.4% at March 31, 1998 to 48.9% at March 31, 1999 and 56.8% at March 31, 2000.
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
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<PAGE>
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
lease assets in January 1992. Then, in June 1992, Japan took a significant
deregulatory step in enacting the Law Regarding Regulation of Business
Concerning Specified Claims, etc., which came into effect in June 1993 and
facilitated the securitization of lease and installment sale assets. After the
Act was revised to allow asset backed commercial paper to be issued in the
domestic market we issued asset-backed commercial paper, backed by lease
receivables, in August 1996.
As of March 31, 2000, our outstanding balance of unsecured domestic bonds
was Yen753,700 million ($7,100 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 Commercial Alliance has also issued medium term notes
under a separate program with a maximum issuance limit of $2,050 million in the
U.S. market and $50 million in Canadian market. As of March 31, 2000, the
balance of notes issued under these medium term note programs stood at
Yen328,221 million ($3,092 million). ORIX Commercial Alliance and ORIX USA have
also issued commercial paper under several commercial paper programs in the
U.S. market which had an aggregate balance of Yen126,213 million ($1,189
million) as of March 31, 2000.
Short-Term Debt
The balance of short-term debt at March 31, 2000 was Yen1,912,761 million
($18,019 million), representing 49.6% of total debt at March 31, 2000, compared
to the level of 51.8% at March 31, 1999. The balance of short-term debt
decreased by Yen272,222 million, or 12.5%, from March 31, 1999 to March 31,
2000. Commercial paper decreased by Yen35,965 million, or 3.5%, reflecting the
decrease of commercial paper issued overseas. Other short-term debt, consisted
principally of borrowings from commercial banks, decreased by Yen236,257
million, or 20.2%, from March 31, 1999 to March 31, 2000.
Long-Term Debt
Long-term debt at March 31, 2000 was Yen1,942,784 million ($18,302
million), representing 50.4% of total debt, compared to the level of 48.2% at
March 31, 1999. The balance of long-term debt decreased by Yen93,244 million,
or 4.6%, from March 31, 1999 to March 31, 2000. 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 Yen761,253 million
($7,171 million) and medium-term notes of Yen328,221 million ($3,092 million).
The balance of asset-backed securities was Yen56,034 million ($528 million) at
March 31, 2000.
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, 2000, we paid interest at fixed rates on approximately 66.4% 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
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<PAGE>
principal amounts of Yen957,398 million ($9,019 million) at March 31, 2000 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. We use contracts
to hedge the risk of change in foreign currency exchange rates associated with
some assets and obligations denominated in foreign currencies. At March 31,
2000, we had long-term debt of Yen250,875 million ($2,363 million) denominated
in foreign currencies other than functional currencies, substantially all of
which were hedged by the use of these foreign exchange forward contracts and
foreign currency swap agreements.
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 ($2,774 million) in
Japan to enhance liquidity. Total committed lines for ORIX and its subsidiaries
were Yen208,054 million and Yen549,525 million ($5,177 million) at March 31,
1999 and 2000, respectively, and of these lines, Yen198,108 million and
Yen509,379 million ($4,799) were available at March 31, 1999 and 2000,
respectively.
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
43.4% at March 31, 1998 to 48.9% at March 31, 1999 and to 56.8% at March 31,
2000.
Shareholders' Equity, Return on Assets and Return on Equity Ratios
The table below shows, for and as of the ends of the periods indicated,
some data relating to shareholder's equity, return on assets and return on
equity.
<TABLE>
<CAPTION>
As or for the Year ended March 31,
----------------------------------
1998 1999 2000
------ ------ ------
<S> <C> <C> <C>
Shareholders' equity ratio............ 5.63% 6.13% 7.97%
Return on assets...................... 0.45% 0.47% 0.57%
Return on equity...................... 7.63% 7.99% 8.13%
</TABLE>
As of March 31, 2000, shareholders' equity grew 29.8% from the previous
fiscal year end, to Yen425,671 million ($4,010 million). This increase
principally reflected the October 1999 public share offering - which boosted
common stock and additional paid-in capital Yen38,810 million ($366 million) -
increased retained earnings of Yen29,564 million ($279 million), and reduced
accumulated other comprehensive loss of Yen26,133 million ($246 million). Thus,
our shareholders' equity ratio rose to 7.97%, return on assets increased to
0.57% and return on equity increased to 8.13%.
As of March 31, 1999, shareholders' equity grew 4.5% from the previous
fiscal year end, to Yen327,843 million ($2,768 million). This increase
principally reflected a 9.0% rise in retained earnings, to Yen298,684 million
($2,522 million). Net unrealized gains on investment in securities increased
Yen1,442 million to Yen4,153 million ($35 million). In light of a weakening of
Japanese stock prices, we recorded an Yen11,077 million ($94 million)
write-down on those investments in securities with price declines. Cumulative
translation adjustments (debit balance) increased to Yen31,703
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<PAGE>
million ($268 million), primarily due to the appreciation of the yen. Thus, our
shareholders' equity ratio rose to 6.13%, return on assets increased to 0.47%
and return on equity increased to 7.99%.
Item 9A. 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. A derivative
transaction is initiated by a staff person specifically appointed to enter into
these transactions. The appointment of the staff person is made by the
president of the relevant company or, in the case of ORIX, the relevant
division head. This application is delivered for approval by the General
Manager of ORIX's Treasury Department, or the Investment and Credit Committee.
Upon approval, the transaction is carried out by an authorized member of the
Treasury Department staff. In the case of the United States and a few
subsidiaries, specialized staff are authorized in advance to enter into
specified transactions up to specified amounts without this review process.
The sections responsible for the execution and administration of
derivative transactions are separated as part of our internal controls. The
execution section analyzes its derivative portfolio and reports its findings on
a quarterly basis to the General Manager of ORIX's Treasury Department. Each
month, or more frequently if required, the market value of each transaction is
reviewed. An authorized officer in the administrative section is responsible
for receiving and confirming all documentation relating to the transaction. On
a quarterly basis, the administrative section prepares reports, including
copies of relevant documentation, relating to executed derivative transactions.
These reports are delivered to ORIX's Audit Department to check compliance with
our internal rules.
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 9.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Risk Management".
Our interest income is exposed to the risk of decreases in
market interest rates. Decreases in market interest rates reduce interest
income from:
o floating rate installment loans;
o investment securities yielding a floating rate of return;
o short-term investments; and
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.
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<PAGE>
Most of our short-term debt and floating-rate long-term debt is
denominated in yen and is therefore exposed to the risk of changes in market
rates of interest for financial obligations denominated in yen. In principle,
our floating rate assets are funded by floating rate debt such as commercial
paper and by way of derivative instruments.
We have foreign-currency denominated assets and liabilities, and engage in
foreign-currency denominated transactions. Although we generally seek to match
the currencies in which our assets and liabilities are denominated, our attempt
at matching is not comprehensive. Consequently, our profits from foreign
currency denominated transactions and shareholders' equity are exposed to
foreign exchange rate risks if that foreign currency denominated investments
are not hedged. These risks include:
o the effects of changes in payment flows on foreign currency swaps;
o changes in the yen equivalent amounts of income or expenses from
transactions denominated in foreign currencies; and
o revaluation of assets and liabilities denominated in foreign
currencies or reflected in the financial statements of subsidiaries
whose functional currencies are other than yen.
We have a portfolio of equity securities, principally Japanese listed
common stocks. Our shareholders' equity and net income are exposed to the risk
of changes in market prices for these securities.
In addition to the risks described above, we are exposed to market risks
in relation to our direct financing leases and operating leases. Interest rate
sensitivity and exchange rate sensitivity data for these leases are not
required to be presented in the tables below. Substantially all of our direct
financing leases and operating leases do not provide for payments that
fluctuate based on changes in market rates of interest or changes in rates of
currency exchange. However, changes in market rates of interest will affect the
fair values of these payments in the future.
We are also exposed to market risks in relation to insurance policies
issued by ORIX Life Insurance. Interest rate sensitivity and exchange rate
sensitivity data for these policies are not required to be presented in the
tables below. All insurance policies issued by ORIX Life Insurance are
denominated in yen. Those policies do not provide for payments that fluctuate
based on market rates of interest. Our obligations under insurance policies
include obligations that are based upon the occurrence of loss events. These
also include obligations that are based upon essentially financial criteria,
such as insurance products that are designed partially or wholly as investment
products. Changes in market rates of interest may affect the fair value of our
obligations under other investment-type insurance products and may affect the
present value of our expected obligations (based on actuarial determinations)
under other insurance products.
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 1999 are: 5.7% for
installment loans, 3.3% for interest-bearing bonds, 2.6% for long-and
short-term debt and 0.5% for deposits. The average payment rate of interest
rate swaps is 3.2% and the average receipt rate is 2.1%. 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
65
<PAGE>
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 1999 to fiscal 2000.
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
Yen2,890 million at the end of fiscal 1999 and Yen2,905 million ($27 million)
at the end of fiscal 2000.
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>
<CAPTION>
Expected maturity date March 31, 2000
------------------------------------------------------------------------------ estimated
2001 2002 2003 2004 2005 Thereafter Total fair value
------------- ----------- ----------- ----------- ----------- ----------- ------------- --------------
(Millions of
yen)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Asset
Installment loans
(fixed rate).. Yen 242,100 Yen 54,342 Yen 33,556 Yen 35,932 Yen 31,569 Yen 123,474 Yen 520,973 Yen 520,983
Average interest
rate........... 3.9% 4.9% 9.1% 9.2% 7.9% 7.7% 5.8%
Installment loans
(floating rate).. Yen 295,702 Yen 212,553 Yen 150,859 Yen 134,818 Yen 121,290 Yen 355,244 Yen 1,270,466 Yen 1,270,466
Average interest
rate........... 4.8% 6.1% 5.7% 6.2% 5.8% 5.7% 5.6%
Investment in
securities
(fixed rate)... Yen 25,881 Yen 21,214 Yen 28,967 Yen 55,626 Yen 51,961 Yen 339,793 Yen 523,442 Yen 531,938
Average interest
rate........... 4.4% 3.5% 3.9% 2.4% 2.0% 4.4% 3.8%
Investment in
securities
(floating
rate).......... Yen 6,300 Yen 5,198 Yen 4,456 Yen 4,632 Yen 1,269 Yen 40,211 Yen 62,066 Yen 62,274
Average interest
rate........... 6.8% 6.8% 8.1% 6.3% 5.5% 2.6% 4.1%
Liabilities
Short-term debt... Yen 1,912,761 -- -- -- -- -- Yen 1,912,761 Yen 1,912,761
Average interest
rate............ 1.9% -- -- -- -- -- 1.9%
Deposits............ Yen 136,788 Yen 11,685 Yen 6,450 -- -- -- Yen 154,923 Yen 155,492
Average interest
rate............ 0.4% 0.7% 0.9% -- -- -- 0.5%
Long-term debt
(fixed rate)... Yen 283,945 Yen 288,863 Yen 269,059 Yen 170,354 Yen 179,541 Yen 97,708 Yen 1,289,470 Yen 1,310,703
Average interest
rate........... 3.7% 2.9% 2.4% 2.0% 2.3% 3.0% 2.8%
Long-term debt
(floating
rate).......... Yen 196,691 Yen 169,579 Yen 78,314 Yen 37,122 Yen 93,438 Yen 78,170 Yen 653,314 Yen 653,314
Average interest
rate........... 4.6% 5.3% 5.0% 4.4% 2.0% 2.6% 4.2%
</TABLE>
<TABLE>
<CAPTION>
Non-Trading Off-Balance Sheet Financial Instruments
Expected maturity date March 31, 2000
------------------------------------------------------------------------------ estimated
2001 2002 2003 2004 2005 Thereafter Total fair value
------------- ----------- ----------- ----------- ----------- ----------- ------------- --------------
(Millions of yen)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Notional amount
(Floating to
fixed)............ Yen 214,196 Yen 158,428 Yen 62,282 Yen 81,315 Yen 85,920 Yen 151,479 Yen 753,620 Yen (9,325)
Average pay rate... 3.0% 3.6% 4.8% 3.0% 4.3% 4.6% 3.8%
Average receive
rate............. 0.9% 1.5% 4.3% 2.6% 4.1% 3.6% 2.4%
Notional amount
(Fixed to
floating).......... Yen 43,500 Yen 52,412 Yen 21,180 Yen 25,397 Yen 39,841 Yen 21,448 Yen 203,778 Yen 8,190
Average pay rate.... 0.4% 0.1% 0.2% 0.6% 0.3% 3.0% 0.6%
Average receive
rate............... 5.3% 3.3% 2.3% 3.1% 4.0% 4.0% 3.8%
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
Weighted March 31,2000
average estimated
Notional amount strike rate fair value
--------------- ----------- -------------
(Millions of yen)
<S> <C> <C> <C>
Caps, floors and collars-held..... Yen 57,477 5.9% Yen (12)
</TABLE>
Item 10. Directors and Officers of Registrant
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 September 20, 2000 are
as follows:
<TABLE>
<CAPTION>
Year First
Name Tile Appointed
----------------------------- -------------------------------------------------------------- ----------
<S> <C> <C>
Yoshihiko Miyauchi........... Chairman and Chief Executive Officer, Representative Director 1970
Yasuhiko Fujiki.............. President and Chief Operating Officer, Representative Director 1994
Yoshiaki Ishida.............. Vice Chairman, Representative Director 1990
Shunsuke Takeda.............. Deputy President, Director 1993
Katsuo Kawanaka.............. Director 1992
Teruo Isogai................. Director 1991
Takeshi Sato................. Director 1997
Hiroaki Nishina.............. Director 1993
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
Naoaki Fujiyama.............. Corporate Auditor 1998
Yasuo Hama................... Corporate Auditor 1998
Hirotaka Takeuchi............ Corporate Auditor; Dean Hitotsubashi University, Graduate
School of International Corporate Strategy 2000
</TABLE>
Mr. Yoshinori Yokoyama, a director of McKinsey & Company, Inc., serves as
an advisor to the Board of Directors.
