UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
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o
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REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
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OR
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended March 31, 2007
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
OR
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o
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SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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Date of event requiring this shell company report
Commission file number: 1-31416
NIS GROUP Kabushiki Kaisha
(Exact name of Registrant as specified in its charter)
NIS GROUP CO., LTD.
(Translation of Registrants name into English)
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Japan
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Shinjuku L-Tower 25F
6-1, Nishi Shinjuku 1-chome
Shinjuku-ku, Tokyo 163-1525
Japan
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(Jurisdiction of incorporation or organization)
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(Address of principal executive offices)
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Securities registered or to be registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered
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Common Stock*
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New York Stock Exchange
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Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
Indicate the number of outstanding shares of each of the issuers classes of capital or
common stock as of the close of the period covered by the annual report:
142,476,902 shares of our
common stock outstanding at March 31, 2007, including 60,239,900 shares represented by 6,023,990
American Depositary Shares, or ADSs, as adjusted for our 1-for-20 reverse stock split and concurrent
change in the ratio of shares of common stock represented by each ADS from one ADS representing 10
shares to two ADSs representing one share, effective as of August 31, 2007.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes
o
No
þ
If this report is an annual or transition report, indicate by check mark if the registrant is
not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934. Yes
o
No
þ
Note Checking the box above will not relieve any registrant required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their
obligations under those Sections.
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
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer
þ
Accelerated filer
o
Non-accelerated filer
o
Indicate by check mark which financial statement item the registrant has elected to follow. Item 17
o
Item 18
þ
If this is an annual report, indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes
o
No
þ
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*
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Not for trading, but only in connection with the listing of American Depositary Shares, each
of two American Depositary Shares representing one share of our common stock.
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Certain Defined Terms, Conventions and Presentation of Financial Information
As used in this annual report on Form 20-F, unless the context otherwise requires, the
Company refers to NIS Group Co., Ltd. and the Group refers to NIS Group Co., Ltd. and its
subsidiaries. Also, references to we our and us are
to the Company or the Group as the context may require.
In this annual report on Form 20-F, subsidiary and subsidiaries refer to consolidated
subsidiaries of the Company, which include companies in which the Company owns more than 50%, and
affiliate and affiliates refer to all of our affiliates accounted for under the equity method,
which include companies in which the Company owns 20-50% and has the ability to exercise
significant influence over their operations.
The consolidated financial statements of the Company have been prepared in accordance with
accounting principles generally accepted in the United States of America, or U.S. GAAP. Unless
otherwise stated or the context otherwise requires, all amounts in such financial statements are
expressed in yen.
In this annual report on Form 20-F, yen or ¥ means the lawful currency of Japan, and
dollar or $ means the lawful currency of the United States of America.
Certain monetary amounts and percentage data included in this annual report have been rounded
for the convenience of the reader. Accordingly, figures shown as totals in certain tables may not
be equal to the arithmetic sum of the figures which precede them.
The Companys fiscal year ends on March 31. The fiscal year ended March 31, 2007 is referred
to throughout this annual report on Form 20-F as this 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.
Special Note Regarding Forward-looking Statements
This annual report on Form 20-F contains forward-looking statements about our industry, our
business, our plans and objectives, our financial condition and our results of operations that are
based on our current expectations, assumptions, estimates and projections. These forward-looking
statements are subject to various risks and uncertainties. These statements discuss future
expectations, identify strategies, discuss market trends, contain projections of results of
operations or of financial condition, or state other forward-looking information. Known and
unknown risks, uncertainties and other factors could cause our actual results to differ materially
from and be worse than those contained in or suggested by any forward-looking statement. We cannot
promise that our expectations, projections, anticipated results, estimates or other information
expressed in or underlying these forward-looking statements will turn out to be correct.
