-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TuyGZ6KxbVB44wR2cXXtQXeIe2GAa5JI5po2/3LXnVhAweZnd7J22eWNbzBeYH67 +z3hUIkaldDwP2R3yPbybw== 0000950130-99-005509.txt : 20000211 0000950130-99-005509.hdr.sgml : 20000211 ACCESSION NUMBER: 0000950130-99-005509 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990929 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ORIX CORP CENTRAL INDEX KEY: 0001070304 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 20-F SEC ACT: SEC FILE NUMBER: 001-14856 FILM NUMBER: 99719487 BUSINESS ADDRESS: STREET 1: 3-22-8 SHIBA STREET 2: MINATO-KU CITY: TOYKO 105 6135 JAPAN STATE: M0 BUSINESS PHONE: 81354195000 MAIL ADDRESS: STREET 1: 3-22-8 SHIBA STREET 2: MINATO-KU CITY: TOKYO 20-F 1 FORM 20-F - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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, 1999 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) 3-22-8 Shiba, Minato-ku Japan Tokyo 105-8683, Japan 813-5419-5000 (Jurisdiction of incorporation or organization) (Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange to which registered ------------------- ----------------------------------------- (1) Common stock, par value (Yen)50 per share (the "Shares") New York Stock Exchange* (2) American Depository Shares ("ADSs"), each of which New York Stock Exchange represents one-half of one Share (3) 0.375% Convertible Notes due 2005 (the "Notes") New York Stock Exchange (4) American Depository Notes ("ADNs"), each of which New York Stock Exchange represents one Note in the principal amount of (Yen)2,000,000
Securities registered or to be registered pursuant to Section 12(g) of the Act: None (Title of Class) Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None (Title of Class) Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by annual report. As of March 31, 1999, 64,870,299 Shares and 300,000 ADSs are outstanding. Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 Item 18 X - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- *Not for trading, but only in connection with the registration of American Depositary Shares. TABLE OF CONTENTS Page ----
Certain Defined Terms, Conventions and Presentation of Financial Information......... ii --- Forward Looking Statements........................................................... ii --- Exchange Rates....................................................................... iii ---
PART I Item 1. Description of Business................................................................ 1 Item 2. Description of Property................................................................ 35 Item 3. Legal Proceedings...................................................................... 35 Item 4. Control of Registrant.................................................................. 35 Item 5. Nature of Trading Market............................................................... 36 Item 6. Exchange Controls and Other Limitations Affecting Security Holders..................... 37 Item 7. Taxation............................................................................... 39 Item 8. Selected Financial Data................................................................ 41 Item 9. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 43 Item 9A. Quantitative and Qualitative Disclosures About Market Risk............................. 83 Item 10. Directors and Officers of Registrant................................................... 87 Item 11. Compensation of Directors and Officers................................................. 88 Item 12. Options to Purchase Securities from Registrant or Subsidiaries......................... 89 Item 13. Interest of Management in Certain Transactions......................................... 91 PART II Item 14. Description of Securities to be Registered............................................. 91 PART III Item 15. Defaults upon Senior Securities........................................................ 91 Item 16. Changes in Securities, Changes in Security for Registered Securities................... 92 PART IV Item 17. Financial Statements................................................................... 92 Item 18. Financial Statements................................................................... 92 Item 19. Financial Statements and Exhibits...................................................... 92
i CERTAIN DEFINED TERMS, CONVENTIONS AND PRESENTATION OF FINANCIAL INFORMATION As used in this Annual Report, unless the context otherwise requires, "Company" and "ORIX" refer to ORIX Corporation and "we", "us", "our" and similar terms refer to ORIX Corporation and its consolidated subsidiaries. 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 (Yen)118.43=$1, the noon buying rate in New York City for cable transfers in yen as certified for customs purposes by the Federal Reserve Bank of New York (the "Noon Buying Rate") on March 31, 1999. The Company's fiscal year ends on March 31. The fiscal year ended March 31, 1999 is referred to throughout this Annual Report as fiscal 1999 or the 1999 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 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 28, 1999 was $1 = (Yen)106.14.
Year Ended March 31, ----------------------------------------------------------- 1995 1996 1997 1998 1999 ----------- ----------- ----------- ----------- ----------- Yen exchange rates per U.S. dollar: High.................... (Yen)105.38 (Yen)107.29 (Yen)124.54 (Yen)133.99 (Yen)147.14 Low..................... 86.85 81.12 104.49 111.42 108.83 Average (of rates avail- able on the last day of each month during the period)................ 98.48 96.95 113.20 123.57 128.10 At period-end........... 86.85 107.00 123.72 133.29 118.43
iii 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. 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. During this period, strong capital investment by the corporate sector stimulated demand for equipment financing. Equipment leasing began to attract interest as an important financing vehicle for capital investment. As a consequence, the leasing industry experienced strong growth, with many commercial banks, general trading companies and manufacturers establishing leasing subsidiaries. We capitalized on the growing demand in this period by expanding our portfolio of lease assets and establishing specialized leasing subsidiaries. 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. The Japanese leasing industry gradually matured over the course of the 1970s. The Japanese economy was adversely affected by the two oil shocks of 1973 and 1979, resulting in reduced growth in capital investment and increased volatility of foreign exchange rates against the yen. The leasing industry, however, continued to grow steadily, although at a reduced rate compared to preceding years. Changes in Japan's industrial structure, particularly the trend toward the use of electronic and other automated equipment, led to changes in the composition of leasing portfolios. 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. With the maturity of the Japanese economy in the 1980s, the Japanese financial sector began a process of gradual deregulation, while the yen became a significant international currency. The strength of the yen triggered a shift in the Japanese economy to domestic-led growth. 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. In this phase of our development we commenced sales of leveraged leases, a field in which we have maintained our position as a market leader. We also acquired ORIX Securities (then Akane Securities K.K.) and expanded the range of our financial products and services. In 1989, ORIX changed its name to ORIX Corporation, reflecting our increasingly international profile and diversification from the leasing business. In the current decade, the Japanese economy has experienced a protracted period of industrial 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 1 Japan, following our investment in 1989 in Stockton Holdings. Stockton is a U.S. company that trades in futures, foreign exchange and securities and provides reinsurance. We also entered the life insurance business through ORIX Life Insurance, originally the Japanese operations of United Omaha Life of the United States. We have steadily grown our operations in this field. We have 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. We acquired the remaining stake in this joint venture company which became our wholly-owned subsidiary in July 1999. We have also continued to expand our leasing presence overseas, with operations established in Poland, India and Egypt. In this third phase of our development, domestic subsidiaries, such as ORIX Rentec and ORIX Auto Leasing, have also established overseas operations. In the current decade, we have also sought: . to enter into Japan's personal financial services markets; . to add value to our products and services in order to increase returns; and . to increase our fee-based business content. 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 September 1997, we commenced sales of ORIX Direct Life Insurance, a new range of life insurance products aimed at the consumer life insurance market. In July 1997, we acquired direct financing lease and installment loan receivables with a book value of (Yen)288,619 million and 87 employees from Crown Leasing, a nonbank associated with the Nippon Credit Bank Ltd., which filed for bankruptcy in April 1997. As consolidation proceeds within the Japanese leasing industry, we will continue to evaluate other possible acquisitions in order to expand our portfolio of leasing assets. 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 will facilitate 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 will facilitate our securitization business as well as the securitization of our own assets. In fiscal 1999, . we became the 12th Japanese company to list its shares on the New York Stock Exchange; . we divided our Real Estate Business Headquarters into ORIX's Real Estate Finance Headquarters and Real Estate Business Headquarters. ORIX Real Estate, a new subsidiary which handles our real estate development, sales and rentals, was established under our new Real Estate Business Headquarters; . we established ORIX Asset Management and Loan Services Corporation (ORIX Asset Management and Loan Services) to take advantage of deregulation in the Japanese financial markets to diversify our services and products; and . we reformed our management structure by separating management decision- making functions from business administration functions. In the current fiscal year, . ORIX Interior merged into ORIX effective April 1, 1999, and we issued 90,480 shares to minority shareholders of ORIX Interior as a result of the merger; 2 . we acquired the lease and rental operations of NEC Home Electronics Lease. Ltd., consisting primarily of direct financing lease receivables, for approximately (Yen)64 billion. These operations are currently carried out by ORIX Media Supply Corporation; . we introduced the ORIX "Value Added" concept, an internal management system, to increase shareholder value; . effective July 1999, we acquired the remaining stake in Banc One Mortgage Capital Markets, previously our joint venture with Bank One Corporation, a major U.S. bank holding company, to increase our ability to securitize and service commercial property loans. Banc One Mortgage Capital Markets has been renamed and currently operates as ORIX Real Estate Capital Markets, LLC; and . we acquired a 40% stake in a consumer finance company in Osaka. . In September 1999, we agreed with the AIG companies in Japan to establish a joint venture company to operate in the Japanese nonlife insurance sector. The new company is expected to begin operations from October 1999 as an agent of the AIU Insurance Company and other AIG member companies and sell 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. 3 Our Portfolio The following chart shows the breakdown of our portfolio as of June 30, 1999 and illustrates the success of our diversification efforts. Our domestic companies listed below include only operating companies. ORIX Commercial Alliance, ORIX Australia, ORIX Aviation Systems and ORIX Real Estate Equities are overseas consolidated subsidiaries.
Business Business Profile Major Customers Major Operating Companies - ----------------------- ---------------------------------------- -------------------- ------------------------------------ Direct financing leases Information-related and office equipment Middle market ORIX Corporation Industrial equipment corporate customers ORIX Auto Leasing Corporation Construction and civil engineering Shipping companies ORIX Alpha Corporation machinery Airline companies ORIX Commercial Alliance Corporation Commercial services equipment ORIX Australia Corporation Limited Automobiles Marine vessels Aircraft Operating leases Measuring and analytical equipment Middle market ORIX Corporation Automobiles corporate customers ORIX Rentec Corporation Marine vessels Shipping companies ORIX Rent-A-Car Corporation Aircraft Airline companies ORIX Aviation Systems Limited Real estate Installment loans Corporate finance Middle market ORIX Corporation Housing loans corporate customers ORIX Credit Corporation Card loans Consumers ORIX Club Corporation Other consumer loans Life insurance Life insurance products sold through Middle market ORIX Life Insurance Corporation agents and directly to consumers corporate customers Consumers Other operations Securities brokerage Consumers ORIX Corporation Trust banking ORIX Securities Corporation Securities investment ORIX Real Estate Equities Venture capital investment ORIX Commodities 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 Loan Sales of interior furnishings Services Corporation Real estate development and brokerage ORIX Investment Corporation Leisure facility management ORIX Trust and Banking Corporation Golf course management Training facilities management Driving school Hotel management Professional baseball team Environmental services
4 Corporate Objective We seek to deliver consistent growth in profits, while maintaining or improving the credit quality of our asset portfolio. We attempt to increase our profits by providing consistent customer service and convenient product delivery and expanding our relationships with existing customers. We also seek to develop products and services for new niche markets in which we believe we can exploit our knowledge, experience and relationships gained from our existing operations and in which we can differentiate ourselves from potential and existing competitors. Business Strategy We seek to achieve our corporate objective by implementing the following strategies: Identifying New Niche Markets We seek to identify new niche markets and customer segments in which we can differentiate ourselves from potential and existing competitors and develop new products, services and marketing strategies in the fields where we have expertise to service these targeted markets and customer segments. We have also identified new niches in existing businesses, such as the addition of a unique and comprehensive package of value-added services to automobile leasing products by ORIX Auto Leasing, and the introduction of specialized consulting services for measuring equipment rentals undertaken by ORIX Rentec. We were also one of the first Japanese leasing companies to focus on the small-ticket leasing market, developing products such as the ORIX Quick Lease (OQL)--a system for effectively and rapidly processing large volumes of small- ticket lease transactions. This system has been beneficial to us since the margins on small-ticket leasing are consistently higher than in other sectors. In addition, the cost of computers, which now account for about 40% of small- ticket leasing, has halved over the last five years, resulting in increased volume. In some business segments, we have increased our capacity to auction used equipment and vehicles. These efforts include the use of a website for the auction of personal computers and measuring equipment after the leases have expired in order to increase the residual value of equipment. Expanding Business with Our Core Middle Market Customers We intend to expand by strengthening our relationships with our core small and medium-sized business customers and providing a comprehensive array of financial products and services to meet the diverse needs of these customers. We seek to design marketing strategies and servicing standards not only to identify new customers but also to attract existing customers to engage in new business. In particular, the marketing network encompassing our various business divisions and group companies actively cross-sells a number of our products and services. We also target dealers and distributors as the point of sale for many products and services, rather than directly contacting individual customers, in order to more effectively and efficiently market these products and services. We have developed a system under which every salesperson is equipped with the entire range of products and services from each ORIX company and division. In many cases, leasing is the first point of contact with a customer. After this initial contact, we assess the client's needs and provide a broader range of tailored financial solutions, including insurance products, commodities funds, securities brokerage services and property development and management services. Taking advantage of the ORIX brand, we have expanded retail operations such as direct life insurance sales. In order to manage our growing customer base and higher volumes of business, we have developed information systems. These system include an automated invoicing and payment handling system for domestic sales and marketing that streamlines processing and recording of transactions for use in further marketing activities. 5 Growing Our Personal Financial Service Businesses We believe the retail financial services market has strong growth potential. Our strategy is to grow our personal finance businesses by developing and providing products to take advantage of the new less restrictive Japanese regulatory environment and to meet growing demand. Products we have developed and are currently providing include: . Life insurance for retail customers; . Deposits from retail customers; . Small-lot commodity funds; and . Discount brokerage services. We are taking advantage of direct marketing methods and technologies to reduce our operating costs and thus make our products more accessible and attractive to our retail customers. For example, we market our life insurance products to retail customers through newspaper advertising and through the internet rather than direct marketing by sales offices and agents to reduce our costs. This allows us to reduce insurance premiums. We also reduce our back-office costs for our direct deposits by servicing our customers over telephones and the internet. This allows us to offer higher interest rates to our customers. Pursuing Selected International Opportunities and Diversifying Income Sources We have established sizable operations in the Americas, particularly in the United States where we have operated since 1974. We also have a significant presence in the Asia and Oceania region, particularly in Hong Kong where we have operated since 1971, as well as in Singapore. By aggressively pursuing selected business opportunities overseas, we have been able to take advantage of our expertise in leasing and other financial services developed in the domestic market while diversifying our sources of income. Our international operations have enabled us to introduce new products and services from overseas markets into the Japanese market. In Asia, we have sought to make investments primarily in leasing companies that are among the leaders in their local market. Despite the recent deterioration in the economic conditions of a number of the Asian markets in which we operate, we intend generally to continue to maintain our operations, and may pursue selected opportunities to expand our position in these markets. Recently, we have also established and invested in several joint ventures in developing countries, such as Egypt and Poland, as part of our strategy to take advantage of the expected economic growth in these countries. Operating Disciplines We believe that the following operating disciplines have been keys to our success: . emphasizing shareholder value; . maintaining strict credit underwriting standards and collection policies to reduce losses; and . introducing corporate governance initiatives such as outside directors and employee stock option plans. Emphasizing Shareholder Value We have consistently sought to promote shareholder value as an essential operating discipline. In pursuit of this goal, we have introduced various disciplines that bolster a bottom-line orientation. Our use of U.S. GAAP, for example, serves to improve transparency of operating results and accountability compared with other Japanese finance companies. ORIX Value Added In April 1999, we introduced the ORIX Value Added concept for use as an indicator of management efficiency. The ORIX Value Added system assigns portions of shareholders' equity to individual corporate divisions commensurate with the magnitude of risks associated with each division's operations. In this way, the system clarifies the level of efficiency with which capital is employed in each division. The ORIX Value Added concept provides standards for calculating the amount of risk capital allocated to each regional or business division of our operations in which ORIX has assigned executive responsibility to a corporate Executive Officer or a company president. To determine the appropriate amount of risk capital, data on divisional earnings during the past five years is used to calculate the volatility of profitability and quantify the 6 associated risk. Our average of (Yen)313.8 billion in shareholders' equity during the last year of that period is assigned to divisions based on the size of the observed volatility of profitability, so that divisions that have recorded greater increases in their profitability are allotted larger portions of capital. Divisional profitability is calculated by adjusting the value of net income after taxes in light of these factors as the size of interdivisional transactions and internal profit. The hurdle rate for capital utilization efficiency assumed represents an assumed rate of return expected by shareholders on capital. Each division is thus encouraged to boost the level of its profitability relative to the associated risks and ultimately cause the level of ORIX Value Added itself to increase. Intermediate mediators for use in attaining the ORIX Value Added hurdle rate include return on risk adjusted capital (RORAC: net income/risk capital), return on assets (ROA: net income/total assets), and the degree of risk (risk capital/total assets). ORIX Value Added=divisional net income--(risk capital x hurdle rate) = risk capital x (RORAC-hurdle rate). To increase ORIX Value Added, each division must elevate its return on assets by improving profitability or reducing its degree of risk. At times when a division's operating environment calls for emphasis to be placed on growth in operating assets, return on assets may show a short-term decline. Similarly, a division may consider business strategies that call for raising the degree of risk to increase profit and ORIX Value Added over the medium-to- long term. Moreover, we recognize that risks may vary depending on the effects of diverse factors. These range from macroeconomic factors such as economic fluctuations, new government policies, and changes in tax systems to microeconomic factors such as the profitability of operating assets and customer creditworthiness associated with the type of transactions and business undertaken by individual divisions. Each division's success in analyzing these risks and drafting appropriate strategies that make the risks into account will be measured in terms of ORIX Value Added. Moreover, examination of trends in ORIX Value Added over time will enable us to monitor the growth potential of operations in individual business sectors. When operations are shown to produce insufficient levels of ORIX Value Added, we will consider withdrawing from them. Maintaining Credit Standards and Active Portfolio Management We have built a disciplined "credit culture" supported by controlled portfolio and risk management processes. Through our Credit Department, we establish clearly defined credit strategies for each of our businesses by evaluating initially and continuously monitoring customer-, industry-, and country-related risks. This centralized administration of credit policy and portfolio management promotes consistency in credit strategy, efficiency in credit analysis and processing, and effectiveness in monitoring closely credit quality and portfolio composition. This systematic process permits staff members in our sales and marketing business units to make quick credit decisions under disciplined guidelines and to gain a competitive advantage over competitors. Our credit standards and policies have created a receivables portfolio that is diversified by market, geography, customer, maturity and product. As a result, we believe that we have been able to reduce our exposure to adverse economic developments in any particular market or region. In addition, we believe that we have developed an expertise in structuring sophisticated transactions that enables us to accommodate unique client needs without compromising credit quality. Our emphasis on disciplined credit standards enabled us to limit our exposure to real estate development loans in the early 1990s. We believe that our risk management systems, portfolio management and servicing capabilities and client-oriented structuring capabilities would enable us achieve long-term success. Management Focus In order to maximize shareholder value in the long term, we are implementing various reforms of our management structure to more clearly delineate management decision-making responsibilities and day-to-day administrative functions. 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. For decisions relating to administrative operations, ORIX has eliminated its Managing Directors' Committee and Credit Committee, comprised of directors, and established the Investment 7 and Credit Committee, which makes decisions relating to important investments, business development programs and credit. In addition, ORIX has created a Group Corporate Executive Officer Committee to promote the sharing of management information. We have phased out our Advisory Board, which was made up of independent individuals and management specialists who provided us with objective opinions regarding many aspects of our operations. We have invited members of our Advisory Board to serve as independent directors or advisors to the Board of Directors. We also reduced the number of members of our Board of Directors. To ensure greater management transparency, we established an Executive Appointment and Compensation Committee. This committee will include independent directors as well as our internally appointed representative directors. The independent directors will appoint the chairman of the committee. The committee will recommend to the Board of Directors candidates for directors, auditors and corporate executives. The committee will also recommend to the Board an executive remuneration and evaluation system as well as the executive remuneration and other compensation scales. Distinct Corporate Culture Recruiting and Developing High Quality Employees Our management believes that one of our most important assets is high- quality, committed employees with specialized expertise. In order to develop and retain high-quality, highly specialized personnel, we actively recruit candidates, including through extensive use of lateral hires. Unlike many of our Japanese competitors, our hiring program is designed to target lateral hires as well as regular hires throughout the year, and focuses on lateral hires with an intent to fill positions that require particular expertise. Localization of Staff We have sought the active participation of local management in our overseas subsidiaries: over 75% of the overseas chief executive officers have been recruited from within the relevant geographic region. ORIX has also established an organizational structure of regional chief executive officers and headquarters in New York for the Americas region. This enables an efficient chain of command to be established and promotes local decision making. Innovative Culture, Products and Services Unlike many Japanese financial institutions, ORIX is not subject to direct regulation as a financial services provider, although a number of our subsidiaries are regulated entities. We seek to take advantage of this position as a generally non-regulated financial institution to aggressively enter new markets and develop new products and services. Therefore, each of our four main business categories has broad geographic reach and multiple distribution channels. These strategic businesses focus on continuous efforts to develop more business opportunities in each specific market. We believe that our expertise, experience and long-standing commitment to our markets and customers are competitive advantages. Our management believes that our employees' commitment to a distinct culture and set of core values distinguishes us from our competitors. Core values include: . each employee's taking pride in his or her work, committing to excellence and working hard to exceed customers' expectations; . earning a reputation for reliability from each of our stakeholders-- shareholders, customers and employees--by conducting business with integrity, intensity and a competitive spirit; and . earning the respect of society by adhering to international standards of fairness, accountability and corporate transparency. We believe that our strong, experienced management team has developed a disciplined operating philosophy and has implemented a distinct business strategy in each of our diverse business units. We seek to reinforce this culture and impart our core values to all employees through extensive training and operating controls at every level. The Leasing Market in Japan The Japanese leasing industry is highly fragmented, with 358 companies registered with the Japan Leasing Association as of March 31, 1999. In addition to these companies, a number of large credit companies not 8 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 1999, the total annual value of new lease contracts reported by the Japan Leasing Association was (Yen)7,144 billion ($60 billion). The value of new lease contracts in fiscal 1999 based on purchase costs represented 9.34% 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 1999 was information- related equipment (including computers and related equipment), which represented 44.0% of the total value of lease contracts, followed by industrial equipment (16.7%) and commercial service equipment (14.5%). Small- and medium-sized companies represented 46.4% of the total customer base in Japan as measured by value of lease contracts, while large companies comprised 49.2% of the customer base. The following tables contain some additional information regarding the Japanese leasing market. The figures for the year ended March 31, 1999 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
Years ended March 31, ---------------------------- 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- Information-related equipment..................... 41.4% 39.9% 42.5% 42.4% 44.0% Industrial equipment.............................. 16.4 16.8 17.0 18.1 16.7 Commercial service equipment...................... 15.7 17.2 15.4 14.6 14.5 Office equipment.................................. 10.6 10.5 9.5 8.7 8.1 Transportation equipment.......................... 7.3 7.1 7.1 7.2 6.6 Medical equipment................................. 3.5 3.4 3.5 3.4 3.8 Other............................................. 5.0 5.1 5.1 5.6 6.3
Annual New Lease Contracts
Year ended March 31, ---------------------------------------------------------- 1995 1996 1997 1998 1999 ---------- ---------- ---------- ---------- ---------- (Billions of yen) Total receivables under new lease contracts.... (Yen)7,350 (Yen)7,621 (Yen)8,287 (Yen)7,930 (Yen)7,144 Annual new lease contracts (cost basis)................. 6,163 6,580 7,224 7,018 6,315 Private fixed investment............. 69,973 73,331 78,056 79,413 67,600 Annual new lease contracts as a percentage of private fixed investment....... 8.81% 8.97% 9.20% 8.84% 9.34%
Overview of Activities Scope of Domestic Operations Domestically our group was comprised of ORIX, 23 major subsidiaries, and a number of investments in non-consolidated affiliates as of March 31, 1999. As of that date, we employed approximately 6,386 staff in Japan and our domestic operations are serviced by a network of 461 offices throughout Japan. We use this extensive nationwide network to service our clients. Approximately 75.5% of our revenues in fiscal 1999 were generated by our domestic operations. Our operating subsidiaries have made a substantial contribution to our overall profits. Activities conducted principally through subsidiaries include the automobile leasing business by ORIX Auto Leasing and operating leases of 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. 9 Our network in Japan is comprised of 461 offices as illustrated below. The number of offices in each region is indicated in brackets. Domestic Network [CHART APPEARS HERE] 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 consolidated subsidiaries and investments in international joint ventures. At March 31, 1999, we operated in 21 countries outside Japan through 45 major subsidiaries and affiliates. Our overseas operations, including our affiliates, employ more than 2,000 staff, and include a network of 164 offices. ORIX USA is our base for operations in the Americas. Stockton Holdings, an affiliate, has shifted its focus of activities to reinsurance and securities and futures trading from commodity futures trading. 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 was originally established as a joint venture with Bank One Corporation, a major U.S. bank holding company to securitize and service 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. 10 We have also continued to expand our leasing presence in other countries, with new bases recently established in Poland and Egypt. In addition, domestic subsidiaries, such as ORIX Rentec and ORIX Auto Leasing, have also established overseas operations. Our network outside Japan is illustrated below. International Network [CHART APPEARS HERE] Profile of Businesses Domestic operations are conducted by ORIX and a number of subsidiaries and affiliates. ORIX has six main headquarters Tokyo Sales, Kinki (Osaka) Sales, District Sales, Real Estate Finance Headquarters, Real Estate Business and International. ORIX also has a number of administrative and support sections, including the Office of Corporate Planning, the Treasury Department, the Credit Department and the Office of Assistant to the President. 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 other of 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. 11 Our main customer base is 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. We provide through our various product lines and distribution channels a variety of financing solutions responsive to the varying financing needs of our customers. We provide 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 our core business activity. The table below provides a geographical breakdown of our investment in direct financing leases as of March 31, 1999.
As of March 31, 1999 --------------------------------------------- Millions of Percent of direct Millions of yen dollars financing leases --------------- ----------- ----------------- Direct financing leases in: Japan........................... (Yen)1,480,533 $12,501 75.8% Overseas........................ 472,309 3,988 24.2% -------------- ------- ----- Total............................ (Yen)1,952,842 $16,489 100.0% ============== ======= =====
As of March 31, 1999, the total balance of our investment in direct financing lease, represented 40.9% 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, 1999.
Year ended March 31, 1999 --------------------------------------------- Millions of Percent of direct Millions of yen dollars financing leases --------------- ----------- ----------------- Direct financing leases in: Japan........................... (Yen) 96,879 $ 818 67.7% Overseas........................ 46,291 391 32.3% ------------ ------ ----- Total............................ (Yen)143,170 $1,209 100.0% ============ ====== =====
Our revenues from direct financing leases in fiscal 1999 represented 24.1% 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. 12 The following table shows the balance of direct financing lease assets by category of equipment.
As of March 31, -------------------------------------------------------------------------- 1995 1996 1997 1998 1999 -------------- -------------- -------------- -------------- -------------- (Millions of yen) Information-related and office equipment....... (Yen) 549,861 (Yen) 551,595 (Yen) 557,439 (Yen) 623,203 (Yen) 493,298 Industrial equipment.... 357,699 394,460 436,813 473,140 444,261 Commercial services equipment.............. 163,470 216,754 226,118 273,730 224,080 Transportation equipment.............. 288,260 373,560 458,572 443,486 414,093 Other................... 355,887 377,467 388,674 372,463 377,110 -------------- -------------- -------------- -------------- -------------- Total.................. (Yen)1,715,177 (Yen)1,913,836 (Yen)2,067,616 (Yen)2,186,022 (Yen)1,952,842 ============== ============== ============== ============== ==============
At March 31, 1999, no single lessee represented more than 1% of our total portfolio of direct finance leases. As of March 31, 1999, approximately 75.8% of our direct financing leases are to lessees located in Japan, and approximately 17.2% of our direct financing leases are to lessees located in the United States. The following table shows a breakdown of the components of investment in direct financing leases.
As of March 31, ------------------------------------------------------------------------------ 1995 1996 1997 1998 1999 -------------- -------------- -------------- -------------- -------------- (Millions of yen) Minimum lease payments receivable............. (Yen)1,891,402 (Yen)2,086,621 (Yen)2,229,528 (Yen)2,353,294 (Yen)2,107,393 Estimated residual value.................. 59,107 75,047 76,578 59,119 52,368 Initial direct costs.... 18,314 21,037 23,886 28,294 29,374 Unearned lease income... (253,646) (268,869) (262,376) (254,685) (236,293) -------------- -------------- -------------- -------------- -------------- Total.................. (Yen)1,715,177 (Yen)1,913,836 (Yen)2,067,616 (Yen)2,186,022 (Yen)1,952,842 ============== ============== ============== ============== ==============
Information-related and Office Equipment Information-related and office equipment has been an important source of growth in the current decade. This 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 the largest single portion of our direct financing lease portfolio, reflecting our strategy to focus on profitable small-ticket leasing. 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. In the field of small ticket leases for office automation and other equipment, we have introduced the ORIX Quick Lease system to speed up credit analysis and approvals. Industrial Equipment Our investment in industrial equipment has grown strongly in recent years, despite a general sluggishness in domestic demand. This is largely due to asset growth in ORIX Commercial Alliance. Industrial equipment primarily consists of trucks, construction and heavy equipment, and paper and pulp milling equipment. Commercial Services Equipment We have grown the commercial services equipment segment. In particular, expansion in the Japanese leisure and retail industries has increased our business. Commercial services equipment includes gaming machines, cash registers, showcases and point-of-sales systems. 13 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 Australia, New Zealand, Hong Kong, Singapore, Malaysia, India and Pakistan. We have grown this segment of the portfolio steadily as the demand for auto leasing services has increased both in Japan and in our overseas markets. Driving the rise in the domestic demand for automobile leasing services are 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 6,000 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 have designated automobile leasing as a strategic growth area. We are therefore coordinating marketing activities of our various business lines and subsidiaries to promote growth in this area. In recent periods we have increased the scope of our corporate fleet leasing operations. As of March 31, 1999, we had a total of 241,000 vehicles under lease. Based on fiscal 1998 data, we had a market share of approximately 10% of the domestic automobile leasing industry, which we believe made us the largest independent automobile lessor in Japan. We believe that our value-added services relating to vehicle maintenance and post-accident procedures enable us to provide quick and efficient comprehensive maintenance services. 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.