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 September 20, 2000
are as follows:
67
<PAGE>
<TABLE>
<CAPTION>
Name Title and Areas of Duties
----------------------------------- ------------------------------------------------------------------------------
<S> <C>
Yoshihiko Miyauchi................. Chairman and Chief Executive Officer
Yasuhiko Fujiki.................... President and Chief Operating Officer
Yoshiaki Ishida.................... Vice Chairman
Shunsuke Takeda.................... Deputy President and Chief Financial Officer, Investment Banking
Headquarters
Katsuo Kawanaka.................... Corporate Executive Vice President, Tokyo Sales Headquarters
Teruo Isogai....................... Corporate Executive Vice President, Kinki (Osaka) Sales
Headquarters
Takeshi Sato....................... Corporate Senior Vice President, International Headquarters
Hiroaki Nishina.................... Corporate Senior Vice President, Real Estate Business Headquarters,
President of ORIX Real Estate Corporation
Kenji Kajiwara..................... Corporate Senior Vice President
Masahiro Matono.................... Corporate Senior Vice President, District Sales Headquarters
Hiroyuki Harada.................... Corporate Senior Vice President, Credit Department
Hiroshi Nakajima................... Corporate Executive Officer, Head of Compliance, General Affairs
Department
Yoshio Ono......................... Corporate Executive Officer, International Headquarters, Regional Chief
Executive, Americas Region
Akira Fukushima.................... Corporate Executive Officer, President of ORIX Auto Leasing
Corporation
Masaru Hattori..................... Corporate Executive Officer, Office of Assistant to the President, Office of
Corporate Planning, Accounting Department
Nobuyuki Kobayashi................. Corporate Executive Officer, IT Business Headquarters, PFS Department,
President of ORIX Computer Systems Corporation, President of ORIX Call
Center Corporation
Shunji Sasaki...................... Corporate Executive Officer, President of ORIX Rentec
Corporation
Shinobu Shiraishi.................. Corporate Executive Officer, President of ORIX Life Insurance
Corporation
Masaaki Tashiro.................... Corporate Executive Officer, Real Estate Finance Headquarters,
President of ORIX Asset Management and Loan Services
Corporation
Tamio Umaki........................ Corporate Executive Officer, District Sales Headquarters
Kozo Endo.......................... Corporate Executive Officer, Kinki (Osaka) Sales Headquarters
Shintaro Agata..................... Corporate Executive Officer, Treasury Department
</TABLE>
With the exception of Mr. Endo and Mr. Agata, who were appointed in 2000,
and Mr. Nakamura and Mr. Umaki, who were appointed in 1999, all other Corporate
Executive Officers were appointed in 1998 when the program was first
established. Except for Mr. Tamura and Mr. Miyahara, all of our directors are
engaged in our business on a full-time basis.
Item 11. Compensation of Directors and Officers
During fiscal 1999, the executive compensation paid to ORIX's Directors
and Corporate Auditors excluding stock options and warrants amounted to
approximately Yen478 million ($4.5 million) in the aggregate. In accordance
with customary Japanese business practices, a retiring Director or Corporate
Auditor receives a lump-sum retirement payment, which is subject to the
approval of the general meeting of shareholders. At the Shareholders' Meeting
held on June 29, 2000, the shareholders approved bonuses for the Directors and
Corporate Auditors in the amounts of Yen86 million and Yen3 million,
respectively, for fiscal 2001.
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.
68
<PAGE>
Item 12. Options to Purchase Securities from Registrant or Subsidiaries
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 and 2000 stock option plans.
<TABLE>
<S> <C> <C> <C> <C> <C>
1997 stock 1998 stock 1999 stock 2000 stock
Name Title option plan option plan option plan option plan
-------------------- ----------------------------------------------- ----------- ----------- ----------- -----------
Yoshihiko Miyauchi. Chairman and Chief Executive Officer 20,000 20,000 20,000 30,000
Yasuhiko Fujiki.... President and Chief Operating Officer 5,000 5,000 7,000 15,000
Yoshiaki Ishida.... Vice Chairman 12,000 12,000 12,000 17,000
Shunsuke Takeda.... Deputy President and Chief Financial Officer 7,000 7,000 9,000 13,000
Katsuo Kawanaka.... Director and Corporate Executive Vice President 7,000 7,000 9,000 11,000
Teruo Isogai....... Director and Corporate Executive Vice President 7,000 7,000 9,000 11,000
Takeshi Sato....... Director and Corporate Senior Vice President 5,000 5,000 7,000 9,000
Hiroaki Nishina.... Director and Corporate Senior Vice President 5,000 5,000 5,000 8,000
Tatsuya Tamura..... Director 1,000
Akira Miyahara..... Director 1,000
Kenji Kajiwara..... Corporate Senior Vice President 5,000 5,000 5,000 7,500
Masahiro Matono.... Corporate Senior Vice President 5,000 5,000 5,000 7,500
Hiroyuki Harada.... Corporate Senior Vice President 5,000 5,000 5,000 7,500
Hiroshi Nakajima... Corporate Executive Officer 5,000 5,000 5,000 7,000
Yoshio Ono......... Corporate Executive Officer 5,000 5,000 5,000 7,000
Akira Fukushima.... Corporate Executive Officer 5,000 5,000 -- --
Masaru Hattori..... Corporate Executive Officer -- 4,000 5,000 6,000
Nobuyuki Kobayashi. Corporate Executive Officer -- 4,000 5,000 6,000
Masaaki Tashiro.... Corporate Executive Officer -- 3,000 5,000 6,000
Tamio Umaki........ Corporate Executive Officer -- -- 4,000 5,000
Kozo Endo.......... Corporate Executive Officer -- -- -- 3,500
Shintaro Agata..... Corporate Executive Officer -- -- -- 3,500
</TABLE>
Former Directors and employees of ORIX were granted options for an
aggregate of 64,000 shares under the 1997 Stock Option Plan, 28,000 shares
under the 1998 Stock Option Plan, and 20,000 shares under the 1999 Stock Option
Plan.
As of March 31, 2000, we had 9,503 full-time employees, an increase of
5.2% from 9,037 as of March 31, 1999. 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 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 Yen3,019 million, Yen2,942
million and Yen3,431 million ($32 million) in fiscal 1998, 1999 and 2000,
respectively.
69
<PAGE>
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.
2000 Stock Option Plan
At the ordinary general meeting of shareholders in June 2000, ORIX's
shareholders approved the 2000 Stock Option Plan, under which 316,700 shares
were purchased from the open market and are held by ORIX reserved for transfer
to 10 Directors and 11 Corporate Executive Officers and 456 employees of ORIX
upon the exercise of their options. As of July 2000, none of the options under
the 2000 Stock Option Plan had been exercised.
The exercise price of the options is Yen16,272 per share. The options
under the 2000 stock option plan were granted after the acquisition of the
shares by ORIX and can be exercised up to June 29, 2010. Options granted under
the 2000 stock option plan generally expire one year after the termination of
the option holder's service with ORIX. The options may not be transferred other
than by will or by the laws of descent and distribution.
1999 Stock Option Plan
At the ordinary general meeting of shareholders in June 1999, ORIX's
shareholders approved the 1999 Stock Option Plan, under which 145,000 shares
were purchased from the open market and are held by ORIX reserved for transfer
to nine Directors and 12 employees of ORIX upon the exercise of their options.
As of July 2000, none of the options under the 1999 Stock Option Plan had been
exercised.
The exercise price of the options is Yen10,393 per share, 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. The options under the 1999 stock
option plan were granted after the acquisition of the shares by ORIX and can be
exercised up to June 29, 2009. Options granted under the 1999 stock option plan
generally expire one year after the termination of the option holder's service
with ORIX. The options may not be transferred other than by will or by the laws
of descent and distribution.
The stock options are immediately exercisable when those individuals who
have been granted options enter into a stock option contract with ORIX.
However, individuals who may take advantage of some specified tax exemptions
under Japanese tax laws may not exercise their options for two years from the
date the options are approved by ORIX's shareholders.
1998 Stock Option Plan
In June 1998, the ordinary general meeting of shareholders of ORIX
approved the 1998 stock option plan, under which 146,000 shares were purchased
from the open market and are held by ORIX reserved for transfer to 18 Directors
and six employees, including two Officers, of ORIX upon the exercise of their
options. As of July 2000, options to purchase 11,000 shares under the 1998
Stock Option Plan had been exercised.
The exercise price of the options is Yen7,784 per Share, adjusted on April
1, 2000 to reflect the share subdivision which was implemented on May 19, 2000.
The options under the 1998 stock option plan were granted after the acquisition
of the shares by ORIX and can be exercised up to ten years after this date.
Options granted under the 1998 stock option plan generally expire one year
after the termination of the option holder's service with ORIX. The options may
not be transferred other than by will or by the laws of descent and
distribution.
The stock options are immediately exercisable when those individuals who
have been granted options enter into a stock option contract with ORIX.
However, individuals who may take advantage of some specified tax exemptions
under Japanese tax laws may not exercise their options for two years from the
date the options are approved by ORIX's shareholders.
1997 Stock Option Plan
In June 1997, the ordinary general meeting of shareholders of ORIX
approved the 1997 stock option plan, under which 168,000 shares were purchased
from the open market and are held by ORIX reserved for transfer to Directors
70
<PAGE>
and employees of ORIX upon the exercise of their options. As of July 2000,
options to purchase 66,000 shares under the 1997 stock option plan had been
exercised.
The exercise price of the options is Yen7,665 per Share, adjusted on April
1, 2000 to reflect the share subdivision which was implemented on May 19, 2000.
The options under the 1997 stock option plan were granted after the acquisition
of shares by ORIX and can be exercised up to five years after this date.
Options granted under the 1997 stock option plan generally expire one year
after the termination of the option holder's service with ORIX. The options may
not be transferred other than by will or by the laws of descent and
distribution.
The stock options are immediately exercisable when those individuals who
have been granted options enter into a stock option contract with ORIX.
2000 Warrant Plan
In August 2000, the Board of Directors of ORIX approved the 2000 warrant
plan under which warrants to purchase 126,143 shares were granted or sold to
Corporate Auditors and some employees of ORIX, excluding employees who are
option holders under the 2000 Stock Option Plan, and to directors, corporate
auditors and some employees of certain subsidiaries by repurchasing warrants
attached to bonds with warrants to be issued by ORIX during fiscal 2001.
The exercise price of the warrants is Yen14,090 per Share. A warrant may
be exercised up to September 6, 2004. Warrants granted under the 2000 warrant
plan generally expire one year after the termination of the warrant holder's
service with ORIX. The warrants may not be transferred other than by will or by
the laws of descent and distribution.
1999 Warrant Plan
In May 1999, the Board of Directors approved the 1999 warrant plan, under
which warrants to purchase approximately 302,484 shares were granted or sold to
Corporate Auditors and some employees of ORIX, excluding employees who are
option holders under the 1999 Stock Option Plan, and directors and auditors of
some of ORIX's subsidiaries.
The exercise price of the warrants is Yen 11,291 per Share. A warrant may
be exercised between November 30, 1999 and November 4, 2003. As of July, 2000,
warrants to purchase 32,743 shares under the 1999 warrant plan had been
exercised. Warrants granted under the 1999 warrant plan generally expire one
year after the termination of the warrant holder's service with ORIX. The
warrants may not be transferred other than by will or by the laws of descent
and distribution.
The exercise price of the warrants was adjusted on April 1, 2000 to
reflect the share subdivision implemented on May 19, 2000.
1998 Warrant Plan
In October 1998, the Board of Directors of ORIX approved the 1998 warrant
plan, under which warrants to purchase 315,593 shares were granted or sold to
Corporate Auditors and some employees of ORIX, excluding employees who are
option holders under the 1998 Stock Option Plan, and directors of some of
ORIX's subsidiaries.
The exercise price of the warrants is Yen6,885 per Share. A warrant may be
exercised between November 30, 1998 and November 5, 2002. As of July, 2000,
warrants to purchase 200,353 shares under the 1998 warrant plan had been
exercised. Warrants granted under the 1998 warrant plan generally expire one
year after the termination of the warrant holder's service with ORIX. The
warrants may not be transferred other than by will or by the laws of descent
and distribution.
The exercise price of the warrants was adjusted on April 1, 2000 to
reflect the share subdivision implemented on May 19, 2000.
1997 Warrant Plan
In September 1997, the Board of Directors of ORIX approved the 1997
warrant plan, under which warrants to purchase 311,110 shares were granted or
sold to Corporate Auditors and some employees of ORIX, excluding employees who
are option holders under the 1997 stock option plan, and directors of some of
ORIX's subsidiaries. On November
71
<PAGE>
4, 1997, ORIX issued bonds with warrants attached and then repurchased the
detached warrants for purposes of granting them under the 1997 Warrant Plan. As
of July, 2000, warrants to purchase 221,310 shares under the 1997 Warrant Plan
had been exercised.
The exercise price of the warrants is Yen7,939 per Share. A warrant may be
exercised between November 7, 1997 and October 23, 2001. Warrants granted under
the 1997 warrant plan generally expire one year after the termination of the
warrant holder's service with ORIX. The warrants may not be transferred other
than by will or by the laws of descent and distribution.
The exercise price of the warrants was adjusted on April 1, 2000 to
reflect the share subdivision implemented on May 19, 2000.
Item 13. Interest of Management in Certain Transactions
None.
PART II
Item 14. Description of Securities to be Registered
Not applicable.
PART III
Item 15. Defaults upon Senior Securities
None.
Item 16. Changes in Securities and Changes in Security for Registered
Securities
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.
PART IV
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 Public Accountants (page F-2)
72
<PAGE>
(b) Consolidated Balance Sheets as of March 31, 1999 and 2000 (page F-3)
(c) Consolidated Statements of Income for the years ended March 31, 1998,
1999, and 2000 (page F-4)
(d) Consolidated Statements of Shareholders' Equity for the years ended
March 31, 1998, 1999 and 2000 (page F-5)
(e) Consolidated Statements of Cash Flows for the years ended March 31,
1998, 1999 and 2000 (page F-6)
(f) Notes to Consolidated Financial Statements (pages F-7 to F-40)
Item 19. Financial Statements and Exhibits
Financial Statements
(a) Consolidated Balance Sheets as of March 31, 1999 and 2000
(b) Consolidated Statements of Income for the years ended March 31, 1998,
1999 and 2000
(c) Consolidated Statements of Shareholders' Equity for the years ended
March 31, 1998, 1999 and 2000
(d) Consolidated Statements of Cash Flows for the years ended March 31,
1998, 1999 and 2000
(e) Notes to Consolidated Financial Statements
Exhibits
None.