Important risks and factors that could cause our actual results to differ materially from the
forward-looking statements are described in Item 3.D and elsewhere in this annual report on Form
20-F and include, without limitation:
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increasing competition among Japans finance companies and other financial
institutions in the business owner and consumer loan industries;
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significant changes to the business environment for
moneylending companies in Japan, including as a result of recent
court decisions by the Supreme Court of Japan, and any future changes
to laws and regulations;
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-3-
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the effect of weak domestic economic conditions, including changes in corporate and
personal bankruptcy and unemployment rates in Japan;
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the growing variety of legal means with which debtors can seek protection from
creditors;
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changes to our portfolio of products and services and expansion into new business
areas that do not achieve intended results;
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the effect of fluctuations in the value of real estate held or securing loans, which
is highly dependent on the health of the Japanese economy and susceptible to regulatory
and legal changes;
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fluctuation in market environments regarding our investments;
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our ability to pursue and maintain profitable strategic alliances, joint ventures
and strategic investments;
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increasing competition in the loan servicing market in which Nissin Servicer Co.,
Ltd., a consolidated subsidiary, operates;
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risks associated with doing business in China, including extensive regulation and
legal and market uncertainty;
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any future inability to obtain funds from lenders or access the debt capital markets
on favorable terms;
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an increase in prevailing market interest rates;
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any failure to implement our business strategies successfully;
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the failure of our risk management systems to effectively evaluate and manage risks;
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our ability to adequately evaluate or control risks
associated with loans or guarantees we make or related collateral;
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any disruption, outages, delays or other difficulties experienced by our information
or technological systems and networks;
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misconduct by an employee or director and our exposure to negative publicity of the
consumer or business finance industries generally or us specifically;
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any failure to maintain the confidentiality of personal information of our
customers; and
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the influence of our chairman and his family over important decisions.
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-4-
PART I
Item 1. Identity of Directors, Senior Management and Advisers
Not required.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
Item 3. Key Information
A. Selected Financial Data.
You should read the following selected consolidated financial information together with Item
5 of this annual report on Form 20-F and our consolidated financial statements and the notes to
the consolidated financial statements beginning on page F-1.
The consolidated income statement data for the years ended March 31, 2003, 2004, 2005, 2006
and 2007 and the consolidated balance sheet data as of March 31, 2003, 2004, 2005, 2006 and 2007
that are identified as being in accordance with accounting principles generally accepted in the
United States of America, or U.S. GAAP, are derived from our consolidated financial statements
prepared in accordance with U.S. GAAP, which have been audited by BDO Sanyu & Co., an independent
registered public accounting firm. We have included our consolidated financial statements for the
years ended March 31, 2005, 2006 and 2007 in this annual report on Form 20-F.
-5-
Selected Financial Information
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Year Ended/As of March 31,
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2003
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2004
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2005
(2)
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2006
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2007
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2007
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(In millions of yen and thousands of U.S. dollars except number of shares and per share data)
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Interest income
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¥
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38,591
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¥
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38,171
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¥
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29,488
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¥
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29,826
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¥
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33,706
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$
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285,523
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Provision for losses on excess interest repayments
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1,074
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1,411
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2,132
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3,331
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12,664
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107,276
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Net interest income
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37,517
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36,760
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27,356
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26,495
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21,042
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178,247
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Interest expense
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3,920
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3,605
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2,971
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2,602
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3,870
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32,783
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Net interest income before provision for loan losses
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33,597
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33,155
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24,385
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23,893
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17,172
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145,464
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Provision for loan losses
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11,543
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11,547
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5,817
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5,923
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10,853
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91,936
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Net interest income from lending activities
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22,054
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21,608
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18,568
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17,970
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6,319
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53,528
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Total other revenue
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818
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2,573
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5,003
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11,445
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17,585
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148,962
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Total operating expense
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13,365
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13,207
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15,438
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17,732
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22,583
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191,300
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Operating income
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9,507
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10,974
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8,133
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11,683
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1,321
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11,190
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Other income (losses)
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21
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219
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4,061
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3,604
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(881
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)
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(7,463
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)
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Other expense
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428
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534
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286
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618
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453
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3,837
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Income (losses) before income taxes
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9,100
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10,659
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11,908
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14,669
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(13
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)
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(110
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)
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Income taxes