As of or for the year ended March 31, --------------------------------------------- 1997 1998 1999 1999 ----------- ----------- ----------- --------- (Millions (Millions of yen, except percentage of data) dollars) 90+ days past due direct financing leases................ (Yen)29,593 (Yen)36,688 (Yen)54,051 $456 90+ days past due direct financing leases as a percentage of the balance of investment in direct financing leases......... 1.4% 1.7% 2.8% -- Provisions as a percentage of average balance of investment in direct financing leases......... 0.3% 0.3% 0.8% -- Allowance for direct financing leases.......................... (Yen) 9,780 (Yen)10,510 (Yen)23,867 $202 Allowance for direct financing leases as a percentage of the balance of 90+ days past due direct financing leases......... 33.0% 28.6% 44.2% -- Allowance for direct financing leases as a percentage of the balance of investment in direct financing leases................ 0.47% 0.48% 1.22% --
14 The 90+ days past due ratio and provisions as a percentage of average balance of investment in direct financing leases increased in fiscal 1999, primarily due to depressed domestic economic conditions which resulted in a larger rate of increase in 90+ days past due leases in the domestic small ticket lease segment. The balance of allowance for direct financing leases as a percentage of the balance of 90+ days past due direct financing leases in fiscal 1999 increased from the level of fiscal 1998. In fiscal 1999, the rate of increase of allowance we take for doubtful receivables was larger than the rate of increase of our 90+ days past due receivables. We believe that the ratio of allowance for doubtful receivables as a percentage of the balance of investment in direct financing leases was adequate as of March 31, 1999, because: . lease receivables are generally diversified and the amount of the realized loss on each contract is likely to be relatively small; . 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 . the allowance for doubtful receivables on direct financing leases as a percentage of the balance of 90+ days past due direct financing leases was 44.2% as of March 31, 1999. The ratio of charge-offs as a percentage of the balance of the investment in direct financing leases averaged 0.30% for fiscal 1997 through fiscal 1999. We recognize that, due to our charge-off policy, historical ratios of charge-offs as a percentage of the balance of our investment in direct financing leases may be lower than if we had taken charge-offs on a more timely basis. Accordingly, in evaluating whether the ratio of allowance for doubtful receivables as a percentage of the balance of our investment in direct financing leases is adequate, we do not give as much weight to historical charge-off ratios as we do to the other factors discussed above. Operating Leases Operating leases constitute another one of our principal business activities. The table below provides a geographical breakdown of our operating lease assets as of March 31, 1999.
As of March 31, 1999 ----------------------------------------- Percentage of total Millions of operating Millions of yen dollars leases --------------- ----------- ------------- Operating leases in: Japan................................ (Yen)261,367 $2,207 63.6% Overseas............................. 149,789 1,265 36.4% ------------ ------ ----- Total................................. (Yen)411,156 $3,472 100.0% ============ ====== =====
As of March 31, 1999, our total operating lease assets represented 8.6% of our total operating assets. The table below provides a geographical breakdown of revenues from our operating leases for the year ended March 31, 1999.
Year ended March 31, 1999 ------------------------------------------ Percentage of total revenue Millions of from operating Millions of yen dollars leases --------------- ----------- -------------- Operating leases in: Japan............................... (Yen)60,769 $513 65.8% Overseas............................ 31,638 267 34.2% ----------- ---- ----- Total................................ (Yen)92,407 $780 100.0% =========== ==== =====
15 In fiscal 1999, our revenues from operating leases represented 15.6% 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.
As of March 31, ---------------------------------------------------------------- 1995 1996 1997 1998 1999 ------------ ------------ ------------ ------------ ------------ (Millions of yen) Transportation equipment.............. (Yen)139,311 (Yen)169,425 (Yen)205,277 (Yen)195,392 (Yen)181,886 Measuring equipment and personal computers..... 38,938 46,166 53,740 59,989 58,552 Real estate and other... 163,809 197,828 206,720 179,685 170,718 ------------ ------------ ------------ ------------ ------------ Total.................. (Yen)342,058 (Yen)413,419 (Yen)465,737 (Yen)435,066 (Yen)411,156 ============ ============ ============ ============ ============
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 24 owned and two managed aircraft. These are leased principally to European and North American carriers. We own 23 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. In addition to ORIX, this segment is serviced by ORIX Aviation Systems. The weighted average useful life of our transportation equipment is 13 years. Our two principal markets for automobile operating leases are Japan and Australia, although we also maintain automobile operating lease operations in Hong Kong, Singapore, Malaysia, New Zealand, India and Pakistan. Our automobile operating lease business has consistently grown in recent years, due to the expansion of demand for automobile rental services in Japan and in other markets. 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 20,000 vehicles each year. 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: . equipment for testing emissions from cellular phones and personal handyphones; . equipment for testing noise emissions; 16 . equipment for testing compliance of electrical circuitry with prescribed standards; . laboratory and field use meteorological and environmental testing equipment (pollution monitoring equipment); and . equipment for monitoring, testing and evaluating the electromagnetic performance of printed circuit boards and the efficiency of microprocessors. ORIX Rentec has succeeded in the Japanese market by continually enhancing its computerized warehousing, distribution and customer service capabilities. It currently maintains two fully-automated warehouse facilities, one in the Tokyo region, and one near Osaka and Kobe. The warehouse facilities efficiently manage their inventories. The facilities maintain automated database systems that ensure that necessary recalibration and servicing of all equipment is undertaken at appropriate intervals. These facilities are the first facilities of their kind in Japan to receive ISO9002 QA certification. 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 approximately 2,000 apartment units, approximately ten office buildings in Japan 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 1999, our revenues from interest on loans and investment securities were (Yen)100,480 million ($848 million), representing 16.9% of our total revenues. As of March 31, 1999, the balance of installment loans was (Yen)1,761,887 million ($14,877 million) and the balance of investment in securities was (Yen)576,206 million ($4,865 million). Installment Loans The table below provides a geographical breakdown of installment loans as of March 31, 1999.
As of March 31, 1999 ------------------------------------------------------ Percentage of total installment Millions of yen Millions of dollars loans --------------- ------------------- ------------------ Investment in install- ment loans Domestic............... (Yen)1,393,226 $11,764 79.1% Foreign................ 368,661 3,113 20.9% -------------- ------- ----- Total .................. (Yen)1,761,887 $14,877 100.0% ============== ======= =====
For a breakdown of investment securities by business segments, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--General--Presentation of Income from Investments". 17 The following table shows the balance of installment loans by domicile and type of borrowers.
As of March 31, -------------------------------------------------------------------------- 1995 1996 1997 1998 1999 -------------- -------------- -------------- -------------- -------------- (Millions of yen) Domestic Consumer Housing loans.......... (Yen)508,252 (Yen)462,906 (Yen)435,388 (Yen)426,559 (Yen)411,215 Card loans............. 46,039 59,473 78,438 98,187 118,347 Other.................. 94,866 87,233 67,902 55,811 43,663 -------------- -------------- -------------- -------------- -------------- Subtotal............... 649,157 609,612 581,728 580,557 573,225 Domestic Commercial Real estate related companies............. 207,501 186,115 193,578 213,911 188,085 Commercial and industrial companies.. 499,577 532,870 558,232 607,952 614,988 -------------- -------------- -------------- -------------- -------------- Subtotal............... 707,078 718,985 751,810 821,863 803,073 -------------- -------------- -------------- -------------- -------------- 1,356,235 1,328,597 1,333,538 1,402,420 1,376,298 Foreign commercial, industrial and other borrowers.............. 245,152 283,665 351,053 377,761 368,661 Direct loan origination costs, net............. 18,010 16,654 16,106 14,644 16,928 -------------- -------------- -------------- -------------- -------------- Total................... (Yen)1,619,397 (Yen)1,628,916 (Yen)1,700,697 (Yen)1,794,825 (Yen)1,761,887 ============== ============== ============== ============== ==============
As of March 31, 1999, we had no concentration of loans to borrowers in a single industry, other than loans to real estate-related companies. At March 31, 1999, we had loans outstanding of (Yen)226,137 million ($1,909 million) to real estate development and construction companies. Of that amount, a valuation allowance was required for loans with an outstanding balance of (Yen)59,172 million ($500 million). The remaining outstanding balance represents performing loans or the portion of loans secured by collateral. As of March 31, 1999, approximately 79.1% 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 card loans and others are unsecured, small-lot consumer loans and shopping credit. 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. 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. Loans to Domestic Commercial Borrowers Loans to domestic commercial borrowers include loans to real estate development concerns, as well as general corporate lending. Historically, a substantial portion of our loans was to real estate development and construction companies. However, in recent years, we have made few new loans to real estate development companies. Reflecting changing industry trends, we receive new 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 18 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, Hong Kong and Singapore. 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 "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.
As of March 31, --------------------------------------------------- 1997 1998 1999 1999 ------------ ------------ ------------ ------------ (Millions of yen) (Millions of dollars) Impaired loans............ (Yen)179,171 (Yen)182,976 (Yen)130,226 $1,100 Impaired loans requiring a valuation allowance...... 159,868 153,529 114,525 967 Valuation allowance....... 92,848 104,921 62,109 524
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 1999, a charge-off of impaired loans amounting to (Yen)50,848 million ($429 million) resulted in a decrease in the outstanding balances of impaired loans as of March 31, 1999 compared to March 31, 1998. 19 The following table provides the outstanding balances of impaired loans by region and type of borrowers. Domestic consumer loans in the "Others" category primarily consist of loans secured by stock and golf club memberships.
As of March 31, -------------------------------------- 1997 1998 1999 ------------ ------------ ------------ (Millions of yen) Domestic Consumers Housing loans........................ (Yen) -- (Yen) -- (Yen) -- Card loans........................... -- -- -- Others............................... 2,296 3,462 740 ------------ ------------ ------------ Subtotal........................... 2,296 3,462 740 Domestic Commercial Real estate related companies........ 118,613 113,703 64,536 Commercial and industrial companies.. 53,484 62,756 57,135 ------------ ------------ ------------ Subtotal........................... 172,097 176,459 121,671 Foreign, commercial, industrial and other borrowers....................... 4,778 3,055 7,815 ------------ ------------ ------------ Total.................................. (Yen)179,171 (Yen)182,976 (Yen)130,226 ============ ============ ============
The following table provides information as to past due loans and allowance for installment loans, excluding amounts attributable to treatment under FASB Statement 114. Average balances are calculated on the basis of fiscal quarter- end balances.
As of March 31, ----------------------------------------------------------- 1997 1998 1999 1999 -------------- -------------- ------------- ------------ (Millions of yen, except percentage data) (Millions of dollars) 90+days past due loans (excluding FASB Statement 114 loans).. (Yen)108,747 (Yen)101,527 (Yen)98,100 $828 90+days past due loans not attributable to treatment under FASB Statement 114 as a percentage of the balance of installment loans................. 7.1% 6.3% 6.0% -- Provisions as a percentage of average balance of installment loans................. 0.4% 1.6% 1.7% -- Allowance for possible loan losses not attributable to treatment under FASB Statement 114......... (Yen) 14,939 (Yen) 30,310 (Yen) 46,630 $394 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......... 13.7% 29.9% 47.5% -- 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... 0.98% 1.88% 2.86% --
20 The following table shows the balance of 90+ days past due loans not attributable to treatment under FASB Statement 114 by domicile and type of borrowers.
As of March 31, ------------------------------------- 1997 1998 1999 ------------ ------------ ----------- (Millions of yen) Domestic consumer Housing loans........................... (Yen) 72,552 (Yen) 70,313 (Yen)71,157 Card loans and other.................... 24,175 20,574 20,021 Domestic commercial Real estate related companies........... 3,433 2,319 -- Commercial and industrial companies..... 8,344 3,275 675 Foreign................................... 243 5,046 6,247 ------------ ------------ ----------- Total..................................... (Yen)108,747 (Yen)101,527 (Yen)98,100 ============ ============ ===========
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, 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, 1999 was adequate because . 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 . 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 47.5% as of March 31, 1999. The ratio of charge-offs as a percentage of the balance of installment loans averaged 0.73% for fiscal 1997 through fiscal 1999. We recognize that, due to our charge-off policies, historical ratios of charge-offs as a percentage of the balance of our investment in installment loans may be lower than if we had taken charge-offs on a more timely basis. Accordingly, in evaluating whether the ratio of allowance for possible loan losses as a percentage of the balance of installment loans is adequate, we do not give as much weight to historical charge-off ratios as we do to the other factors discussed above. 21 Investment Securities We maintain a sizable investment in various securities. The largest segment of this portfolio is the investment of the reserves in our life insurance operations. This is approximately 57.5% 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. We also have investments in equities and other securities arising from transactions such as syndicated loans. The following table shows our investment in securities by category of investment.
As of March 31, ---------------------------------------------------------- 1997 1998 1999 ------------------ ------------------ ------------------ (Millions of yen) Trading securities...... (Yen) 82 0.0% (Yen) 46 0.0% (Yen) 414 0.1% Available-for-sale securities............. 409,722 94.3 451,074 90.2 507,510 88.1 Held-to-maturity securities............. 3,223 0.8 3,127 0.6 16,542 2.8 Other securities........ 21,461 4.9 46,202 9.2 51,740 9.0 ------------ ----- ------------ ----- ------------ ----- Total.................. (Yen)434,488 100.0% (Yen)500,449 100.0% (Yen)576,206 100.0% ============ ===== ============ ===== ============ =====
Corporate debt securities consist of non-convertible, general obligation and fixed interest rate instruments. Our portfolio included investments by ORIX USA in high yield debt securities with a balance of (Yen)41,099 million ($347 million) as of March 31, 1999. In June 1998 we reduced the balance of investments in high yield debt securities by (Yen)50,611 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.
As of March 31, --------------------------------------------------- 1997 1998 1999 1999 ------------ ------------ ------------ ------------ (Millions of yen) (Millions of dollars) Available-for-sale securi- ties: Japanese and foreign government bond securities.............. (Yen) 13,812 (Yen) 5,779 (Yen) 20,601 $ 174 Japanese prefectural and foreign municipal bond securities.............. 32,518 20,039 20,468 173 Corporate debt securities.............. 270,528 336,164 398,753 3,367 Mortgage-backed and other asset-backed securities.............. 20,343 24,321 6,795 57 Funds in trust........... 5,791 4,270 6,128 52 Equity securities........ 66,730 60,501 54,765 462 ------------ ------------ ------------ ------ (Yen)409,722 (Yen)451,074 (Yen)507,510 $4,285 ============ ============ ============ ====== Held-to-maturity securities: Corporate debt securities.............. (Yen) 3,199 (Yen) 3,098 (Yen) 16,515 $ 139 ------------ ------------ ------------ ------ (Yen) 3,199 (Yen) 3,098 (Yen) 16,515 $ 139 ============ ============ ============ ======
At March 31, 1999, marketable equity securities amounted to approximately 9.5% of ORIX's total investment in securities. We make these equity investments mainly to strengthen business relationships with customers. 22 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 1999 were (Yen)196,259 million ($1,657 million), or 33.0% of our total revenues. ORIX Life Insurance ORIX Life Insurance is a full-line life insurance underwriter, with total value of insurance contracts in force at March 31, 1999 amounting to (Yen)2,260 billion ($19.0 billion). ORIX Life Insurance traditionally distributed its products through agents, including ORIX as well as independent agents. However 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 (Yen)10 million on insurable amounts and (Yen)15 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, 1999.
As of March 31, 1999 --------------------------- Millions of Millions of yen dollars --------------- ----------- Investment in securities Fixed income securities........................... (Yen)284,281 $2,400 Marketable securities............................. 8,783 74 Other securities.................................. 38,101 322 ------------ ------ Total investment in securities...................... (Yen)331,165 $2,796 Other investments................................... 19,990 169 ------------ ------ Total .............................................. (Yen)351,155 $2,965 ============ ======
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. 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, property development and management, and several other businesses. As of March 31, 1999, these operations had assets of (Yen)73,345 million ($619 million), representing 1.5% of our total operating assets. In fiscal 1999, we had revenues from other operations of (Yen)47,549 million ($401 million), representing 8.0% of our total revenues. 23 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 1999, operating profit from the condominium business was approximately 68.2% 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 650 residential apartment units in fiscal 1998 and 575 units in fiscal 1999. We expect to complete the subdivision and sale of approximately 500 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 have commenced work on a multi-purpose development in Yokohama's Minato Mirai complex, which will have hotel, retail and commercial office space. 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. Aiming to utilize our management resources more efficiently, we divided our former Real Estate Business Headquarters into two organizational entities in March 1999. We placed the operations of departments responsible for real estate-related finance in the new Real Estate Finance Headquarters. We consolidated real estate-related development, leasing, and rental business and other real estate-related operations of the former Real Estate Business Headquarters as well as various Group companies in a newly established company, ORIX Real Estate. In response to a new servicing law passed in February 1999, we established ORIX Asset Management and Loan Services. 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. Having revised our organizational structure to better address current trends, 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 26% of the cumulative (Yen)553 billion of commodities funds sold in Japan between fiscal 1989 and fiscal 1999. Taking advantage of deregulation in Japan which reduced and ultimately eliminated minimum investment requirements, we have expanded our marketing activities to individuals, while maintaining our corporate marketing operations at existing levels. In February 1998, we completed the offering of our Leading Hitter Fund. The total offering of approximately (Yen)15 billion was one of the largest offerings of its kind. In fiscal 1999, we reduced the minimum size of investment in our funds to (Yen)1 million. Securities Brokerage In 1997, we acquired all of the equity we did not then hold in ORIX Securities. ORIX Securities is engaged primarily in equity and other securities brokerage activities. We attach significant strategic importance to this 24 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 also provides us with seats on the Tokyo Stock Exchange and the Osaka Securities Exchange. To take advantage of the deregulation of brokerage commissions scheduled for October 1999, ORIX Securities is preparing to offer 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, 1999, assets under ORIX Capital's management were approximately (Yen)8,800 million ($74 million), which consists 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 intend to 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 (Yen)1 million. 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 June 10, 1999, the balance of these deposits exceeded (Yen)50 billion. Waste Management We established ORIX Eco Services Corporation (ORIX Eco Services) in April 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. 25 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. We also own a minority stake in Skymark Airlines Co., Ltd., Japan's fourth major domestic carrier, the establishment of which was made possible by airline deregulation in 1997. 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 consolidated 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. (ORIX Polska) 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 24.2% of our total revenues in fiscal 1999. Of these overseas revenues, approximately 47.8% is in the Americas, 35.6% in the Asia and Oceania region, and the remaining 16.6% in Europe. Approximately 23.4% of our total assets are overseas operating assets, excluding assets attributable to the corporate segment and assets which belong to affiliate operations. Approximately 50.6% of overseas assets relate to the Americas, 35.2% to Asia and Oceania, and the remaining 14.2% to Europe. The Americas We made our initial investment in South America in 1973, with the acquisition of a 25% equity interest in Bradesco Leasing S.A. Arrendamento Mercantil, a general machinery and equipment leasing company, and a pioneer of lease financing in Brazil. 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 26 United States significantly. ORIX USA, headquartered in New York and with offices in Los Angeles, San Francisco, Chicago and Atlanta, 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 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 New York, Los Angeles, San Diego and Washington DC, 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: . build-to-suit development of retail, industrial and office projects; . the acquisition of office and industrial properties that offer value- enhancement opportunities; and . 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 six divisional operating centers in the United States and one office in 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 Bermuda-based Stockton Holdings. In 1997 Stockton Holdings sold all its subsidiary's investment management business including commodities trading to Goldman Sachs & Co., which manages a portion of Stockton Holdings' surplus and reserves previously managed by Stockton Holdings' own subsidiaries. Stockton Holdings' did this in order to concentrate on its insurance and reinsurance business. As of March 31, 1999 we owned 29.7% of the equity of Stockton Holdings, without taking into account outstanding options. In July 1999, we acquired the remaining stake in Banc One Mortgage Capital Markets. Asia, Oceania and Middle East In 1971 we established our first overseas office in Hong Kong, and we had 45 major subsidiaries and affiliates at March 31, 1999. These companies do business in 11 countries in the Asia and Oceania region. 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. In this decade, our domestic subsidiaries have also started to expand into the region. For example, we have established specialized auto leasing operations in Hong Kong, Singapore and Malaysia, and ORIX Rentec 27 established personal computer and measuring equipment rental operations in Singapore in 1995 and in Malaysia in 1996. In 1986, we established ORIX Australia, and in 1988 we established ORIX New Zealand Limited. Specializing in auto leasing and financing, these subsidiaries now form one of the largest automobile asset financing operations in the Asia and Oceania region. ORIX Australia also acquired a fuel card services company in 1997 and a truck rental concern in 1998. The acquisitions have helped expand total assets and our services offered. We started activities in the Middle East and Northern African region in 1986, when we entered into a joint venture with local Pakistani investors to form ORIX Leasing Pakistan Limited (ORIX Leasing Pakistan), which was publicly listed in 1988. ORIX established ORIX Investment Bank Pakistan Limited in November 1995. This company was publicly listed in 1996. ORIX Leasing Pakistan is the regional base for our expansion in the Middle East. In 1994, ORIX Leasing Pakistan, in conjunction with Oman's largest insurance company, formed a joint venture leasing company, Oman ORIX Leasing Company SAOG--the country's largest lessor. ORIX Leasing Pakistan is listed on the Muscat Stock Exchange. In 1993, we invested in Infrastructure Leasing & Financial Services, Ltd in India, followed in 1995 by the establishment of a specialist auto leasing subsidiary. In 1997, ORIX and ORIX Leasing Pakistan, in conjunction with the National Bank of Egypt, formed Egypt's first leasing company, following the passage of legislation in 1995 that enabled the provision of lease financing. 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 and ORIX Corporate Finance Limited (ORIX Corporation Finance) in London, ORIX Ireland and ORIX Aviation Systems in Dublin, and ORIX Polska in Warsaw. Multinational transportation operators are the principal customers of our European operations. Established in 1982, ORIX Europe has grown to now provide throughout Europe leasing, general and corporate lending and other financial services. 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. In 1988, we established ORIX Ireland in the International Financial Services Centre in Dublin as a finance vehicle for ORIX's European operations. In 1991, we established ORIX Aviation Systems in Dublin, which has marketing, technical, legal and administrative teams to develop our international aircraft operating lease business. In 1995, we expanded our activities into central and eastern Europe with the formation of ORIX Polska, an equipment leasing company in Warsaw. We originally took an 18% stake in the venture, but subsequently increased this stake to 85% in 1997 based on our view of the strong economic prospects for Poland. The remaining 15% of the equity in this venture is held by the European Bank for Reconstruction & Development. 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. 28 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 Supervisory Agency, which has the right to review their operations and inspect their records to monitor compliance with the provisions of the Moneylending Business Law. The Financial Supervisory 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 Supervisory Agency. There are two kinds of licenses related to insurance businesses: one for life insurance businesses and another for non-life insurance businesses. The same entity cannot obtain both of these licenses. In general, ORIX Life Insurance, as an insurance company, is prohibited from engaging in any other activity. Insurance solicitation which is conducted by ORIX is also governed by the Insurance Business Law. ORIX is registered as a sales agent with the Ministry of Finance, the government authority formerly in charge of supervising the insurance business at the time of ORIX's application for the registration. We operate our securities business through ORIX Securities. The Securities and Exchange Law and related laws and regulations apply to the securities industry in Japan. The Securities and Exchange Law regulates both the business activities of securities companies and the conduct of securities transactions. ORIX Securities is subject to these and other laws and regulations. Violation of these provisions could result in sanctions against ORIX Securities or its officers and employees. General banking and trust businesses, which are operated by our banking subsidiary, ORIX Trust and Banking, are also regulated. In general, the Banking Law governs the general banking business and the Trust Law and the Trust Business Law govern the trust business. These banking businesses may not be carried out without a license from the Financial Reconstruction Committee and are supervised by the Financial Supervisory Agency. Outside of Japan, some of our businesses are also subject to regulation and supervision in the jurisdictions in which we operate. Competition Our markets are highly competitive and are characterized by competitive factors that vary by product and geographic region. Our competitors include independent and captive leasing and finance companies and commercial banks. Some of our competitors have substantial market positions. Many of our competitors are large companies that 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. We compete with Japan's financial services companies in our core leasing and finance businesses. The domestic leasing market in general has not been subject to regulation. 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 29 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. Recent favorable economic statistics 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 development and construction companies may exceed our allowances for these loans At March 31, 1999, we had loans outstanding of (Yen)226,137 million ($1,909 million) to real estate development and construction companies. Of that amount, we maintained an allowance for possible loan losses of (Yen)59,172 million ($500 million). Our allowance for doubtful receivables and possible loan losses may be inadequate to cover credit losses on our loans to real estate development and construction companies. Japanese real estate development 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 development and construction companies may further decline. This may prevent us from fully recovering our loans to those companies if they default on their obligations. 30 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 these countries have improved recently, we may suffer losses on investments in these countries and poor operating results on our businesses in these countries if these countries experience . declines in the value of the local currency, . declines in the gross domestic product, . declines in corporate earnings, . political turmoil, or . stock market volatility. These and other factors could result in . lower demand for our services, . further deterioration of credit quality of our customers in Asian markets, . the need to give financial support to our Asian subsidiaries or affiliates, or . 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, 1999, the book value of our investments in securities was (Yen)576,206 million ($4,865 million). We may suffer losses on these investments because of changes in market prices, defaults or other reasons. 9.5% of our investment securities at March 31, 1999 were marketable equity securities, mainly common stock of Japanese listed companies. The market values of these equity securities are volatile and have declined substantially in recent years. Unrealized gains and losses on equity securities are generally recorded in shareholders' equity, net of income taxes and are not directly charged to income. However, declines in market value on available- for-sale securities are charged to income if we believe that these declines are other than temporary. We recorded (Yen)11,077 million ($94 million) in charges of this kind in fiscal 1999 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 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. 31 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: . the nature and characteristics of obligors, . economic conditions and trends, . charge-off experience, . delinquencies, and . 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. Recently, some Japanese banks have changed their lending practices by refusing to roll over short-term funding previously provided to borrowers. We think this poses a significant risk to us. We are taking steps to reduce this risk by finding new funding sources such as domestic capital markets, including corporate bonds and commercial paper, overseas lenders and securitization, and arranging for committed credit facilities from Japanese banks. Despite these efforts, the risk that we will be unable to roll over short-term funding remains significant. We may be adversely affected by Year 2000 problems The Year 2000 ("Y2K") problem results from the fact that many existing computer programs and systems use only two digits to identify the year in the date field. If not corrected, computer applications that use a two- 32 digit format could fail or create wrong results in any computer calculation or other processing involving the Year 2000 or a later date. We have developed and are implementing detailed plans for making and testing modifications to our key computer systems and equipment with embedded chips to ensure that they are Y2K compliant. See "Risk Management--Year 2000 Readiness", which describes these plans. We believe that with these detailed plans and completed modifications, the Y2K issue will not cause significant operational problems for us. However, if the modifications and conversions are not made, or not completed in a timely fashion, the Y2K issue could have a material impact on our operations. In addition, if any of our lessees, suppliers, financial institutions and other material third parties with which we conduct business are not Y2K-ready, we could be materially adversely affected. The major risks we see in connection with the Y2K problem are as follows: . due to outages or disruptions in our own computer system and/or infrastructures outside our company, such as electricity, we would become unable to conduct normal business operations. . failure of our computer systems could, for example, cause settlement of trades to fail, lead to incomplete or inaccurate accounting, recording or processing of trades in securities, commodities and other assets, result in the generation of erroneous results or give rise to uncertainty about our exposure to trading risks and our need for liquidity. If not remedied, potential risks include business interruption or shutdown, financial loss, regulatory actions, reputational harm and legal liability. . due to outages or disruptions in the microprocessors, hardware and/or software used in our leased equipment, our lessees' ability to operate our leased equipment could be impaired, which could impair their ability to make payments to us. We will continue to evaluate the nature of these risks, but at this time we cannot determine the probability that any of these risks will occur. We also cannot predict the nature, duration or severity of any problems that would arise if any of these risks do occur. If a significant number of our material third parties experience failures in their computer systems or operations due to Y2K non-compliance, it could affect our ability to process transactions or otherwise engage in similar normal business activities. For example, the following problems could result: . important services provided by vendors, such as telecommunications and electrical power, upon which we depend, may be disrupted. . our ability to perform critical data functions, such as pricing our assets, may be impaired. . settlements of our trades in our securities or commodities trading activities could fail, our ability to trade in some markets and our funding flows may be disrupted if financial intermediaries, such as exchanges and clearing agents, experience Y2K problems. . capital flows may be disrupted, potentially resulting in liquidity stress, if banks and other lenders experience Y2K problems. . we may be exposed to increased credit risk and lost business if our counterparties and customers face financial and accounting difficulties as a result of Y2K problems. . we may incur losses or suffer damages to our equipment that are under operating leases. . we may incur losses or suffer damages to our equipment that are under maintenance leases for example, leasing fees may not be paid because maintenance service providers has not taken adequate steps to address the issue. . our relationships with our customers may suffer as a result of any of the above. In addition, our customers use banks of different sizes to make payments to us. While a new Japanese government guideline requires that all banks take steps necessary to make sure that their systems are Y2K compliant, our revenue may be disrupted if those banks fail to prepare adequately for Y2K problems. 33 While many of these risks are outside our control, we have identified our material third parties and have a plan to address any non-compliance issues. While we believe that we are adequately addressing the Y2K issue, we cannot assure you that our Y2K analyses will be completed on a timely basis or that the cost and liabilities associated with the Y2K issue will not materially adversely impact us. We are developing a contingency plan to handle our most reasonably likely worst case Y2K scenario and expect to finalize it by September 30, 1999. See "Risk Management--Year 2000 Readiness" for a description of our contingency plan. We cannot assure you that the various assumptions we used in creating this plan will hold true if any Y2K problems actually occur. For that reason or other reasons, the measures provided in the plan may not be adequate. 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. The notes are unsecured and will be structurally subordinated to other debt obligations of ORIX's subsidiaries The notes are unsecured obligations of ORIX and will be structurally subordinated to other debt obligations of its subsidiaries. Approximately 28.8%, or (Yen) 585,704 million ($4,946 million), of our outstanding long-term indebtedness on a consolidated basis at March 31, 1999, consisted of debt of our subsidiaries. In addition, in common with most other Japanese corporations, our loan agreements relating to short-term and long-term debt with Japanese banks and some insurance companies provide that our assets are subject to pledges as collateral against these indebtedness at any time if requested by the lenders. Lenders whose loans constituted approximately 46.8%, or (Yen)1,437 billion ($12 billion), of ORIX's indebtedness at March 31, 1999 have the right to request that ORIX pledges assets to secure their loans. Although we have not received any requests of this kind from our lenders, we cannot assure you that our lenders will not request us to provide collateral in the future. Most of these loan agreements, and some other loan agreements, contain rights of the lenders to offset cash deposits held by them against loans to ORIX under specified circumstances. Whether these provisions in our loan agreements and debt arrangements can be enforced will depend upon factual circumstances. However, if they are enforced, the claims of these lenders and banks would have priority over our assets and would rank senior to your claims. 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. 34 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. 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, 1999 of approximately (Yen)78,355 million ($662 million). Item 3. Legal Proceedings We are a defendant in various lawsuits arising in the ordinary course of our business. We aggressively manage our 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 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, 1999, ORIX had an aggregate number of 64,870,299 shares outstanding, each with a par value of (Yen)50 per share. As of March 31, 1999, no person was the beneficial owner of more than 10% of any class of ORIX's shares. As of March 31, 1999 the total aggregate amount of ORIX's voting shares owned by all Directors, Corporate Executive Officers and Corporate Auditors of ORIX was 79,017 shares or 0.1% of the total number of outstanding shares. 35 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 Translated into Price per Share US$ per ADS -------------------- --------------- Average daily trading volume Nikkei Stock (hundreds of Average Calendar period High Low High Low shares) at period end TOPIX - --------------- ---------- ---------- --------------- -------------- -------------- -------- 1996 First quarter.......... (Yen)4,530 (Yen)3,950 $ 21.41 $ 18.82 1,040.0 (Yen)21,406.85 1,636.88 Second quarter......... 4,420 4,050 20.94 18.54 954.0 22,530.75 1,712.45 Third quarter.......... 4,350 4,000 19.60 18.37 751.4 21,556.40 1,627.55 Fourth quarter......... 5,000 4,130 21.53 18.50 1,122.3 19,361.35 1,470.94 1997 First quarter.......... 5,890 4,560 23.77 19.50 1,639.5 18,003.40 1,373.26 Second quarter......... 8,820 5,490 38.85 22.37 2,184.1 20,604.96 1,553.81 Third quarter.......... 9,950 8,150 42.00 33.53 1,427.5 17,887.71 1,388.32 Fourth quarter......... 9,820 7,650 40.55 30.39 1,378.0 15,258.74 1,175.03 1998 First quarter.......... 10,200 8,130 38.72 32.92 1,802.0 16,527.17 1,251.70 Second quarter......... 9,600 8,400 37.22 30.81 1,390.7 15,830.27 1,230.38 Third quarter.......... 10,630 8,430 37.71 32.17 1,301.6 13,406.39 1,043.57 Fourth quarter......... 9,500 7,560 34.99 34.40 901.1 13,842.17 1,086.99 1999 First quarter.......... 9,080 7,200 38.47 32.70 1,592.8 15,836.59 1,267.22
36 New York Stock Exchange The ADSs are listed on the New York Stock Exchange under the symbol "IX". Two ADSs represent one share. On March 31, 1999, approximately 300,000 ADSs were outstanding. This is equivalent to 150,000 shares, or approximately 0.2% 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 299,800 ADSs. 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 ------------------ Average daily Calendar Period High Low trading volume - --------------- --------- --- ---------------- ($) ($) (number of ADSs) 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
There has been no market for the Notes and the ADNs. The Notes and ADNs have been approved for listing on the NYSE. Trading of the Notes and ADNs is expected to commence on the NYSE on October 4, 1999. There can be no assurance that a public market in the United States for the Notes and ADNs will develop or will continue if developed. 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: . individuals not resident in Japan, . corporations organized under the laws of foreign countries or whose principal offices are located outside Japan, and . 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. 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. 37 Dividends and Proceeds of Sale Under the foreign exchange control laws, 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.