73
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, ORIX Corporation certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form 20-F and has duly
caused this Annual Report to be signed on its behalf by the undersigned,
thereunto duly authorized in Tokyo, Japan, on September 22, 2000.
ORIX CORPORATION
By: /s/ Masaru Hattori
----------------------------------
Name: Masaru Hattori
Title: Attorney-in-Fact
Corporate Executive Officer
<PAGE>
98000/800/TPST/fpgs.ed
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants................................ F-2
Consolidated Balance Sheets as of March 31, 1999 and 2000............... F-3
Consolidated Statements of Income For the Years Ended March 31,
1998, 1999 and 2000................................................... F-4
Consolidated Statements of Shareholders' Equity For the Years
Ended March 31, 1998, 1999 and 2000................................... F-5
Consolidated Statements of Cash Flows For the Years Ended
March 31, 1998, 1999 and 2000......................................... F-6
Notes to Consolidated Financial Statements............................ F-7
F-1
<PAGE>
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, 1999
and 2000, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended March 31,
2000, 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, 1999 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
2000, 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 (v).
/s/ ARTHUR ANDERSEN
Tokyo, Japan
May 17, 2000
F-2
<PAGE>
CONSOLIDATED BALANCE SHEETS
ORIX Corporation and Subsidiaries March 31, 1999 and 2000
<TABLE>
1999 2000 2000
---------------------------------------------
Millions of Yen Thousands of
U.S. dollars
---------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and Cash Equivalents........................................ Yen 252,290 Yen 265,956 $ 2,505,473
Restricted Cash and Cash Equivalents............................. 2,250 13,666 128,742
Time Deposits.................................................... 8,861 7,698 72,520
Investment in Direct Financing Leases............................ 1,952,842 1,744,953 16,438,559
Installment Loans................................................ 1,761,887 1,791,439 16,876,486
Allowance for Doubtful Receivables on
Direct Financing Leases and Possible Loan Losses............... (132,606) (136,939) (1,290,052)
Investment in Operating Leases................................... 411,156 397,576 3,745,417
Investment in Securities......................................... 576,206 758,381 7,144,428
Other Operating Assets........................................... 73,345 72,472 682,732
Investment in Affiliates......................................... 77,160 63,312 596,439
Other Receivables................................................ 67,540 70,345 662,694
Advances......................................................... 62,079 89,676 844,805
Prepaid Expenses................................................. 24,584 24,813 233,754
Office Facilities................................................ 78,355 74,770 704,381
Other Assets..................................................... 131,687 103,424 974,319
------------- ------------- -----------
Yen 5,347,636 Yen 5,341,542 $50,320,697
============= ============= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-Term Debt.................................................. Yen 2,184,983 Yen 1,912,761 $18,019,416
Deposits......................................................... 53,269 154,923 1,459,472
Trade Notes and Accounts Payable................................. 165,019 151,477 1,427,009
Accrued Expenses................................................. 63,364 72,733 685,191
Policy Liabilities............................................... 356,541 494,443 4,657,965
Income Taxes:
Current........................................................ 9,054 5,688 53,585
Deferred....................................................... 106,497 135,218 1,273,839
Deposits from Lessees............................................ 45,038 45,844 431,879
Long-Term Debt................................................... 2,036,028 1,942,784 18,302,252
------------- ------------- -----------
Total liabilities.......................................... 5,019,793 4,915,871 46,310,608
------------- ------------- -----------
Commitments and Contingent Liabilities
Shareholders' Equity:
Common stock, par value Yen 50 per share:
authorized 259,000,000 shares
issued 64,870,299 shares in 1999 and
68,630,294 shares in 2000................... 20,180 41,688 392,727
Additional paid-in capital..................................... 37,464 59,285 558,502
Legal reserve.................................................. 1,860 1,970 18,559
Retained earnings.............................................. 298,684 328,248 3,092,303
Accumulated other comprehensive loss........................... (27,550) (1,417) (13,349)
Treasury stock, at cost:
314,247 shares in 1999 and 402,223 shares in 2000.............. (2,795) (4,103) (38,653)
------------- ------------- -----------
327,843 425,671 4,010,089
------------- ------------- -----------
Yen 5,347,636 Yen 5,341,542 $50,320,697
============= ============= ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
ORIX Corporation and Subsidiaries For the Years Ended
March 31, 1998, 1999 and 2000
<TABLE>
1998 1999 2000 2000
-----------------------------------------------------------------
Millions of Yen Thousands of
U.S. dollars
-----------------------------------------------------------------
Revenues:
<S> <C> <C> <C> <C>
Direct financing leases................................. Yen 149,369 Yen 143,170 Yen 130,798 $1,232,200
Operating leases........................................ 97,668 92,407 100,503 946,802
Interest on loans and investment securities............. 95,033 100,480 97,390 917,475
Brokerage commissions and gains on investment
securities............................................. 8,071 7,381 19,700 185,586
Life insurance premiums and related investment
income................................................. 126,031 196,259 205,829 1,939,039
Interest income on deposits............................. 3,429 6,695 3,884 36,590
Other operating revenues................................ 27,542 47,549 58,409 550,250
----------- ----------- ----------- ----------
Total revenues........................................ 507,143 593,941 616,513 5,807,942
----------- ----------- ----------- ----------
Expenses:
Interest expense........................................ 142,177 140,846 115,038 1,083,731
Depreciation--operating leases.......................... 59,222 57,405 60,750 572,303
Life insurance costs.................................... 115,876 186,775 193,664 1,824,437
Other operating expenses................................ 13,841 31,522 38,302 360,829
Selling, general and administrative expenses............ 79,671 82,395 90,961 856,910
Provision for doubtful receivables and possible loan
losses................................................. 49,434 51,845 45,573 429,326
Write-downs of long-lived assets........................ 8,752 644 7,881 74,244
Write-downs of securities............................... 858 11,077 12,297 115,846
Foreign currency transaction loss (gain), net........... 6,271 390 (839) (7,904)
----------- ----------- ----------- ----------
Total expenses........................................ 476,102 562,899 563,627 5,309,722
----------- ----------- ----------- ----------
Operating Income......................................... 31,041 31,042 52,886 498,220
Equity in Net Income (Loss) of and Gain (Loss) on Sales
of Affiliates (Yen 6,825 million gain in 1998, Yen 3,978
million gain in 1999 and Yen 1,503 million ($14,159
thousand) loss in 2000)................................. 7,371 (3,727) (838) (7,895)
----------- ----------- ----------- ----------
Income before Income Taxes............................... 38,412 27,315 52,048 490,325
Provision for Income Taxes............................... 14,681 1,694 21,406 201,658
----------- ----------- ----------- ----------
Net Income............................................... Yen 23,731 Yen 25,621 Yen 30,642 $ 288,667
=========== =========== =========== ==========
Amounts per Share of Common Stock: Yen U.S. dollars
----------------------------------------------------------------
Net income Basic (Notes 1 (x) and 16).................. Yen 305.33 Yen 330.43 Yen 385.27 $3.63
Diluted (Notes 1 (x) and 16)................ 305.33 330.43 377.02 3.55
Cash dividends......................................... 15.00 15.00 15.00 0.14
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ORIX Corporation and Subsidiaries For the Years Ended
March 31, 1998, 1999 and 2000
<TABLE>
1998 1999 2000 2000
------------------------------------------------------------
Millions of Yen Thousands of
U.S. dollars
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Common Stock:
Beginning balance (64,870,299 shares)......................... Yen 20,180 Yen 20,180 Yen 20,180 $ 190,108
Common stock issued in public offering (3,300,000 shares)..... -- -- 19,856 187,056
Exercise of warrants (357,175 shares)......................... -- -- 1,647 15,516
Common stock issued for acquisitions of minority interests
of subsidiaries (102,820 shares)............................ -- -- 5 47
----------- ----------- ----------- -----------
Ending balance (68,630,294 shares in 2000).................... Yen 20,180 Yen 20,180 Yen 41,688 $ 392,727
----------- ----------- ----------- -----------
Additional Paid-in Capital:
Beginning balance............................................. Yen 37,093 Yen 37,303 Yen 37,464 $ 352,935
Compensation cost of stock option granted..................... 49 -- -- --
Value ascribed to warrants attached to 0.1% bonds issued...... 161 -- -- --
Value ascribed to warrants attached to 1.925% bonds issued.... -- 161 -- --
Value ascribed to warrants attached to 1.22% bonds issued..... -- -- 333 3,137
Common stock issued in public offering........................ -- -- 18,954 178,559
Exercise of warrants and stock options........................ -- -- 1,504 14,168
Common stock issued for acquisitions of minority interests
of subsidiaries............................................. -- -- 1,030 9,703
----------- ----------- ----------- -----------
Ending balance................................................ Yen 37,303 Yen 37,464 Yen 59,285 $ 558,502
----------- ----------- ----------- -----------
Legal Reserve:
Beginning balance............................................. Yen 1,640 Yen 1,750 Yen 1,860 $ 17,523
Transfer from retained earnings............................... 110 110 110 1,036
----------- ----------- ----------- -----------
Ending balance................................................ Yen 1,750 Yen 1,860 Yen 1,970 $ 18,559
----------- ----------- ----------- -----------
Retained Earnings:
Beginning balance............................................. Yen 251,496 Yen 274,144 Yen 298,684 $ 2,813,792
Cash dividends................................................ (973) (971) (968) (9,120)
Transfer to legal reserve..................................... (110) (110) (110) (1,036)
Net income.................................................... 23,731 25,621 30,642 288,667
----------- ----------- ----------- -----------
Ending balance................................................ Yen 274,144 Yen 298,684 Yen 328,248 $ 3,092,303
----------- ----------- ----------- -----------
Accumulated Other Comprehensive Loss:
Beginning balance............................................. Yen (1,825) Yen (18,079) Yen (27,550) $ (259,539)
Net increase (decrease) in net unrealized gains
on investment in securities................................. (9,931) 1,442 41,551 391,437
Net increase in minimum pension liability adjustments......... -- -- (3,485) (32,831)
Net decrease in cumulative translation adjustments............ (6,323) (10,913) (11,933) (112,416)
----------- ----------- ----------- -----------
Ending balance................................................ Yen (18,079) Yen (27,550) Yen (1,417) $ (13,349)
----------- ----------- ----------- -----------
Treasury Stock:
Beginning balance............................................. Yen -- Yen (1,477) Yen (2,795) $ (26,331)
Purchases of treasury stock .................................. (1,477) (1,318) (1,811) (17,061)
Exercise of stock options..................................... -- -- 503 4,739
----------- ----------- ----------- -----------
Ending balance................................................ Yen (1,477) Yen (2,795) Yen (4,103) $ (38,653)
----------- ----------- ----------- -----------
Total Shareholders' Equity:
Beginning balance............................................. Yen 308,584 Yen 313,821 Yen 327,843 $ 3,088,488
Increase, net................................................. 5,237 14,022 97,828 921,601
----------- ----------- ----------- -----------
Ending balance................................................ Yen 313,821 Yen 327,843 Yen 425,671 $ 534,857
Summary of Comprehensive Income:
Net income.................................................... Yen 23,731 Yen 25,621 Yen 30,642 $ 288,667
Other comprehensive income (loss)............................. (16,254) (9,471) 26,133 246,190
----------- ----------- ----------- -----------
Comprehensive income.......................................... Yen 7,477 Yen 16,150 Yen 56,775 $ 534,857
=========== =========== =========== ===========
</TABLE>
F-5
<PAGE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-6
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
ORIX Corporation and Subsidiaries For the Years Ended
March 31, 1998, 1999 and 2000
<TABLE>
1998 1999 2000 2000
--------------------------------------------------------------
Millions of Yen Thousands of
U.S. dollars
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income.................................................. Yen 23,731 Yen 25,621 Yen 30,642 $ 288,667
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization........................... 90,245 88,914 93,203 878,031
Provision for doubtful receivables and possible
loan losses........................................... 49,434 51,845 45,573 429,326
Increase in policy liabilities.......................... 72,432 135,086 137,902 1,299,124
Deferred income taxes, net.............................. 1,664 (10,346) 6,464 60,895
Equity in net (income) loss of and (gain) loss on
sales of affiliates................................... (7,371) 3,727 838 7,895
Gains on sales of available-for-sale securities......... (5,775) (5,276) (13,893) (130,881)
Write-downs of long-lived assets........................ 8,752 644 7,881 74,244
Write-downs of securities............................... 858 11,077 12,297 115,846
Increase (decrease) in accrued expenses................. 12,461 (898) 11,886 111,974
Increase (decrease) in deposits from lessees............ 2,053 (4,477) 1,828 17,221
Net increase in restricted cash and cash equivalents.... -- (2,250) (11,702) (110,240)
Other, net.............................................. (1,924) (6,913) (4,288) (40,396)
-------------- ------------ -------------- -----------
Net cash provided by operating activities........... 246,560 286,754 318,631 3,001,706
-------------- ------------ -------------- -----------
Cash Flows from Investing Activities:
Purchases of lease equipment, including advance payments.... (1,221,978) (1,034,901) (1,022,279) (9,630,513)
Principal payments received under direct financing leases... 859,795 894,692 710,485 6,693,217
Net proceeds from securitization of lease and loan
receivables............................................... 44,127 224,960 185,530 1,747,810
Installment loans made to customers......................... (696,031) (706,758) (801,959) (7,554,960)
Principal collected on installment loans.................... 614,779 635,022 681,908 6,424,004
Proceeds from sales of operating lease assets............... 60,032 45,150 37,013 348,686
Investment in and dividends received from affiliates, net... (11,676) (1,592) (8,945) (84,268)
Proceeds from sales of affiliates........................... 14,611 10,877 2,881 27,141
Purchases of available-for-sale securities.................. (198,693) (301,575) (263,679) (2,484,023)
Proceeds from sales of available-for-sale securities........ 177,832 182,338 177,157 1,668,931
Maturities of available-for-sale securities................. 5,634 38,345 18,403 173,368
Maturities of held-to-maturity securities................... -- -- 3,089 29,100
Purchases of other securities............................... (92,078) (54,902) (14,382) (135,488)
Proceeds from sales of other securities..................... 67,754 46,242 3,759 35,412
Other, net.................................................. (7,349) (3,944) (1,839) (17,325)
-------------- ------------ -------------- -----------
Net cash used in investing activities............... (383,241) (26,046) (292,858) (2,758,908)
-------------- ------------ -------------- -----------
Cash Flows from Financing Activities:
Repayment of short-term debt, net........................... (68,667) (278,186) (248,386) (2,339,953)
(Repayment of) proceeds from commercial paper, net.......... 90,189 (76,143) (16,426) (154,743)
Proceeds from long-term debt................................ 620,973 567,166 722,069 6,802,346
Repayment of long-term debt................................. (321,043) (525,534) (604,360) (5,693,453)
Net increase in deposits due to customers................... -- 45,353 101,654 957,645
Issuance of common stock.................................... -- -- 41,346 389,505
Purchases of treasury stock................................. (1,477) (1,318) (1,811) (17,061)
Dividends paid.............................................. (973) (971) (968) (9,120)
Other, net.................................................. 210 161 829 7,811
-------------- ------------ -------------- -----------
Net cash provided by (used in) financing
activities........................................ 319,212 (269,472) (6,053) (57,023)
-------------- ------------ -------------- -----------
Effect of Exchange Rate Changes on Cash and Cash Equivalents.. (3,207) (7,161) (6,054) (57,033)
-------------- ------------ -------------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents.......... 179,324 (15,925) 13,666 128,742
Cash and Cash Equivalents at Beginning of Year................ 88,891 268,215 252,290 2,376,731
-------------- ------------ -------------- -----------
Cash and Cash Equivalents at End of Year...................... Yen 268,215 Yen 252,290 Yen 265,956 $ 2,505,473
============== ============ ============== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ORIX Corporation and Subsidiaries
1. SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
In preparing the accompanying consolidated financial statements, ORIX
Corporation (the Company) and its subsidiaries have complied with accounting
principles generally accepted in the United States of America, modified for the
accounting for stock splits (see (l)). 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)), additional provisions for
doubtful receivables on direct financing leases and possible loan losses,
impairment of long-lived assets and long-lived assets to be disposed of,
translation of current and non-current assets and liabilities denominated in
foreign currencies at the exchange rates prevailing as of each balance sheet
date, adoption of the straight-line method of depreciation for operating lease
equipment, accounting for pension plans, accounting for investment in
securities, deferral of life insurance policy acquisition cost and an
additional provision for 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 loss in shareholders' equity are from translation of foreign
currency financial statements into Japanese Yen.