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3,924
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4,582
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4,646
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6,214
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1,597
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13,528
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Net income (losses)
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¥
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5,176
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¥
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6,077
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¥
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7,262
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¥
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8,455
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¥
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(1,610
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)
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$
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(13,638
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)
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Consolidated Balance Sheet Data:
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Cash and cash equivalents
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¥
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23,612
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¥
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20,243
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¥
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25,709
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¥
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22,860
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¥
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28,344
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$
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240,102
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Loans receivable, net
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166,977
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166,890
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146,119
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225,947
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250,780
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2,124,354
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Purchased loans receivable, net
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2,946
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4,342
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13,581
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24,155
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28,910
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244,896
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Other
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13,039
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18,793
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42,992
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86,981
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146,043
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1,237,129
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Total assets
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¥
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206,574
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¥
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210,268
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¥
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228,401
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¥
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359,943
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¥
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454,077
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$
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3,846,481
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Short-term borrowings
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¥
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5,600
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¥
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5,563
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¥
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12,600
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¥
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60,411
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¥
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84,258
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$
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713,748
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Long-term borrowings
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148,595
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142,577
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136,844
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198,924
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260,817
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2,209,377
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Other
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6,782
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7,670
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10,840
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|
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17,671
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22,247
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188,455
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Total liabilities
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160,977
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155,810
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160,284
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277,006
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367,322
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3,111,580
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Minority interests
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|
161
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|
|
|
1,146
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|
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2,433
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|
|
|
4,192
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|
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|
35,510
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Common stock
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|
|
6,611
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|
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|
7,218
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|
|
|
7,779
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|
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|
11,849
|
|
|
|
16,289
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|
|
|
137,984
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|
Additional paid-in capital
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|
|
8,462
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|
|
|
9,092
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|
|
|
9,836
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|
|
|
14,808
|
|
|
|
19,490
|
|
|
|
165,100
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|
Other
|
|
|
30,524
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|
|
|
37,987
|
|
|
|
49,356
|
|
|
|
53,847
|
|
|
|
46,784
|
|
|
|
396,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
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|
|
45,597
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|
|
|
54,297
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|
|
|
66,971
|
|
|
|
80,504
|
|
|
|
82,563
|
|
|
|
699,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total liabilities and shareholders equity
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|
¥
|
206,574
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|
|
¥
|
210,268
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|
|
¥
|
228,401
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|
|
¥
|
359,943
|
|
|
¥
|
454,077
|
|
|
$
|
3,846,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Number of Shares
(1)
:
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|
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|
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|
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|
|
|
|
|
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Issued at the end of fiscal year (in thousands)
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|
|
127,319
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|
|
|
129,337
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|
|
|
130,720
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|
|
|
140,647
|
|
|
|
145,894
|
|
|
|
145,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Per Share Data
(1)
:
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net income
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
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|
¥
|
41.80
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|
|
¥
|
50.80
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|
|
¥
|
59.60
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|
|
¥
|
65.40
|
|
|
¥
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(11.42
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)
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|
$
|
(0.097
|
)
|
Diluted
|
|
|
38.80
|
|
|
|
46.80
|
|
|
|
54.00
|
|
|
|
61.60
|
|
|
|
(11.42
|
)
|
|
|
(0.097
|
)
|
Cash dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Declared
|
|
|
7.80
|
|
|
|
9.00
|
|
|
|
16.20
|
|
|
|
21.00
|
|
|
|
3.20
|
|
|
|
0.027
|
|
Paid during the fiscal year
|
|
|
6.60
|
|
|
|
8.40
|
|
|
|
10.60
|
|
|
|
20.40
|
|
|
|
14.20
|
|
|
|
0.120
|
|
|
|
|
(1)
|
|
The Company completed a 2-for-1 stock split on each of May 21, 2002, May 20, 2003, May
20, 2004, November 19, 2004, November 18, 2005, and April 1, 2006, respectively, a 1.2-for-1
stock split on May 20, 2005 and 1-for-20 reverse stock split on August 31, 2007. All share
information presented above has been retroactively adjusted to reflect such stock splits and
reverse stock split.
|
|
(2)
|
|
The Company sold ¥32,697 million of unguaranteed consumer loans receivable on June 1, 2004 to
NETCARD, Inc. (formerly known as Orient Credit Co., Ltd.) resulting in a gain of ¥3,327
million.
|
-6-
Exchange Rate Information
For convenience, we have translated certain yen amounts in this annual report on Form 20-F
into dollars at the rate of ¥118.05 = $1.00, the mean of the exchange rate quotations by The Bank
of Tokyo-Mitsubishi UFJ, Ltd. for buying and selling spot dollars by telegraphic transfer against
yen as of March 31, 2007, our most recent balance sheet date included in this annual report on Form
20-F. However, you should not construe such translations as representations that the yen amounts
have been, could have been or could be converted into dollars at that or any other rate.