Dividend Translated into Year ending per Share dollar per ADS - ----------- ---------- --------------- March 31, 1995....................................... (Yen)15.00 $0.09 March 31, 1996....................................... 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
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: . in response to a decline in our earnings or financial condition; . to permit us to increase our assets; 38 . to maintain our debt-to-equity ratios at a desired level; or . 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%. For United States federal income tax purposes, U.S. holders of ADSs are treated as the owners of the underlying shares. See "Item 7. Taxation" for a more detailed discussion of the U.S. taxation of dividend payments. 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: . the overall tax consequences of owning the Notes, ADNs, Shares or ADSs described herein, including specifically the tax consequences under Japanese law, . the laws of the jurisdiction in which they are resident, and . 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: . 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". . 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, 2000. 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, . non-resident holders and DFIs generally would be entitled to receive additional amounts, and . we would be entitled to redeem the debt securities. Under current Japanese practice, we and our paying agents may determine our withholding obligations in respect of notes held through a qualified clearing organization in reliance on certifications we receive from the qualified clearing organization. In these cases, we do not need to obtain certifications from the ultimate beneficial owners of the notes. As part of the procedures under which these certifications are given, a beneficial owner may be required to establish that it is a non-resident holder or DFI to the person or entity through which is holds the notes. If a non-resident holder or DFI does not hold its notes through a qualified clearing organization, the non-resident holder or DFI, as the case may be, will be required to deliver to our paying agents a claim for exemption from Japanese withholding tax and documentation concerning its identity and residence in order to receive interest payments on the notes free of Japanese withholding tax. We and our paying agents may adopt modified 39 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: . on the full amount of interest to be received, or . 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. 40 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. 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.
Year ended March 31, ----------------------------------------------------------------------------------------------- 1995 1996 1997 1998 1999 1999 -------------- -------------- -------------- -------------- -------------- --------------- (Millions of yen except per share data) (Millions of dollars except per share data) Income statement data: Total revenues.......... (Yen) 362,702 (Yen) 382,603 (Yen) 428,294 (Yen) 507,143 (Yen) 593,941 $ 5,015 Interest expense........ 167,937 138,394 130,743 142,177 140,846 1,189 Selling, general and administrative expenses............... 58,561 61,569 70,902 79,671 82,395 696 Provision for doubtful receivables and possible loan losses... 15,015 46,536 57,748 58,186 52,489 443 -------------- -------------- -------------- -------------- -------------- ------- Operating income........ 30,825 28,374 26,562 31,041 31,042 262 Equity in net income (loss) of affiliates and gains on sales of affiliates............. 2,804 6,653 10,327 7,371 (3,727) (31) Income before income taxes.................. 33,629 35,027 36,889 38,412 27,315 231 Net income.............. 17,072 18,003 19,044 23,731 25,621 216 Earnings per share (basic and diluted).... 263.17 277.53 293.57 366.40 396.52 3.35 Cash dividends per share.................. 15.00 15.00 15.00 15.00 15.00 0.13 As of March 31, ----------------------------------------------------------------------------------------------- 1995 1996 1997 1998 1999 1999 -------------- -------------- -------------- -------------- -------------- --------------- (Millions of yen) (Millions of dollars) Balance sheet data: Investment in direct financing leases(1).... (Yen)1,715,177 (Yen)1,913,836 (Yen)2,067,616 (Yen)2,186,022 (Yen)1,952,842 $16,489 Installment loans(1).... 1,619,397 1,628,916 1,700,697 1,794,825 1,761,887 14,877 -------------- -------------- -------------- -------------- -------------- ------- 3,334,574 3,542,752 3,768,313 3,980,847 3,714,729 31,366 Investment in operating leases................. 342,058 413,419 465,737 435,066 411,156 3,472 Investment in securities............. 278,807 345,935 434,488 500,449 576,206 4,865 Other operating assets(2).............. 42,162 55,161 58,193 65,838 73,345 619 -------------- -------------- -------------- -------------- -------------- ------- Operating assets(2)..... 3,997,601 4,357,267 4,726,731 4,982,200 4,775,436 40,322 Allowance for doubtful receivables on direct financing leases and possible loan losses... (47,400) (81,886) (117,567) (145,741) (132,606) (1,120) Other assets............ 455,355 476,375 480,811 737,850 704,806 5,952 -------------- -------------- -------------- -------------- -------------- ------- Total assets............ (Yen)4,405,556 (Yen)4,751,756 (Yen)5,089,975 (Yen)5,574,309 (Yen)5,347,636 $45,154 ============== ============== ============== ============== ============== ======= Short-term debt......... (Yen)1,826,237 (Yen)2,281,511 (Yen)2,513,421 (Yen)2,576,483 (Yen)2,184,983 $18,450 Long-term debt.......... 1,929,301 1,705,298 1,703,913 2,044,570 2,036,028 17,192 Shareholders' equity.... 238,050 276,251 308,584 313,821 327,843 2,768
41
1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- Selected data and ratios:(3) Shareholders' equity ratio.................. 5.40% 5.81% 6.06% 5.63% 6.13% Return on assets........ 0.39% 0.39% 0.39% 0.45% 0.47% Return on equity........ 7.29% 7.00% 6.51% 7.63% 7.99% Consolidated ratio of earnings to fixed charges................ 1.19 1.21 1.22 1.28 1.25 Allowance/investment in direct financing leases and installment loans.. 1.4% 2.3% 3.1% 3.7% 3.6%
- -------- (1) The sum of assets considered 90 or more days past due and total impaired assets measured pursuant to FASB Statement 114 amounted to (Yen)317,511 million as of March 31, 1997, (Yen)321,191 million as of March 31, 1998 and (Yen)282,377 million ($2,384 million) as of March 31, 1999. These sums included investment in direct financing leases considered 90 or more days past due of (Yen)29,593 million as of March 31, 1997, (Yen)36,688 million as of March 31, 1998 and (Yen)54,051 million ($456 million) as of March 31, 1999, installment loans (excluding amounts attributable to treatment under FASB Statement 114) considered 90 or more days past due of (Yen)108,747 million as of March 31, 1997, (Yen)101,527 million as of March 31, 1998 and (Yen)98,100 million ($828 million) as of March 31, 1999, and installment loans considered impaired under the definition contained in FASB Statement 114 of (Yen)179,171 million as of March 31, 1997, (Yen)182,976 million as of March 31, 1998 and (Yen)130,226 million ($1,100 million) as of March 31, 1999. 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. 42 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, 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. Market Environment We earn most of our revenues from our operations in Japan. Revenues from overseas operations have also contributed significantly to our operating results in recent periods. Overseas operations generated 24.3% of our total revenues in fiscal 1999. Japan The Japanese economy experienced a significant downturn during the early 1990s. The economy suffered from depreciation in real estate and stock values, reduced capital investment and reduced personal consumption. The economy began a slow recovery in the second half of fiscal 1996 backed by looser monetary policy, depreciation of the yen against the dollar and the Government's economic stimulus packages. This slow recovery, which continued until early 1997, was significantly hampered by weakened personal spending partly because consumers were adversely affected by consumption tax increases and increased medical expenses not covered by national health insurance. The economy was also hurt by the continued decline of Japanese real estate prices and general instability in the financial industry due to continuing asset quality problems. In particular, a series of bank and corporate failures and the related instability in the Japanese financial system increased economic uncertainty. The Bank of Japan reduced the official discount rate from 1.75% to 1.00% in April 1995 and then to a record low of 0.50% in September 1995, where it has remained to date. The general decline in real estate values continued during the period under review. The value of the yen compared with the U.S. dollar appreciated in 1995 and depreciated over the next three years. In fiscal 1999, however, the yen again appreciated, reaching a value of (Yen)118 to the U.S. dollar at March 31, 1999. The Nikkei Stock Average fell in fiscal 1997 and fiscal 1998, before rising in fiscal 1999 to end the fiscal year at (Yen)15,836.59. On October 9, 1998, the Nikkei Stock Average was (Yen)12,879.97, its lowest level in ten years. In the latter half of fiscal 1998 private capital expenditure was sluggish and exports to Asian markets declined, resulting in a decline in confidence in the economic outlook within the corporate sector. During this period the failure of several Japanese financial institutions, an increase in the premium paid by Japanese banks for interbank deposits and the credit tightening faced by Japanese corporate borrowers have increased uncertainties about the stability of the Japanese financial system. The impact of these conditions, and of the application of capital adequacy requirements to Japanese banks, led to restrictions on the availability of credit from banks. The shortage of funding sources made it more difficult for companies to obtain funds required to make necessary capital investments, in many cases resulting in bankruptcies and closures of small and medium sized companies, with consequent adverse effects on overall demand and consumer confidence. 43 Recently, the Government has implemented measures to stimulate the economy and alleviate the limited availability of credit. For instance, the Government established the Financial Reconstruction Commission in December 1998 to restructure the Japanese financial system in an attempt to make it more competitive. The Government has also injected capital into Japanese banks, resulting in some increase in lending. Recent preliminary data indicate an improvement in gross domestic product for the quarter ended March 31, 1999, although this may reflect Government stimulus measures rather than an improvement in fundamentals. In recent months several regional banks have failed, and capital investment and consumer spending continue to be restrained. The Americas In the United States, strong capital investment has been a driving force behind economic expansion, combining with growing corporate earnings and stable interest rates to sustain a period of sustained growth that began in 1991. During fiscal 1996, economic statistics showed slow to modest growth and, during fiscal 1997, fiscal 1998 and fiscal 1999, the economy continued to expand with active individual and corporate investment. Financial markets were generally robust as inflation remained moderate and equity indices increased significantly. Asia In Asia, beginning in the second half of 1997, the currencies of South Korea, Indonesia, Thailand and several other Southeast Asian countries depreciated substantially against the U.S. dollar. This depreciation triggered a loss of value in the stock markets of these countries as well as general asset deflation. Moreover, in many Asian countries where currency depreciation has occurred, interest rates have risen and price inflation has resulted from increased costs of imported goods. Thailand, Indonesia, Korea and other countries have sought financial assistance from institutions such as the International Monetary Fund and agreed to adopt economic reform measures that may hurt their economies for some period. As a result of these adverse economic conditions, many financial institutions in these countries and regions have become increasingly unable or unwilling to extend or renew credit to borrowers, and a significant number of companies have experienced financial difficulties, including payment defaults and bankruptcies. In addition, the continuing weakness of the Japanese economy and the depreciation of the yen against the U.S. dollar have increased the uncertainty of the economic stability in Asia in general. Further adverse developments in Japan and the rest of Asia could worsen current difficulties. For example, these developments could hurt local financial institutions that have lent to borrowers in the rest of Asia, local exporters that export to these regions and companies and financial institutions that rely on the availability of credit from Japanese lenders. Europe In Europe, the economies of a number of countries experienced recessions beginning in the early 1990s as their governments took measures intended to achieve balanced budgets in preparation for the planned currency integration in January 1999. During the second half of 1997, some of these countries started to show signs of recovery. Those European countries that rely on exports to emerging markets countries, such as those in Asia, have been slower in their recovery. Recent recoveries of the Asian economies and the decline in the value of the Euro has helped to increase demand for industrial goods in some countries and may improve their economic outlook in the future. 44 Presentation of Income from Investments We present income from investments in separate lines of our consolidated statements of income, depending upon the type of security and whether the security is held in connection with our life insurance operations. The balances of our investments in securities are shown by type of security and operation as of the end of each of the last three fiscal years in the tables below.
As of March 31, 1997 -------------------------------------- Life Other insurance operations Total ------------ ------------ ------------ (Millions of yen) Fixed income securities.................. (Yen)124,294 (Yen)216,130 (Yen)340,424 Marketable equity securities............. 11,825 54,905 66,730 Other securities......................... 5,071 22,263 27,334 ------------ ------------ ------------ Total.................................. (Yen)141,190 (Yen)293,298 (Yen)434,488 ============ ============ ============ As of March 31, 1998 -------------------------------------- Life Other insurance operations Total ------------ ------------ ------------ (Millions of yen) 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 ============ ============ ============ As of March 31, 1999 -------------------------------------- Life Other insurance operations Total ------------ ------------ ------------ (Millions of yen) Fixed income securities.................. (Yen)284,281 (Yen)178,878 (Yen)463,159 Marketable equity securities............. 8,783 45,982 54,765 Other securities......................... 38,101 20,181 58,282 ------------ ------------ ------------ Total.................................. (Yen)331,165 (Yen)245,041 (Yen)576,206 ============ ============ ============
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 45 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. Effective April 1, 1996, we adopted FASB Statement 121 ("Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of"). This statement requires that long-lived assets and some identifiable intangibles which we hold and use be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We conduct this review for impairment by using undiscounted future cash flows which we expect would be generated by the assets or the intangibles. These assets and intangibles are to be reported at the lower of the carrying amount or fair value, less costs to sell. See note 7 of the notes to the consolidated financial statements. 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 46 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 some 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 as well as overseas transactions. In the initial evaluation process, the salesperson will first obtain the financial statements and other relevant financial information of 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: . acceptable maximum credit lines; . selected target markets and products; . the creditworthiness of borrowers, including credit history, financial condition, adequacy of cash flow and quality of management; and . 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 consolidated subsidiaries and nonconsolidated affiliates in 21 countries outside of Japan as of March 31, 1999. 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 practice and economic conditions and the varying natures of the transactions being undertaken. Some of these companies, particularly consolidated 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 non-consolidated 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 47 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 consultive measures that help customers rehabilitate their activities, to the repossession, legal adjudication, and the obtaining of 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. 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 credit cards begun in 1998, all of our consumer lending is done only after interviewing the applicant and receiving all relevant financial data. We only target some borrower profiles, and always obtain third party credit reports, in order to minimize default and other risks. Our domestic installment loans are mostly secured by real estate collateral, except for credit 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 underlying 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. 48 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. After the approval of these plans, each division executes its operation in accordance 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. 49 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 believe we can 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: . insurance risk: the risk that a greater number of policy claims than anticipated will arise resulting in greater levels of expense and reduced, and in some cases, negative earnings; . 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 . 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 of policies: . 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; . 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 . 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 50 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 position. 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. Year 2000 Readiness Our State of Year 2000 Readiness In 1996, our computer systems management company, ORIX Computer Systems, formed a project team to address the Year 2000 problem. This project team has worked to counter the potential impact of the problem on our key operational and information management systems. Implementation for mainframe systems was completed in March 1999. During June and July 1999, we completed our testing of the operations of systems with clocks that are set to read the date January 1, 2000 or after, and no significant problems were found. In general, we have completed countermeasures for other principal systems. The project team has developed detailed contingency plans for making and testing modifications to our key computer systems as well as equipment unrelated to information systems that have embedded chips to ensure that both the systems and equipment are Year 2000 compliant. Based on these plans, we have divided our information systems into three categories: . mainframe systems such as accounting and marketing support systems; . systems necessary for the operations of individual departments, such as the Accounting Department's accounting and settlement systems and the Treasury Department's systems for managing borrowings, derivatives, and other financial products; and . the diverse business management and administration systems that various sections have introduced for use on personal computers. Each of these categories encompasses various subcategories. To facilitate the implementation of Year 2000 contingency plans, the project team has prioritized the subcategories in view of their importance to related systems and our overall operations. The project team is closely checking the implementation of contingency plans for each subcategory. Currently, implementation of our contingency plans is proceeding on schedule. In March 1999, we formed the Year 2000 Project Committee to extend the scope of evaluation and contingency plan implementation programs to encompass all of our operations. This new committee is headed by ORIX's corporate executive officer responsible for general affairs, and the other members of the committee are from related departments in our group. We have investigated the latent impact of the Year 2000 problem relating to operating lease assets. We have proceeded to make improvements where this kind of impact appears possible. Although the lessees of aircraft, 51 vessels and other operating lease assets bear responsibility for the operation of those assets, we are assisting those lessees when necessary. The Year 2000 Project Committee has also been liaising with our subsidiaries, banks, vendors and other important third parties to understand their Year 2000 countermeasure status. We plan to send questionnaires to these third parties and will request that responses be returned to us by August 31, 1999 so that we can confirm information which we have obtained from other sources. These other sources have not revealed any significant Year 2000 compliance issue likely to significantly affect our operations. However, as we cannot independently verify and guarantee the effectiveness of third parties' Year 2000 countermeasures, we may request the implementation of countermeasures if necessary. Based on results of a survey of rental equipment suppliers conducted by one of our subsidiaries, we are determining ways to minimize risk. For example, we are refraining from purchasing equipment from non-compliant suppliers. Cost of Year 2000 Countermeasures The expenses associated with Year 2000 countermeasures to date have not had a significant affect on our performance. On a consolidated basis, these expenses have amounted to approximately (Yen)900 million, and most of these expenses were incurred and paid prior to March 31, 1999. This estimate of expenses principally reflects the cost of outside support for the analysis, remediation and testing of software and the cost of the procuring new equipment and software. The estimate does not include the cost of employee-hours spent on Year 2000 countermeasures in the course of the employees' regular work activities because we do not separately track these costs incurred. Based upon our investigations to date, we anticipate that the expenses associated with future Year 2000 countermeasures activities will be at a low level that will not have a significant affect on our performance. Year 2000 Contingency Plan We have developed preliminary contingency plans with respect to several aspects of our operations. In particular, our contingency plans address what we believe to be the most reasonably likely worst-case scenarios, including the following: . we become unable to receive leases and rentals and other payments due to disruption of our or our customers' bank settlement systems; . we make mistakes detrimental to us in billing customers; . we are unable to obtain funding due to a panic in the capital market; . we lose track of business with customers and information regarding customers; and . our application operation is disrupted and our customers become unable to apply for leases, installment loans and housing loans. We intend to develop contingency plans for those risks, and for any other Year 2000 risks that we may subsequently identify, except where we determine that the risks are not likely to be significant. We intend to continue to evaluate and refine our contingency plans throughout 1999 as we obtain further information, particularly with respect to the Year 2000 readiness of third parties. We also plan to thoroughly educate our staff in areas that require particular caution and attention, such as contract application, remittance, and payment operations. We also intend to test the implementation of our contingency plans in a number of areas. We cannot guarantee that our contingency plans will be sufficient to respond to the known risks, particularly since the responses to many risks will depend upon the ability of third parties to remediate Year 2000 problems 52 in a timely fashion. We also cannot guarantee that we will identify all of the relevant risks, or that our assessment of the significance of the risks will be accurate. Results of Operations 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 (Yen)4,775 billion ($40 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 (Yen)593,941 million ($5,015 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. We do not expect revenues to continue to increase at the same rate in fiscal 2000. 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 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 (Yen)11,077 million ($94 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 (Yen)562,899 million ($4,753 million), from fiscal 1998 to fiscal 1999. While income before income taxes decreased 28.9%, to (Yen)27,315 million ($231 million), net income increased 8.0%, to (Yen)25,621 million ($216 million), reflecting a substantial decrease in the provision for deferred income taxes. 53 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
Year ended March 31, Change -------------------------------- ----------------------- 1998 1999 Amount Percent --------------- --------------- -------------- ------- (Millions of yen) 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 affiliates and gains 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 Balance Sheet Data As of March 31, Change -------------------------------- ----------------------- 1998 1999 Amount Percent --------------- --------------- -------------- ------- (Millions of yen) Investment in direct fi- nancing 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 securi- ties................... 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 receivables 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) =============== =============== ============== 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. Volume of New Assets Year ended March 31, Change -------------------------------- ----------------------- 1998 1999 Amount Percent --------------- --------------- -------------- ------- (Millions of yen) 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
54 Total Revenues Our total revenues increased by 17.1%, or (Yen)86,798 million, to (Yen)593,941 million ($5,015 million) in fiscal 1999 compared to (Yen)507,143 million in fiscal 1998, reflecting principally an increase of (Yen)70,228 million or 55.7%, in life insurance premiums and related investment income, and an increase of (Yen)20,007 million, or 72.6%, in other operating revenues. Direct Financing Leases Revenues from direct financing leases decreased by 4.2%, or (Yen)6,199 million, from fiscal 1998 to (Yen)143,170 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 (Yen)6,596 million ($56 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
As of March 31, Change ----------------------------- ---------------------- 1998 1999 Amount Percent -------------- -------------- ------------- ------- (Millions of yen) 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............... 273,730 224,080 (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) ============== ============== =============
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 (Yen)913,221 million ($7,711 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-related and office equipment, investment in that category decreased by 20.8% due 55 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 (Yen)223,537 million ($1,888 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 (Yen)50,656 million ($428 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 (Yen)194,243 million ($1,640 million) under securitized lease receivables as of March 31, 1999. Operating Leases Revenues from operating leases decreased by 5.4%, or (Yen)5,261 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 (Yen)2,356 million ($20 million) in fiscal 1999, compared to (Yen)1,298 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. Investment in Operating Leases
As of March 31, Change ------------------------- --------------------- 1998 1999 Amount Percent ------------ ------------ ------------ ------- (Millions of yen) 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) ============ ============ ============
The balance of our total investment in operating leases decreased by 5.5%, or (Yen)23,910 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 (Yen)5,447 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. 56 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
As of March 31, Change ----------------------------- --------------------- 1998 1999 Amount Percent -------------- -------------- ------------ ------- (Millions of yen) 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 com- panies................. 213,911 188,085 (25,826) (12.1) Commercial and indus- trial companies........ 607,952 614,988 7,036 1.2 -------------- -------------- ------------ Subtotal.............. 821,863 803,073 (18,790) (2.3) -------------- -------------- ------------ 1,402,420 1,376,298 (26,122) (1.9) Foreign commercial, indus- trial and other borrow- ers...................... 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) ============== ============== ============
The total balance of installment loans decreased by 1.8%, to (Yen)1,761,887 million ($14,877 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 (Yen)306,957 million at March 31, 1998 to (Yen)245,041 million ($2,069 million) at March 31, 1999. Fixed income securities declined by (Yen)59,865 million, principally as a result of the sale of (Yen)50,611 million ($427 million) of U.S. high-yield securities in a securitization transaction. Brokerage Commissions and Gains on Investment Securities All non-interest income and losses (other than foreign currency transaction gain or loss) which we recognize on securities held in connection with operations other than life insurance are reflected in our consolidated statements of income as brokerage commissions and gains on investment securities. Brokerage commissions and gains on investment securities decreased by (Yen)690 million, or 8.5%, from fiscal 1998 to fiscal 1999. ORIX Securities Corporation (ORIX Securities) 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. 57 At March 31, 1999, gross unrealized gains of available-for-sale securities, including those held in connection with our life insurance operations, were (Yen)32,356 million ($273 million). At March 31, 1999, gross unrealized losses on available-for-sale securities, including those held in connection with our life insurance operations, were (Yen)25,153 million ($212 million). Life Insurance Premiums and Related Investment Income Life insurance premiums and related investment income increased by (Yen)70,228 million, or 55.7%, in fiscal 1999 to (Yen)196,259 million ($1,657 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. We expect life insurance premiums to grow at a more moderate rate in fiscal 2000. Interest Income Interest income not included in other categories of revenues includes principally interest on bank deposits. Interest income increased by (Yen)3,266 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 are generated from various businesses, such as the development and sales of residential apartments and sales of commodities funds and leveraged leases. Other operating revenues increased by (Yen)20,007 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 (Yen)562,899 million ($4,753 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 (Yen)11,077 million ($94 million) in fiscal 1999. Interest Expense Interest expense was (Yen)140,846 million ($1,189 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 (Yen)95,629 million, or 8.6 %, as of March 31, 1999, short- term asset-backed securities decreased from (Yen)28,400 million as of March 31, 1998 to (Yen)0 as of March 31, 1999, and long-term asset-backed securities decreased from (Yen)305,520 million as of March 31, 1998 to (Yen)194,243 million ($1,640 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, 58 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 (Yen)57,405 million ($485 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 (Yen)70,899 million, or 61.2%, to (Yen)186,775 million ($1,577 million) from fiscal 1998 to fiscal 1999. 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 4.4% in fiscal 1998 and 3.7% in fiscal 1999. 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 127.7%, to (Yen)31,522 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 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 1999 were (Yen)82,395 million ($696 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. 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 (Yen)52,489 million ($443 million), a decrease of 9.8 % 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.