(e) Recognition of revenues
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
F-8
<PAGE>
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. In principle,
the Company and its subsidiaries recognize losses related to securities for
which the market price has been below the acquisition cost (or current carrying
value if an adjustment has been made in the past) for more than one year or if
there has been a significant deterioration in a bond issuer's credit rating, an
issuer's default or similar event. However, if the Company has 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.
F-9
<PAGE>
(h) 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--Certain 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 certain 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
loss. All other foreign exchange contracts are marked to market and gains or
losses are charged to earnings. The Company and certain subsidiaries also enter
into 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.
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 certain subsidiaries are exposed to credit-related losses in
the event of non-performance by counterparties.
(i) 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.
(j) 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 4.4%, 3.7% and 3.3% for fiscal 1998, 1999 and 2000,
respectively.
(k) Capitalization of interest costs
The Company and certain subsidiaries capitalized interest costs of
Yen 1,041 million, Yen 966 million and Yen 2,132 million ($20,085 thousand) in
fiscal 1998, 1999 and 2000, respectively, related to specific long-term
development projects.
F-10
<PAGE>
(l) 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, 2000
would have increased by approximately Yen 24,674 million ($232,445 thousand),
with a corresponding decrease in retained earnings; total shareholders' equity
would have remained unchanged. A stock split to be implemented on May 19, 2000
(see Note 16) 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.
(m) 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.
(n) 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 in a certain
domestic subsidiary and deposits related to servicing agreements in a certain
foreign subsidiary.
(o) Other operating assets
Other operating assets consist primarily of business assets, including
golf courses, hotels and training facilities.
(p) 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.
(q) 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.
(r) 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 17,482 million and Yen 17,666 million ($166,425 thousand) as of March 31,
1999 and 2000, respectively.
(s) Other assets
Other assets consist primarily of the unamortized excess of purchase
prices over the net assets acquired in acquisitions of Yen 14,431 million and
Yen 14,388 million ($135,544 thousand) as of March 31, 1999 and 2000,
respectively, deferred insurance acquisition costs, which are amortized over
the contract periods, and leasehold deposits.
(t) 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, by using undiscounted future
cash flows expected to be generated by the assets, for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. During fiscal 1998, 1999 and 2000, the Company
and certain subsidiaries wrote down certain real estate development projects
included in investment in operating leases and advances in the consolidated
balance sheets to their fair values. And an
F-11
<PAGE>
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.
(u) Advertising
The costs of advertising are expensed as incurred. The total amounts
charged to advertising expense in fiscal 1998, 1999 and 2000 are Yen 2,973
million, Yen 4,860 million and Yen 6,916 million ($65,153 thousand),
respectively.
(v) Financial statements presentation in U.S. dollars
The translation 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, 2000, which was Yen 106.15 to U.S.$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.
(w) New accounting pronouncement
In June 1998, FASB Statement No. 133 ("Accounting for Derivative
Instruments and Hedging Activities") was issued. FASB Statement No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. 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 met, a derivative
may be specifically designated as a hedge. This Statement amends portions of
FASB Statements No. 52 and No. 107. It supersedes FASB Statements No. 80, No.
105 and No. 119. This Statement is effective for fiscal years beginning after
June 15, 1999. However, FASB Statement No. 137 ("Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133") was issued in June 1999, to defer the effective date of
FASB Statement No. 133 to fiscal years beginning after June 15, 2000. The
expected impact of the adoption of this Statement is not known and cannot be
reasonably estimated until further study is completed.
(x) 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.
(y) Reclassifications
Certain amounts in the 1998 and 1999 consolidated financial statements
have been reclassified to conform with the 2000 presentation.
2. ACQUISITIONS
In June 1997, the Company purchased contract receivables of Yen 288 billion
from Crown Leasing Corporation, which is in bankruptcy, consisting of direct
financing leases of Yen 257 billion and loan contracts of Yen 31 billion. The
purchase price was Yen 254 billion, which was adjusted based on the outstanding
remaining contract receivables as of May 31, 1997 and other conditions provided
for in the agreement.
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.
F-12
<PAGE>
3. CASH FLOW INFORMATION
Cash payments for interest and income taxes during fiscal 1998, 1999 and
2000 are as follows:
1998 1999 2000 2000
----------------------------------------------------------
Millions of Yen Thousands of
U.S. dollars
----------------------------------------------------------
Interest...... Yen 135,563 Yen 146,073 Yen 119,285 $1,123,740
Income Taxes.. 15,358 6,904 17,785 167,546
4. INVESTMENT IN DIRECT FINANCING LEASES
Investment in direct financing leases at March 31, 1999 and 2000 consists
of the following:
1999 2000 2000
-------------------------------------------
Millions of Yen Thousands of
U.S. dollars
-------------------------------------------
Minimum lease payments receivable.. Yen 2,107,393 Yen 1,889,224 $17,797,683
Estimated residual value........... 52,368 49,965 470,702
Initial direct costs............... 29,374 26,042 245,332
Unearned lease income.............. (236,293) (220,278) (2,075,158)
------------- ------------- -----------
Yen 1,952,842 Yen 1,744,953 $16,438,559
============= ============= ===========
Minimum lease payments receivable (including guaranteed residual values)
are due in periodic installments through 2022. At March 31, 2000, the amounts
due in each of the next five years and thereafter are as follows:
Thousands of
Year ending March 31 Millions of Yen U.S. dollars
-------------------- --------------------------------
2001........................ Yen 629,871 $ 5,933,782
2002........................ 483,156 4,551,635
2003........................ 341,198 3,214,301
2004........................ 225,720 2,126,425
2005........................ 99,230 934,809
Thereafter.................. 110,049 1,036,731
------------- -----------
Total................... Yen 1,889,224 $17,797,683
============= ===========
During fiscal 1998, a subsidiary entered into a securitization and a
revolving securitization arrangement whereby the subsidiary securitizes
selected contracts on a monthly basis. During fiscal 1999 and 2000, the
subsidiary securitized Yen 20,731 million and Yen 29,918 million ($281,846
thousand) principal balance of its receivables, respectively. As of March 31,
1999 and 2000, the securitized receivables had an unpaid principal balance
outstanding of Yen 35,707 million and Yen 34,292 million ($323,052 thousand),
respectively, which is excluded from the consolidated financial statements. In
connection with these transactions, as of March 31, 1999 and 2000, Yen 2,512
million and Yen 2,236 million ($21,065 thousand), respectively, of cash
collateral was required and is included in other receivables in the
consolidated balance sheets. The subsidiary's exposure is limited to the amount
of the servicing assets, the excess spread assets and the balance of the
required cash collateral which aggregate Yen 3,824 million and Yen 3,489 million
($32,869 thousand) at March 31, 1999 and 2000, respectively, and are included
in other receivables in the consolidated balance sheets.
In fiscal 2000, the subsidiary entered into another securitization. The
payables under securitized lease receivables of Yen 48,580 million ($457,654
thousand) are included in long-term debt, the minimum lease payment receivables
of Yen 47,817 million ($450,466 thousand) and cash collateral of Yen 2,936
million ($27,659 thousand) are included in investment in direct financing
leases and other assets in the consolidated balance sheets as of March 31,
2000, respectively.
During fiscal 1999 and 2000, the Company and another subsidiary
securitized Yen 202,806 million and Yen 290,748 million ($2,739 million)
principal balance of their receivables, respectively. As of March 31, 1999 and
2000, cash collateral and excess spread assets amounted to Yen 5,018 million and
Yen 189 million, Yen 8,675 million ($81,724 thousand)
F-13
<PAGE>
and Yen 0, respectively, which are included in other receivables in the
consolidated balance sheets, and the securitized receivables had an unpaid
principal balance outstanding of Yen 199,542 million and Yen 319, 652 million
($3,011 million), which are excluded from the consolidated balance sheets.
Among these transactions, as the servicing fees adequately compensate the
Company, no servicing asset or liability has been recorded.
Under a securitization introduced by the Company and another subsidiary in
fiscal 1998 and 1999, the payables under securitized lease receivables of Yen
194,243 million and Yen 7,454 million ($70,221 thousand) are included in
long-term debt, the minimum lease payments receivable of Yen 223,179 million
and Yen 9,790 million ($92,228 thousand) are included in investment in direct
financing leases in the consolidated balance sheets as of March 31, 1999 and
2000, respectively.
Gains and losses from the disposition of direct financing lease assets are
not significant for fiscal 1998, 1999 and 2000.
5. INVESTMENT IN OPERATING LEASES
Investment in operating leases at March 31, 1999 and 2000 consists of the
following:
Years 1999 2000 2000
----------- ---------------------------------------
Weighted
average Millions of Yen Thousands of
useful life U.S. dollars
----------- ---------------------------------------
Transportation equipment... 12 Yen 255,745 Yen 234,831 $2,212,256
Measuring equipment and
personal computers....... 3 106,889 109,533 1,031,870
Real estate and other...... 40 192,239 204,503 1,926,548
----------- ----------- ----------
554,873 548,867 5,170,674
Accumulated depreciation... (156,073) (165,018) (1,554,574)
----------- ----------- ----------
Net...................... 398,800 383,849 3,616,100
Rental receivables......... 12,356 13,727 129,317
----------- ----------- ----------
Yen 411,156 Yen 397,576 $3,745,417
=========== =========== ==========
For fiscal 1998, 1999 and 2000, gains from the disposition of operating
lease assets are Yen 1,298 million, Yen 2,356 million and Yen 4,144 million
($39,039 thousand), 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 nine years. The minimum future rentals on non-cancelable
operating leases are as follows:
Thousands of
Year ending March 31 Millions of Yen U.S. dollars
-------------------- --------------- ------------
2001........................ Yen 40,969 $385,954
2002........................ 26,980 254,169
2003........................ 15,676 147,678
2004........................ 8,816 83,052
2005........................ 5,818 54,809
Thereafter.................. 5,007 47,169
----------- --------
Total................... Yen 103,266 $972,831
=========== ========
F-14
<PAGE>
6. INSTALLMENT LOANS
The composition of installment loans by domicile and type of borrowers at
March 31, 1999 and 2000 is as follows:
1999 2000 2000
------------------------------------------
Thousands of
Millions of Yen U.S. dollars
------------------------------------------
Domestic borrowers:
Consumers--
Housing loans.................... Yen 411,215 Yen 396,748 $ 3,737,617
Card loans....................... 118,347 121,272 1,142,459
Other............................ 43,663 56,461 531,898
------------- ------------- -----------
573,225 574,481 5,411,974
------------- ------------- -----------
Commercial--
Real estate related companies.... 188,085 203,537 1,917,447
Commercial and industrial
companies...................... 614,988 657,355 6,192,699
------------- ------------- -----------
803,073 860,892 8,110,146
------------- ------------- -----------
1,376,298 1,435,373 13,522,120
Foreign commercial, industrial
and other borrowers............... 368,661 337,754 3,181,856
Loan origination costs, net......... 16,928 18,312 172,510
------------- ------------- -----------
Yen 1,761,887 Yen 1,791,439 $16,876,486
============= ============= ===========
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, 2000, the contractual maturities of installment loans for
each of the next five years and thereafter are as follows:
Thousands of
Year ending March 31 Millions of Yen U.S. dollars
-------------------- --------------- ------------
2001........................ Yen 532,334 $ 5,014,922
2002........................ 262,948 2,477,136
2003........................ 181,645 1,711,211
2004........................ 168,755 1,589,779
2005........................ 151,600 1,428,168
Thereafter.................. 475,845 4,482,760
------------- -----------
Total................... Yen 1,773,127 $16,703,976
============= ===========
Included in interest on loans and investment securities in the
consolidated statements of income is interest income on loans of Yen 79,486
million, Yen 88,003 million and Yen 83,321 million ($784,936 thousand) for
fiscal 1998, 1999 and 2000, respectively.