The following table presents the noon buying rates for Japanese yen per $1.00 in New York City
for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve
Bank of New York:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
High
|
|
|
Low
|
|
|
Average
(1)
|
|
|
Period-end
|
|
2003
|
|
|
¥133.40
|
|
|
|
¥115.71
|
|
|
|
¥121.10
|
|
|
|
¥118.07
|
|
2004
|
|
|
120.55
|
|
|
|
104.18
|
|
|
|
112.75
|
|
|
|
104.18
|
|
2005
|
|
|
114.30
|
|
|
|
102.26
|
|
|
|
107.28
|
|
|
|
107.22
|
|
2006
|
|
|
120.93
|
|
|
|
104.41
|
|
|
|
113.67
|
|
|
|
117.48
|
|
2007
|
|
|
121.81
|
|
|
|
110.07
|
|
|
|
116.55
|
|
|
|
117.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calendar Month
|
|
|
|
|
|
|
|
|
January 2007
|
|
|
121.81
|
|
|
|
118.49
|
|
|
|
120.45
|
|
|
|
121.02
|
|
February 2007
|
|
|
121.77
|
|
|
|
118.33
|
|
|
|
120.50
|
|
|
|
118.33
|
|
March 2007
|
|
|
118.15
|
|
|
|
116.01
|
|
|
|
117.26
|
|
|
|
117.56
|
|
April 2007
|
|
|
119.84
|
|
|
|
117.69
|
|
|
|
118.93
|
|
|
|
119.44
|
|
May 2007
|
|
|
121.79
|
|
|
|
119.77
|
|
|
|
120.77
|
|
|
|
121.76
|
|
June 2007
|
|
|
124.09
|
|
|
|
121.08
|
|
|
|
122.69
|
|
|
|
123.39
|
|
July 2007
|
|
|
123.34
|
|
|
|
118.41
|
|
|
|
121.41
|
|
|
|
119.13
|
|
August 2007
|
|
|
119.76
|
|
|
|
113.81
|
|
|
|
116.73
|
|
|
|
115.83
|
|
|
|
|
(1)
|
|
The average yen exchange rates for the fiscal year represent the average noon buying rates on
the last business day of each month during the respective period.
|
The
noon buying rate for yen on September 21, 2007 was ¥115.60 per $1.00.
B. Capitalization and Indebtedness.
Not applicable.
C. Reasons for the Offer and Use of Proceeds.
Not applicable.
-7-
D. Risk Factors.
Increasing competition among Japans finance companies and other financial institutions may
adversely affect our ability to increase or maintain the size of our loan portfolio, the average
credit quality of our customers or the interest rates we charge on our loans
The loan finance industries in Japans financial sector are becoming increasingly competitive.
In particular, competition for new customers has intensified primarily due to the entry into this
industry of additional competitors, which has included entry through capital investments by major
financial institutions and the establishment of joint venture corporations. In addition, some
existing finance companies were acquired by corporations including information technology companies
and foreign-affiliated financial institutions and subsequently enhanced their business. Many of
these competitors have substantially greater financial, technical and marketing resources, larger
customer bases, longer histories, greater name recognition, more extensive physical infrastructure
and networks of loan offices and more established relationships in the finance industry than we do.
Our competitors seek to compete aggressively on the basis of interest rates, lending terms and the
coverage and scale of their networks of distribution and marketing channels. Under these
competitive pressures, we have focused our efforts on acquisition of prime customers with low
credit risk, especially among small and medium-sized enterprises (SMEs) in Japan, including
through alliances with various companies, in an effort to differentiate ourselves from our
competitors. In June 2004, we reduced our involvement in the consumer loan business by selling a
majority of the outstanding balance of our unguaranteed consumer
loans to a third-party and
strategically shifting our loan portfolio toward the provision of loans to SMEs and their owners, which
typically carry lower interest rates than consumer loans. The weighted period-end average
contractual interest rate on our outstanding loans decreased from 16.1% at March 31, 2006 to 13.8%
at March 31, 2007 due to shifting our portfolio and
concentrating on secured loans for property
companies. If we are unable to match our competitors terms, we may fail to increase or maintain
the number and average balance of our customer accounts, and our results of operations or financial
condition could be adversely affected. If, on the other hand, we reduce interest rates on our
products in response to competitive pressures, our interest margins will decline. Furthermore, the
average credit quality of our customers may decrease if we are not able to attract prime customers,
or if we lose these prime customers to our competitors, and our financial condition or results of
operations could be adversely affected.