Year ended March 31, -------------------------- 1998 1999 ------------ ------------ (Millions of yen) Beginning balance................................ (Yen)117,567 (Yen)145,741 Provisions charged to income................... 58,186 52,489 Charge-offs (net): Gross charge-offs............................ (32,771) (71,349) Recoveries................................... 680 399 ------------ ------------ Charge-offs (net)............................ (32,091) (70,950) Other.......................................... 2,079 5,326 ------------ ------------ Ending balance................................... (Yen)145,741 (Yen)132,606 ============ ============
59 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. Allowance for Doubtful Receivables on Direct Financing Leases and Possible Loan Losses
Year ended March 31, 1999 --------------------------------------------------------------- Installment Loans Other ------------------------- --------- Direct FASB FASB Financing Statement Statement Leases General No. 114 No. 121 Total ----------- ----------- ------------ --------- ------------ (Millions of yen) Beginning balance....... (Yen)10,510 (Yen)30,310 (Yen)104,921 (Yen)-- (Yen)145,741 ----------- ----------- ------------ -------- ------------ Provisions charged to income............... 16,853 28,054 6,938 644 52,489 Charge-offs (net)..... (6,938) (12,520) (50,848) (644) (70,950) Other................. 3,442 786 1,098 -- 5,326 ----------- ----------- ------------ -------- ------------ Ending balance.......... (Yen)23,867 (Yen)46,630 (Yen) 62,109 (Yen)-- (Yen)132,606 =========== =========== ============ ======== ============
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 (Yen)52,489 million ($443 million). Direct financing leases and loans totaling (Yen)70,950 million ($599 million), including write-downs of (Yen)644 million ($5 million) made in accordance with FASB Statement 121, were written off. As of March 31, 1999, the allowance was (Yen)132,606 million ($1,120 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 (Yen)182,976 million as of March 31, 1998 and (Yen)130,226 million ($1,100 million) as of March 31, 1999. The principal reason for the decline was a charge-off of impaired loans in the amount of (Yen)50,848 million ($429 million). We determined that a valuation allowance was required for impaired loans which had outstanding balances of (Yen)153,529 million as of March 31, 1998 and (Yen)114,525 million ($967 million) as of March 31, 1999. 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 (Yen)104,921 million as of March 31, 1998 and (Yen)62,109 million ($524 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 (Yen)181,074 million for fiscal 1998 and (Yen)170,838 million ($1,443 million) for fiscal 1999. We recognized interest income on impaired loans of (Yen)1,551 million for fiscal 1998 and (Yen)1,577 million ($13 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". During fiscal 1999, in accordance with FASB Statement 121, we wrote down (Yen)644 million ($5 million) for some real estate development projects included in "investment in operating leases" and "advances" in the 60 consolidated balance sheets. These write-downs are 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. See "--Policies relating to Non-performing Assets and Charge- offs" and note 7 of the notes to the consolidated financial statements. Write-downs of Securities During fiscal 1999, we refined our policy for determining whether declines in the market value of available- for-sale securities are other than temporary. Our current policy 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. We refined our policy primarily to reflect 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, 1999. 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 . 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 . there has been an issuer default or similar event. However, if we have a significant long-term business relationship with a company, we would also consider the probability of the market value recovering within the following twelve months. As part of this review, we would consider: . the company's operating results, . the company's net asset value, . the company's future performance forecast, and . 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. We followed this policy in fiscal 1999 and charged (Yen)11,077 million ($94 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 (Yen)858 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 (Yen)390 million ($3 million) in fiscal 1999, compared to a loss of (Yen)6,271 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. 61 Equity in Net Income (Loss) of Affiliates and Gains on Sales of Affiliates Equity in net income (loss) of affiliates and gains on sales of affiliates was (Yen)7,371 million in fiscal 1998 but amounted to a loss of (Yen)3,727 million ($31 million) in fiscal 1999. Some of our affiliates had particularly strong performances in fiscal 1999, including . Banc One Mortgage Capital Markets, LLC (Banc One Mortgage Capital Markets), previously our joint venture with Bank One Corporation, which engages in the securitization of loans secured by commercial property; . our investment in Stockton Holdings Limited (Stockton Holdings), which engages in reinsurance activities and trades commodities and financial futures; and .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 (Korea Development Leasing), 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 (Yen)11,576 million ($98 million) compared to (Yen)23,815 million as of March 31, 1998. Provision for Income Taxes Provision for income taxes in fiscal 1999 was (Yen)1,694 million ($14 million), substantially below the provision of (Yen)14,681 million in fiscal 1998. The decrease of (Yen)12,987 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 (Yen)31,042 million ($262 million), a level comparable to that in fiscal 1998. Income before income taxes decreased by 28.9% to (Yen)27,315 million. Net income increased 8.0%, to (Yen)25,621 million ($216 million), from fiscal 1998 to fiscal 1999, reflecting the substantial decrease in provision for income taxes in fiscal 1999. Net income per share in fiscal 1999 was (Yen)397 ($3.35), compared to (Yen)366 in fiscal 1998. Cash Flows Net cash provided by operating activities increased by (Yen)42,444 million, or 17.2%, from fiscal 1998 to fiscal 1999, to a total of (Yen)289,004 million ($2,440 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 (Yen)26,046 million ($220 million) in fiscal 1999, compared to (Yen)383,241 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 (Yen)269,472 million ($2,275 million) in fiscal 1999, compared to net cash provided by financing activities of (Yen)319,212 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. 62 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 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 1998 and 1999, as well as the amounts and percentages of the changes from fiscal 1998 to 1999.
Year ended March 31, Change ------------------------- -------------------- 1998 1999 Amount Percent ------------ ------------ ----------- ------- (Millions of yen) 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) ------------ ------------ ----------- 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 ------------ ------------ -----------
63 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.
Year ended March 31, Change -------------------------- --------------------- 1998 1999 Amount Percent ------------ ------------ ------------ ------- (Millions of yen) 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) ============ ============ ============
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.
As of March 31, Change ------------------------------ ---------------------- 1998 1999 Amount Percent -------------- -------------- ------------- ------- (Millions of yen) 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) ============== ============== =============
64 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 (ORIX Rentec)) and installment loans to commercial and industrial companies (other than for real estate finance). Our domestic corporate finance segment also includes investment securities (other than those held by ORIX Life Insurance Corporation (ORIX Life Insurance)). The activities of this segment are conducted by ORIX, ORIX Auto Leasing Corporation (ORIX Auto Leasing), ORIX Alpha Corporation (ORIX Alpha) and a few other domestic subsidiaries. In this business segment, segment profit declined 20.1%, or (Yen)8,857 million, from fiscal 1998 to (Yen)35,240 million ($298 million) in fiscal 1999. The balance of segment assets declined 8.4%, or (Yen)186,932 million, from March 31, 1998 to (Yen)2,046.5 billion ($17.3 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 (Yen)179,309 million ($1,514 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 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 (ORIX Rent-A-Car). In fiscal 1999, we recorded (Yen)6,923 million ($58 million) of profit in this segment. This represents a decrease of 17.7% from segment profit of (Yen)8,407 million in fiscal 1998. The balance of segment assets increased by 6.1%, or (Yen)6,337 million, from March 31, 1998 to (Yen)109,772 million ($927 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 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. In fiscal 1999, segment loss amounted to (Yen)11,013 million ($93 million), compared to a loss of (Yen)23,071 million in fiscal 1998. Real estate-related finance assets declined 11.7%, or (Yen)75,744 million, from March 31, 1998 to (Yen)573,767 million ($4,845 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 65 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 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 (ORIX Real Estate) but were conducted by the Real Estate Division of ORIX through fiscal 1999. In fiscal 1999, segment loss was (Yen)2,236 million ($19 million), compared to a loss of (Yen)8,392 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 (Yen)5,910 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 (Yen)24,376 million, from March 31, 1998 to (Yen)273,504 million ($2,309 million) as of March 31, 1999. 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 declined 33.8%, or (Yen)1,949 million, from fiscal 1998 to (Yen)3,813 million ($32 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 (Yen)138,458 million, from March 31, 1998 to (Yen)334,836 million ($2,827 million) as of March 31, 1999. The growth in segment assets reflected strong demand for our "ORIX Direct" policies. Marketable equity securities held in connection with our life insurance business declined from (Yen)16,804 million as of March 31, 1998 to (Yen)8,783 million ($74 million) as of March 31, 1999, as we sold Japanese equity securities. Other Domestic Business Segments Our other domestic business segments include: . consumer loans by ORIX Credit Corporation (ORIX Credit) and ORIX Club Corporation (ORIX Club); . security brokerage by ORIX Securities; . commodities trading by ORIX Commodities Corporation (ORIX Commodities); . venture capital operations conducted by ORIX Capital Corporation (ORIX Capital); and . trust and banking conducted by ORIX Trust and Banking Corporation (ORIX Trust and Banking). The weakness of the Japanese stock market reduced brokerage commissions of ORIX Securities during fiscal 1999. ORIX Trust and Banking became a subsidiary of ORIX in April 1998 and incurred temporary start-up costs during fiscal 1999. Reflecting these factors as well as gains on the sale of affiliates recognized in fiscal 1998, the segment's results changed from a profit in fiscal 1998 of (Yen)1,891 million to a loss before income taxes of (Yen)4,266 million ($36 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 (Yen)5,265 million from March 31, 1998 to (Yen)248,872 million ($2,101 million) as of March 31, 1999. 66 Overseas Business Segments The Americas Our activities in the Americas include: . direct financing leases of transportation equipment and construction machinery; . operating leases of real estate; . installment loans to customers in the industrial and real estate sectors; and . investment securities. We conduct our activities in the Americas mainly through ORIX USA Corporation (ORIX USA), ORIX Commercial Alliance Corporation (ORIX Commercial Alliance) and ORIX Real Estate Equities, Inc (ORIX Real Estate Equities), our wholly-owned subsidiaries in the United States. Segment profit in the Americas declined 3.2%, or (Yen)673 million, from fiscal 1998 to (Yen) 20,590 million ($174 million) in fiscal 1999. ORIX's investment in the Banc One Mortgage Capital Markets, LLC. (Banc One Mortgage Capital Markets) contributed significantly to segment profit, which was offset by reduced profits at ORIX Commercial Alliance. Segment assets amounted to (Yen)634,101 million ($5,354 million) as of March 31, 1999, down 5.2% or (Yen)34,641 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. Our activities in Asia and Oceania include: .direct financing leases of information-related, industrial, commercial service and other equipment; .operating leases of measuring and transportation equipment; .housing and card loans to customers; .installment loans to real estate and industrial customers; and .investment securities. These activities are conducted in Asia and Oceania mainly through ORIX Asia Limited (ORIX Asia), ORIX Australia Corporation Limited (ORIX Australia) and P.T. ORIX Indonesia Finance (ORIX Indonesia). In Asia and Oceania, we recorded a (Yen)11,729 million ($99 million) segment loss during fiscal 1999, (Yen)3,288 million more than in fiscal 1998. Segment assets amounted to (Yen)440,872 million ($3,723 million) as of March 31, 1999, down 4.0% or (Yen)18,170 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. Of segment assets, (Yen)314,172 million ($2,653 million) as of March 31, 1999 was invested in Asia. These assets included (Yen)130,664 million ($1,103 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 Ireland), ORIX Europe Limited (ORIX Europe) and ORIX Aviation Systems Limited (ORIX Aviation Systems). Reflecting considerable improvement in the profitability of our aircraft operating lease business, segment profit in Europe rose to (Yen)264 million ($2 million). Due to the sale of two aircraft and other 67 factors, segment assets amounted to (Yen)178, 559 million ($1,508 million) at March 31, 1999, down 29.1% from March 31, 1998. Year Ended March 31, 1998 Compared to Year Ended March 31, 1997 Overview In fiscal 1998 we increased our assets through marketing activities, while maintaining our credit standards. Consolidated operating assets increased 5.4%, or (Yen)255,469 million, from March 31, 1997, to (Yen)4,982 billion at March 31, 1998. Investment in all categories of operating assets increased, except for a 6.6% decline in investment in operating leases. Total revenues increased 18.4% from fiscal 1997 to fiscal 1998, to (Yen)507,143 million, reflecting principally strong domestic growth in revenues from life insurance and direct financing leases as well as growth in revenues from various businesses in the United States. Operating expenses increased significantly. We incurred a foreign currency transaction loss of (Yen)6,271 million in fiscal 1998 due principally to devaluation of the Indonesian Rupiah. Depreciation on operating leases increased 7.6% in fiscal 1998, and we continued to make a substantial provision for doubtful receivables and possible loan losses. Life insurance costs increased significantly due to the growth in policies in force, and these costs increased slightly as a percentage of life insurance premiums and related investment income. Selling, general and administrative expenses increased 12.4% from fiscal 1997 to fiscal 1998 as we expanded both our domestic and our overseas operations. Total expenses increased by 18.5%, to (Yen)476,102 million, from fiscal 1997 to fiscal 1998, and income before income taxes increased 4.1%, to (Yen)38,412 million. Net income increased 24.6%, to (Yen)23,731 million, reflecting a decrease of 17.7%, or (Yen)3,164 million, in the provision for income taxes. The tables below contains some financial data for fiscal 1997 and 1998, as well as the amounts and percentages of the changes from fiscal 1997 to fiscal 1998. Income Statement Data
Year ended March 31, Change ------------------------- -------------------- 1997 1998 Amount Percent ------------ ------------ ----------- ------- (Millions of yen) Total revenues............. (Yen)428,294 (Yen)507,143 (Yen)78,849 18.4% Direct financing leases.. 136,661 149,369 12,708 9.3 Operating leases......... 91,971 97,668 5,697 6.2 Interest on loans and investment securities... 89,487 95,033 5,546 6.2 Brokerage commissions and gains on investment securities.............. 4,231 8,071 3,840 90.8 Life insurance premiums and related investment income.................. 82,296 126,031 43,735 53.1 Interest income on deposits................ 2,151 3,429 1,278 59.4 Other operating revenues................ 21,497 27,542 6,045 28.1 Total expenses............. 401,732 476,102 74,370 18.5 ------------ ------------ ----------- Operating income........... 26,562 31,041 4,479 16.9 Equity in net income (loss) of affiliates and gains on sales of affiliates....... 10,327 7,371 (2,956) (28.6) Income before income taxes..................... 36,889 38,412 1,523 4.1 Net income................. 19,044 23,731 4,687 24.6
68 Balance Sheet Data
As of March 31, Change ------------------------------ --------------------- 1997 1998 Amount Percent -------------- -------------- ------------ ------- (Millions of yen) Investment in direct financing leases........ (Yen)2,067,616 (Yen)2,186,022 (Yen)118,406 5.7% Investment in operating leases.................. 465,737 435,066 (30,671) (6.6) Installment loans........ 1,700,697 1,794,825 94,128 5.5 Investment in securities.............. 434,488 500,449 65,961 15.2 Other operating assets... 58,193 65,838 7,645 13.1 -------------- -------------- ------------ Operating assets......... 4,726,731 4,982,200 255,469 5.4 Allowance for doubtful receivables on direct financing leases and possible loan losses.... (117,567) (145,741) (28,174) (24.0) Other assets............. 480,811 737,850 257,039 53.5 -------------- -------------- ------------ Total assets............. (Yen)5,089,975 (Yen)5,574,309 (Yen)484,334 9.5 ============== ============== ============
The table below shows the volume of new transactions for fiscal 1997 and 1998, as well as the amount and percentage of change in these data from fiscal 1997 to fiscal 1998. Figures for new equipment acquisitions for direct financing leases and operating leases are based on purchase costs of the equipment. Volume of New Assets
Year ended March 31, Change --------------------------- -------------------- 1997 1998 Amount Percent ------------ -------------- ------------ ------- (Millions of yen) Direct financing leases: New equipment acquisitions...... (Yen)886,806 (Yen)1,093,519 (Yen)206,713 23.3% Operating leases: New equipment acquisitions...... 92,932 98,566 5,634 6.1 Installment loans: New loans added....................... 593,074 715,030 121,956 20.6 Investment in securities: New securities added............ 135,324 217,225 81,901 60.5
Total Revenues Our total revenues increased by 18.4%, or (Yen)78,849 million, to (Yen)507,143 million in fiscal 1998 compared to (Yen)428,294 million in fiscal 1997, reflecting principally an increase of (Yen)43,735 million or 53.1%, in revenues from life insurance premiums and related investment income, an increase of (Yen)12,708 million, or 9.3%, in revenues from direct financing leases and more modest increases in most other categories of revenues. Direct Financing Leases Revenues from direct financing leases increased by 9.3%, or (Yen)12,708 million, from fiscal 1997 to fiscal 1998. The relatively high rate of growth in revenues in fiscal 1998 compared to fiscal 1997 reflects an increase in the average interest rates on domestic direct financing leases, calculated on the basis of quarterly balances, to 5.94% in fiscal 1998 from 5.79% in fiscal 1997 primarily due to strong growth in domestic small-ticket leases of office equipment that yield relatively high margins and a steady increase in domestic automobile leases as well as substantial growth in leases of construction equipment in the United States. The average interest rates on overseas direct financing leases, calculated on the basis of quarterly balances, slightly decreased to 10.28% in fiscal 1998 from 10.38% in fiscal 1997, reflecting the sale of lease receivables for securitization in fiscal 1998. Gains on securitization transactions during fiscal 1998 were (Yen)1,331 million. Gains and losses from disposition of direct financing lease assets, other than those involved in the securitization transactions, were not significant for fiscal 1998. 69 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
As of March 31, Change ----------------------------- --------------------- 1997 1998 Amount Percent -------------- -------------- ------------ ------- (Millions of yen) Information-related and office equipment......... (Yen) 557,439 (Yen) 623,203 (Yen) 65,764 11.8% Industrial equipment...... 436,813 473,140 36,327 8.3 Commercial services equipment................ 226,118 273,730 47,612 21.1 Transportation equipment.. 458,572 443,486 (15,086) (3.3) Other..................... 388,674 372,463 (16,211) (4.2) -------------- -------------- ------------ Total................... (Yen)2,067,616 (Yen)2,186,022 (Yen)118,406 5.7 ============== ============== ============
Investment in direct financing leases increased by 5.7% from March 31, 1997 to March 31, 1998. New investment in leased equipment in fiscal 1998 amounted to (Yen)1,093,519 million, an increase of 23.3% from fiscal 1997. Despite the general trend of diminished demand for finance leases in Japan due to deteriorating economic conditions as well as the devaluation of assets denominated in Asian currencies, the following factors contributed to this increase: our purchase of direct financing lease receivables of approximately (Yen)257,325 million from Crown Leasing Corporation (Crown Leasing), a leasing company in Japan which became insolvent in early 1997; and a substantial increase in office equipment assets related to steady growth in small-ticket lease operations, principally information-related and office equipment and commercial services equipment leasing. In addition, industrial equipment lease assets increased by 8.3%, principally as a result of an increase in leases of construction, trucking and other heavy equipment in the United States. A 3.3% decrease in transportation equipment lease assets reflects principally the devaluation of the Indonesian Rupiah, which was partly offset by continued growth in our automobile lease operations in Japan resulting from the trend toward corporate outsourcing. Operating Leases Revenues from operating leases increased by 6.2%, or (Yen)5,697 million, despite a decrease in the balance of operating leases. This increase was attributable primarily to growth in revenues from measuring equipment and personal computers, which have yielded increasing returns. Gains on the sale of operating lease assets included in revenues from operating leases were (Yen)1,298 million in fiscal 1998, a decline from (Yen)2,770 million in fiscal 1997. 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. Investment in Operating Leases
As of March 31, Change ------------------------- --------------------- 1997 1998 Amount Percent ------------ ------------ ------------ ------- (Millions of yen) Transportation equipment..... (Yen)205,277 (Yen)195,392 (Yen) (9,885) (4.8)% Measuring equipment and personal computers.......... 53,740 59,989 6,249 11.6 Real estate and other........ 206,720 179,685 (27,035) (13.1) ------------ ------------ ------------ Total...................... (Yen)465,737 (Yen)435,066 (Yen)(30,671) (6.6) ============ ============ ============
The balance of our total investment in operating leases decreased by 6.6%, to (Yen)435,066 million, from March 31, 1997 to March 31, 1998, principally due to the sales of two aircraft and an oceangoing vessel and an office building in the United States, which were partially offset by new investments in measuring equipment and personal computers in Japan. The balance of investment in transportation equipment operating leases decreased 70 by 4.8% from March 31, 1997 to March 31, 1998, principally reflecting the sale of these aircraft and vessel. During fiscal 1998 one Boeing 737 was added to our existing fleet while two Boeing 737s were sold, bringing the total fleet size to 26 as of March 31, 1998. Rising demand in Japan for personal computers, workstations and other information-related products, and strong demand for measuring equipment rentals related principally to rapid growth in the mobile communications industry, supported a 11.6% growth in the balance of investment within this segment of the portfolio. The balance of investment in real estate and other operating lease assets in fiscal 1998 declined 13.1%, or (Yen)27,035 million, from the level in fiscal 1997, reflecting principally a cautious approach to new investment in domestic real estate, as well as the sale of an office building in the United States. Interest on Loans and Investment Securities Interest we earned 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 6.2%, or (Yen)5,546 million, from fiscal 1997 to fiscal 1998, reflecting growth in the balance of installment loans and in the balance of interest- earning investment securities as well as an increase in foreign currency loans, principally corporate and real estate loans in the United States. The average interest rate earned on overseas loans, calculated on the basis of quarterly balances, increased to 9.09% in fiscal 1998 from 8.09% in fiscal 1997, primarily due to an increase in relatively high-margin foreign currency loans such as bridge loans. The average interest rate earned on overseas investment securities, calculated on the basis of quarterly balances, decreased to 8.58% in fiscal 1998 from 8.71% in fiscal 1997, primarily because we sold some available-for-sale securities which we had purchased in prior periods. These increases in balances were offset to some extent by a decline in the average interest rate earned on domestic loans, calculated on the basis of quarterly balances, to 4.02% in fiscal 1998 from 4.39% in fiscal 1997, due to the impact of a decline in market rates of interest for financial obligations denominated in yen in fiscal 1998 compared to fiscal 1997, as well as a decline in the average interest rate earned on investment securities, calculated on the basis of quarterly balances, to 3.44% in fiscal 1998 from 3.75% in fiscal 1997, primarily because we sold some available-for-sale securities which we had purchased in prior periods. 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 with respect thereto is reflected in our consolidated statements of income as life insurance premiums and related investment income. Installment Loans
As of March 31, Change ----------------------------- -------------------- 1997 1998 Amount Percent -------------- -------------- ----------- ------- (Millions of yen) Domestic Consumer Housing loans........... (Yen) 435,388 (Yen) 426,559 (Yen)(8,829) (2.0)% Card loans.............. 78,438 98,187 19,749 25.2 Other................... 67,902 55,811 (12,091) (17.8) -------------- -------------- ----------- Subtotal.............. 581,728 580,557 (1,171) (0.2) Domestic Commercial Real estate related companies.............. 193,578 213,911 20,333 10.5 Commercial and industrial companies... 558,232 607,952 49,720 8.9 -------------- -------------- ----------- Subtotal.............. 751,810 821,863 70,053 9.3 -------------- -------------- ----------- 1,333,538 1,402,420 68,882 5.2 Foreign commercial, industrial and other borrowers................ 351,053 377,761 26,708 7.6 Direct loan origination costs, net............... 16,106 14,644 (1,462) (9.1) -------------- -------------- ----------- Total................. (Yen)1,700,697 (Yen)1,794,825 (Yen)94,128 5.5 ============== ============== ===========
71 The total balance of installment loans increased by 5.5%, to (Yen)1,794,825 million, from March 31, 1997 to March 31, 1998. Loans to domestic consumers declined slightly as we refrained from extending new housing loans while card loans increased. Other loans, principally retail loans extended for shopping credit, decreased due to a strategic shift from shopping credit to card loans. Domestic installment loans to corporate customers, principally customers in the retail and commercial service industries, increased by 9.3%, or (Yen)70,053 million, due largely to increased demand for lending from the leisure and retail industries as well as the addition of Crown Leasing's loan receivables. Also, new loans of (Yen)18,999 million were added as a result of the acquisition of Yamaichi Trust and Banking, Ltd (Yamaichi Trust and Banking). Overseas, substantially all of our installment loans are made to corporate customers, principally in the United States, England and Hong Kong, except for a small percentage of individual borrowers of housing loans and consumer finance loans in Hong Kong. During fiscal 1998, we expanded our financing activities in the United States, resulting in a 7.6% increase in the balance of installment loans to foreign borrowers as of March 31, 1998, compared to March 31, 1997. The balance of investment in fixed income securities (other than those included in the life insurance portfolio) increased by 10.5% from (Yen)216,130 million at March 31, 1997 to (Yen)238,743 million at March 31, 1998. This increase reflects growth in both domestic and foreign assets, particularly due to an addition of (Yen)34,189 million of these securities arising from the acquisition of Yamaichi Trust and Banking. Brokerage Commissions and Gains on Investment Securities Brokerage commissions and gains on investment securities increased by (Yen)3,840 million, or 90.8%, from fiscal 1997 to fiscal 1998. Brokerage commissions declined slightly in fiscal 1998 compared to fiscal 1997 as domestic investment in securities generally remained sluggish. Revenues from gains on investment securities increased substantially in fiscal 1998, as we sold securities and realized sizeable gains during fiscal 1998 due to gains on securities investments in the United States. At March 31, 1998, gross unrealized gains and gross unrealized losses of available-for-sale securities, including those held in connection with our life insurance operations, were (Yen)25,344 million and (Yen)20,997 million, respectively. Life Insurance Premiums and Related Investment Income Life insurance premiums and related investment income increased by (Yen)43,735 million in fiscal 1998, or 53.1%, to (Yen)126,031 million. Life insurance premiums increased due primarily to the introduction in September 1997 of a new range of 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 relatively low-risk and moderate-return investments, such as Japanese corporate bonds. In addition, the sale of a portion of bonds used to manage funds contributed to an increase in related investment income. Interest Income on Deposits Interest income on deposits increased by (Yen)1,278 million, or 59.4%, from fiscal 1997 to fiscal 1998, principally as a result of increase in average balance of deposits. Other Operating Revenues Other operating revenues are generated from various businesses, such as sales of commodities funds and leveraged leases, and the development and sales of residential apartments. Other operating revenues increased by (Yen)6,045 million, or 28.1%, from fiscal 1997 to fiscal 1998 due to the strength of our fee-based businesses, such as leveraged leases for aircrafts. 72 Total Expenses Total expenses were (Yen)476,102 million in fiscal 1998, an increase of 18.5% from total expenses in fiscal 1997, reflecting increases in most categories of expenses, particularly increases of (Yen)41,990 million, or 56.8%, in life insurance costs, (Yen)11,434 million, or 8.7%, in interest expenses, (Yen)4,208 million, or 7.6%, in depreciation on operating leases and (Yen)8,769 million, or 12.4%, in selling, general and administrative expenses, as well as the recognition of substantial foreign exchange losses. Interest Expense Interest expense was (Yen)142,177 million in fiscal 1998, an increase of 8.7% from fiscal 1997. The increase in interest expense principally reflected an increase in fund procurement requirements that accompanied the purchase of operating assets and other new investments. Despite higher interest rates on our borrowings from Japanese banks due to the so-called Japan premium, we were able to reduce our average funding costs by diversifying our funding sources, specifically through increased use of asset-backed securities and commercial paper and other direct funding methods. See "--Funding and Liquidity-- Diversification of Funding Sources". The average interest rates on our domestic short-term and long-term debt, calculated on the basis of quarterly balances, decreased to 2.15% in fiscal 1998 from 2.27% in fiscal 1997. Commercial paper increased by (Yen)106,561 million, or 10.6%, as of March 31, 1998, short-term asset-backed securities increased from (Yen)1,500 million as of March 31, 1997 to (Yen)28,400 million as of March 31, 1998, and long-term asset-backed securities increased from (Yen)954 million as of March 31, 1997 to (Yen)305,520 million as of March 31, 1998. Our interest expense related to these capital markets funding, was generally lower than traditional bank borrowings. The average interest rates on our short-term and long-term overseas debt, calculated on the basis of quarterly balances, increased to 6.95% in fiscal 1998 from 6.34% in fiscal 1997, primarily due to increases in market interest rates overseas. Depreciation on Operating Leases Depreciation on operating leases increased to (Yen)59,222 million in fiscal 1998, an increase of 7.6% from the level in fiscal 1997. The principal reason for this increase was an increase in the proportion of assets with relatively rapid depreciation rates within the operating lease portfolio, such as personal computers and measuring equipment. Life Insurance Costs Life insurance costs increased by (Yen)41,990 million, or 56.8%, to (Yen)115,876 million, in part reflecting a rise in contract volume. Furthermore, we introduced insurance products requiring up-front payment of premiums, and as to which we record full reserves for the contract during the period in which the related premiums are recorded. Other Operating Expenses Other operating expenses decreased 4.6%, to (Yen)13,841 million, in fiscal 1998, due to a decrease of cost of sales of ORIX Interior Corporation (ORIX Interior) as a result of a reduction in ORIX Interior's operations. Selling, General and Administrative Expenses Selling, general and administrative expenses in fiscal 1998 were (Yen)79,671 million, an increase of 12.4% from fiscal 1997. However, due to the expansion of our business, the ratio of these expenses to total revenues decreased 15.7% in fiscal 1998 from 16.6% in fiscal 1997, respectively. This increase in expenses primarily reflects the expansion of our operations and increased marketing expenditures. Pension-related expenses also increased in fiscal 1998, reflecting more conservative assumptions we use to determine net pension cost. See note 12 of the notes to the consolidated financial statements. Provision for Doubtful Receivables and Possible Loan Losses Provision for doubtful receivables and possible loan losses in fiscal 1998 was (Yen)58,186 million, an increase of 0.8% from the corresponding amount in fiscal 1997. 73 The table below shows the calculation of this provision for fiscal 1997 and fiscal 1998. The "Other" category includes foreign currency translation adjustments and the effect of an acquisition.