F-15
<PAGE>
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 1998, 1999 and 2000 are as follows:
<TABLE>
1998 1999 2000 2000
----------------------------------------------------
Thousands of
Millions of Yen U.S. dollars
----------------------------------------------------
<S> <C> <C> <C> <C>
Beginning balance................... Yen 117,567 Yen 145,741 Yen 132,606 $1,249,232
Provisions charged to income........ 49,434 51,845 45,573 429,326
Charge-offs......................... (24,019) (70,705) (37,697) (355,129)
Recoveries.......................... 680 399 354 3,335
Other*.............................. 2,079 5,326 (3,897) (36,712)
----------- ----------- ----------- ----------
Ending balance...................... Yen 145,741 Yen 132,606 Yen 136,939 $1,290,052
=========== =========== =========== ==========
</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, 1999 and 2000 are as follows:
1999 2000 2000
----------------------------------------
Thousands of
Millions of Yen U.S. dollars
----------------------------------------
Balance of allowance related to:
Direct financing leases........ Yen 23,867 Yen 35,783 $ 337,099
Installment loans.............. 108,739 101,156 952,953
----------- ----------- -----------
Total........................ Yen 132,606 Yen 136,939 $ 1,290,052
=========== =========== ===========
The recorded investments in loans considered impaired are Yen 130,226
million and Yen 125,921 million ($1,186 million) as of March 31, 1999 and 2000,
respectively. Of these amounts, it was determined that a valuation allowance
was required with respect to loans which had outstanding balances of Yen
114,525 million and Yen 83,408 million ($785,756 thousand) as of March 31, 1999
and 2000, respectively. The Company and its subsidiaries recorded a valuation
allowance of Yen 62,109 million and Yen 51,791 million ($487,904 thousand) as
of March 31, 1999 and 2000, 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 1998, 1999
and 2000 were Yen 181,074 million, Yen 170,838 million and Yen 128,658 million
($1,212 million), respectively.
The Company and its subsidiaries recognized interest income on impaired
loans of Yen 1,551 million, Yen 1,577 million and Yen 1,429 million ($13,462
thousand), and collected in cash interest on impaired loans of Yen 1,288
million, Yen 1,297 million and Yen 1,061 million ($9,995 thousand) in fiscal
1998, 1999 and 2000, respectively.
As of March 31, 1999 and 2000, the Company and its subsidiaries suspended
income recognition pursuant to its non-accrual policy on investment in direct
financing leases of Yen 41,565 million and Yen 43,047 million ($405,530
thousand), and on installment loans other than impaired loans of Yen 89,869
million and Yen 84,550 million ($796,514 thousand), respectively.
F-16
<PAGE>
8. INVESTMENT IN SECURITIES
Investment in securities at March 31, 1999 and 2000 consists of the
following:
1999 2000 2000
----------------------------------------
Thousands of
Millions of Yen U.S. dollars
----------------------------------------
Trading securities............ Yen 414 Yen 390 $ 3,674
Available-for-sale securities. 507,510 689,638 6,496,825
Held-to-maturity securities... 16,542 11,404 107,433
Other securities.............. 51,740 56,949 536,496
----------- ----------- -----------
Yen 576,206 Yen 758,381 $ 7,144,428
=========== =========== ===========
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 17). For fiscal 1998, 1999 and 2000, net
unrealized holding losses on trading securities are Yen 5 million, Yen 1
million, and Yen 3 million ($28 thousand), respectively.
During fiscal 1998 and 1999, the Company and its subsidiaries sold
available-for-sale securities for aggregate proceeds of Yen 177,832 million and
Yen 182,338 million, resulting in gross realized gains of Yen 9,951 million and
Yen 6,801 million and gross realized losses of Yen 4,176 million and Yen 1,525
million, respectively. During fiscal 2000, the Company and its subsidiaries
sold available-for-sale securities for aggregate proceeds of Yen 177,157
million ($1,669 million), resulting in gross realized gains of Yen 17,726
million ($166,990 thousand) and gross realized losses of Yen 3,833 million
($36,109 thousand). 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 1998, 1999 and 2000, the Company and its subsidiaries
charged losses on securities of Yen 858 million, Yen 11,077 million and Yen
12,297 million ($115,846 thousand), 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, 1999 and
2000 are as follows:
<TABLE>
Gross Gross
unrealize unrealized
March 31, 1999 Amortized cost gains losses Fair value
-------------- -----------------------------------------------------
Millions of Yen
-----------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale:
Japanese and foreign government bond
securities............................... Yen 20,930 Yen 86 Yen (415) Yen 20,601
Japanese prefectural and foreign
municipal bond securities................ 20,215 561 (308) 20,468
Corporate debt securities.................. 408,041 8,783 (18,071) 398,753
Mortgage-backed and other asset-backed
securities............................... 7,345 -- (550) 6,795
Funds in trust............................. 5,574 1,016 (462) 6,128
Equity securities.......................... 38,202 21,910 (5,347) 54,765
----------- ---------- ----------- -----------
Yen 500,307 Yen 32,356 Yen (25,153) Yen 507,510
=========== ========== ========== ===========
Held-to-maturity:
Corporate debt securities.................. Yen 16,542 Yen -- Yen (27) Yen 16,515
----------- ---------- ----------- -----------
Yen 16,542 Yen -- Yen (27) Yen 16,515
=========== ========== ========== ===========
</TABLE>
F-17
<PAGE>
<TABLE>
Gross Gross
unrealize unrealized
March 31, 1999 Amortized cost gains losses Fair value
-------------- -----------------------------------------------------
Millions of Yen
-----------------------------------------------------
<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>
<TABLE>
Gross Gross
unrealize unrealized
March 31, 1999 Amortized cost gains losses Fair value
-------------- -----------------------------------------------------
Thousands of U.S. dollars
-----------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale:
Japanese and foreign government bond
securities.............................. $ 122,185 $ 820 $ (1,526) $ 121,479
Japanese prefectural and foreign
municipal bond securities............... 304,324 7,357 (603) 311,078
Corporate debt securities................. 4,470,646 116,910 (42,883) 4,544,673
Mortgage-backed and other asset-backed
securities.............................. 511,267 15,478 (13,556) 513,189
Funds in trust............................ 18,842 4,512 -- 23,354
Equity securities......................... 342,383 692,737 (52,068) 983,052
----------- ---------- ----------- -----------
$ 5,769,647 $ 837,814 $ (110,636) $ 6,496,825
=========== ========== =========== ===========
Held-to-maturity:
Corporate debt securities................. $ 107,433 $ -- $ -- $ 107,433
----------- ---------- ----------- -----------
$ 107,433 $ -- $ -- $ 107,433
=========== ========== =========== ===========
</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, 2000:
<TABLE>
Amortized cost Fair value Amortized cost Fair value
------------------------------------------------------
Millions of Yen Thousands of U.S. dollars
------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale:
Due within one year....................... Yen 32,181 Yen 32,774 $ 303,165 $ 308,752
Due after one to five years............... 173,323 179,960 1,632,812 1,695,337
Due after five to ten years............... 234,382 234,448 2,208,027 2,208,648
Due after ten years....................... 134,218 135,626 1,264,418 1,277,682
----------- ---------- ----------- -----------
Yen 574,104 Yen 582,808 $ 5,408,422 $ 5,490,419
=========== ========== =========== ===========
Held-to-maturity:
Due after ten years....................... Yen 11,404 Yen 11,404 $ 107,433 $ 107,433
----------- ---------- ----------- -----------
Yen 11,404 Yen 11,404 $ 107,433 $ 107,433
=========== ========== =========== ===========
</TABLE>
Securities not due at a single maturity date, such as mortgage-backed
securities, are included in the above table based on their final maturities.
F-18
<PAGE>
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 15,547 million, Yen 12,477 million and Yen 14,069 million ($132,539
thousand) for fiscal 1998, 1999 and 2000, respectively.
9. INVESTMENT IN AFFILIATES
Investment in affiliates at March 31, 1999 and 2000 consists of the
following:
1999 2000 2000
--------------------------------------
Thousands of
Millions of Yen U.S. dollars
--------------------------------------
Common stock, at equity value.. Yen 57,592 Yen 51,869 $ 488,639
Loans.......................... 19,568 11,443 107,800
---------- ---------- ---------
Yen 77,160 Yen 63,312 $ 596,439
========== ========== =========
Certain Asia and Oceania affiliates are listed on stock exchanges. The
aggregate investment in and quoted market value of those affiliates amounted to
Yen 1,107 million and Yen 1,467 million as of March 31, 1999, respectively, and
Yen 1,040 million ($9,797 thousand) and Yen 644 million ($6,067 thousand) as of
March 31, 2000, respectively.
In fiscal 1998, 1999 and 2000, the Company received dividends from
affiliates of Yen 3,428 million, Yen 825 million and Yen 1,091 million ($10,278
thousand), 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 were charged to income
as KDLC had negative equity and the Company was not in a position to exert
influence over KDLC's operations. Accordingly, KDLC was excluded from the table
for fiscal 1999.
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). Accordingly, KDLC and ORECM are excluded
from the table for fiscal 2000.
Combined and condensed financial information with respect to the major
affiliates (KDLC, Stockton Holdings Limited--30% owned, Bradesco Leasing S.A.
Arrendamento Mercantil--25% owned and ORECM) accounted for by the equity method
is as follows.
1998 1999 2000 2000
--------------------------------------------------
Thousands of
Millions of Yen U.S. dollars
--------------------------------------------------
Operations:
Total revenues............. Yen 107,983 Yen 50,453 Yen 54,563 $ 514,018
Income before income taxes. 4,107 13,235 2,293 21,602
Net income................. 6,188 12,177 1,532 14,432
Financial position:
Total assets............... 886,093 393,589 356,742 3,360,735
Total liabilities.......... 770,001 296,210 276,799 2,607,621
Shareholders' equity....... 116,092 97,379 79,943 753,114
The Company had no significant transactions with these companies.
On May 9, 2000, the Company agreed to sell the shares of Bradesco Leasing
S.A. Arrendamento Mercantil. This sale will not have a significant impact on
results of operations.
F-19
<PAGE>
10. 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, 1999 and 2000 are as follows:
March 31, 1999
-----------------------------
Weighted
Millions of Yen average rate
-----------------------------
Short-term debt in Japan, mainly from banks........ Yen 889,412 1.4%
Short-term debt outside Japan, mainly from banks... 282,170 6.5%
Commercial paper in Japan.......................... 826,150 0.6%
Commercial paper outside Japan..................... 187,251 5.6%
-------------
Yen 2,184,983 2.1%
=============
<TABLE>
March 31, 2000
-------------------------------------------
Thousands of Weighted
Millions of Yen U.S. dollars average rate
-------------------------------------------
<S> <C> <C> <C>
Short-term debt in Japan, mainly from banks........ Yen 674,708 $ 6,356,175 1.5%
Short-term debt outside Japan, mainly from banks... 260,617 2,455,177 6.1%
Commercial paper in Japan.......................... 851,223 8,019,058 0.2%
Commercial paper outside Japan..................... 126,213 1,189,006 6.7%
------------- ------------
Yen 1,912,761 $ 18,019,416 1.9%
============= ============
</TABLE>
In fiscal 2000, the Company obtained short-term committed credit lines of
Yen 294,500 million ($2,774 million) in Japan to enhance liquidity as
stipulated in the Commitment Line Law that came into effect in March 1999.
Total committed lines for the Company and subsidiaries were Yen 208,054
million and Yen 549,525 million ($5,177 million) at March 31, 1999 and 2000,
respectively, and of these lines, Yen 198,108 million and Yen 509,379 million
($4,799 million) were available at March 31, 1999 and 2000, respectively. Of
the total committed lines, Yen 61,302 million ($578 million) were long-term
committed credit lines at March 31, 1999 and 2000.
While Yen 144,895 million and Yen 436,505 million ($4,112 million) of the
committed lines at March 31, 1999 and 2000 were for commercial paper backup
purposes, no borrowings have been made under these lines.
Long-term debt at March 31, 1999 and 2000 consists of the following:
March 31, 1999
--------------------------
Due Millions of Yen
--------------------------
Commercial banks:
Fixed rate: 1.6% to 9.3%........................ 2000-2005 Yen 240,913
Floating rate: principally based on LIBOR
plus 0.2% to 1.1%............................. 2000-2009 165,323
Government-sponsored agencies in Japan:
Fixed rate: 4.2% to 6.2%........................ 2000-2007 10,313
Floating rate: principally based on LIBOR
plus 0.0% to 0.1%............................. 2000-2003 48,607
Insurance companies and others:
Fixed rate: 1.1% to 9.0%........................ 2000-2009 375,908
Floating rate: principally based on LIBOR
plus 0.0% to 0.5%............................. 2000-2008 173,352
Unsecured 1.4% to 8.5% bonds...................... 2000-2013 569,590
Unsecured 0.1% to 1.9% bonds with warrants........ 2002-2003 5,200
Unsecured notes under medium-term note program:
0.8% to 7.3%.................................... 2000-2009 244,591
Zero Coupon..................................... 2000-2006 7,988
Payables under securitized lease receivables,
floating rate based on LIBOR plus 0.3% to 0.7%.. 2002 194,243
-------------
Yen 2,036,028
=============
F-20
<PAGE>
<TABLE>
March 31, 2000
----------------------------------------
Thousands of
Due Millions of Yen U.S. dollars
----------------------------------------
<S> <C> <C> <C>
Commercial banks:
Fixed rate: 1.6% to 9.9%..................... 2001-2005 Yen 143,890 $ 1,355,536
Floating rate: principally based on LIBOR
plus 0.3% to 0.6%.......................... 2001-2009 106,266 1,001,093
Government-sponsored agencies in Japan:
Fixed rate: 4.2% to 6.2%..................... 2001-2007 7,931 74,715
Floating rate: principally based on LIBOR
plus 0.0% to 0.1%.......................... 2001-2003 41,522 391,163
Insurance companies and others:
Fixed rate: 0.8% to 9.4%...................... 2001-2009 330,219 3,110,871
Floating rate: principally based on LIBOR
plus 0.0% to 0.5%........................... 2001-2008 167,448 1,577,466
Unsecured 1.1% to 8.5% bonds................... 2001-2013 712,553 6,712,699
Unsecured 0.4% convertible notes............... 2005 40,000 376,825
Unsecured 0.1% to 1.9% bonds with warrants..... 2002-2004 8,700 81,959
Unsecured notes under medium-term note program:
0.1% to 8.2%................................. 2001-2010 316,733 2,983,825
Zero Coupon.................................. 2001-2006 11,488 108,224
Payables under securitized lease receivables,
0.7% to 7.8%................................. 2001-2004 56,034 527,876
------------- -----------
Yen 1,942,784 $18,302,252
============= ===========
</TABLE>
The repayment schedule for the next five years and thereafter for
long-term debt at March 31, 2000 is as follows:
Thousands of
Year ending March 31 Millions of Yen U.S. dollars
-------------------- --------------------------------
2001........................ Yen 480,636 $ 4,527,894
2002........................ 458,442 4,318,813
2003........................ 347,373 3,272,473
2004........................ 207,476 1,954,555
2005........................ 272,979 2,571,634
Thereafter.................. 175,878 1,656,883
------------- -----------
Total..................... Yen 1,942,784 $18,302,252
============= ===========
Certain agreements relating to long-term debt provide that the Company is
required to submit proposals as to the appropriations of earnings (including
payment of dividends) if requested to do so by the lenders for their review and
approval prior to presentation to the shareholders. To date, the Company has
not received such requests from its lenders. In addition, the agreements
related to debt payable to banks provide that the bank under certain
circumstances may request additional security for these loans and has the right
to offset cash deposited against any short-term or long-term debt that becomes
due, and in case of default and certain other specified events, against all
other debt payable to the bank. 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 4, the
short-term and long-term debt payable to financial institutions are secured by
the following assets as of March 31, 2000:
Millions of Yen Thousands of
U.S. dollars
-----------------------------
Time deposits...................................... Yen 7,618 $ 71,766
Minimum lease payments, loans and future
rentals.......................................... 40,261 379,284
Investment in securities........................... 7,902 74,442
Other operating assets and office facilities,
net.............................................. 4,080 38,436
---------- --------
Yen 59,861 $563,928
========== ========
F-21
<PAGE>
In addition, under agreements with customers on brokerage business,
customers' securities of Yen 4,394 million ($41,394 thousand) at market value
are pledged as collateral for the short-term debt as of March 31, 2000.
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.
The following short-term and long-term debt is guaranteed by commercial
banks and an insurance company as of March 31, 2000:
Thousands of
Millions of Yen U.S. dollars
--------------------------------
Commercial paper........................ Yen 16,690 $ 157,230
Government-sponsored agencies in Japan.. 4,480 42,204
11. DEPOSITS
Deposits at March 31, 1999 and 2000, consist of the following:
1999 2000 2000
---------------------------------------
Thousands of
Millions of Yen U.S. dollars
---------------------------------------
Time deposits..... Yen 49,588 Yen 148,162 $ 1,395,780
Other deposits.... 3,681 6,761 63,692
---------- ----------- -----------
Total....... Yen 53,269 Yen 154,923 $ 1,459,472
========== =========== ===========
The balances of time deposits, including CDs, issued in amounts of Yen 10
million ($94 thousand) or more were Yen 47,977 million and Yen 127,911 million
($1,205 million) at March 31, 1999 and 2000, respectively.
The maturity schedule of time deposits at March 31, 2000 is as follows:
Thousands of
Year ending March 31 Millions of Yen U.S. dollars
-------------------- --------------------------------
2001.................................. Yen 130,027 $1,224,936
2002.................................. 11,685 110,080
2003.................................. 6,450 60,764
----------- ----------
Total............................. Yen 148,162 $1,395,780
=========== ==========
F-22
<PAGE>
12. INCOME TAXES
Income before income taxes and the provision for income taxes in fiscal
1998, 1999 and 2000 are as follows:
1998 1999 2000 2000
-------------------------------------------------
Thousands of
Millions of Yen U.S. dollars
-------------------------------------------------
Income before income taxes:
Domestic.................. Yen 28,186 Yen 15,728 Yen 33,245 $313,189
Foreign................... 10,226 11,587 18,803 177,136
---------- ---------- ---------- --------
Yen 38,412 Yen 27,315 Yen 52,048 $490,325
========== ========== ========== ========
Provision for income taxes:
Current--
Domestic.................. Yen 4,964 Yen 5,633 Yen 6,803 $ 64,089
Foreign................... 8,053 6,407 8,139 76,674
---------- ---------- ---------- --------
13,017 12,040 14,942 140,763
---------- ---------- ---------- --------
Deferred--
Domestic.................. 5,072 (14,153) 7,913 74,545
Foreign................... (3,408) 3,807 (1,449) (13,650)
---------- ---------- ---------- --------
1,664 (10,346) 6,464 60,895
---------- ---------- ---------- --------
Provision for income taxes.. Yen 14,681 Yen 1,694 Yen 21,406 $201,658
========== ========== ========== ========
The normal income tax rate in Japan was approximately 51%, 48% and 42% in
fiscal 1998, 1999 and 2000, 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 1998, 1999
and 2000 are as follows:
<TABLE>
1998 1999 2000 2000
--------------------------------------------------
Millions of Yen Thousands of
U.S. dollars
--------------------------------------------------
<S> <C> <C> <C> <C>
Income before income taxes.................... Yen 38,412 Yen 27,315 Yen 52,048 $490,325
========== ========== ========== ========
Tax provision computed at normal rate......... Yen 19,744 Yen 13,029 Yen 21,860 $205,935
Increases (reductions) in taxes due to:
Application of the equity method............ (1,170) 2,846 150 1,413
Permanent non-deductible expenses........... 1,050 858 677 6,378
Effect of a change in tax rates............. (6,315) (14,582) -- --
Amortization of goodwill.................... 663 (459) (115) (1,083)
Effect of lower tax rate than normal in a
domestic subsidiary....................... (334) (267) (373) (3,514)
Other, net................................... 1,043 269 (793) (7,471)
---------- ---------- ---------- --------
Provision for income taxes............... Yen 14,681 Yen 1,694 Yen 21,406 $201,658
========== ========== ========== ========
</TABLE>
F-23
<PAGE>
Total income taxes recognized in fiscal 1998, 1999 and 2000 are as
follows:
<TABLE>
1998 1999 2000 2000
---------------------------------------------------
Thousands of
Millions of Yen U.S. dollars
---------------------------------------------------
<S> <C> <C> <C> <C>
Provision for income taxes......................... Yen 14,681 Yen 1,694 Yen 21,406 $201,658
Income tax on other comprehensive income (loss):
Net unrealized gains (losses) on investment in
securities..................................... (10,500) 1,414 28,435 267,876
Minimum pension liability adjustment............. -- -- (2,515) (23,693)
Cumulative translation adjustments............... 20 (528) (958) (9,025)
---------- ---------- ---------- --------
Total income taxes................................. Yen 4,201 Yen 2,580 Yen 46,368 $436,816
========== ========== ========== ========
</TABLE>
The tax effects of temporary differences giving rise to the deferred tax
assets and liabilities at March 31, 1999 and 2000 are as follows:
<TABLE>
1999 2000 2000
---------------------------------------
Millions of Yen Thousands of
U.S. dollars
---------------------------------------
<S> <C> <C> <C>
Assets:
Net operating loss carryforwards................ Yen 15,266 Yen 14,184 $ 133,622
Allowance for doubtful receivables on direct
financing leases and possible loan losses..... 31,852 30,181 284,324
Installment loans............................... 4,006 3,360 31,653
Policy liabilities.............................. 1,840 704 6,632
Accrued expenses................................ 3,973 4,381 41,272
Other........................................... 2,703 2,218 20,895
----------- ----------- ----------
Yen 59,640 Yen 55,028 $ 518,398
=========== =========== ==========
Liabilities:
Investment in direct financing leases........... Yen 119,916 Yen 122,591 $1,154,885
Investment in operating leases.................. 14,499 12,386 116,684
Investment in securities........................ 5,551 32,616 307,263
Deferred life insurance acquisition costs....... 5,941 6,856 64,588
Undistributed earnings.......................... 13,111 11,623 109,496
Other........................................... 4,619 2,950 27,790
----------- ----------- ----------
Yen 163,637 Yen 189,022 $1,780,706
----------- ----------- ----------
Net deferred tax liability...................... Yen 103,997 Yen 133,994 $1,262,308
=========== =========== ==========
</TABLE>
Certain subsidiaries have recognized deferred tax assets from net
operating loss carryforwards totaling Yen 37,889 million ($356,938 thousand) as
of March 31, 2000, which expire as follows:
Thousands of
Year ending March 31 Millions of Yen U.S. dollars
-------------------- --------------------------------
2001........................ Yen 1,318 $ 12,417
2002........................ 2,016 18,992
2003........................ 6,034 56,844
2004........................ 5,602 52,774
2005........................ 5,723 53,914
Thereafter.................. 17,196 161,997
---------- ---------
Total..................... Yen 37,889 $ 356,938
========== =========
Undistributed earnings of certain foreign subsidiaries for which deferred
income taxes were not provided amounted to Yen 54,148 million ($510,108
thousand) as of March 31, 2000. Since the management decided that the
undistributed earnings are permanently reinvested, no provision for income
taxes has been provided.
Net deferred tax assets and liabilities at March 31, 1999 and 2000 are
reflected in the accompanying consolidated
F-24
<PAGE>
balance sheets under the following captions:
1999 2000 2000
--------------------------------------------
Millions of Yen Thousands of
U.S. dollars
--------------------------------------------
Other Assets................. Yen 2,500 Yen 1,224 $ 11,531
Income Taxes: Deferred....... 106,497 135,218 1,273,839
------------ ------------ -----------
Net deferred tax liability... Yen 103,997 Yen 133,994 $ 1,262,308
============ ============ ===========
13. 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.
Effective April 1, 1998, the Company and its subsidiaries adopted FASB
Statement No. 132 ("Employers' Disclosures about Pension and Other
Postretirement Benefits"), which revised disclosure about pension and other
postretirement plans. The following disclosures reflect the requirements of the
new rule.
The funded status of the defined benefit pension plans, a substantial
portion of which consists of domestic pension plans, as of March 31, 1999 and
2000 is as follows:
<TABLE>
1999 2000 2000
----------------------------------------
Millions of Yen Thousands of
U.S. dollars
----------------------------------------
<S> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year............... Yen 28,070 Yen 30,805 $290,203
Service cost.......................................... 2,140 2,360 22,233
Interest cost......................................... 1,297 1,460 13,754
Plan participants' contributions...................... 445 458 4,314
Plan amendments....................................... 46 218 2,054
Actuarial loss........................................ 57 12,145 114,413
Foreign currency exchange rate change................. (250) (325) (3,062)
Benefits paid......................................... (1,000) (986) (9,289)
Plan curtailment...................................... -- (70) (659)
---------- ---------- --------
Benefit obligation at end of year................... Yen 30,805 Yen 46,065 $433,961
========== ========== ========
Change in plan assets:
Fair value of plan assets at beginning of year........ Yen 26,122 Yen 30,936 $291,437
Actual return on plan assets.......................... 152 3,716 35,007
Employer contribution................................. 5,313 4,844 45,633
Plan participants' contributions...................... 445 458 4,314
Benefits paid......................................... (876) (840) (7,913)
Foreign currency exchange rate change................. (220) (291) (2,741)
---------- ---------- --------
Fair value of plan assets at end of year............ Yen 30,936 Yen 38,823 $365,737
========== ========== ========
The funded status of the plans:
Funded status......................................... Yen 131 Yen (7,242) $(68,224)
Unrecognized prior service cost....................... 44 253 2,383
Unrecognized net actuarial loss....................... 7,450 17,232 162,336
Unrecognized net transition obligation................ 561 472 4,447
---------- ---------- --------
Net amount recognized............................... Yen 8,186 Yen 10,715 $100,942
========== ========== ========
F-25
<PAGE>
1999 2000 2000
----------------------------------------
Millions of Yen Thousands of
U.S. dollars
----------------------------------------
<S> <C> <C> <C>
Amount recognized in the consolidated balance
sheets consists of:
Prepaid benefit cost.................................. Yen 10,095 Yen 10,077 $ 94,931
Accrued benefit liability............................. (2,322) (5,564) (52,416)
Intangible asset...................................... 413 202 1,903
Accumulated other comprehensive income, gross of tax.. -- 6,000 56,524
---------- ---------- --------
Net amount recognized............................... Yen 8,186 Yen 10,715 $100,942
========== ========== ========
</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 3,054
million, Yen 2,090 million and Yen 419 million, respectively, at March 31,
1999, and Yen 19,829 million ($186,802 thousand), Yen 16,230 million ($152,897
thousand) and Yen 10,899 million ($102,675 thousand), respectively, at March
31, 2000.
Net pension cost of the plans for fiscal 1998, 1999 and 2000 consists of
the following:
<TABLE>
1998 1999 2000 2000
-------------------------------------------------
Thousands of
Millions of Yen U.S. dollars
-------------------------------------------------
<S> <C> <C> <C> <C>
Service cost........................................ Yen 1,784 Yen 2,140 Yen 2,360 $22,233
Interest cost....................................... 1,127 1,297 1,460 13,754
Expected return on plan assets...................... (1,071) (1,369) (1,565) (14,744)
Amortization of unrecognized transition obligation.. 24 45 35 330
Amortization of unrecognized net actuarial loss..... 244 175 237 2,233
Amortization of unrecognized prior service cost..... -- 2 10 94
Plan curtailment.................................... -- -- (43) (405)
--------- --------- --------- -------
Net periodic pension cost........................... Yen 2,108 Yen 2,290 Yen 2,494 $23,495
========= ========= ========= =======
</TABLE>
Significant assumptions of domestic and foreign pension plans used to
determine these amounts for fiscal 1998, 1999 and 2000 are as follows:
1998 1999 2000
---------------------
Domestic
Discount rate...................................... 4.4% 4.4% 3.0%
Rate of increase in compensation levels............ 2.7% 2.6% 2.6%
Expected long-term rate of return on plan assets... 4.5% 4.4% 3.0%
1998 1999 2000
---------------------
Foreign
Discount rate...................................... 7.3% 6.8% 7.8%
Rate of increase in compensation levels............ 4.0% 4.0% 5.0%
Expected long-term rate of return on plan assets... 9.3% 9.3% 9.3%
In addition, directors and corporate auditors of the Company and certain
subsidiaries, and executive officers of the Company, receive lump-sum payments
upon termination of their services under unfunded termination plans. The
payments to directors and corporate auditors are subject to shareholders'
approval. The amount required based on length of services and remuneration to
date under these plans is fully accrued.