Year ended March 31, -------------------------- 1997 1998 ------------ ------------ (Millions of yen) Beginning balance................................ (Yen) 81,886 (Yen)117,567 Provisions charged to income................... 57,748 58,186 Charge-offs (net): Gross charge-offs............................ (28,062) (32,771) Recoveries................................... 2,071 680 ------------ ------------ Charge-offs (net)............................ (25,991) (32,091) Other.......................................... 3,924 2,079 ------------ ------------ Ending balance................................... (Yen)117,567 (Yen)145,741 ============ ============
A breakdown of the allowance for doubtful receivables and possible loan losses as of March 31, 1998 is shown below. The "Other" category includes foreign currency translation adjustments and the effect of an acquisition. Allowance for Doubtful Receivables on Direct Financing Leases and Possible Loan Losses
Year ended March 31, 1998 ---------------------------------------------------------------- Installment Loans Other -------------------------- --------- Direct FASB FASB Financing Statement Statement Leases General No. 114 No. 121 Total ----------- ------------ ------------ --------- ------------ (Millions of yen) Beginning balance....... (Yen) 9,780 (Yen) 14,939 (Yen) 92,848 (Yen) -- (Yen)117,567 ----------- ------------ ------------ --------- ------------ Provisions charged to income............... 7,142 25,131 17,161 8,752 58,186 Charge-offs (net)..... (5,986) (12,190) (5,163) (8,752) (32,091) Other................. (426) 2,430 75 -- 2,079 ----------- ------------ ------------ --------- ------------ Ending balance.......... (Yen)10,510 (Yen) 30,310 (Yen)104,921 (Yen) -- (Yen)145,741 =========== ============ ============ ========= ============
Provisions charged to income for fiscal 1998 amounted to (Yen)58,186 million. Direct financing leases and loans totaling (Yen)32,091 million, including write-downs of (Yen)8,752 million made in accordance with FASB Statement 121, were written off. As of March 31, 1998, the balance of the allowance for doubtful receivables on direct financing leases and possible loan losses was (Yen)145,741 million, and the ratio of this figure to the balance of investment in direct financing leases and installment loans was 3.7%, compared to 3.1% as of March 31, 1997. Although the outstanding balance of our direct financing lease assets has grown to exceed (Yen)2,186 billion, risk dispersal strategies have enabled us to maintain a low incidence of delinquency within this segment. 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 as of March 31, 1997 and 1998 was (Yen)179,171 million and (Yen)182,976 million, respectively. Of these amounts, we determined that a valuation allowance was required for loans which had outstanding balances of (Yen)159,868 million and (Yen)153,529 million as of March 31, 1997 and 1998, respectively. 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 (Yen)92,848 million and (Yen)104,921 million, respectively, as of March 31, 1997 and 1998. 74 The average recorded investments in impaired loans for fiscal 1997 and fiscal 1998 were (Yen)179,172 million and (Yen)181,074 million, respectively. We recognized interest income on impaired loans of (Yen)1,524 million and (Yen)1,551 million for fiscal 1997 and 1998, respectively. For a discussion of delinquencies on installment loans, see "Item 1. Description of Business-- Profile of Businesses--Installment Loans and Investments Securities". During fiscal 1998, we wrote down (Yen)8,752 million for real estate development projects included in "investment in operating leases" and "advances" in the consolidated balance sheets. These write-downs of (Yen)8,752 million are 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. See "--Policies relating to Non-performing Assets and Charge-offs" and note 7 of the notes to the consolidated financial statements. Write-downs of Securities Write-downs of securities were not material in amount in fiscal 1997 or fiscal 1998. Foreign Currency Transaction Loss Because Asia-based subsidiaries procured a portion of their funding through U.S. dollar-denominated loans, the depreciation of local currencies against the U.S. dollar and other factors led to the recording of (Yen)6,271 million net foreign currency transaction loss in fiscal 1998, compared to a (Yen)1,361 million net foreign currency transaction gain in fiscal 1997. Equity in Net Income of Affiliates and Gains on Sales of Affiliates Equity in net income of affiliates and gains on sales of affiliates decreased by (Yen)2,956 million, or 28.6%, from fiscal 1997 to fiscal 1998, principally reflecting losses recognized on our investment in a Korea Development Leasing, and a significant decline in the net income of Stockton Holdings due principally to a decline in its net investment income. These declines were partially offset by increases in earnings from affiliated leasing companies, earnings of affiliates in Brazil and Chile as well as gains from the sales of shares of affiliates in Canada and Belgium and other domestic affiliates. The net gain realized on the sale of affiliates in fiscal 1998 was (Yen)6,825 million. At March 31, 1998, the investment in affiliates accounted for by the equity method located in Asia (other than Japan and Oceania) decreased to (Yen)23,815 million, compared to (Yen)31,166 million as of March 31, 1997. Provision for Income Taxes Provision for income taxes in fiscal 1998 was (Yen)14,681 million, a decrease of 17.7% from this provision in fiscal 1997, reflecting both the reduction of standard Japanese tax rates from approximately 51% to 48%, effective from April 1, 1998, and the remeasurement of deferred tax balances based on the new tax rates. Net Income Operating income increased by (Yen)4,479 million, or 16.9%, from fiscal 1997 to fiscal 1998 due to strong growth in revenues in most of the business segments, partially offset by an increase in expenses. Income before income taxes rose 4.1% to (Yen)38,412 million, with net income increasing 24.6% to (Yen)23,731 million from fiscal 1997 to fiscal 1998 due to a substantial decrease in provision for income taxes in fiscal 1998. Net income per share in fiscal 1998 was (Yen)366, compared to (Yen)294 in fiscal 1997. Cash Flows Net cash provided by operating activities increased by (Yen)48,659 million, or 24.6%, from fiscal 1997 to fiscal 1998, to a total of (Yen)246,560 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 75 cash outlays that are spread over a number of years. In addition, reflecting the transfer of operating assets from Crown Leasing, both total revenues and net interest expense rose, with total revenues growing 18.4%, to (Yen)507,143 million, and net interest expense increasing 8.7%, to (Yen)142,177 million in fiscal 1998. Net cash used in investing activities increased by (Yen)101,978 million, or 36.3%, from fiscal 1997 to fiscal 1998, to (Yen)383,241 million, principally reflecting the net growth in our lease assets, loans and securities, due to factors including the acquisition of assets from Crown Leasing. Net cash provided by financing activities increased by (Yen)270,124 million from fiscal 1997 to fiscal 1998, to (Yen)319,212 million. We significantly increased the portion of our funding obtained in the capital markets in the period, principally through a sizeable increase in domestic commercial paper issuance, securitization of lease receivables as well as through the increased issuance of bonds, with the goal of financing the acquisition of operating assets and improving the liquidity of operating funds. Cash and cash equivalents increased by (Yen)179,324 million from March 31, 1997 to March 31, 1998 to (Yen)268,215 million and we strategically increased cash reserves to minimize any potential impact from tight domestic lending conditions. Business Segments The table below provides the amount of our revenues by business segment for fiscal 1997 and 1998, as well as the amount and percentages of the changes from fiscal 1997 to fiscal 1998.
Year ended March 31, Change ------------------------- -------------------- 1997 1998 Amount Percent ------------ ------------ ----------- ------- (Millions of yen) Domestic Business Segments Corporate finance......... (Yen)106,887 (Yen)120,939 (Yen)14,052 13.1 Equipment operating leases................... 46,080 50,189 4,109 8.9 Real estate-related finance.................. 22,620 19,102 (3,518) (15.6) Real estate............... 17,525 19,203 1,678 9.6 Life insurance............ 82,296 125,767 43,471 52.8 Other..................... 20,498 20,631 133 0.6 ------------ ------------ ----------- Subtotal................ 295,906 355,831 59,925 20.3 ------------ ------------ ----------- Overseas Business Segments The Americas.............. 55,258 71,485 16,227 29.4 Asia and Oceania.......... 53,179 55,750 2,571 4.8 Europe.................... 22,326 21,966 (360) (1.6) ------------ ------------ ----------- Subtotal................ 130,763 149,201 18,438 14.1 ------------ ------------ ----------- Total................... 426,669 505,032 78,363 18.4 ------------ ------------ ----------- Adjustments................. 1,625 2,111 486 29.9 ------------ ------------ ----------- Total consolidated revenues............... (Yen)428,294 (Yen)507,143 (Yen)78,849 18.4 ============ ============ ===========
76 The table below shows the amount of our profits by business segment for fiscal 1997 and 1998, as well as the amounts and percentages of the changes from fiscal 1997 to fiscal 1998.
Year ended March 31, Change ------------------------------ --------------------- 1997 1998 Amount Percent -------------- -------------- ------------ ------- (Millions of yen) Domestic Business Segments Corporate finance..... (Yen) 32,276 (Yen) 44,097 (Yen)11,821 36.6 Equipment operating leases............... 7,998 8,407 409 5.1 Real estate related finance.............. (16,120) (23,071) (6,951) -- Real estate........... (10,885) (8,392) 2,493 -- Life insurance........ 5,036 5,762 726 14.4 Other................. 81 1,891 1,810 2,234.6 -------------- -------------- ------------ Subtotal............ 18,386 28,694 10,308 56.1 -------------- -------------- ------------ Overseas Business Segments The Americas.......... 12,760 21,263 8,503 66.6 Asia and Oceania...... 12,646 (8,441) (21,087) -- Europe................ (4,257) (2,123) 2,134 -- -------------- -------------- ------------ Subtotal............ 21,149 10,699 (10,450) (49.4) -------------- -------------- ------------ Total............... 39,535 39,393 (142) (0.4) -------------- -------------- ------------ Adjustments............. (2,646) (981) 1,665 -- -------------- -------------- ------------ Total consolidated income before income taxes....... (Yen) 36,889 (Yen) 38,412 (Yen) 1,523 4.1 ============== ============== ============ The table below shows the amount of our assets by business segment for fiscal 1997 and 1998, as well as the amounts and percentages of the changes from fiscal 1997 to fiscal 1998. As of March 31, Change ------------------------------ --------------------- 1997 1998 Amount Percent -------------- -------------- ------------ ------- (Millions of yen) Domestic Business Segments Corporate finance..... (Yen)2,013,346 (Yen)2,233,448 (Yen)220,102 10.9 Equipment operating leases............... 93,956 103,435 9,479 10.1 Real estate related finance.............. 667,509 649,511 (17,998) (2.7) Real estate........... 282,198 297,880 15,682 5.6 Life insurance........ 143,982 196,378 52,396 36.4 Other................. 191,446 243,607 52,161 27.2 -------------- -------------- ------------ Subtotal............ 3,392,437 3,724,259 331,822 9.8 -------------- -------------- ------------ Overseas Business Segments The Americas.......... 654,256 668,742 14,486 2.2 Asia and Oceania...... 510,474 459,042 (51,432) (10.1) Europe................ 284,819 251,759 (33,060) (11.6) -------------- -------------- ------------ Subtotal............ 1,449,549 1,379,543 (70,006) (4.8) -------------- -------------- ------------ Total............... 4,841,986 5,103,802 261,816 5.4 -------------- -------------- ------------ Adjustments............. (115,255) (121,602) (6,347) -- -------------- -------------- ------------ Total consolidated operating assets... (Yen)4,726,731 (Yen)4,982,200 (Yen)255,469 5.4 ============== ============== ============
77 Domestic Business Segments Corporate Finance In our domestic corporate finance segment, segment profit increased 36.6%, or (Yen)11,821, to (Yen)44,097 million in fiscal 1998, and the balance of segment assets increased 10.9%, or (Yen)220,102 million, from March 31, 1997 to (Yen)2,233.4 billion as of March 31, 1998. Increase in revenues in this segment is primarily due to an increase in revenues from domestic direct financing leases. This increase is primarily due to strong growth in domestic automobile leasing, which we have targeted as a strategic growth area. In addition, our revenues increased because we avoided rate-based competition initiated by our competitors and we diversified into domestic small-ticket leases, such as office equipment, that yield relatively high margins. These increases were offset to some extent by a decline in the average interest rate earned on domestic loans due to the impact of a decline in market rates of interest for financial obligations denominated in yen in fiscal 1998 compared to fiscal 1997. Increase in assets in this segment is primarily due to an increase in domestic installment loans to commercial customers, other than real estate customers. This increase is largely due to an increase in demand for lending from the leisure and retail industries, as well as the addition of Crown Leasing's loan receivables. Equipment Operating Leases In fiscal 1998, we recorded (Yen)8,407 million of segment profit in our domestic equipment operating lease segment. This represents a increase of 5.1%, or (Yen)409 million, from segment profit in fiscal 1997. The balance of segment assets increased by 10.1%, or (Yen)9,479 million, from March 31, 1997 to (Yen)103,435 million as of March 31, 1998. The increase in revenues from domestic operating leases in fiscal 1998 was attributable primarily to growth in revenues from measuring equipment and personal computers, which have yielded increasing returns. Rising demand in Japan for personal computers, workstations and other information-related products, and strong demand for measuring equipment rentals related principally to rapid growth in the mobile communications industry, contributed to the growth in the balance of investment in this segment. Real Estate-Related Finance In fiscal 1998, segment loss in our domestic real estate-related finance business amounted to (Yen)23,071 million, compared to a loss of (Yen)16,120 million in fiscal 1997. Real estate-related finance assets decreased 2.7%, or (Yen)17,998, to (Yen)649,511 million, from March 31, 1997 to March 31, 1998. The increase in losses in this segment was due primarily to a 25.7% increase in our provision for doubtful receivables and possible loan losses in this segment from fiscal 1997 to (Yen)29,014 million in fiscal 1998. The provision for doubtful receivables and possible loan losses in this segment mainly included valuation allowance for impaired loans. Although domestic residential property prices stabilized during fiscal 1998, continued declines in Japan's commercial land prices during that period made us revalue some of our real estate collateral in this segment and resulted in additional provisions in fiscal 1998. Real Estate In fiscal 1998, the real estate segment experienced a loss of (Yen)8,392 million, compared to a loss of (Yen)10,885 million in fiscal 1997. The reduction in losses in this segment from fiscal 1997 to fiscal 1998 was due principally to increased sales of the Sanctus series and other series of condominiums in fiscal 1998. In addition, losses in this segment were reduced by a 26.3% decrease in our provision for doubtful receivables and possible loan losses in this segment from fiscal 1997 to (Yen)5,910 million in fiscal 1998 due primarily to decreased impaired real estate development project losses in accordance with FASB Statement 121. 78 The balance of our domestic real estate assets in this segment increased 5.6%, or (Yen)15,682 million to (Yen)297,880 million, from March 31, 1997 to March 31, 1998. Life Insurance Business Segment profits in the domestic life insurance business increased 14.4%, or (Yen)726 million, from fiscal 1997 to (Yen)5,762 million in fiscal 1998. The outstanding balance of segment assets increased 36.4%, or (Yen)52,396 million to (Yen)196,378 million as of March 31, 1998. The growth in profits and assets in this segment was due principally to growth in insurance premiums which reflected demand for our "ORIX Direct" life insurance products for individuals launched in fiscal 1998. In addition, a rise in contract volumes for life insurance business aimed at corporate customers also contributed to the increase in profits and assets in this segment. Other Domestic Business Segments Segment profit in other business increased by (Yen)1,810 million to (Yen)1,891 million in fiscal 1998, reflecting the gains on sales of affiliates. Overseas Business Segments The Americas Segment profit in the Americas increased 66.6%, or (Yen)8,503 million, from fiscal 1997 to (Yen)21,263 million in fiscal 1998. As of March 31, 1998, segment assets amounted to (Yen)668,742 million, up 2.2% or (Yen)14,486 million from March 31, 1997. The increase in profits and assets in this segment was primarily due to growth in leasing activities conducted by ORIX Commercial Alliance. Banc One Mortgage Capital Markets also contributed to the increase in profits and assets by increasing our participation in the securitization and servicing of commercial mortgage loans. In addition, positive conditions in the economy and securities markets of the United States generated increases in interest income and gains on investment securities in the Americas, adding to the growth in profits and assets in this segment. Asia and Oceania In Asia and Oceania, we recorded a (Yen)8,441 million segment loss during fiscal 1998, compared to a profit of (Yen)12,646 million in fiscal 1997. As of March 31, 1998, assets in Asia and Oceania amounted to (Yen)459,042 million, down 10.1%, or (Yen)51,432 million, as of March 31, 1997. As of March 31, 1998, the balance of assets in Asia was approximately (Yen)323,168 million, of which (Yen)152,401 million was denominated in local currencies other than U.S. dollars. The loss and decreases in assets in this segment were principally due to deteriorating economic conditions in a number of Asian countries in which we conduct business and the devaluation of the currencies in those countries. Due to the effects of the Asian currency crises in the previous year, economic conditions in Asia and Oceania remained severe. Amid these circumstances, we focused on preventing an expansion of losses and restrained new investment. We wrote down a portion of our investment in Korea Development Leasing. Of segment assets, (Yen)323,168 million as of March 31, 1998 was invested in Asia. These assets included (Yen)146,927 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 leasing business, we recorded a (Yen)2,123 million segment loss in Europe during fiscal 1998, compared to a loss of (Yen)4,257 million in fiscal 1997. Due to the sale of two aircraft and other factors, segment assets amounted to (Yen)251,759 million, down 11.6%, or (Yen)33,060 million, as of March 31, 1998. 79 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, including financing the year 2000 date conversion (See "--Risk Management--Year 2000 Readiness"), 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 34.3% at March 31, 1997, to 43.3% at March 31, 1998 and 48.2% at March 31, 1999. We are seeking to improve our debt to equity ratio by raising funds through the global offering of shares as well as securitization of our assets. Japanese finance companies were allowed for the first time to issue commercial paper in the domestic market in June 1993. In the following month, ORIX became the first finance company to issue domestic commercial paper. From April 1, 1998, ORIX has been able to issue commercial paper directly to investors without the use of dealers. While the proceeds from the issuance of commercial paper and bonds previously were not permitted to be used for any loan operations, in May 1999 new legislation eliminated this restriction for some qualifying lenders. Because ORIX is a qualifying lender, it is able to issue commercial paper and bonds and use the proceeds without restriction. Prior to the establishment of the current regulatory regime for asset-backed securities, we issued Japan's first asset-backed securitization 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, 1999, our outstanding balance of unsecured domestic bonds was (Yen)560,200 million ($4,730 million). We have also been diversifying our funding sources through cultivation of overall financial relationships with a variety of institutional lenders in Japan. While we, like most large Japanese corporate borrowers, historically relied principally on Japanese city banks, long-term credit banks and trust banks for funds, in recent years we have borrowed from other institutional lenders in Japan. These lenders include, among others, life insurance companies, regional banks and Japanese branches of foreign banks. 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 80 medium term notes under a separate program in the U.S. market. As of March 31, 1999, the balance of notes issued under these medium term note programs stood at (Yen)252,579 million ($2,133 million). ORIX Commercial Alliance intends to establish a medium term note program in the amount of $500 million and to issue $250 million amount of notes under the program before December, 1999. 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 (Yen)187,251 million ($1,581 million) as of March 31, 1999. Short-Term Debt We have significantly increased our use of commercial paper for short-term funding in place of more expensive domestic borrowings from commercial banks and other institutional lenders. The balance of short-term debt at March 31, 1999 was (Yen)2,184,983 million ($18,450 million), representing 51.8% of total debt at March 31, 1999, compared to the level of 55.8% at March 31, 1998. While the balance of short- term debt decreased by (Yen)391,500 million, or 15.2%, from March 31, 1998 to March 31, 1999, commercial paper decreased by (Yen)95,629 million, or 8.6%, reflecting the decrease of commercial paper issued overseas and in Japan. Other short-term debt consisted principally of borrowings from commercial banks decreased by (Yen)295,871 million, or 20.2%, from March 31, 1998 to March 31, 1999. Long-Term Debt Long-term debt at March 31, 1999 was (Yen)2,036,028 million ($17,192 million), representing 48.2% of total debt, compared to the level of 44.2% at March 31, 1998. The balance of long-term debt decreased by (Yen)8,542 million, or 0.4%, from March 31, 1998 to March 31, 1999. 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 (Yen)574,790 million ($4,853 million) and medium-term notes of (Yen)252,579 million ($2,133 million). The balance of asset-backed securities was (Yen)194,243 million ($1,640 million) at March 31, 1999. Some agreements relating to our long-term debt provide that we are required to submit proposals as to the appropriations of earnings (including payment of dividends) if requested by the lenders for their review and approval prior to presentation to shareholders. To date, we have not received these requests from our lenders. In addition, 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, 1999, we paid interest at fixed rates on approximately 64.2% of our long-term debt. The rest of our long-term debt incurred interest at floating rates, principally based on Yen LIBOR. We have entered into various types of interest rate contracts in managing our interest rate risk. Under interest rate swap agreements, we agree with other parties to exchange, at specified intervals, the difference between fixed-rate and floating-rate interest amounts calculated by reference to an agreed notional amount. Interest rate swaps with notional principal amounts of (Yen)1,133 billion ($9,567 million) at March 31, 1999 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. 81 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, 1999, we had long-term debt of (Yen)168,394 million ($1,422 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 do not maintain a substantial amount of committed bank credit lines, 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. We and other Japanese companies have 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. We maintain committed credit facilities in our subsidiaries in the U.S., the United Kingdom and Hong Kong. Furthermore, we recently arranged a (Yen)179.5 billion, 364-day commercial paper back-up facility in Japan to help us maintain liquidity on a cost-effective basis. 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 has increased from 34.3% at March 31, 1997 to 43.3% at March 31, 1998 and to 48.2% at March 31, 1999. During fiscal 1998, we strategically increased cash reserves to minimize the potential impact of tight domestic lending conditions, and we maintained these increases in fiscal 1999. 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.
As of or for the year ended March 31, ------------------------- 1997 1998 1999 ------- ------- ------- Shareholders' equity ratio........................... 6.06% 5.63% 6.13% Return on assets..................................... 0.39% 0.45% 0.47% Return on equity..................................... 6.51% 7.63% 7.99%
As of March 31, 1999, shareholders' equity grew 4.5% from the previous fiscal year end, to (Yen)327,843 million ($2,768 million). This increase principally reflected a 9.0% rise in retained earnings, to (Yen)298,684 million ($2,522 million). Net unrealized gains on investment in securities increased (Yen)1,442 million to (Yen)4,153 million ($35 million). In light of a weakening of Japanese stock prices, we recorded an (Yen)11,077 million ($94 million) write-down on those investments in securities with price declines that we believe are other than temporary. Cumulative translation adjustments (debit balance) increased to (Yen)31,703 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%. 82 As of March 31, 1998, shareholders' equity grew 1.7% from the previous fiscal year end, a relatively modest increase compared to the 11.7% increase from fiscal 1996 to fiscal 1997. This increase was attributable principally to a 9.0% increase in retained earnings. This increase was partially offset by reduction in the net unrealized gain on investment securities primarily reflecting lower equity prices in Japan, and cumulative translation adjustments resulting from depreciation of Asian currencies which caused a decrease in the results of operations of Asian subsidiaries when translated into yen. Thus, although shareholders' equity ratio declined to 5.63% from 6.06%, return on assets increased to 0.45% and return on equity increased to 7.63%. 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, 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, ORIX's Corporate Executive Vice President in charge of the 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 ORIX's Corporate Executive Vice President in charge of the 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 Internal Compliance Office 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: . floating rate installment loans; . investment securities yielding a floating rate of return; . short-term investments; and . 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: . short-term debt; 83 . floating rate long-term debt; and . interest rate swaps in which we pay a floating rate of interest. Our most significant exposure of this kind is to short-term debt; we customarily finance a significant portion of our operations through the issuance of commercial paper and short-term borrowings. We also have a significant amount of floating-rate long-term debt. Most of our short-term debt and floating-rate long-term debt is denominated in yen and is therefore exposed to the risk of changes in market rates of interest for financial obligations denominated in yen. In principle, our floating rate assets are funded by floating rate debt such as commercial paper and by way of derivative instruments. We have foreign-currency denominated assets and liabilities, and engage in foreign-currency denominated transactions. Although we generally seek to match the currencies in which our assets and liabilities are denominated, our attempt at matching is not comprehensive. Consequently, our profits from foreign currency denominated transactions and shareholders' equity are exposed to foreign exchange rate risks if that foreign currency denominated investments are not hedged. These risks include: . the effects of changes in payment flows on foreign currency swaps; . changes in the yen equivalent amounts of income or expenses from transactions denominated in foreign currencies; and . 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. 84 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 the fiscal 1998 are: 5.4% for installment loans, 4.9% for interest-bearing bonds, 3.0% for long-and short-term debt. The average payment rate on interest rate swaps is 3.6% and the average receipt rate is 2.7%. The average interest rates of financial instruments as of the end of the fiscal 1999 are: 5.7% for installment loans, 3.3% for interest-bearing bonds, 2.6% for long-and short-term debt. 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. 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. Compared to the tabular presentations of assets, liabilities and derivative instruments, sensitivity analysis, which presents losses resulting from hypothetical rate changes, helps you better understand the foreign currency exchange risk position of our financial instruments. Therefore, we changed our presentation of our foreign currency rate exposure from a table form which we used previously to sensitivity analysis in this prospectus. We are exposed to exchange risk mainly when our investment is primarily denominated in the local currency of Indonesia or other Asian countries and the source of our funding is US dollar debt. When the currencies depreciate against the US dollar, we incur foreign currency transaction losses. There is no material change in our exchange risk position from fiscal 1998 to fiscal 1999. We picked up 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 (Yen)2,866 million at the end of fiscal 1998 and (Yen)2,890 million ($24 million) at the end of fiscal 1999. 85 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
Expected maturity date ------------------------------------------------------------------------------------ 2000 2001 2002 2003 2004 Thereafter Total -------------- ------------ ------------ ------------ ------------ ------------ -------------- Asset Installment loans (fixed rate).... (Yen)227,464 (Yen)58,248 (Yen)52,676 (Yen)35,585 (Yen)55,658 (Yen)123,885 (Yen)553,516 Average interest rate........... 4.4% 5.7% 6.1% 8.1% 6.4% 6.4% 5.6% Installment loans (floating rate).......... (Yen)268,691 (Yen)174,119 (Yen)162,432 (Yen)117,394 (Yen)123,203 (Yen)362,532 (Yen)1,208,371 Average interest rate........... 6.4% 5.4% 5.8% 5.7% 5.3% 5.6% 5.7% Investment in securities (fixed rate).... (Yen)38,613 (Yen)27,325 (Yen)22,442 (Yen)33,687 (Yen)49,705 (Yen)222,062 (Yen)393,834 Average interest rate........... 3.0% 3.8% 3.7% 2.8% 2.3% 3.3% 3.2% Investment in securities (floating rate).......... (Yen)5,744 (Yen)5,307 (Yen)6,078 (Yen)5,938 (Yen)3,837 (Yen)52,335 (Yen)79,239 Average interest rate........... 6.3% 6.2% 6.3% 6.5% 6.3% 2.7% 3.9% Liabilities Short-term debt........... (Yen)2,184,983 -- -- -- -- -- (Yen)2,184,983 Average interest rate........... 2.1% -- -- -- -- -- 2.1% Long-term debt (fixed rate).... (Yen)220,695 (Yen)309,637 (Yen)296,472 (Yen)236,908 (Yen)78,425 (Yen)165,291 (Yen)1,307,428 Average interest rate........... 5.3% 3.8% 3.0% 2.4% 3.9% 3.3% 3.6% Long-term debt (floating rate).......... (Yen)303,290 (Yen)158,390 (Yen)88,068 (Yen)54,337 (Yen)17,896 (Yen)106,619 (Yen)728,600 Average interest rate........... 1.5% 1.8% 3.9% 4.7% 2.2% 2.2% 2.2% March 31, 1999 estimated fair value ----------------- (Millions of yen) Asset Installment loans (fixed rate).... (Yen)564,077 Average interest rate........... Installment loans (floating rate).......... (Yen)1,208,371 Average interest rate........... Investment in securities (fixed rate).... (Yen)393,757 Average interest rate........... Investment in securities (floating rate).......... (Yen)69,375 Average interest rate........... Liabilities Short-term debt........... (Yen)2,184,983 Average interest rate........... Long-term debt (fixed rate).... (Yen)1,337,992 Average interest rate........... Long-term debt (floating rate).......... (Yen)728,600 Average interest rate...........
Non-Trading Off-Balance Sheet Financial Instruments
Expected maturity date -------------------------------------------------------------------------------- 2000 2001 2002 2003 2004 Thereafter Total ------------ ------------ ------------ ----------- ----------- ------------ ------------ Interest rate swaps Notional amount (Floating to fixed)......... (Yen)277,774 (Yen)214,600 (Yen)150,827 (Yen)42,802 (Yen)40,995 (Yen)191,805 (Yen)918,803 Average pay rate........... 2.8% 3.0% 3.5% 6.3% 5.7% 5.0% 3.7% Average receive rate........... 0.7% 0.8% 1.2% 4.8% 4.7% 3.3% 1.7% Notional amount (Fixed to floating)...... (Yen)27,617 (Yen)35,500 (Yen)50,912 (Yen)20,080 (Yen)27,546 (Yen)52,373 (Yen)214,028 Average pay rate........... 2.4% 0.2% 0.6% 0.8% 1.1% 2.1% 1.2% Average receive rate........... 4.9% 5.1% 3.5% 2.4% 3.1% 3.7% 3.8% March 31, 1999 estimated fair value ---------------- (Million of yen) Interest rate swaps Notional amount (Floating to fixed)......... (Yen)(29,045) Average pay rate........... Average receive rate........... Notional amount (Fixed to floating)...... (Yen)15,829 Average pay rate........... Average receive rate...........
March 31,1999 Weighted average estimated Notional amount strike rate fair value --------------- ---------------- ----------------- (Millions of yen) Caps, floors and collars- held...................... (Yen)76,232 5.7% (Yen)(6)
86 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 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. On June 26, 1998, ORIX introduced a new corporate executive officers system to help separate strategic decision-making functions from day-to-day administration operations. See "Item 1. Description of Business--Corporate Objective--Operating Disciplines--Management Focus." The Directors and Corporate Auditors of ORIX as of September 29, 1999 are as follows:
Year First Name Title Appointed ---- ----- ---------- Yoshihiko Miyauchi...... President and Chief Executive Officer, 1970 Representative Director Yoshiaki Ishida......... Deputy President, Representative Director 1990 Koichi Maki............. Director 1984 Shunsuke Takeda......... Director 1993 Katsuo Kawanaka......... Director 1992 Teruo Isogai............ Director 1991 Hiroshi Furukawa........ Director 1992 Yasuhiko Fujiki......... Director 1994 Takeshi Sato............ Director 1997 Tatsuya Tamura.......... Director; President and Chief Executive Officer, 1999 Japan Investor Solutions & Technologies Co., Ltd.; Representative Director and Chairman, A.T. Kearney K.K. Akira Miyahara.......... Director; Vice Chairman of the Board, Fuji Xerox 1999 Co., Ltd. Takeo Shiraki........... Standing Corporate Auditor 1986 Yuji Yamazaki........... Corporate Auditor 1997 Naoaki Fujiyama......... Corporate Auditor 1998 Yasuo Hama.............. Corporate Auditor 1998
Mr. Yoshinori Yokoyama, a director of McKinsey & Company, Inc., serves as an advisor to the Board of Directors. 87 The Corporate Executive Officers of ORIX as of September 29, 1999 are as follows:
Name Title and Areas of Duties ---- ------------------------- Yoshihiko Miyauchi......... President and Chief Executive Officer Yoshiaki Ishida............ Deputy President Koichi Maki................ Corporate Executive Vice President, Office of Corporate Planning, Accounting Department Shunsuke Takeda............ Corporate Executive Vice President, Treasury Department Katsuo Kawanaka............ Corporate Executive Vice President, Tokyo Sales Headquarters Teruo Isogai............... Corporate Executive Vice President, Kinki (Osaka) Sales Headquarters Hiroshi Furukawa........... Corporate Senior Vice President, District Sales Headquarters Yasuhiko Fujiki............ Corporate Senior Vice President, Office of Assistant to the President, PFS Department Takeshi Sato............... Corporate Senior Vice President, International Headquarters Hiroaki Nishina............ Corporate Executive Officer, Real Estate Business Headquarters, President of ORIX Real Estate Corporation Kenji Kajiwara............. Corporate Executive Officer, Kinki (Osaka) Sales Headquarters, Masahiro Matono............ Corporate Executive Officer, Tokyo Sales Headquarters Hiroshi Nakajima........... Corporate Executive Officer, General Affairs Department Yoshio Ono................. Corporate Executive Officer, Regional Chief Executive, Americas Region Hiroyuki Harada............ Corporate Executive Officer, Credit Department Akira Fukushima............ Corporate Executive Officer, President of ORIX Auto Leasing Corporation Masaru Hattori............. Corporate Executive Officer, Office of Corporate Planning Nobuyuki Kobayashi......... Corporate Executive Officer, Office of Corporate Reengineering, President of ORIX Computer Systems 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 Hiroshi Nakamura........... Corporate Executive Officer, Compliance Affairs and Legal Affairs Department Tamio Umaki................ Corporate Executive Officer, District Sales Headquarters
With the exception of 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. Tamara 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 (Yen)570 million ($4.8 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, 1999, the shareholders approved bonuses for the Directors and Corporate Auditors, in the amount of (Yen)62 million and (Yen)2 million, respectively, for fiscal 2000. 88 Item 12. Options to Purchase Securities from Registrant or Subsidiaries The following table shows the names of Directors, Corporate Executive Officers and employees who received stock options, and the number of shares for which they were granted options, under the 1997, 1998 and 1999 stock option plans.
Number of shares ----------------------------------- 1997 stock 1998 stock 1999 stock Name Title option plan option plan option plan ---- ----- ----------- ----------- ----------- Yoshihiko Miyauchi...... President and Chief Executive Officer 20,000 20,000 20,000 Yoshiaki Ishida......... Deputy President 12,000 12,000 12,000 Koichi Maki............. Director and Corporate Executive Vice President 9,000 9,000 9,000 Shunsuke Takeda......... Director and Corporate Executive Vice President 7,000 7,000 9,000 Katsuo Kawanaka......... Director and Corporate Executive Vice President 7,000 7,000 9,000 Teruo Isogai............ Director and Corporate Executive Vice President 7,000 7,000 9,000 Hiroshi Furukawa........ Director and Corporate Senior Vice President 7,000 7,000 7,000 Yasuhiko Fujiki......... Director and Corporate Senior Vice President 5,000 5,000 7,000 Takeshi Sato............ Director and Corporate Senior Vice President 5,000 5,000 7,000 Hiroaki Nishina......... Corporate Executive Officer 5,000 5,000 5,000 Kenji Kajiwara.......... Corporate Executive Officer 5,000 5,000 5,000 Masahiro Matono......... Corporate Executive Officer 5,000 5,000 5,000 Hiroshi Nakajima........ Corporate Executive Officer 5,000 5,000 5,000 Yoshio Ono.............. Corporate Executive Officer 5,000 5,000 5,000 Hiroyuki Harada......... Corporate Executive Officer 5,000 5,000 5,000 Akira Fukushima......... Corporate Executive Officer 5,000 5,000 -- Masaru Hattori.......... Corporate Executive Officer -- 4,000 5,000 Nobuyuki Kobayashi...... Corporate Executive Officer -- 4,000 5,000 Masaaki Tashiro......... Corporate Executive Officer -- 3,000 5,000 Hiroshi Nakamura........ Corporate Executive Officer -- -- 4,000 Tamio Umaki............. Corporate Executive Officer -- -- 4,000 Kunitoshi Masuda........ Employee -- 3,000 3,000 Yoshinori Tsukiji....... Employee 3,000 3,000 -- Takehiko Inoue.......... Employee 3,000 3,000 --
Former Directors and employees of ORIX were granted options for an aggregate of 48,000 shares under the 1997 Stock Option Plan and 12,000 shares under the 1998 Stock Option Plan. As of March 31,1999, we had 9,037 full-time employees, an increase of 10.2% from 8,203 as of March 31, 1998. 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 89 (termination or pension plans for both employees and directors and corporate auditors) charged to income for all benefit plans (including defined benefit plans) were (Yen)2,431 million, (Yen)3,019 million and (Yen)2,942 million ($25 million) in fiscal 1997, 1998 and 1999, respectively. 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. 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 of total consideration not to exceed (Yen)1,900 million will be purchased from the open market and will be held by ORIX reserved for transfer to nine Directors and 12 employees of ORIX upon the exercise of their options. The exercise price of the options will be equal to the amount obtained by multiplying the average purchase price of shares acquired by ORIX by 1.0 (with fractional amounts of less than one yen to be rounded up to one yen); provided, however, that if the transfer price as so calculated is less than the closing price for ordinary transactions in ORIX's shares on the Tokyo Stock Exchange on the date that the right to acquire shares is granted to a particular individual, then the transfer price shall be equal to this closing price, subject to adjustment if there is a share split or the new shares are issued at a price less than the then current market price. The options under the 1999 stock option plan will be 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. 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 1999, none of the options under the 1998 Stock Option Plan had been exercised. The exercise price of the options is (Yen)9,340 per Share, subject to adjustment if there is a share split or the new shares are issued at a price at a price less than the then current market price. 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 and employees of ORIX upon the exercise of their options. As of July 1999, options to purchase 1,500 shares under the 1997 stock option plan had been exercised. 90 The exercise price of the options is (Yen)9,198 per Share, subject to adjustment if there is a share split or the new shares are issued at a price less the then current market. 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. 1999 Warrant Plan Although the details have not been formalized, the Board of Directors approved in May 1999 the introduction of the 1999 warrant plan in the third or fourth quarter of fiscal 2000, under which warrants to purchase approximately 260,900 shares may be granted to Corporate Auditors and some employees of ORIX, excluding employees who are option holders under the 1999 stock option plan, and directors of some of ORIX's subsidiaries. 1998 Warrant Plan In October 1998, the Board of Directors of ORIX approved the 1998 warrant plan, under which warrants to purchase 262,994 shares were granted 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 (Yen)8,262 per Share. A warrant may be exercised between November 30, 1998 and November 5, 2002. As of July, 1999, warrants to purchase 79,626 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. 1997 Warrant Plan In September 1997, the Board of Directors of ORIX approved the 1997 warrant plan, under which warrants to purchase 259,258 shares were granted 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 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, 1999, warrants to purchase 60,017 shares under the 1997 Warrant Plan had been exercised. The exercise price of the warrants is (Yen)9,526.5 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. 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. 91 Item 16. Changes in Securities and Changes in Security for Registered Securities None. 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) (b) Consolidated Balance Sheets as of March 31, 1998 and 1999 (page F-3) (c) Consolidated Statements of Income for the years ended March 31, 1997, 1998 and 1999 (page F-4) (d) Consolidated Statements of Shareholders' Equity for the years ended March 31, 1997, 1998 and 1999 (page F-5) (e) Consolidated Statements of Cash Flows for the years ended March 31, 1997, 1998 and 1999 (page F-6) (f) Notes to Consolidated Financial Statements (page F-7 to F-40) Item 19. Financial Statements and Exhibits Financial Statements (a) Consolidated Balance Sheets as of March 31, 1998 and 1999 (b) Consolidated Statements of Income for the years ended March 31, 1997, 1998 and 1999 (c) Consolidated Statements of Shareholders' Equity for the years ended March 31, 1997, 1998 and 1999 (d) Consolidated Statements of Cash Flows for the years ended March 31, 1997, 1998 and 1999 (e) Notes to Consolidated Financial Statements Exhibits 1.1 Articles of Incorporation of the Company, together with an English translation 1.3 Regulations of the Board of Directors of the Company, as amended, together with an English translation
92 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Public Accountants.................................. F-2 Consolidated Balance Sheets as of March 31, 1998 and 1999................. F-3 Consolidated Statements of Income for the years ended March 31, 1997, 1998 and 1999................................................................. F-4 Consolidated Statements of Shareholders' Equity for the years ended March 31, 1997, 1998 and 1999.................................................. F-5 Consolidated Statements of Cash Flows for the years ended March 31, 1997, 1998 and 1999............................................................ F-6 Notes to Consolidated Financial Statements................................ F-7
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and the Board of Directors of ORIX Corporation: We have audited the accompanying consolidated balance sheets of ORIX Corporation (a Japanese corporation) and its subsidiaries as of March 31, 1998 and 1999, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended March 31, 1999, 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, 1998 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1999, in conformity with accounting principles generally accepted in the United States of America (see Note 1). 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 (u). /s/ Arthur Andersen Tokyo, Japan May 20, 1999, except for Note 25 as to which the date is June 17, 1999 F-2 ORIX CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS March 31, 1998 and 1999
1998 1999 1999 -------------- -------------- ------------ Millions of yen Thousands of U.S. dollars ASSETS Cash and Cash Equivalents......... (Yen) 268,215 (Yen) 254,540 $ 2,149,286 Time Deposits..................... 10,535 8,861 74,821 Investment in Direct Financing Leases........................... 2,186,022 1,952,842 16,489,420 Installment Loans................. 1,794,825 1,761,887 14,877,033 Allowance for Doubtful Receivables on Direct Financing Leases and Possible Loan Losses............. (145,741) (132,606) (1,119,699) Investment in Operating Leases.... 435,066 411,156 3,471,722 Investment in Securities.......... 500,449 576,206 4,865,372 Other Operating Assets............ 65,838 73,345 619,311 Investment in Affiliates.......... 95,087 77,160 651,524 Other Receivables................. 67,558 67,540 570,295 Advances.......................... 101,282 62,079 524,183 Prepaid Expenses.................. 21,068 24,584 207,583 Office Facilities, at Cost, Net of Accumulated Depreciation ((Yen)16,121 million in 1998 and (Yen)17,482 million ($147,615 thousand) in 1999) .... 37,142 78,355 661,614 Other Assets...................... 136,963 131,687 1,111,938 -------------- -------------- ----------- (Yen)5,574,309 (Yen)5,347,636 $45,154,403 ============== ============== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Short-Term Debt................... (Yen)2,576,483 (Yen)2,184,983 $18,449,574 Trade Notes and Payables.......... 194,154 218,288 1,843,182 Accrued Expenses.................. 65,848 63,364 535,034 Policy Liabilities................ 221,455 356,541 3,010,563 Income Taxes: Current......................... 4,116 9,054 76,450 Deferred........................ 113,531 106,497 899,240 Deposits from Lessees............. 40,331 45,038 380,292 Long-Term Debt.................... 2,044,570 2,036,028 17,191,826 -------------- -------------- ----------- Total liabilities............. 5,260,488 5,019,793 42,386,161 -------------- -------------- ----------- Commitments and Contingent Liabilities Shareholders' Equity: Common stock, par value (Yen)50 per share: authorized--259,000,000 shares outstanding--64,870,299 shares in 1998 and 1999.............. 20,180 20,180 170,396 Additional paid-in-capital...... 37,303 37,464 316,339 Legal reserve................... 1,750 1,860 15,705 Retained earnings............... 274,144 298,684 2,522,030 Accumulated other comprehensive loss........................... (18,079) (27,550) (232,628) Treasury stock, at cost, 168,213 shares in 1998 and 314,247 shares in 1999 ................ (1,477) (2,795) (23,600) -------------- -------------- ----------- 313,821 327,843 2,768,242 -------------- -------------- ----------- (Yen)5,574,309 (Yen)5,347,636 $45,154,403 ============== ============== ===========
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. F-3 ORIX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For the Years Ended March 31, 1997, 1998 and 1999
1997 1998 1999 1999 ------------ ------------ ------------ ------------ Millions of yen Thousands of U.S. dollars Revenues: Direct financing leases............... (Yen)136,661 (Yen)149,369 (Yen)143,170 $1,208,900 Operating leases...... 91,971 97,668 92,407 780,267 Interest on loans and investment securities........... 89,487 95,033 100,480 848,434 Brokerage commissions and gains on investment securities........... 4,231 8,071 7,381 62,324 Life insurance premiums and related investment income.... 82,296 126,031 196,259 1,657,173 Interest income on deposits............. 2,151 3,429 6,695 56,531 Other operating revenues............. 21,497 27,542 47,549 401,494 ------------ ------------ ------------ ----------- Total revenues...... 428,294 507,143 593,941 5,015,123 ------------ ------------ ------------ ----------- Expenses: Interest expense...... 130,743 142,177 140,846 1,189,276 Depreciation-- operating leases..... 55,014 59,222 57,405 484,717 Life insurance costs.. 73,886 115,876 186,775 1,577,092 Other operating expenses............. 14,509 13,841 31,522 266,166 Selling, general and administrative expenses............. 70,902 79,671 82,395 695,727 Provision for doubtful receivables and possible loan losses............... 57,748 58,186 52,489 443,207 Write-downs of securities........... 291 858 11,077 93,532 Foreign currency transaction loss (gain), net.......... (1,361) 6,271 390 3,293 ------------ ------------ ------------ ----------- Total expenses...... 401,732 476,102 562,899 4,753,010 ------------ ------------ ------------ ----------- Operating income........ 26,562 31,041 31,042 262,113 Equity in Net Income (Loss) of Affiliates and Gains on Sales of Affiliates ((Yen)4 million loss in 1997 and (Yen)6,825 million gain in 1998, (Yen)3,978 million ($33,589 thousand) gain in 1999)............... 10,327 7,371 (3,727) (31,470) ------------ ------------ ------------ ----------- Income before Income Taxes.................. 36,889 38,412 27,315 230,643 Provision for Income Taxes.................. 17,845 14,681 1,694 14,304 ------------ ------------ ------------ ----------- Net Income.............. (Yen) 19,044 (Yen) 23,731 (Yen) 25,621 $ 216,339 ============ ============ ============ =========== Yen U.S. dollars --------------------------------------- ------------ Amounts per Share of Common Stock: Net income (basic and diluted earnings per share)............... (Yen) 293.57 (Yen) 366.40 (Yen) 396.52 $ 3.35 Cash dividends........ 15.00 15.00 15.00 0.13
The accompanying notes to consolidated financial statements are an integral part of these statements. F-4 ORIX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the Years Ended March 31, 1997, 1998 and 1999
1997 1998 1999 1999 ------------ ------------ ------------ ------------ Millions of yen Thousands of U.S. dollars Common Stock............ (Yen) 20,180 (Yen) 20,180 (Yen) 20,180 $ 170,396 ------------ ------------ ------------ ---------- Additional Paid-in Capital: Beginning balance..... (Yen) 37,093 (Yen) 37,093 (Yen) 37,303 $ 314,979 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 1,360 ------------ ------------ ------------ ---------- Ending balance........ (Yen) 37,093 (Yen) 37,303 (Yen) 37,464 $ 316,339 ------------ ------------ ------------ ---------- Legal Reserve: Beginning balance..... (Yen) 1,530 (Yen) 1,640 (Yen) 1,750 $ 14,777 Transfer from retained earnings............. 110 110 110 928 ------------ ------------ ------------ ---------- Ending balance........ (Yen) 1,640 (Yen) 1,750 (Yen) 1,860 $ 15,705 ------------ ------------ ------------ ---------- Retained Earnings: Beginning balance..... (Yen)233,535 (Yen)251,496 (Yen)274,144 $2,314,819 Cash dividends........ (973) (973) (971) (8,200) Transfer to legal reserve.............. (110) (110) (110) (928) Net income............ 19,044 23,731 25,621 216,339 ------------ ------------ ------------ ---------- Ending balance........ (Yen)251,496 (Yen)274,144 (Yen)298,684 $2,522,030 ------------ ------------ ------------ ---------- Accumulated Other Comprehensive Loss: Beginning balance..... (Yen)(16,087) (Yen) (1,825) (Yen)(18,079) $ (152,656) Net increase (decrease) in net unrealized gains on investment in securities........... (1,213) (9,931) 1,442 12,176 Net increase (decrease) in cumulative translation adjustments.......... 15,475 (6,323) (10,913) (92,148) ------------ ------------ ------------ ---------- Ending balance........ (Yen) (1,825) (Yen)(18,079) (Yen)(27,550) $ (232,628) ------------ ------------ ------------ ---------- Treasury Stock: Beginning balance..... (Yen) -- (Yen) -- (Yen) (1,477) $ (12,472) Purchases of treasury stock................ -- (1,477) (1,318) (11,128) ------------ ------------ ------------ ---------- Ending balance........ (Yen) -- (Yen) (1,477) (Yen) (2,795) $ (23,600) ------------ ------------ ------------ ---------- Total Shareholders' Equity: Beginning balance..... (Yen)276,251 (Yen)308,584 (Yen)313,821 $2,649,843 Increase, net......... 32,333 5,237 14,022 118,399 ------------ ------------ ------------ ---------- Ending balance........ (Yen)308,584 (Yen)313,821 (Yen)327,843 $2,768,242 ============ ============ ============ ========== Summary of Comprehensive Income: Net income............ (Yen) 19,044 (Yen) 23,731 (Yen) 25,621 $ 216,339 Other comprehensive income (loss)........ 14,262 (16,254) (9,471) (79,972) ------------ ------------ ------------ ---------- Comprehensive income.. (Yen) 33,306 (Yen) 7,477 (Yen) 16,150 $ 136,367 ============ ============ ============ ==========
The accompanying notes to consolidated financial statements are an integral part of these statements. F-5 ORIX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended March 31, 1997, 1998 and 1999
1997 1998 1999 1999 ----------- ------------ ------------ ----------- Thousands of U.S. Millions of yen dollars Cash Flows from Operating Activities: Net income.............. (Yen)19,044 (Yen) 23,731 (Yen) 25,621 $ 216,339 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation--operating leases................. 55,014 59,222 57,405 484,717 Provision for doubtful receivables and possible loan losses... 57,748 58,186 52,489 443,207 Increase in policy liabilities............ 40,550 72,432 135,086 1,140,640 Deferred income taxes, net.................... 4,875 1,664 (10,346) (87,360) Equity in net income (loss) of affiliates and gains on sales of affiliates............. (10,327) (7,371) 3,727 31,470 Amortization of initial direct costs and loan origination costs...... 22,977 26,408 27,076 228,625 Gains on sales of available-for-sale securities............. (906) (5,775) (5,276) (44,549) Write-downs of securities............. 291 858 11,077 93,532 Increase (decrease) in accrued expenses....... 5,011 12,461 (898) (7,583) Increase (decrease) in deposits from lessees.. 6,051 2,053 (4,477) (37,803) Other, net.............. (2,427) 2,691 (2,480) (20,941) ----------- ------------ ------------ ----------- Net cash provided by operating activities.. 197,901 246,560 289,004 2,440,294 ----------- ------------ ------------ ----------- Cash Flows from Investing Activities: Purchases of lease equipment, including advance payments....... (1,020,093) (1,221,978) (1,034,901) (8,738,504) Principal payments received under direct financing leases....... 829,657 859,795 894,692 7,554,606 Net proceeds from securitization of lease receivables............ -- 44,127 224,960 1,899,519 Installment loans made to customers........... (593,074) (696,031) (706,758) (5,967,728) Principal collected on installment loans...... 548,110 614,779 635,022 5,362,003 Proceeds from sales of operating lease assets................. 29,722 60,032 45,150 381,238 Investment in and dividends received from affiliates, net........ (1,721) (11,676) (1,592) (13,443) Proceeds from sales of affiliates............. 214 14,611 10,877 91,843 Purchases of available- for-sale securities.... (145,957) (198,693) (301,575) (2,546,441) Proceeds from sales of available-for-sale securities............. 66,926 177,832 182,338 1,539,627 Maturities of available- for-sale securities.... 6,837 5,634 38,345 323,778 Maturities of held-to- maturity securities.... 5,860 -- -- -- Purchases of other securities............. (6,158) (92,078) (54,902) (463,582) Proceeds from sales of other securities....... 7,831 67,754 46,242 390,458 Other, net.............. (9,417) (7,349) (3,944) (33,301) ----------- ------------ ------------ ----------- Net cash used in investing activities.. (281,263) (383,241) (26,046) (219,927) ----------- ------------ ------------ ----------- Cash Flows from Financing Activities: Repayment of short-term debt, net.............. (418,996) (68,667) (278,186) (2,348,949) (Repayment of) proceeds from commercial paper, net.................... 556,254 90,189 (76,143) (642,937) Proceeds from long-term debt................... 277,074 620,973 567,166 4,789,040 Repayment of long-term debt................... (364,271) (321,043) (525,534) (4,437,507) Net increase in deposits due to customers....... -- -- 45,353 382,952 Purchases of treasury stock.................. -- (1,477) (1,318) (11,128) Dividends paid.......... (973) (973) (971) (8,200) Other, net.............. -- 210 161 1,360 ----------- ------------ ------------ ----------- Net cash provided by (used in) financing activities............ 49,088 319,212 (269,472) (2,275,369) ----------- ------------ ------------ ----------- Effect of Exchange Rate Changes on Cash and Cash Equivalents............. 2,224 (3,207) (7,161) (60,467) ----------- ------------ ------------ ----------- Net increase (Decrease) in Cash and Cash Equivalents............. (32,050) 179,324 (13,675) (115,469) Cash and Cash Equivalents at Beginning of Year.... 120,941 88,891 268,215 2,264,755 ----------- ------------ ------------ ----------- Cash and Cash Equivalents at End of Year.......... (Yen)88,891 (Yen)268,215 (Yen)254,540 $ 2,149,286 =========== ============ ============ ===========
The accompanying notes to consolidated financial statements are an integral part of these statements. F-6 ORIX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 (1)). 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, recording of interest income on time deposits on an accrual basis, 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 and other temporary differences. (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. Intercompany balances, transactions and unrealized profits 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 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 F-7 ORIX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) automobiles). The excess of aggregate lease rentals plus the estimated residual value over the cost of the leased equipment constitutes the unearned lease income to be taken into income over the lease term. The estimated residual values represent estimated proceeds from the disposition of equipment at the time the lease is terminated. Certain direct lease origination costs ("initial direct costs") are being deferred and amortized over the lease term as a yield adjustment. The unamortized balance of initial direct costs is reflected as a component of investment in direct financing leases. Amortization of unearned lease income and direct finance lease origination cost is computed using the interest method. Installment loans--Interest income on installment loans is recognized on an accrual basis. Certain direct loan origination costs, offset by loan origination fees ("loan origination costs, net"), are being deferred and amortized over the contractual term of the loan as an adjustment of the related loan's yield using the interest method. Interest payments received on impaired loans are recorded as interest income unless the collection of the remaining investment is doubtful at which time payments received are recorded as reductions of principal (see Note 7) Non-accrual policy--Revenues on direct financing leases and installment loans are no longer accrued at the time when principal or interest is past due 180 days or more, or when 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 and losses arising from dispositions of operating lease assets are included in operating lease revenues. In fiscal 1997, two subsidiaries shortened the estimated useful lives of certain transportation equipment and measurement instruments as a result of studies of the effect of obsolescence and other pertinent economic factors that may have an impact on the remaining useful lives of these assets. The effect of this change in estimate was to increase depreciation expense in fiscal 1997 by (Yen)4,472 million. 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 or smaller- balance homogeneous loans (in the Company's case, 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. F-8 ORIX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (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 charges against income 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 an issuer 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 forecast as well as general market conditions are taken into consideration. If management believes, based on this review, that the market value may realistically be expected to recover, the loss will continue to be classified as temporary. Temporary declines in market value are recorded through other comprehensive income (loss), net of applicable income taxes. If after an additional twelve months the market value is still significantly below the acquisition cost, the loss will be considered other than temporary and the decline in market value charged to income. Held-to-maturity securities are recorded at amortized cost. (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 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, including the contracts for which the hedged asset or liability has been sold or otherwise disposed of, 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. 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. F-9 ORIX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (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 5.0%, 4.4% and 3.7% for fiscal 1997, 1998 and 1999, respectively. (k) Capitalization of interest costs The Company and certain subsidiaries capitalized interest costs of (Yen)602 million, (Yen)1,041 million and (Yen)966 million ($8,157 thousand) in fiscal 1997, 1998 and 1999, respectively, related to specific long-term development projects. (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, 1999 would have increased by approximately (Yen)24,674 million ($208,342 thousand) with a corresponding decrease in retained earnings; total shareholders' equity would have remained unchanged. (m) Cash and cash equivalents Cash and cash equivalents include cash on hand, deposits placed with banks and securities purchased under resale agreements with original maturities of three months or less. (n) Other operating assets Other operating assets consists primarily of business assets, including golf courses, hotels and training facilities. (o) 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 sale of lease assets. (p) 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. (q) Office facilities Office facilities are stated at cost less accumulated depreciation. Depreciation is calculated on a declining-balance basis or straight-line basis over estimated useful lives. F-10 ORIX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (r) Other assets Other assets consist primarily of the unamortized excess of purchase prices over the net assets acquired in acquisitions of (Yen)14,234 million and (Yen)14,431 million ($121,853 thousand) as of March 31, 1998 and 1999, respectively, deferred insurance acquisition costs, which are amortized over the contract periods, and leasehold deposits. (s) Impairment of long-lived assets As further discussed in Note 7, effective April 1, 1996, the Company and its subsidiaries adopted FASB Statement No. 121 ("Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"). This statement requires that long-lived assets and certain identifiable intangibles to be held and used by the companies be 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. Such assets are to be reported at the lower of the carrying amount or fair value less cost to sell. (t) Advertising The costs of advertising are expensed as incurred. (u) Financial statements presentation in U.S. dollars As a convenience to readers, the consolidated financial statements are also presented in U.S. dollars by arithmetically translating all Japanese yen amounts at (Yen)118.43 to U.S.$1, the exchange rate at March 31, 1999. (v) 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, the exposure draft of proposed Statement of Financial Accounting Standards ("Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133") was issued on May 20, 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. (w) Reclassifications Certain amounts in the 1997 and 1998 consolidated financial statements have been reclassified to conform with the 1999 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. F-11 ORIX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 ($574 million) in assets. This acquisition was accounted for under the purchase method, and net assets acquired were (Yen)13.5 billion ($114 million). 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 ($37 million), which is being amortized over five years on a straight-line basis. 3. CASH FLOW INFORMATION Cash payments for interest and income taxes during fiscal 1997, 1998 and 1999 were as follows:
1997 1998 1999 1999 ------------ ------------ ------------ ------------ Millions of yen Thousands of U.S. dollars Interest................. (Yen)126,669 (Yen)135,563 (Yen)146,073 $1,233,412 Income Taxes............. 12,702 15,358 6,904 58,296
4. INVESTMENT IN DIRECT FINANCING LEASES Investment in direct financing leases at March 31, 1998 and 1999 consists of the following:
1998 1999 1999 -------------- -------------- ------------ Millions of yen Thousands of U.S. dollars Minimum lease payments receivable.................. (Yen)2,353,294 (Yen)2,107,393 $17,794,419 Estimated residual value..... 59,119 52,368 442,185 Initial direct costs......... 28,294 29,374 248,028 Unearned lease income........ (254,685) (236,293) (1,995,212) -------------- -------------- ----------- (Yen)2,186,022 (Yen)1,952,842 $16,489,420 ============== ============== ===========
Minimum lease payments receivable (including guaranteed residual values) are due in periodic installments through 2017. At March 31, 1999, 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 -------------------- --------------- ------------ 2000............................................ (Yen) 767,663 $ 6,481,998 2001............................................ 530,321 4,477,928 2002............................................ 357,080 3,015,114 2003............................................ 225,679 1,905,590 2004............................................ 111,170 938,698 Thereafter...................................... 115,480 975,091 -------------- ----------- Total......................................... (Yen)2,107,393 $17,794,419 ============== ===========
In September 1993 and June 1994, a subsidiary securitized (Yen)29,247 million and (Yen)29,284 million principal balance of its receivables, respectively. In June 1997, the subsidiary purchased all of the remaining securitized receivables and recorded a gain of (Yen)460 million which resulted from a lower level of realized losses in the securitized portfolio relative to the losses anticipated by the subsidiary. F-12 ORIX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) During fiscal 1998, the subsidiary entered into another securitization and a revolving securitization arrangement whereby the subsidiary securitizes selected contracts on a monthly basis. During fiscal 1998 and 1999, the subsidiary securitized (Yen)50,656 million and (Yen)20,731 million ($175,049 thousand) principal balance of its receivables, respectively. As of March 31, 1998 and 1999, the securitized receivables had an unpaid principal balance outstanding of (Yen)44,042 million and (Yen)35,707 million ($301,503 thousand), respectively, which is excluded from the consolidated financial statements. In connection with these transactions, as of March 31, 1998 and 1999, (Yen)2,569 million and (Yen)2,512 million ($21,211 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)4,173 million and (Yen)3,824 million ($32,289 thousand) at March 31, 1998 and 1999, respectively, and are included in other receivables in the consolidated balance sheets. During fiscal 1999, the Company and another subsidiary securitized (Yen)202,806 million ($1,712,455 thousand) principal balance of their receivables. As of March 31, 1999, cash collateral and excess spread assets amounted to (Yen)5,018 million ($42,371 thousand) and (Yen)189 million ($1,596 thousand), 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 ($1,684,894 thousand), which is 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 in fiscal 1998, the payables under securitized lease receivables of (Yen)305,520 million and (Yen)194,243 million ($1,640,150 thousand) are included in long-term debt, the minimum lease payments receivable of (Yen)337,923 million and (Yen)223,179 million ($1,884,480 thousand) are included in the consolidated balance sheets as of March 31, 1998 and 1999, respectively. Gains and losses from the disposition of direct financing lease assets are not significant for fiscal 1997, 1998 and 1999. 5. INVESTMENT IN OPERATING LEASES Investment in operating leases at March 31, 1998 and 1999 consists of the following:
Years 1998 1999 1999 ----------- ------------ ------------ ------------ Weighted Millions of yen Thousands of average U.S. dollars useful life Transportation equipment.............. 13 (Yen)263,146 (Yen)255,745 $2,159,461 Measuring equipment and personal computers..... 3 103,207 106,889 902,550 Real estate and other... 40 198,327 192,239 1,623,229 ------------ ------------ ----------- 564,680 554,873 4,685,240 Accumulated depreciation........... (141,251) (156,073) (1,317,850) ------------ ------------ ----------- Net................... 423,429 398,800 3,367,390 Rental receivables...... 11,637 12,356 104,332 ------------ ------------ ----------- (Yen)435,066 (Yen)411,156 $3,471,722 ============ ============ ===========
For fiscal 1997, 1998 and 1999, gains from the disposition of operating lease assets are (Yen)2,770 million, (Yen)1,298 million and (Yen)2,356 million ($19,894 thousand), respectively, and are included in operating lease revenues in the consolidated statements of income. F-13 ORIX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The operating lease contracts include non-cancelable lease terms ranging from one month to 10 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 -------------------- --------------- ------------ 2000............................................ (Yen)37,831 $319,438 2001............................................ 22,073 186,380 2002............................................ 12,532 105,818 2003............................................ 5,729 48,375 2004............................................ 2,441 20,610 Thereafter...................................... 2,868 24,217 ----------- -------- Total......................................... (Yen)83,474 $704,838 =========== ========
6. INSTALLMENT LOANS The composition of installment loans by domicile and type of borrowers at March 31, 1998 and 1999 is as follows:
1998 1999 1999 -------------- -------------- ------------ Millions of yen Thousands of U.S. dollars Domestic borrowers: Consumers-- Housing loans............... (Yen) 426,559 (Yen) 411,215 $ 3,472,220 Card loans.................. 98,187 118,347 999,299 Other....................... 55,811 43,663 368,682 -------------- -------------- ----------- 580,557 573,225 4,840,201 -------------- -------------- ----------- Commercial-- Real estate related companies.................. 213,911 188,085 1,588,153 Commercial and industrial companies.................. 607,952 614,988 5,192,840 -------------- -------------- ----------- 821,863 803,073 6,780,993 -------------- -------------- ----------- 1,402,420 1,376,298 11,621,194 Foreign commercial, industrial and other borrowers............ 377,761 368,661 3,112,902 Loan origination costs, net..... 14,644 16,928 142,937 -------------- -------------- ----------- (Yen)1,794,825 (Yen)1,761,887 $14,877,033 ============== ============== ===========
In principle, all domestic installment loans, except card loans, are made under agreements which require the borrower to provide collateral or guarantors. F-14 ORIX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) At March 31, 1999, the contractual maturities of installment loans for each of the next five years and thereafter are as follows:
Thousands of U.S. Year ending March 31 Millions of yen dollars -------------------- --------------- ----------- 2000............................................. (Yen) 491,780 $ 4,152,495 2001............................................. 229,038 1,933,953 2002............................................. 212,601 1,795,162 2003............................................. 151,253 1,277,151 2004............................................. 177,741 1,500,811 Thereafter....................................... 482,546 4,074,524 -------------- ----------- Total.......................................... (Yen)1,744,959 $14,734,096 ============== ===========
Included in interest on loans and investment securities in the consolidated statements of income is interest income on loans of (Yen)74,265 million, (Yen)79,486 million and (Yen)88,003 million ($743,080 thousand) for fiscal 1997, 1998 and 1999, respectively. 7. ALLOWANCE FOR DOUBTFUL RECEIVABLES ON DIRECT FINANCING LEASES AND POSSIBLE LOAN LOSSES Changes in the allowance for doubtful receivables on direct financing leases and possible loan losses for fiscal 1997, 1998 and 1999 are as follows:
1997 1998 1999 1999 ------------ ------------ ------------ ------------ Millions of yen Thousands of U.S. dollars Beginning balance....... (Yen) 81,886 (Yen)117,567 (Yen)145,741 $1,230,609 Provisions charged to income................. 57,748 58,186 52,489 443,207 Charge-offs............. (28,062) (32,771) (71,349) (602,457) Recoveries.............. 2,071 680 399 3,369 Other*.................. 3,924 2,079 5,326 44,971 ------------ ------------ ------------ ---------- Ending balance.......... (Yen)117,567 (Yen)145,741 (Yen)132,606 $1,119,699 ============ ============ ============ ==========
- -------- * 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 is as follows:
1997 1998 1999 1999 ------------ ------------ ------------ ------------ Millions of yen Thousands of U.S. dollars Balance of allowance related to: Direct financing leases............... (Yen) 9,780 (Yen) 10,510 (Yen) 23,867 $ 201,528 Installment loans..... 107,787 135,231 108,739 918,171 ------------ ------------ ------------ ---------- Total............... (Yen)117,567 (Yen)145,741 (Yen)132,606 $1,119,699 ============ ============ ============ ==========
The recorded investments in loans considered impaired are (Yen)182,976 million and (Yen)130,226 million ($1,099,603 thousand) as of March 31, 1998 and 1999, respectively. Of these amounts, it was determined that a valuation allowance was required with respect to loans which had outstanding balances of (Yen)153,529 million and (Yen)114,525 million ($967,027 thousand) as of March 31, 1998 and 1999, respectively. The Company and its subsidiaries recorded a valuation allowance of (Yen)104,921 million and (Yen)62,109 million ($524,436 thousand) as of March 31, 1998 and 1999, 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. F-15 ORIX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The average recorded investments in impaired loans for fiscal 1997, 1998 and 1999 were (Yen)179,172 million, (Yen)181,074 million and (Yen)170,838 million ($1,442,523 thousand), respectively. The Company and its subsidiaries recognized interest income on impaired loans of (Yen)1,524 million, (Yen)1,551 million and (Yen)1,577 million ($13,316 thousand), and collected in cash interest on impaired loans of (Yen)1,252 million, (Yen)1,288 million and (Yen)1,297 million ($10,952 thousand) in fiscal 1997, 1998 and 1999, respectively. As of March 31, 1998 and 1999, the Company suspended income recognition pursuant to its non-accrual policy on investment in direct financing leases of (Yen)26,081 million and (Yen)41,565 million ($350,967 thousand), and on installment loans other than impaired loans of (Yen)84,818 million and (Yen)89,869 million ($758,836 thousand), respectively. Effective April 1, 1996, the Company and its subsidiaries adopted FASB Statement No. 121. For a description of FASB Statement No. 121, see Note 1 (s). As a result, during fiscal 1997, 1998 and 1999, 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. These write-downs of (Yen)8,021 million, (Yen)8,752 million and (Yen)644 million ($5,438 thousand) were charged to income as provision for doubtful receivables and possible loan losses in the consolidated statements of income for fiscal 1997, 1998 and 1999, respectively. In the previous table, these amounts are included in both provisions charged to income and charge-offs. 8. INVESTMENT IN SECURITIES Investment in securities at March 31, 1998 and 1999 consists of the following:
1998 1999 1999 ------------ ------------ ------------ Millions of yen Thousands of U.S. dollars Trading securities.................... (Yen) 46 (Yen) 414 $ 3,496 Available-for-sale securities......... 451,074 507,510 4,285,316 Held-to-maturity securities........... 3,127 16,542 139,677 Other securities...................... 46,202 51,740 436,883 ------------ ------------ ---------- (Yen)500,449 (Yen)576,206 $4,865,372 ============ ============ ==========
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 16). For fiscal 1997, 1998 and 1999, net unrealized holding losses on trading securities are (Yen)18 million, (Yen)5 million, and (Yen)1 million ($8 thousand), respectively. During fiscal 1997 and 1998, the Company and its subsidiaries sold available-for-sale securities for aggregate proceeds of (Yen)66,926 million and (Yen)177,832 million, resulting in gross realized gains of (Yen)1,878 million and (Yen)9,951 million, and gross realized losses of (Yen)972 million and (Yen)4,176 million, respectively. During fiscal 1999, the Company and its subsidiaries sold available-for-sale securities for aggregate proceeds of (Yen)182,338 million ($1,539,627 thousand), resulting in gross realized gains of (Yen)6,801 million ($57,426 thousand) and gross realized losses of (Yen)1,525 million ($12,877 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 1997, 1998 and 1999, the Company charged losses on securities of (Yen)291 million, (Yen)858 million and (Yen)11,077 million ($93,532 thousand), respectively, to income for declines in market value of available- for-sale securities where the decline was classified as other than temporary. F-16 ORIX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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, 1998 and 1999 are as follows:
March 31, 1998 --------------------------------------------------- Gross Gross Amortized unrealized unrealized cost gains losses Fair value ------------ ----------- ------------ ------------ Millions of yen Available-for-sale: Japanese and foreign government bond securities.............. (Yen) 5,762 (Yen) 120 (Yen) (103) (Yen) 5,779 Japanese prefectural and foreign municipal bond securities.............. 19,090 965 (16) 20,039 Corporate debt securities.............. 335,769 7,443 (7,048) 336,164 Mortgage-backed and other asset-backed securities.............. 24,346 5 (30) 24,321 Funds in trust........... 4,867 -- (597) 4,270 Equity securities........ 56,893 16,811 (13,203) 60,501 ------------ ----------- ------------ ------------ (Yen)446,727 (Yen)25,344 (Yen)(20,997) (Yen)451,074 ============ =========== ============ ============ Held-to-maturity Corporate debt securities.............. (Yen) 3,127 (Yen) -- (Yen) (29) (Yen) 3,098 ------------ ----------- ------------ ------------ (Yen) 3,127 (Yen) -- (Yen) (29) (Yen) 3,098 ============ =========== ============ ============
March 31, 1999 --------------------------------------------------- Gross Gross Amortized unrealized unrealized cost gains losses Fair value ------------ ----------- ------------ ------------ Millions of yen 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 ============ =========== ============ ============
F-17 ORIX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 1999 -------------------------------------------- Gross Gross Amortized unrealized unrealized cost gains losses Fair value ---------- ---------- ---------- ---------- Thousands of U.S. dollars Available-for-sale: Japanese and foreign government bond securities................. $ 176,729 $ 726 $ (3,504) $ 173,951 Japanese prefectural and foreign municipal bond securities....... 170,692 4,737 (2,601) 172,828 Corporate debt securities........ 3,445,419 74,162 (152,588) 3,366,993 Mortgage-backed and other asset- backed securities............... 62,020 -- (4,644) 57,376 Funds in trust................... 47,066 8,579 (3,901) 51,743 Equity securities................ 322,570 185,004 (45,149) 462,425 ---------- -------- --------- ---------- $4,224,496 $273,208 $(212,387) $4,285,316 ========== ======== ========= ========== Held-to-maturity: Corporate debt securities........ $ 139,677 $ -- $ (228) $ 139,449 ---------- -------- --------- ---------- $ 139,677 $ -- $ (228) $ 139,449 ========== ======== ========= ==========
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, 1999:
Amortized Amortized cost Fair value cost Fair value ------------ ------------ ---------- ---------- Thousands of U.S. Millions of yen dollars Available-for-sale: Due within one year...... (Yen) 41,374 (Yen) 40,241 $ 349,354 $ 339,787 Due after one to five years................... 154,199 152,667 1,302,027 1,289,091 Due after five to ten years................... 179,876 180,510 1,518,838 1,524,192 Due after ten years...... 81,082 73,199 684,641 618,078 ------------ ------------ ---------- ---------- (Yen)456,531 (Yen)446,617 $3,854,860 $3,771,148 ============ ============ ========== ========== Held-to-maturity: Due within one year...... (Yen) 2,983 (Yen) 2,983 $ 25,188 $ 25,188 Due after one to five years................... 120 93 1,013 785 Due after ten years...... 13,439 13,439 113,476 113,476 ------------ ------------ ---------- ---------- (Yen) 16,542 (Yen) 16,515 $ 139,677 $ 139,449 ============ ============ ========== ==========
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)15,222 million, (Yen)15,547 million and (Yen)12,477 million ($105,353 thousand), for fiscal 1997, 1998 and 1999, respectively. F-18 ORIX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 9. INVESTMENT IN AFFILIATES Investment in affiliates at March 31, 1998 and 1999 consists of the following:
1998 1999 1999 ----------- ----------- ------------ Millions of yen Thousands of U.S. dollars Common stock, at equity value........... (Yen)71,821 (Yen)57,592 $486,296 Loans................................... 23,266 19,568 165,228 ----------- ----------- -------- (Yen)95,087 (Yen)77,160 $651,524 =========== =========== ========
Certain Asia and Oceania affiliates are listed on stock exchanges. The aggregate investment in and quoted market value of those affiliates amounted to (Yen) 5,605 million and (Yen)1,867 million as of March 31, 1998, and (Yen)1,107 million ($9,347 thousand) and (Yen)1,467 million ($12,387 thousand) as of March 31, 1999. During fiscal 1999, the Company wrote down its investment in a major affiliate (Korea Development Leasing Corporation (KDLC)--26% owned) to zero as KDLC has negative equity. KDLC is a target of Korea's public workout program for financial institutions and hopes to restructure its operations in cooperation with its creditors. However, KDLC's future viability remains in doubt. The Company is not in a position to exert influence over KDLC's operations, and KDLC is not engaging in new business. Therefore, cumulative translation adjustments included in accumulated other comprehensive loss in the consolidated balance sheets as an unrealized loss of (Yen)5,205 million ($43,950 thousand) have been charged to current period earnings. 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 Banc One Mortgage Capital Markets, LLC.--45% owned) accounted for by the equity method is as follows. KDLC is excluded from the table for fiscal 1999 due to the conditions discussed above.
1997 1998 1999 1999 ------------ ------------ ----------- ------------ Millions of yen Thousands of U.S. dollars Operations: Total revenues........ (Yen)133,199 (Yen)107,983 (Yen)50,453 $ 426,015 Income before income taxes................ 22,058 4,107 13,235 111,754 Net income............ 20,975 6,188 12,177 102,820 Financial position: Total assets.......... 1,051,698 886,093 393,589 3,323,389 Total liabilities..... 935,829 769,999 296,210 2,501,140 Shareholders' equity.. 115,869 116,092 97,379 822,249
The Company had no significant transactions with these companies. F-19 ORIX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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, 1998 and 1999 are as follows:
March 31, 1998 ---------------------------- Weighted Millions of yen average rate --------------- ------------ Short-term debt in Japan, mainly from banks... (Yen) 1,098,793 1.7% Short-term debt outside Japan, mainly from banks........................................ 368,660 6.6% Commercial paper in Japan..................... 841,974 1.4% Commercial paper outside Japan................ 267,056 6.2% --------------- (Yen) 2,576,483 2.8% ===============
March 31, 1999 ---------------------------------------- Thousands of U.S. Weighted Millions of yen dollars average rate --------------- ----------- ------------ Short-term debt in Japan, mainly from banks....................... (Yen) 889,412 $ 7,510,023 1.4% Short-term debt outside Japan, mainly from banks................ 282,170 2,382,589 6.5% Commercial paper in Japan......... 826,150 6,975,851 0.6% Commercial paper outside Japan.... 187,251 1,581,111 5.6% -------------- ----------- (Yen)2,184,983 $18,449,574 2.1% ============== ===========
Long-term debt at March 31, 1998 and 1999 consists of the following:
March 31, 1998 ------------------------- Due Millions of yen --------- --------------- Commercial banks: Fixed rate: 1.8% to 10.2%...................... 1999-2005 (Yen) 341,906 Floating rate: principally based on LIBOR plus 0.1% to 0.8%.................................. 1999-2009 159,924 Government-sponsored agencies in Japan: Fixed rate: 3.8% to 6.2%....................... 1999-2007 17,737 Floating rate: principally based on LIBOR plus 0.1% to 0.6%.................................. 1999-2003 43,036 Insurance companies and others: Fixed rate: 1.6% to 8.5%....................... 1999-2009 423,372 Floating rate: principally based on LIBOR plus 0.1% to 0.5%.................................. 1999-2008 193,769 Unsecured 1.7% to 5.0% bonds..................... 1999-2013 345,000 Unsecured 0.1% bonds with warrants............... 2002 3,000 Unsecured notes under medium-term note program: 1.0% to 7.4%................................... 1999-2009 199,289 Zero Coupon.................................... 1999-2006 9,017 Payables under securitized lease receivables, floating rate based on LIBOR plus 0.3%.......... 2002 305,520 Unsecured debt under borrowed securities agreements, 6.1%................................ 1999 3,000 -------------- (Yen)2,044,570 ==============
F-20 ORIX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 1999 ------------------------------------- Thousands of U.S. Due Millions of yen dollars --------- --------------- ----------- Commercial banks: Fixed rate: 1.6% to 9.3%............ 2000-2005 (Yen) 240,913 $ 2,034,223 Floating rate: principally based on LIBOR plus 0.2% to 1.1%............ 2000-2009 165,323 1,395,955 Government-sponsored agencies in Japan: Fixed rate: 4.2% to 6.2%............ 2000-2007 10,313 87,081 Floating rate: principally based on LIBOR plus 0.0% to 0.1%............ 2000-2003 48,607 410,428 Insurance companies and others: Fixed rate: 1.1% to 9.0%............ 2000-2009 375,908 3,174,094 Floating rate: principally based on LIBOR plus 0.0% to 0.5%............ 2000-2008 173,352 1,463,751 Unsecured 1.4% to 8.5% bonds.......... 2000-2013 569,590 4,809,508 Unsecured 0.1% to 1.9% bonds with warrants............................. 2002-2003 5,200 43,908 Unsecured notes under medium-term note program: 0.8% to 7.3%........................ 2000-2009 244,591 2,065,279 Zero Coupon......................... 2000-2006 7,988 67,449 Payables under securitized lease receivables, floating rate based on LIBOR plus 0.3% to 0.7%.............. 2002 194,243 1,640,150 -------------- ----------- (Yen)2,036,028 $17,191,826 ============== ===========
The repayment schedule for the next five years and thereafter for long-term debt at March 31, 1999 is as follows:
Thousands of U.S. Year ending March 31 Millions of yen dollars -------------------- --------------- ----------- 2000............................................. (Yen) 523,985 $ 4,424,428 2001............................................. 468,027 3,951,929 2002............................................. 384,540 3,246,981 2003............................................. 291,245 2,459,216 2004............................................. 96,321 813,316 Thereafter....................................... 271,910 2,295,956 -------------- ----------- Total.......................................... (Yen)2,036,028 $17,191,826 ============== ===========
Certain of the 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. F-21 ORIX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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, 1999:
Thousands of Millions of yen U.S. dollars --------------- ------------ Time deposits................................. (Yen) 8,672 $ 73,225 Minimum lease payments, loans and future rentals...................................... 49,974 421,971 Investment in securities...................... 5,646 47,674 Other operating assets and office facilities, net.......................................... 4,736 39,990 ----------- -------- (Yen)69,028 $582,860 =========== ========
In addition, under agreements with customers on brokerage business, customers' securities of (Yen)19 million ($160 thousand) at market value are pledged as collateral for the short-term debt as of March 31, 1999. 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, 1999:
Thousands of Millions of yen U.S. dollars --------------- ------------ Commercial paper................................ (Yen)64,502 $544,642 Government-sponsored agencies in Japan.......... 7,246 61,184
11. INCOME TAXES Income before income taxes and the provision for income taxes in fiscal 1997, 1998 and 1999 are as follows:
1997 1998 1999 1999 ----------- ----------- ----------- ------------ Millions of yen Thousands of U.S. dollars Income before income taxes: Domestic.............. (Yen)20,157 (Yen)28,186 (Yen)15,728 $132,804 Foreign............... 16,732 10,226 11,587 97,839 ----------- ----------- ----------- -------- (Yen)36,889 (Yen)38,412 (Yen)27,315 $230,643 =========== =========== =========== ======== Provision for income taxes: Current-- Domestic.............. (Yen) 6,968 (Yen) 4,964 (Yen) 5,633 $ 47,564 Foreign............... 6,002 8,053 6,407 54,100 ----------- ----------- ----------- -------- 12,970 13,017 12,040 101,664 ----------- ----------- ----------- -------- Deferred-- Domestic.............. 4,646 5,072 (14,153) (119,505) Foreign............... 229 (3,408) 3,807 32,145 ----------- ----------- ----------- -------- 4,875 1,664 (10,346) (87,360) ----------- ----------- ----------- -------- Provision for income taxes.................. (Yen)17,845 (Yen)14,681 (Yen) 1,694 $ 14,304 =========== =========== =========== ========
F-22 ORIX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The normal income tax rate in Japan was approximately 51% in fiscal 1997 and 1998, and was approximately 48% in fiscal 1999. 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%. These changes in the tax rates resulted in (Yen)6,315 million and (Yen)14,582 million ($123,128 thousand) of benefit in fiscal 1998 and 1999, respectively. Reconciliations of the differences between tax provision computed at the normal rate and consolidated provisions for income taxes in fiscal 1997, 1998 and 1999 are as follows:
1997 1998 1999 1999 ----------- ----------- ----------- ------------ Millions of yen Thousands of U.S. dollars Income before income taxes.................. (Yen)36,889 (Yen)38,412 (Yen)27,315 $230,643 =========== =========== =========== ======== Tax provision computed at normal rate......... (Yen)18,961 (Yen)19,744 (Yen)13,029 $110,015 Increases (reductions) in taxes due to: Application of the equity method........ (3,300) (1,170) 2,846 24,031 Permanent non- deductible expenses.. 1,227 1,050 858 7,245 Effect of a change in tax rates............ -- (6,315) (14,582) (123,128) Amortization of goodwill............. 420 663 (459) (3,876) Other, net............ 537 709 2 17 ----------- ----------- ----------- -------- Provision for income taxes.................. (Yen)17,845 (Yen)14,681 (Yen) 1,694 $ 14,304 =========== =========== =========== ========
Total income taxes recognized for the years ended March 31, 1997, 1998 and 1999 are as follows:
1997 1998 1999 1999 ----------- ----------- ---------- ------------ Millions of yen Thousands of U.S. dollars Provision for income taxes.................. (Yen)17,845 (Yen)14,681 (Yen)1,694 $14,304 Income tax on other comprehensive income (loss): Net unrealized gains (losses) on investment in securities........... (1,939) (10,500) 1,414 11,940 Cumulative translation adjustments.......... 1,606 20 (528) (4,459) ----------- ----------- ---------- ------- Total income taxes.. (Yen)17,512 (Yen) 4,201 (Yen)2,580 $21,785 =========== =========== ========== =======
F-23 ORIX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The tax effects of temporary differences giving rise to the deferred tax assets and liabilities at March 31, 1998 and 1999 are as follows:
1998 1999 1999 ------------ ------------ ------------ Millions of yen Thousands of U.S. dollars Assets: Net operating loss carryforwards... (Yen) 16,761 (Yen) 15,266 $ 128,903 Allowance for doubtful receivables on direct financing leases and possible loan losses.............. 38,305 31,852 268,952 Installment loans.................. 948 4,006 33,826 Policy liabilities................. 1,432 1,840 15,537 Accrued expenses................... 2,953 3,973 33,547 Other.............................. 2,037 2,703 22,824 ------------ ------------ ---------- (Yen) 62,436 (Yen) 59,640 $ 503,589 ------------ ------------ ---------- Liabilities: Investment in direct financing leases............................ (Yen)127,350 (Yen)119,916 $1,012,547 Investment in operating leases..... 17,696 14,499 122,427 Investment in securities........... 7,298 5,551 46,871 Deferred life insurance acquisition costs............................. 5,719 5,941 50,165 Undistributed earnings............. 16,732 13,111 110,707 Other.............................. 1,172 4,619 39,002 ------------ ------------ ---------- (Yen)175,967 (Yen)163,637 $1,381,719 ------------ ------------ ---------- Net deferred tax liability......... (Yen)113,531 (Yen)103,997 $ 878,130 ============ ============ ==========
Certain subsidiaries have recognized deferred tax assets from net operating loss carryforwards totaling (Yen)38,361 million ($323,913 thousand) as of March 31, 1999, which expire as follows:
Thousands of Year ending March 31 Millions of yen U.S. dollars -------------------- --------------- ------------ 2000............................................ (Yen) 807 $ 6,814 2001............................................ 1,939 16,373 2002............................................ 2,280 19,252 2003............................................ 9,536 80,520 2004............................................ 7,948 67,111 Thereafter...................................... 15,851 133,843 ----------- -------- Total......................................... (Yen)38,361 $323,913 =========== ========
Undistributed earnings of certain foreign subsidiaries and affiliates for which deferred income taxes were not provided amounted to (Yen)53,041 million ($447,868 thousand) as of March 31, 1999. Since the management decided that such undistributed earnings are permanently reinvested, no provision for income taxes has been provided. F-24 ORIX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Net deferred tax assets and liabilities at March 31, 1998 and 1999 are reflected in the accompanying consolidated balance sheets under the following captions:
1998 1999 1999 ------------ ------------ ------------ Millions of yen Thousands of U.S. dollars Other Assets.......................... (Yen) -- (Yen) 2,500 $ 21,110 Income Taxes: Deferred................ 113,531 106,497 899,240 ------------ ------------ -------- Net deferred tax liability............ (Yen)113,531 (Yen)103,997 $878,130 ============ ============ ========
12. 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's 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. As of April 1, 1997, the Company and certain subsidiaries made remeasurements of both plan assets and obligations. As a result of the remeasurements, the discount rate and the expected long-term rate of return were changed to reflect current market conditions. These changes resulted in an increase in the projected benefit obligation at April 1, 1997 by (Yen)3,894 million compared with the amount measured on March 31, 1997. Accordingly, net periodic pension cost for fiscal 1998 was calculated based on the new assumptions, and contributions by the Company and certain subsidiaries increased as appropriate. Effective April 1, 1998, the Company 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 requirement of the new rule. F-25 ORIX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The funded status of the defined benefit pension plans as of March 31, 1998 and 1999 is as follows;