Total provisions charged to income for all the plans including the defined
benefit plans are Yen 3,019 million, Yen 2,942 million and Yen 3,431 million
($32,322 thousand) in fiscal 1998, 1999 and 2000, respectively.
F-26
<PAGE>
14. STOCK-BASED COMPENSATION
The Company has introduced stock option plans for all 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 plan, the options vest 100% on the grant date
and are exercisable for 5 years, 9.75 years and 9.7 years from that date in
fiscal 1998, 1999 and 2000, respectively. The Company acquired 168,000, 146,000
and 145,000 shares of its common stock for the plan during fiscal 1998, 1999
and 2000, respectively. The Board of Directors intends to obtain approval from
the shareholders, at the next general meeting, to be held on June 29, 2000, for
the acquisition by the Company of 319,100 shares of its common stock for a
total consideration not exceeding Yen 7,000 million ($65,944 thousand) for an
additional grant of stock options during fiscal 2001.
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 compensation expense of Yen 49
million, Yen 0 and Yen 0 in fiscal 1998, 1999 and 2000, respectively. 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 1998, 1999 and 2000 would have been as follows:
<TABLE>
1998 1999 2000 2000
--------------------------------------------
<S> <C> <C> <C> <C>
Net income (millions of Yen and thousands of
U.S. dollars)........................................ Yen 23,385 Yen 25,102 Yen 29,761 $280,367
Basic earnings per share (Yen and U.S. dollars)........ Yen 300.88 Yen 323.74 Yen 374.19 $ 3.53
Diluted earnings per share (Yen and U.S. dollars)...... Yen 300.88 Yen 323.74 Yen 365.66 $ 3.44
</TABLE>
The following table summarizes information about stock option activity for
fiscal 1998, 1999 and 2000:
<TABLE>
Weighted average Weighted
exercise price average Exrecise price
Number of ------------------------- remaining ------------------------
shares Yen U.S. dollars life Low High
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at March 31, 1997.. -- --
Granted...................... 168,000 Yen 7,665
Exercised.................... -- --
Forfeited or expired......... -- --
------------------------------------------------------------------------------------------------------------------
Outstanding at March 31, 1998.. 168,000 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 $97.91
Exercised.................... 57,000 7,686 72.41
Forfeited or expired......... -- -- --
------------------------------------------------------------------------------------------------------------------
Outstanding at March 31, 2000.. 402,000 8,689 81.86 6.88 Years Yen 7,665 Yen 10,393
</TABLE>
All of the options outstanding at March 31, 1998, 1999 and 2000 are
exercisable. Exercise prices of all the granted options were adjusted on April
1, 2000 for a 1.2-for-1 stock split to be implemented on May 19, 2000.
The fair value of these stock options was estimated using the
Black-Scholes option pricing model under the following assumptions:
1998 1999 2000
-------------------------------------
Grant-date fair value Yen 2,356 Yen 3,552 Yen 6,078 ($57.26)
Expected life 5 Years 10 Years 8.55 Years
Risk-free rate 1.21% 0.81% 1.72%
Expected volatility 24.56% 29.74% 35.53%
Expected dividend yield 0.158% 0.161% 0.149%
F-27
<PAGE>
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 311,110
shares, 315,593 shares and 302,484 shares by repurchasing warrants attached to
bonds with warrants issued by the Company during fiscal 1998, 1999 and 2000,
respectively. Grant-date fair value was Yen 516, Yen 510 and Yen 1,100
($10.36), and exercise price was Yen 7,939, Yen 6,885 and Yen 11,291 ($106.37)
in fiscal 1998, 1999 and 2000, respectively. Exercise price of the warrants
granted in fiscal 1998 has 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 to be implemented on May 19, 2000.
Subject to the final approval by the Board of Directors of the Company,
the Company intends to introduce a fiscal 2001 warrant plan. Under the plan,
warrants to purchase approximately 112,500 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 2001. 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.
15. ACCUMULATED OTHER COMPREHENSIVE 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 loss in
fiscal 1998, 1999 and 2000 are as follows:
<TABLE>
Net unrealized Minimum Accumulated
gains on pension Cumulative other
investment in liability translation comprehensive
securities adjustments adjustments income (loss)
--------------------------------------------------------------
Millions of Yen
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at April 1, 1997........................................ Yen 12,642 Yen -- Yen (14,467) Yen (1,825)
Net unrealized gains (losses) on investment in securities,
net of tax of Yen 10,500 million.............................. (9,931) (9,931)
Foreign currency translation adjustments,
net of tax of Yen (20) million............................... (6,323) (6,323)
----------- ---------- ----------- -----------
Current period change........................................... Yen (9,931) Yen -- Yen (6,323) Yen (16,254)
----------- ---------- ----------- -----------
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 gains included in
net income, net of tax of Yen 484 million..................... (1,148) (1,148)
Minimum pension liability adjustments,
net of tax of Yen 2,515 million............................... (3,485) (3,485)
F-28
<PAGE>
Net unrealized Minimum Accumulated
gains on pension Cumulative other
investment in liability translation comprehensive
securities adjustments adjustments income (loss)
--------------------------------------------------------------
Millions of Yen
--------------------------------------------------------------
<S> <C> <C> <C> <C>
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)
=========== ========== =========== ===========
</TABLE>
<TABLE>
Net unrealized Minimum Accumulated
gains on pension Cumulative other
investment in liability translation comprehensive
securities adjustments adjustments income (loss)
--------------------------------------------------------------
Thousands of U.S. dollars
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at March 31, 1999....................................... $ 39,124 $ -- $(298,663) $(259,539)
Net unrealized gains (losses) on investment in securities,
net of tax of $(272,435) thousand............................. 402,252 402,252
Reclassification adjustment for gains included in
net income, net of tax of $4,560 thousand.................... (10,815) (10,815)
Minimum pension liability adjustments,
net of tax of $23,693 thousand................................ (32,831) (32,831)
Foreign currency translation adjustments,
net of tax of $11,484 thousand................................ (114,781) (114,781)
Reclassification adjustment for losses included in
net income, net of tax of $(2,459) thousand................... 2,365 2,365
-------- --------- --------- ---------
Current period change........................................... $391,437 $ (32,831) $(112,416) $ 246,190
-------- --------- --------- ---------
Balance at March 31, 2000....................................... $430,561 $ (32,831) $(411,079) $ (13,349)
======== ========= ========= =========
</TABLE>
16. SHAREHOLDERS' EQUITY
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 appropriated 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 par 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.
The Board of Directors intends to recommend to the shareholders, at the
next general meeting, to be held on June 29, 2000, the declaration of a cash
dividend totaling Yen 1,023 million ($9,637 thousand), which will be paid in
that month to the shareholders of record as of March 31, 2000, covering fiscal
2000, and the related appropriation of retained earnings to the legal reserve
of Yen 120 million ($1,130 thousand).
The amount of retained earnings legally available for distribution (and
for the requisite appropriation to the legal reserve) is that recorded in the
Company's books and amounted to Yen 87,436 million ($823,702 thousand) as of
March 31, 2000. However, there is a restriction on the payment of dividends
relating to the treasury stock acquired for the stock option plan, amounting to
Yen 4,099 million ($38,615 thousand) as of March 31, 2000.
Retained earnings at March 31, 2000 includes Yen 26,574 million ($250,344
thousand) relating to equity in undistributed earnings of 50% or less owned
companies accounted for by the equity method.
F-29
<PAGE>
In fiscal 2000, the Company decided to undertake a 1.2-for-1 stock split
to be implemented on May 19, 2000 and assigned to all shareholders appearing on
the final list of shareholders as of March 31, 2000.
17. BROKERAGE COMMISSIONS AND GAINS ON INVESTMENT SECURITIES
Brokerage commissions and gains on investment securities in fiscal 1998,
1999 and 2000 consist of the following:
1998 1999 2000 2000
----------------------------------------------
Thousands of
Millions of Yen U.S. dollars
----------------------------------------------
Brokerage commissions............ Yen 1,400 Yen 1,165 Yen 3,089 $ 29,100
Gains on investment securities,
net............................ 6,671 6,216 16,611 156,486
--------- --------- ---------- ---------
Yen 8,071 Yen 7,381 Yen 19,700 $ 185,586
========= ========= ========== =========
Trading activities--Gains on investment securities, net, include net
trading revenue on trading securities amounting to Yen 574 million, Yen 679
million and Yen 1,390 million ($13,095 thousand) for fiscal 1998, 1999 and
2000, respectively. Gains of Yen 303 million and Yen 561 million, and a loss of
Yen 15 million ($141 thousand) of derivative trading instruments are also
included in gains on investment securities, net, for fiscal 1998, 1999 and
2000, respectively.
18. LIFE INSURANCE OPERATIONS
Life insurance premiums and related investment income in fiscal 1998, 1999
and 2000 consist of the following:
1998 1999 2000 2000
---------------------------------------------------
Thousands of
Millions of Yen U.S. dollars
---------------------------------------------------
Life insurance premiums..... Yen 118,856 Yen 186,629 Yen 190,758 $1,797,061
Life insurance related
investment income......... 7,175 9,630 15,071 141,978
----------- ----------- ----------- ----------
Yen 126,031 Yen 196,259 Yen 205,829 $1,939,039
=========== =========== =========== ==========
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. Amortization charged to
income for fiscal 1998, 1999 and 2000 amounted to Yen 7,020 million, Yen 8,428
million and Yen 9,756 million ($91,908 thousand), respectively.
19. OTHER OPERATIONS
Other operating 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.
20. PER SHARE DATA
In Japan, dividends which are payable to shareholders of record at the end
of a fiscal year are subsequently approved by shareholders, and, accordingly,
the declaration of these dividends is not reflected in the financial statements
at such fiscal year-end. However, dividends per share shown in the consolidated
statements of income have been presented on an accrual basis and include, in
each fiscal year, dividends to be approved by shareholders after such fiscal
year.
In fiscal 1998, the Company adopted FASB Statement No. 128 ("Earnings
per Share"), which requires companies
F-30
<PAGE>
to present basic EPS and diluted EPS. The application of this statement did not
have an effect on basic and diluted EPS in fiscal 1998 and 1999 as diluted EPS
is equal to basic EPS in each period.
F-31
<PAGE>
A reconciliation of the differences between basic and diluted EPS in
fiscal 2000 is as follows:
<TABLE>
Weighted-
Net income average shares EPS EPS
-------------------------------------------------------------
Millions of Yen Thousands Yen U.S. dollars
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic EPS:
Net income available to common stockholders... Yen 30,642 79,534 Yen 385.27 $3.63
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 $3.55
========== ====== ========== =====
</TABLE>
EPS has been adjusted for the stock splits retroactively (see notes 1 (x)
and 16).
21. DERIVATIVE FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company and certain 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 certain subsidiaries to reduce those risks, as explained in this
note.
(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,
1999 and 2000, as indicated in the following table:
<TABLE>
1999 2000 2000
-----------------------------------------------------
Notional amount Notional amount Notional amount
-----------------------------------------------------
I Millions of Yen Thousands of
U.S. dollars
-----------------------------------------------------
<S> <C> <C> <C>
Interest rate swap agreements... Yen 1,132,831 Yen 957,398 $9,019,293
Options, caps, floors and
collars held.................. 76,232 57,447 541,187
Futures......................... -- 14,233 134,084
</TABLE>
Under interest rate swap agreements, the Company and certain 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 such subsidiaries
pay the fixed rate and receive the floating rate under the majority of their
swaps. Because the size of swap positions needed to reduce the impact of market
fluctuations on net interest expense varies over time, the Company and certain
subsidiaries have also entered into swaps in which they receive the fixed rate
and pay the floating rate when necessary to reduce their net swap positions.
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, 1999 and 2000 are set out in the following table:
F-32
<PAGE>
1999 2000 2000
------------------------------------------------------
Outstanding Outstanding Outstanding
contract amount contract amount contract amount
------------------------------------------------------
Millions of Yen Thousands of
U.S. dollars
------------------------------------------------------
Loan commitments Yen 18,726 Yen 10,273 $96,778
(c) Foreign exchange risk management
The Company and certain subsidiaries have entered into foreign exchange
forward contracts and foreign currency swap agreements in managing their
foreign exchange risk as of March 31, 1999 and 2000, as indicated in the
following table:
<TABLE>
1999 2000 2000
-----------------------------------------------------
Notional amount Notional amount Notional amount
-----------------------------------------------------
I Millions of Yen Thousands of
U.S. dollars
-----------------------------------------------------
<S> <C> <C> <C>
Foreign exchange forward
contracts................... Yen 30,954 Yen 36,617 $ 344,955
Foreign currency swap
agreements.................. 288,796 330,491 3,113,434
</TABLE>
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 such 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 certain subsidiaries have entered into various types of
contracts for the purpose of trading activities as of March 31, 1999 and 2000,
as indicated in the following table:
<TABLE>
1999 2000 2000
-----------------------------------------------------
Notional amount Notional amount Notional amount
-----------------------------------------------------
I Millions of Yen Thousands of
U.S. dollars
-----------------------------------------------------
<S> <C> <C> <C>
Futures....................... Yen 34,973 Yen 15,347 $144,578
Interest rate swap
agreements.................. 2,000 7,060 66,510
Options, caps, floors and
collars held................ 7,080 9,080 85,539
Options, caps, floors and
collars written............. 10,697 12,265 115,544
Foreign exchange forward
contracts................... 2,768 938 8,837
</TABLE>
22. 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, 1999 and 2000, 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 3,420
billion, or 75%, at March 31, 1999 and approximately Yen 3,490 billion ($32,878
million), or 76%, at March 31, 2000 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
F-33
<PAGE>
31, 1999 and 2000, 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
percentages of consolidated total assets invested in transportation equipment,
and information-related, office and measuring equipment were 11.1% and 10.3% as
of March 31, 1999, respectively, and the percentage of consolidated total
assets invested in transportation equipment was 10.4% as of March 31, 2000.
Most of the lease payments are made at fixed rates.