1998 1999 1999 ----------- ----------- --------- Millions of yen Thousands of U.S. dollars Change in benefit obligation: Benefit obligation at beginning of year................................ (Yen)26,038 (Yen)28,070 $237,018 Service cost......................... 1,784 2,140 18,070 Interest cost........................ 1,127 1,297 10,952 Plan participants' contributions..... 414 445 3,757 Plan amendments...................... -- 46 388 Actuarial loss (gain)................ (540) 57 481 Foreign currency exchange rate change.............................. 150 (250) (2,111) Benefits paid........................ (903) (1,000) (8,444) ----------- ----------- -------- Benefit obligation at end of year.. (Yen)28,070 (Yen)30,805 $260,111 =========== =========== ======== Change in plan assets: Fair value of plan assets at beginning of year................... (Yen)21,374 (Yen)26,122 $220,569 Actual return on plan assets......... 1,298 152 1,284 Employer contribution................ 3,706 5,313 44,862 Plan participants' contributions..... 414 445 3,758 Benefits paid........................ (818) (876) (7,397) Foreign currency exchange rate change.............................. 148 (220) (1,858) ----------- ----------- -------- Fair value of plan assets at end of year.............................. (Yen)26,122 (Yen)30,936 $261,218 =========== =========== ======== The funded status of the plans: Funded status........................ (Yen)(1,948) (Yen) 131 $ 1,106 Unrecognized prior service cost...... -- 44 372 Unrecognized net actuarial loss...... 6,333 7,450 62,906 Unrecognized net transition obligation.......................... 630 561 4,737 ----------- ----------- -------- Net amount recognized.............. (Yen) 5.015 (Yen) 8,186 $ 69,121 =========== =========== ======== Amount recognized in the consolidated balance sheets consists of: Prepaid benefit cost................. (Yen) 7,359 (Yen)10,095 $ 85,240 Accrued benefit liability............ (2,782) (2,322) (19,607) Intangible asset..................... 438 413 3,488 ----------- ----------- -------- Net amount recognized.............. (Yen) 5,015 (Yen) 8,186 $ 69,121 =========== =========== ========
Net pension cost of the plans for fiscal 1997, 1998 and 1999 consists of the following:
1997 1998 1999 1999 ---------- ----------- ---------- --------- Millions of yen Thousands of U.S. dollars Service cost................ (Yen)1,440 (Yen) 1,784 (Yen)2,140 $ 18,070 Interest cost............... 846 1,127 1,297 10,952 Expected return on plan assets..................... (1,040) (1,071) (1,369) (11,560) Amortization of unrecognized transition obligation...... (31) 24 45 380 Amortization of unrecognized net actuarial loss......... 77 244 175 1,478 Amortization of unrecognized prior service cost......... -- -- 2 16 ---------- ----------- ---------- -------- Net periodic pension cost..................... (Yen)1,292 (Yen) 2,108 (Yen)2,290 $ 19,336 ========== =========== ========== ========
F-26 ORIX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Significant assumptions used to determine these amounts for fiscal 1997, 1998 and 1999 are as follows:
1997 1998 1999 ---- ---- ---- Discount rate................................................. 5.5% 4.7% 4.6% Rate of increase in compensation levels....................... 3.1% 2.8% 2.8% Expected long-term rate of return on plan assets.............. 5.5% 4.9% 4.8%
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 of the plans including the defined benefit plans are (Yen)2,431 million, (Yen)3,019 million and (Yen)2,942 million ($24,842 thousand) in fiscal 1997, 1998 and 1999, respectively. 13. STOCK-BASED COMPENSATION Since fiscal 1998, the Company has introduced stock option plans for all directors, executive officers and key employees. Under the plans, the right is granted to purchase the treasury shares of the Company at a certain purchase price. A fiscal 1998 stock option plan provides that a purchase price will be an amount obtained by multiplying by 1.03 an average of the closing market prices of the shares on the Tokyo Stock Exchange on all trading days for a month immediately preceding the month of the date of the grant, provided that the exercise price shall not be less than the average acquisition price of the treasury shares. The options vest 100% on the grant date and are exercisable for five years from that date. The Company acquired 168,000 shares of its common stock for the plan during fiscal 1998. A fiscal 1999 stock option plan provides that a purchase price will be an amount obtained by multiplying by 1.00 the average acquisition price of the treasury shares, provided that the exercise price shall not be less than the closing market price of the shares on the Tokyo Stock Exchange on the grant date. The options vest 100% on the grant date and are exercisable for 9.75 years from that date. The Company acquired 146,000 shares of its common stock for the plan during fiscal 1999. The Board of Directors intends to obtain approval from the shareholders, at the next general meeting, to be held on June 29, 1999, for the acquisition by the Company of 145,000 shares of its common stock for a total consideration not exceeding (Yen)1,900 million ($16,043 thousand) for an additional grant of stock options during fiscal 2000. 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 cost of (Yen)49 million and no compensation cost in fiscal 1998 and 1999, respectively. Had compensation cost for the Company's stock option plans been determined consistent with FASB Statement No. 123, the Company's net income and earnings per share in fiscal 1998 and 1999 would have been as follows:
1998 1999 1999 ----------- ----------- -------- Net income (millions of yen and thousands of U.S. dollars)......................... (Yen)23,385 (Yen)25,102 $211,956 Basic and diluted earnings per share (yen and U.S. dollars)........................ (Yen)361.05 (Yen)388.49 $ 3.28
F-27 ORIX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table summarizes information about stock option activity for fiscal 1998 and 1999:
Weighted average exercise price Exercise price Number of ----------------------- Weighted average --------------------- shares Yen U.S. dollars remaining life Low High --------- ---------- ------------ ---------------- ---------- ---------- Outstanding at March 31, 1997................... -- -- Granted................. 168,000 (Yen)9,198 Exercised............... -- -- Forfeited or expired.... -- -- Outstanding at March 31, 1998................... 168,000 9,198 Granted................. 146,000 9,340 $78.87 Exercised .............. -- -- -- Forfeited or expired.... -- -- -- Outstanding at March 31, 1999................... 314,000 9,264 78.22 6.00 Years (Yen)9,198 (Yen)9,340 Exercisable at March 31, 1998................... 168,000 9,198 Exercisable at March 31, 1999................... 314,000 9,264 78.22
The fair value of these stock options was estimated using the Black-Scholes option pricing model under the following assumptions;
1998 1999 ---------- ---------- Grant-date fair value......................... (Yen)2,356 (Yen)3,552($29.99) Expected life................................. 5 Years 10 Years Risk-free rate................................ 1.21% 0.81% Expected volatility........................... 24.56% 29.74% Expected dividend yield....................... 0.158% 0.161%
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 259,258 shares and 262,994 shares by repurchasing warrants attached to bonds with warrants issued by the Company during fiscal 1998 and 1999, respectively. Grant-date fair value was (Yen)620 and (Yen)612 ($5.17), and exercise price was (Yen)9,527 and (Yen)8,262 ($69.76) in fiscal 1998 and 1999, 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. Subject to the final approval by the Board of Directors of the Company, the Company intends to introduce a fiscal 2000 warrant plan. Under the plan, warrants to purchase approximately 260,900 shares will be granted to corporate auditors and key employees (not including employees who are option holders under the stock option plan) of the Company and directors of its certain subsidiaries by repurchasing warrants attached to bonds with warrants to be issued by the Company during fiscal 2000. 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. 14. ACCUMULATED OTHER COMPREHENSIVE LOSS Effective April 1, 1998, the Company 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. F-28 ORIX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 1997, 1998 and 1999 are as follows:
Net unrealized Accumulated Net unrealized Accumulated gains on Cumulative other gains on Cumulative other investment translation comprehensive investment translation comprehensive in securities adjustments income (loss) in securities adjustments income (loss) -------------- ------------ ------------- -------------- ----------- ------------- Millions of Yen Thousands of U.S. dollars Balance at April 1, 1996................... (Yen)13,855 (Yen)(29,942) (Yen)(16,087) Net unrealized gains (losses) on investment in securities, net of tax of (Yen)1,939 million................ (1,213) (1,213) Foreign currency translation adjustment, net of tax of (Yen)(1,606) million... 15,475 15,475 ----------- ------------ ------------ Current period change... (Yen)(1,213) (Yen) 15,475 (Yen) 14,262 ----------- ------------ ------------ Balance at March 31, 1997................... (Yen)12,642 (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 adjustment, net of tax of (Yen)(20) million................ (6,323) (6,323) ----------- ------------ ------------ Current period change... (Yen)(9,931) (Yen) (6,323) (Yen)(16,254) ----------- ------------ ------------ Balance at March 31, 1998................... (Yen) 2,711 (Yen)(20,790) (Yen)(18,079) $22,891 $(175,547) $(152,656) Net unrealized gains (losses) on investment in securities, net of tax of (Yen)1,317 million ($11,120 thousand).............. (1,096) (1,096) (9,254) (9,254) Reclassification adjustment for losses included in net income, net of tax of (Yen)(2,731) million ($(23,060) thousand)... 2,538 2,538 21,430 21,430 Foreign currency translation adjustment, net of tax of (Yen)892 million ($7,532 thousand).............. (16,118) (16,118) (136,098) (136,098) Reclassification adjustment for losses included in net income, net of tax of (Yen)(364) million ($(3,074) thousand).... 5,205 5,205 43,950 43,950 ----------- ------------ ------------ ------- --------- --------- Current period change... (Yen) 1,442 (Yen)(10,913) (Yen) (9,471) $12,176 $ (92,148) $ (79,972) ----------- ------------ ------------ ------- --------- --------- Balance at March 31, 1999................... (Yen) 4,153 (Yen)(31,703) (Yen)(27,550) $35,067 $(267,695) $(232,628) =========== ============ ============ ======= ========= =========
15. 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. F-29 ORIX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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, 1999, the declaration of a cash dividend totaling (Yen)968 million ($8,174 thousand), which will be paid in that month to the shareholders of record as of March 31, 1999, covering fiscal 1999, and the related appropriation of retained earnings to the legal reserve of (Yen)110 million ($928 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)74,149 million ($626,100 thousand) as of March 31, 1999. However, there is a restriction on the payment of dividends relating to the treasury stock acquired for the stock option plan, amounting to (Yen)2,793 million ($23,584 thousand) as of March 31, 1999. 16. BROKERAGE COMMISSIONS AND GAINS ON INVESTMENT SECURITIES Brokerage commissions and gains on investment securities in fiscal 1997, 1998 and 1999 consists of the following:
1997 1998 1999 1999 ---------- ---------- ---------- ------------ Millions of yen Thousands of U.S. dollars Brokerage commissions........ (Yen)1,448 (Yen)1,400 (Yen)1,165 $ 9,837 Gains on investment securities, net............. 2,783 6,671 6,216 52,487 ---------- ---------- ---------- ------- (Yen)4,231 (Yen)8,071 (Yen)7,381 $62,324 ========== ========== ========== =======
Trading activities--Gains on investment securities, net, include net trading revenue on trading securities amounting to (Yen)223 million, (Yen)574 million and (Yen)679 million ($5,733 thousand), and derivative trading instruments amounting to (Yen)964 million, (Yen)303 million and (Yen)561 million ($4,737 thousand) for fiscal 1997, 1998 and 1999, respectively. 17. LIFE INSURANCE OPERATIONS Life insurance premiums and related investment income in fiscal 1997, 1998 and 1999 consists of the following:
1997 1998 1999 1999 ----------- ------------ ------------ ------------ Millions of yen Thousands of U.S. dollars Life insurance premiums............... (Yen)77,122 (Yen)118,856 (Yen)186,629 $1,575,859 Life insurance related investment income...... 5,174 7,175 9,630 81,314 ----------- ------------ ------------ ---------- (Yen)82,296 (Yen)126,031 (Yen)196,259 $1,657,173 =========== ============ ============ ==========
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 F-30 ORIX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) to premium revenue recognized. Amortization charged to income for fiscal 1997, 1998 and 1999 amounted to (Yen)5,795 million, (Yen)7,020 million and (Yen)8,428 million ($71,164 thousand), respectively. 18. OTHER OPERATIONS Other operating revenues and expenses include revenues and costs from sales of residential apartments developed by the Company, fee income and costs from leveraged lease arrangements, commission income and costs from sales of commodities funds and revenues and expenses from other operations. 19. 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 to present basic earnings per share (EPS) and diluted EPS. The application of this statement did not have an effect on basic and diluted EPS in fiscal 1997, 1998 and 1999 as diluted EPS is equal to basic EPS in each period. As of March 31, 1999, treasury stock held and warrants issued in connection with the introduction of stock option plans and warrant plans that could potentially dilute basic EPS were not included in the composition of diluted EPS because of its antidilutive effect for the period. 20. 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, 1998 and 1999, as indicated in the following table:
1998 1999 1999 -------------- -------------- ------------ Notional Notional Notional amount amount amount -------------- -------------- ------------ Millions of yen Thousands of U.S. dollars Interest rate swap agreements..................... (Yen)1,056,070 (Yen)1,132,831 $9,565,406 Options, caps floors and collars held........................... 82,461 76,232 643,688
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. F-31 ORIX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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, 1998 and 1999 are set out in the following table:
1998 1999 1999 --------------- --------------- --------------- Outstanding Outstanding Outstanding contract amount contract amount contract amount --------------- --------------- --------------- Millions of yen Thousands of U.S. dollars Loan commitments........... (Yen)14,227 (Yen)18,726 $158,119 (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, 1998 and 1999, as indicated in the following table: 1998 1999 1999 --------------- --------------- --------------- Notional amount Notional amount Notional amount --------------- --------------- --------------- Millions of yen Thousands of U.S. dollars Foreign exchange forward contracts................. (Yen)67,560 (Yen)30,954 $ 261,370 Foreign currency swap agreements................ 196,756 288,796 2,438,538
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. 21. 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, 1998 and 1999, 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 F-32 ORIX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Yen)3,520 billion, or 73%, at March 31, 1998 and approximately (Yen)3,420 billion ($28,878 million), or 75%, at March 31, 1999 of the credit risks arising from all financial instruments are attributable to customers located in Japan. The largest concentration of credit risks as to foreign countries is exposure attributable to the United States of America. The Company and its subsidiaries make direct financing lease and operating lease contracts mostly with the lessees in commercial industries for their office, industry, commercial service, transport and other equipment. At March 31, 1998 and 1999, 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 11.4% and 12.2% as of March 31, 1998, and 11.1% and 10.3% as of March 31, 1999, respectively. Most of the lease payments are made at fixed rates. 22. 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. The following table does not include trading instruments because it is immaterial.
March 31, 1998 -------------------------- Carrying Estimated amount fair value ------------ ------------ Millions of yen Non-trading instruments Assets: Cash and cash equivalents.................... (Yen)268,215 (Yen)268,215 Time deposits................................ 10,535 10,535 Installment loans............................ 1,794,825 1,816,854 Allowance for doubtful receivables on possible loan losses........................ (135,231) (135,231) Investment in securities: Practicable to estimate fair value......... 461,024 460,995 Not practicable to estimate fair value..... 39,379 39,379 Liabilities: Short-term debt.............................. 2,576,483 2,576,483 Long-term debt............................... 2,044,570 2,063,314 Foreign exchange forward contracts: Assets....................................... 353 353 Liabilities.................................. 2,167 2,167 Foreign currency swap agreements: Assets....................................... -- 483 Liabilities.................................. -- 23,429 Interest rate swap agreements: Assets....................................... -- 13,278 Liabilities.................................. -- 30,690 Options and other derivatives: Assets....................................... 241 30
F-33 ORIX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 1999 -------------------------------------------------- Carrying Estimated Carrying Estimated amount fair value amount fair value ------------ ------------ ---------- ---------- Thousands of U.S. Millions of yen dollars Non-trading instruments Assets: Cash and cash equivalents......... (Yen)254,540 (Yen)254,540 $2,149,286 $2,149,286 Time deposits........ 8,861 8,861 74,821 74,821 Installment loans.... 1,761,887 1,772,448 14,877,033 14,966,208 Allowance for doubtful receivables on possible loan losses.............. (108,739) (108,739) (918,171) (918,171) Investment in securities: Practicable to estimate fair value............. 528,261 528,234 4,460,533 4,460,305 Not practicable to estimate fair value............. 47,531 47,531 401,343 401,343 Liabilities: Short-term debt...... 2,184,983 2,184,983 18,449,574 18,449,574 Long-term debt....... 2,036,028 2,066,592 17,191,826 17,449,903 Foreign exchange forward contracts: Assets............... 383 383 3,234 3,234 Liabilities.......... 589 589 4,973 4,973 Foreign currency swap agreements: Assets............... -- 16,497 -- 139,297 Liabilities.......... -- 7,905 -- 66,748 Interest rate swap agreements: Assets............... -- 14,294 -- 120,696 Liabilities.......... -- 27,510 -- 232,289 Options and other derivatives: Assets............... 109 (6) 920 (51)
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, time deposits and short-term debt--For cash and cash equivalents, time deposits and short-term debt, the carrying amounts recognized in the balance sheets were determined to be reasonable estimates of their fair values due to relatively short maturity. Installment loans--The carrying amounts of floating-rate installment loans with no significant changes in credit risk and which could be repriced within a short-term period were determined to be reasonable estimates of their fair values. For certain homogeneous categories of medium- and long-term fixed-rate loans, such as housing F-34 ORIX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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. However, the management of the Company believes that the carrying amounts of other securities approximated the estimated fair values of these securities. 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. 23. COMMITMENTS AND CONTINGENT LIABILITIES Commitments, guarantees and contingencies--As of March 31, 1999, the Company and its subsidiaries had commitments for the purchase of equipment to be leased, having a cost of approximately (Yen)14,186 million ($119,784 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 - -------------------- --------------- ------------ 2000............................................... (Yen) 416 $ 3,513 2001............................................... 418 3,530 2002............................................... 382 3,226 2003............................................... 339 2,862 2004............................................... 304 2,567 Thereafter......................................... 1,117 9,432 ---------- ------- Total............................................ (Yen)2,976 $25,130 ========== =======
The Company and its subsidiaries lease office space under operating lease agreements, which are primarily cancelable, and made rental payments totaling (Yen)5,783 million, (Yen)6,446 million and (Yen)6,996 million ($59,073 thousand) in fiscal 1997, 1998 and 1999, respectively. F-35 ORIX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) As of March 31, 1999, the Company and its subsidiaries were contingently liable as guarantor for borrowings of (Yen)29,048 million ($245,276 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. 24. 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, venture capital operations and trust and banking operations. F-36 ORIX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Financial information of the segments for fiscal 1997, 1998 and 1999 is as follows:
Equipment Corporate operating finance leases ------------ ----------- Revenues......... (Yen)106,887 (Yen)46,080 Interest revenue......... 12,635 16 Interest expense......... 37,496 1,339 Depreciation and amortization.... 22,870 25,995 Other significant non-cash items: Provision for doubtful receivables and possible loan losses......... 16,663 23 Increase in policy liabilities.... -- -- Equity in net income (loss) of affiliates and gains on sales of affiliates... (10) -- Segment profit (loss).......... 32,276 7,998 Segment assets... 2,013,346 93,956 Long-lived assets.......... 29,044 60,622 Expenditures for long-lived assets.......... 9,647 34,311 Investment in affiliates...... 139 10 Equipment Corporate operating finance leases ------------ ----------- Revenues......... (Yen)120,939 (Yen)50,189 Interest revenue......... 14,107 25 Interest expense......... 40,343 1,328 Depreciation and amortization.... 27,333 28,197 Other significant non-cash items: Provision for doubtful receivables and possible loan losses......... 12,013 81 Increase in policy liabilities.... -- -- Equity in net income (loss) of affiliates and gains on sales of affiliates... (20) (10) Segment profit (loss).......... 44,097 8,407 Segment assets... 2,233,448 103,435 Long-lived assets.......... 36,775 65,554 Expenditures for long-lived assets.......... 14,329 38,695 Investment in affiliates...... 134 13 Year ended March 31, 1997 (Millions of yen) ----------------------------------------------------------------------------------------------------- Domestic operations Foreign operations -------------------------------------------------- ------------------------------------- Real estate related Life The Asia and finance Real estate insurance Other Americas Oceania Europe Total ------------ ------------ ------------ ----------- ----------- ------------ ------------ ------------ Revenues......... (Yen)22,620 (Yen)17,525 (Yen) 82,296 (Yen)20,498 (Yen)55,258 (Yen)53,179 (Yen)22,326 (Yen)426,669 Interest revenue......... 22,013 417 -- 13,208 19,420 13,322 10,341 91,372 Interest expense......... 14,119 3,172 -- 4,369 29,955 22,951 15,735 129,136 Depreciation and amortization.... 2,091 3,994 208 2,097 6,377 11,624 7,045 82,301 Other significant non-cash items: Provision for doubtful receivables and possible loan losses......... 23,087 8,021 -- 2,721 4,498 1,660 1,075 57,748 Increase in policy liabilities.... -- -- 40,550 -- -- -- -- 40,550 Equity in net income (loss) of affiliates and gains on sales of affiliates... -- -- -- 29 8,735 3,955 92 12,801 Segment profit (loss).......... (16,120) (10,885) 5,036 81 12,760 12,646 (4,257) 39,535 Segment assets... 667,509 282,198 143,982 191,446 654,256 510,474 284,819 4,841,986 Long-lived assets.......... 2,379 269,801 -- 4,211 64,914 74,567 108,473 614,011 Expenditures for long-lived assets.......... -- 16,257 -- 841 16,652 27,560 2,731 107,999 Investment in affiliates...... -- -- -- 10,676 38,306 27,685 1,743 78,559 Year ended March 31, 1998 (Millions of yen) ----------------------------------------------------------------------------------------------------- Domestic operations Foreign operations -------------------------------------------------- ------------------------------------- Real estate related Life The Asia and finance Real estate insurance Other Americas Oceania Europe Total ------------ ------------ ------------ ----------- ----------- ------------ ------------ ------------ Revenues......... (Yen)19,102 (Yen)19,203 (Yen)125,767 (Yen)20,631 (Yen)71,485 (Yen)55,750 (Yen)21,966 (Yen)505,032 Interest revenue......... 18,428 460 -- 13,864 24,727 16,397 9,949 97,957 Interest expense......... 11,171 4,296 -- 4,274 36,202 27,157 15,138 139,909 Depreciation and amortization.... 2,363 3,717 223 2,466 6,065 12,481 7,400 90,245 Other significant non-cash items: Provision for doubtful receivables and possible loan losses......... 29,014 5,910 -- 2,824 6,077 2,184 83 58,186 Increase in policy liabilities.... -- -- 72,432 -- -- -- -- 72,432 Equity in net income (loss) of affiliates and gains on sales of affiliates... -- -- -- 3,121 8,454 (3,644) -- 7,901 Segment profit (loss).......... (23,071) (8,392) 5,762 1,891 21,263 (8,441) (2,123) 39,393 Segment assets... 649,511 297,880 196,378 243,607 668,742 459,042 251,759 5,103,802 Long-lived assets.......... 3,396 276,124 -- 4,546 35,882 77,897 102,013 602,187 Expenditures for long-lived assets.......... 2,627 12,982 -- 526 4,708 30,187 3,684 107,738 Investment in affiliates...... -- -- -- 8,561 41,326 21,606 181 71,821
F-37 ORIX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Equipment Corporate operating finance leases ------------ ----------- Revenues......... (Yen)122,629 (Yen)51,000 Interest revenue......... 17,926 7 Interest expense......... 41,697 1,538 Depreciation and amortization.... 26,427 30,299 Other significant non-cash items: Provision for doubtful re- ceivables and possible loan losses......... 24,420 35 Increase in policy liabilities.... -- -- Equity in net in- come (loss) of affiliates and gains on sales of affiliates... (16) 4 Segment profit (loss).......... 35,240 6,923 Segment assets... 2,046,516 109,772 Long-lived assets.......... 33,338 63,433 Expenditures for long-lived assets.......... 10,524 34,399 Investment in affiliates...... 141 16 Year ended March 31, 1999 (Millions of yen) ------------------------------------------------------------------------------------------------------ Domestic operations Foreign operations --------------------------------------------------- ------------------------------------ Real estate related Life The Asia and finance Real estate insurance Other Americas Oceania Europe Total ------------ ------------ ------------ ------------ ----------- ------------ ----------- ------------- Revenues......... (Yen)17,731 (Yen)39,088 (Yen)195,484 (Yen)22,684 (Yen)68,821 (Yen)51,220 (Yen)23,811 (Yen)592,468 Interest revenue......... 16,601 519 -- 16,828 26,048 18,750 9,674 106,353 Interest expense......... 10,891 4,220 -- 4,435 34,049 27,707 13,174 137,711 Depreciation and amortization.... 2,259 3,994 359 338 5,507 12,038 7,693 88,914 Other significant non-cash items: Provision for doubtful re- ceivables and possible loan losses......... 15,857 -- -- 3,324 5,861 1,775 1,217 52,489 Increase in policy liabilities.... -- -- 135,086 -- -- -- -- 135,086 Equity in net in- come (loss) of affiliates and gains on sales of affiliates... -- -- -- (99) 7,564 (10,979) 11 (3,515) Segment profit (loss).......... (11,013) (2,236) 3,813 (4,266) 20,590 (11,729) 264 37,586 Segment assets... 573,767 273,504 334,836 248,872 634,101 440,872 178,559 4,840,799 Long-lived assets.......... 3,744 245,963 -- 5,877 32,773 82,204 79,247 546,579 Expenditures for long-lived assets.......... 2,175 27,121 -- 1,333 20,312 37,109 136 133,109 Investment in affiliates...... -- -- -- 9,313 38,956 8,997 169 57,592
Year ended March 31, 1999 (Thousands of U.S. dollars) ----------------------------------------------------------------------------------------------------------- Domestic operations Foreign operations ---------------------------------------------------------------- ------------------------------ Real Equipment estate Corporate operating related Real Life The Asia and finance leases finance estate insurance Other Americas Oceania Europe Total ---------- --------- --------- --------- ---------- --------- --------- --------- --------- ---------- Revenues......... $1,035,456 $430,634 $149,717 $330,052 $1,650,629 $191,539 $581,111 $432,492 $201,055 $5,002,685 Interest revenue......... 151,364 59 140,176 4,382 -- 142,092 219,944 158,321 81,686 898,024 Interest expense......... 352,081 12,987 91,961 35,633 -- 37,448 287,503 233,953 111,239 1,162,805 Depreciation and amortization.... 223,144 255,839 19,075 33,725 3,031 2,854 46,500 101,647 64,958 750,773 Other significant non-cash items: Provision for doubtful receivables and possible loan losses......... 206,198 296 133,893 -- -- 28,067 49,489 14,988 10,276 443,207 Increase in policy liabilities.... -- -- -- -- 1,140,640 -- -- -- -- 1,140,640 Equity in net income (loss) of affiliates and gains on sales of affiliates... (135) 34 -- -- -- (836) 63,869 (92,705) 93 (29,680) Segment profit (loss).......... 297,560 58,456 (92,992) (18,880) 32,196 (36,021) 173,858 (99,037) 2,229 317,369 Segment assets... 17,280,385 926,894 4,844,778 2,309,415 2,827,290 2,101,427 5,354,226 3,722,638 1,507,717 40,874,770 Long-lived assets.......... 281,500 535,616 31,614 2,076,864 -- 49,624 276,729 694,115 669,145 4,615,207 Expenditures for long-lived assets.......... 88,863 290,458 18,365 229,004 -- 11,256 171,511 313,341 1,149 1,123,947 Investment in affiliates...... 1,191 135 -- -- -- 78,637 328,937 75,969 1,427 486,296
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 F-38 ORIX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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.
1997 1998 1999 1999 ------------ -------------- -------------- ----------- Millions of yen Thousands of U.S. dollars Revenues: Total revenues for segments............. (Yen)426,669 (Yen) 505,032 (Yen) 592,468 $ 5,002,685 Revenue related to corporate assets... 1,625 2,111 1,473 12,438 ------------ -------------- -------------- ----------- Total consolidated revenues............... (Yen)428,294 (Yen) 507,143 (Yen) 593,941 $ 5,015,123 ============ ============== ============== =========== Segment profit: Total profit for segments............. (Yen) 39,535 (Yen) 39,393 (Yen) 37,586 $ 317,369 Unallocated interest expenses, general and administrative expenses........... (4,441) (4,386) (4,189) (35,371) Adjustment of income tax expenses to equity in net income and minority income............. (2,493) (1,741) (375) (3,166) Unallocated write- downs of securities......... -- -- (8,383) (70,784) Unallocated other gain or loss....... 4,288 5,146 2,676 22,595 ------------ -------------- -------------- ----------- Total consolidated income before income taxes.................. (Yen) 36,889 (Yen) 38,412 (Yen) 27,315 $ 230,643 ============ ============== ============== =========== Segment assets: Total assets for segments............. (Yen)5,103,802 (Yen)4,840,799 $40,874,770 Advances............ (101,282) (62,079) (524,183) Investment in affiliates (not including loans)... (71,821) (57,592) (486,296) Corporate assets.... 51,501 54,308 458,566 -------------- -------------- ----------- Total consolidated operating assets....... (Yen)4,982,200 (Yen)4,775,436 $40,322,857 ============== ============== ===========
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 ORIX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 1997, 1998 and 1999. 25. EVENT SUBSEQUENT TO DATE OF AUDITOR'S REPORT On June 17, 1999, through its subsidiary, the Company agreed to purchase from NEC HOME ELECTRONICS LEASE, LTD. (NECHEL) lease operations primarily consisting of direct financing lease receivables of approximately (Yen)73 billion ($616 million) as of March 31, 1999. The estimate purchase price is approximately (Yen)64 billion ($540 million), but this amount will be adjusted based on the remaining outstanding receivables as of the transfer date, in July 1999, and other conditions provided for in the agreement. The subsidiary has also agreed to hire approximately 160 employees from NECHEL. F-40 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 29, 1999. ORIX CORPORATION /s/ Koichi Maki By: _________________________________ Name:Koichi Maki Title:Director Corporate Executive Vice President EXHIBITS INDEX
Sequentially Exhibit Numbered Number Description Page ------- ----------- ------------ *1.1 Articles of Incorporation of the Company, together with an English translation (filed as Exhibit 3.1 to the Form F-1 Registration Statement No. 333-10732 filed on August 27, 1999) *1.3 Regulations of the Board of Directors of the Company, as amended, together with an English translation (filed as Exhibit 3.3 to the Form F-1 Registration Statement No. 333-10732 filed on August 27, 1999)
- -------- * Each such exhibit hereto has been filed with the Securities and Exchange Commission as part of the filing indicated and is incorporated herein by reference. -----END PRIVACY-ENHANCED MESSAGE-----