23. 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.
Carrying Estimated
March 31, 1999 amount fair value
-------------- -------------------------------
Millions of Yen
-------------------------------
Trading instruments
Trading securities............................ Yen 414 Yen 414
Futures:
Assets...................................... 99 99
Options and other derivatives:
Assets...................................... 192 192
Liabilities................................. 54 54
Non-trading instruments
Assets:
Cash and cash equivalents................... 252,290 252,290
Restricted cash and cash equivalents........ 2,250 2,250
Time deposits............................... 8,861 8,861
Installment loans........................... 1,761,887 1,772,448
Allowance for doubtful receivables on
possible loan losses...................... (108,739) (108,739)
Investment in securities:
Practicable to estimate fair value........ 524,052 524,025
Not practicable to estimate fair value.... 51,740 51,740
Liabilities:
Short-term debt............................. 2,184,983 2,184,983
Deposits.................................... 53,269 53,269
Long-term debt.............................. 2,036,028 2,066,592
Foreign exchange forward contracts:
Assets...................................... 383 383
Liabilities................................. 589 589
Foreign currency swap agreements:
Assets...................................... -- 16,497
Liabilities................................. -- 7,905
Interest rate swap agreements:
Assets...................................... -- 14,294
Liabilities................................. -- 27,510
Options and other derivatives:
Assets...................................... 109 (6)
F-34
<PAGE>
<TABLE>
Carrying Estimated Carrying Estimated
March 31, 2000 amount fair value amount fair value
-------------- -----------------------------------------------------------
Millions of Yen Thousands of U.S. dollars
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Trading instruments
Trading securities................................ Yen 390 Yen 390 $ 3,674 $ 3,674
Futures:
Assets.......................................... 53 53 499 499
Options and other derivatives:
Assets.......................................... 90 90 848 848
Liabilities..................................... 38 38 358 358
Non-trading instruments
Assets:
Cash and cash equivalents....................... 265,956 265,956 2,505,473 2,505,473
Restricted cash and cash equivalents............ 13,666 13,666 128,742 128,742
Time deposits................................... 7,698 7,698 72,520 72,520
Installment loans............................... 1,791,439 1,791,449 16,876,486 16,876,580
Allowance for doubtful receivables on possible
loan losses................................... (101,156) (101,156) (952,953) (952,953)
Investment in securities:
Practicable to estimate fair value............ 701,042 701,042 6,604,258 6,604,258
Not practicable to estimate fair value........ 56,949 56,949 536,496 536,496
Liabilities:
Short-term debt................................. 1,912,761 1,912,761 18,019,416 18,019,416
Deposits........................................ 154,923 155,492 1,459,472 1,464,833
Long-term debt.................................. 1,942,784 1,964,017 18,302,252 18,502,280
Foreign exchange forward contracts:
Assets.......................................... 463 463 4,362 4,362
Liabilities..................................... 20 20 188 188
Foreign currency swap agreements:
Assets.......................................... -- 23,154 -- 218,125
Liabilities..................................... -- 3,140 -- 29,581
Interest rate swap agreements:
Assets.......................................... -- 11,680 -- 110,033
Liabilities..................................... -- 12,815 -- 120,725
Options and other derivatives:
Assets.......................................... 78 (12) 735 (113)
Liabilities..................................... 5 101 47 951
</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, current pricing 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
F-35
<PAGE>
amounts recognized in the balance sheets were determined to be reasonable
estimates of their fair values due to relatively short maturity.
Installment loans--The carrying amounts of floating-rate installment loans
with no significant changes in credit risk and which could be repriced within a
short-term period were determined to be reasonable estimates of their fair
values. For certain homogeneous categories of medium- and long-term fixed-rate
loans, such as housing loans and other loans, the estimated fair values were
calculated by discounting the future cash flows using the current interest
rates charged by the Company and its subsidiaries for new loans made to
borrowers with similar credit ratings and remaining maturities.
Investment in securities--For trading securities and available-for-sale
securities, the estimated fair values, which are also the carrying amounts
recorded in the balance sheets, were generally based on quoted market prices or
quotations provided by dealers. For held-to-maturity securities, the estimated
fair values were based on quoted market prices, if available. If a quoted
market price was not available, estimated fair values were determined using
quoted market prices for similar securities or the carrying amounts (where
carrying amounts were believed to approximate the estimated fair values).
For other securities, for which there were no quoted market prices,
reasonable estimates of fair values could not be made without incurring
excessive costs.
Deposits--The carrying amounts of demand deposits recognized in the
balance sheets were determined to be reasonable estimates of their fair value.
The estimated fair values of time deposits were calculated by discounting the
future cash flows. The current interest rates offered for the deposits with
similar terms and remaining average maturities were used as the discount rates.
Long-term debt--The carrying amounts of long-term debt with floating rates
which could be repriced within short-term periods were determined to be
reasonable estimates of their fair values. For medium- and long-term fixed-rate
debt, the estimated fair values were calculated by discounting the future cash
flows. The borrowing interest rates 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 certain 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 and dealer quotes
are available for most of the Company's and certain subsidiaries' derivatives.
24. COMMITMENTS AND CONTINGENT LIABILITIES
Commitments, guarantees and contingencies--As of March 31, 2000, the
Company and its subsidiaries had commitments for the purchase of equipment to
be leased, having a cost of approximately Yen 13,471 million ($126,905
thousand).
The minimum future rentals on non-cancelable operating leases are as
follows:
Thousands of
Year ending March 31 Millions of Yen U.S. dollars
-------------------- --------------- ------------
2001......................... Yen 491 $ 4,626
2002......................... 476 4,484
2003......................... 402 3,787
2004......................... 293 2,760
2005......................... 257 2,421
Thereafter................... 877 8,262
--------- -------
Total...................... Yen 2,796 $26,340
========= =======
F-36
<PAGE>
The Company and its subsidiaries lease office space under operating lease
agreements, which are primarily cancelable, and made rental payments totaling
Yen 6,446 million, Yen 6,996 million and Yen 5,674 million ($53,453 thousand)
in fiscal 1998, 1999 and 2000, respectively.
As of March 31, 2000, the Company and its subsidiaries were contingently
liable as guarantor for borrowings of Yen 24,495 million ($230,758 thousand) 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.
25. SEGMENT INFORMATION
Effective April 1, 1998, the Company adopted FASB Statement No. 131
("Disclosures about Segments of an Enterprise and Related Information"). Prior
period amounts have been restated in accordance with the requirement of the
standard. 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. 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 and equipment operating leases in domestic operations, the Company
aggregates 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
financial 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 and venture capital operations.
Financial information of the segments for fiscal 1998, 1999 and 2000 is as
follows:
<TABLE>
Year ended March 31, 1998 (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 120,939 Yen 50,189 Yen 19,102 Yen 19,203 Yen 125,767 Yen 20,631
Interest revenue....................... 14,107 25 18,428 460 -- 13,864
Interest expense....................... 40,343 1,328 11,171 4,296 -- 4,274
Depreciation and amortization.......... 27,333 28,197 2,363 3,717 223 2,466
Other significant non-cash items:
Provision for doubtful
receivables and possible
loan losses........................ 12,013 81 29,014 -- -- 2,824
Write-downs of long-lived
assets............................. -- -- -- 5,910 -- --
Increase in policy liabilities....... -- -- -- -- 72,432 --
Equity in net income (loss) of
and gain (loss) on sales of
affiliates........................... (20) (10) -- -- -- 3,121
Segment profit (loss).................. 44,097 8,407 (23,071) (8,392) 5,762 1,891
Segment assets......................... 2,233,448 103,435 649,511 297,880 196,378 243,607
Long-lived assets...................... 36,775 65,554 3,396 276,124 -- 4,546
Expenditures for long-lived
assets............................... 14,329 38,695 2,627 12,982 -- 526
Investment in affiliates............... 134 13 -- -- -- 8,561
[Financial data--to be continued]
</TABLE>
F-37
<PAGE>
[Financial data--continued]
<TABLE>
Year ended March 31, 1998 (Millions of Yen)
-------------------------------------------------------
Foreign Operations
---------------------------------------
The Asia and
Americas Oceania Europe Total
----------- ----------- ---------- -------------
<S> <C> <C> <C> <C>
Revenues............................... Yen 71,485 Yen 55,750 Yen 21,966 Yen 505,032
Interest revenue....................... 24,727 16,397 9,949 97,957
Interest expense....................... 36,202 27,157 15,138 139,909
Depreciation and amortization.......... 6,065 12,481 7,400 90,245
Other significant non-cash items:
Provision for doubtful
receivables and possible
loan losses........................ 3,235 2,184 83 49,434
Write-downs of long-lived
assets............................. 2,842 -- -- 8,752
Increase in policy liabilities....... -- -- -- 72,432
Equity in net income (loss) of
and gain (loss) on sales of
affiliates........................... 8,454 (3,644) -- 7,901
Segment profit (loss).................. 21,263 (8,441) (2,123) 39,393
Segment assets......................... 668,742 459,042 251,759 5,103,802
Long-lived assets...................... 35,882 77,897 102,013 602,187
Expenditures for long-lived
assets............................... 4,708 30,187 3,684 107,738
Investment in affiliates............... 41,326 21,606 181 71,821
</TABLE>
F-37
<PAGE>
<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
[Financial data--to be continued]
</TABLE>
[Financial data--continued]
<TABLE>
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-38
<PAGE>
<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
[Financial data--to be continued]
</TABLE>
[Financial data--continued]
<TABLE>
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-38
<PAGE>
<TABLE>
Year ended March 31, 2000 (Thousands of U.S. dollars)
-----------------------------------------------------------------------------------
Domestic Operations
-----------------------------------------------------------------------------------
Equipment Real estate
Corporate operating related Real Life
finance leases finance estate insurance Other
------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................... $ 1,143,806 $ 499,293 $ 162,920 $ 422,732 $ 1,928,837 $ 290,928
Interest revenue....................... 153,801 28 153,255 6,981 -- 173,198
Interest expense....................... 295,073 11,936 73,245 40,236 -- 24,720
Depreciation and amortization.......... 293,887 292,953 14,122 30,268 5,181 19,265
Other significant non-cash items:
Provision for doubtful
receivables and possible
loan losses........................ 205,350 57 93,867 47 -- 58,154
Write-downs of long-lived
assets............................. -- -- 1,404 69,694 -- --
Increase in policy liabilities....... -- -- -- -- 1,299,124 --
Equity in net income (loss) of
and gain (loss) on sales of
affiliates........................... 347 104 264 -- -- (15,817)
Segment profit (loss).................. 385,473 73,697 (32,171) (77,635) 51,390 (9,760)
Segment assets......................... 18,545,360 1,068,196 5,626,698 2,604,748 4,006,924 2,282,431
Long-lived assets...................... 327,691 594,649 34,074 2,375,205 30,692 50,419
Expenditures for long-lived
assets............................... 181,970 329,750 34,074 322,025 31,041 820
Investment in affiliates............... 1,554 207 895 -- -- 118,126
[Financial data--to be continued]
</TABLE>
[Financial data--continued]
<TABLE>
Year ended March 31, 2000 (Thousands of U.S. dollars)
-------------------------------------------------------
Foreign Operations
---------------------------------------
The Asia and
Americas Oceania Europe Total
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Revenues............................... $ 702,072 $ 468,573 $ 172,021 $ 5,791,182
Interest revenue....................... 254,216 140,198 63,401 945,078
Interest expense....................... 318,907 207,282 90,287 1,061,686
Depreciation and amortization.......... 41,498 125,803 55,054 878,031
Other significant non-cash items:
Provision for doubtful
receivables and possible
loan losses........................ 42,440 24,748 4,663 429,326
Write-downs of long-lived
assets............................. 3,146 -- -- 74,244
Increase in policy liabilities....... -- -- -- 1,299,124
Equity in net income (loss) of
and gain (loss) on sales of
affiliates........................... 358 10,184 179 (4,381)
Segment profit (loss).................. 176,872 31,757 2,619 602,242
Segment assets......................... 6,513,452 3,481,300 1,503,608 45,632,717
Long-lived assets...................... 521,074 722,317 569,807 5,270,928
Expenditures for long-lived
assets............................... 394,753 278,003 9 1,572,445
Investment in affiliates............... 280,066 86,255 1,536 488,639
</TABLE>
F-38
<PAGE>
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 evaluates 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.
<TABLE>
1998 1999 2000 2000
------------------------------------------------------------
Millions of Yen Thousands of
U.S. dollars
------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Total revenues for segments................. Yen 505,032 Yen 592,468 Yen 614,734 $ 5,791,182
Revenue related to corporate assets....... 2,111 1,473 1,779 16,760
------------- ------------- ------------- -----------
Total consolidated revenues .................. Yen 507,143 Yen 593,941 Yen 616,513 $ 5,807,942
============= ============= ============= ===========
Segment profit:
Total profit for segments .................. Yen 39,393 Yen 37,586 Yen 63,928 $ 602,242
Unallocated interest expenses,
general and administrative expenses..... (4,386) (4,189) (3,374) (31,785)
Adjustment of income tax
expenses to equity in net income
and minority income .................... (1,741) (375) (537) (5,059)
Unallocated write-downs of securities..... -- (8,383) (9,772) (92,058)
Unallocated other gain or loss ........... 5,146 2,676 1,803 16,985
------------- ------------- ------------- -----------
Total consolidated income before income taxes. Yen 38,412 Yen 27,315 Yen 52,048 $ 490,325
============= ============= ============= ===========
Segment assets:
Total assets for segments .................. Yen 5,103,802 Yen 4,840,799 Yen 4,843,913 $45,632,717
Advances ................................. (101,282) (62,079) (89,676) (844,805)
Investment in affiliates
(not including loans) .................. (71,821) (57,592) (51,869) (488,639)
Corporate assets ......................... 51,501 54,308 62,453 588,349
------------- ------------- ------------- -----------
Total consolidated operating assets .......... Yen 4,982,200 Yen 4,775,436 Yen 4,764,821 $44,887,622
============= ============= ============= ===========
</TABLE>
FASB Statement No. 131 requires disclosure of information about geographic
areas as an 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.
F-39
<PAGE>
FASB Statement No. 131 requires disclosure of revenues from external
customers for each product and service as an 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 1998, 1999
and 2000.
F-40