Significant
changes to the business environment for moneylending companies in Japan, including as a result of recent court decisions by the Supreme Court of Japan, may continue to adversely affect us, and any future changes to laws and regulations may also adversely affect us
Our business activities are subject to various laws and regulations in the countries in
which we operate, primarily in Japan. Pursuant to the Law Concerning the Regulation on Acceptance
of Contributions, Money Deposits and Interest (the Contributions Law), it is a criminal offence
for any lending business to charge an interest rate exceeding a maximum interest rate of 29.2% per
year. Separately, the Law Concerning the Regulation of Interest Rates (the Interest Rate
Restriction Law) provides that an agreement for the payment of interest above a prescribed maximum
rate is invalid with respect to the portion exceeding the maximum rate. As at the date of this
annual report on Form 20-F, these prescribed maximum rates for the purposes of the Interest Rate
Restriction Law are 20% per year for loans of less than ¥100,000; 18% per year for loans of
¥100,000 or more but less than ¥1 million; and 15% per year for loans of ¥1 million or more.
However, notwithstanding the above restriction on interest rates under the Interest Rate
Restriction Law, the Law Concerning Regulations on Moneylending Business, etc. (the Moneylending
Business Law) provides that a payment by a borrower or guarantor of interest in excess of the
prescribed maximum interest rates under the Interest Rate Restriction Law to a registered
moneylender such as us is valid (and non-refundable) so long as such interest is paid voluntarily
without coercion, mistake or threat and certain documentation requirements are satisfied (often
called deemed valid payments). Interest that exceeds the prescribed maximum rates under the
Interest Rate Restriction Law (but is below the maximum interest rate of 29.2% allowed under
the Contributions Law) is often called gray-zone interest. The interest rates for all of our
loan products are set below the maximum lending rate of 29.2% allowed under the Contributions Law,
however, we continue to charge gray-zone interest to our customers, although loans with
gray-zone interest are significantly decreasing.
Since
January 13, 2006, the Supreme Court of Japan decided a number of cases relating to
the abovementioned laws that have negatively affected the ability of moneylenders like us to
enforce deemed valid payments of gray-zone interest and have resulted in increased claims for
repayment of gray-zone interest. In particular, in
January 2006, the court ruled that the voluntary payment requirement
for deemed valid payments under the Moneylending Business Law should
be interpreted strictly, that an acceleration clause in a
loan agreement is invalid with respect to a delay in the payment of
excess interest and that, unless there is some particular situation
such that the borrower is not misled into believing that such a
clause is valid, the voluntary nature of excess interest payments,
which is the requirement for deemed valid payments, will not be
recognized. As a result of
such court decisions, the Enforcement Regulation of the Moneylending Business Law was amended
effective as of July 1, 2006 such that our loan documentation must now specifically provide that we
may not accelerate a loan as a result of non-payment if such non-payment relates only to
gray-zone interest.
-8-
As a result of such court decisions and regulatory changes, and as a result of an increased
number of borrowers in Japan encountering financial difficulties, we have recently experienced a
greater number of claims for repayment of gray-zone
interest. The total amount of refunds of excess interest repayments in cash and loan principal charged-off by
excess interest repayments was ¥2,532 million and ¥5,230 million for the years ended March 31, 2006
and 2007, respectively. We have also been reducing the level of interest that we charge on loans
to customers. (See Business Overview Our Operations
Integrated Financial Services Segment
in
Item 4.B of this annual report on Form 20-F.) Since a borrower
may claim for refund of excess interest for up to 10 years, which is the statute of
limitations, our total gross exposure may theoretically be up to the amount of excess interest
received by us over the 10 years.
In addition, in October 2006, the Japanese Institute of Certified Public Accountants issued
Audit Treatment of Reserve for Losses on Excess Interest Repayment Claims in Consumer Finance
Companies under which we are, in effect, required to keep a certain amount of reserves for losses
on excess interest repayments to provide for probable refunds of gray-zone interest previously
paid by borrowers. Accordingly, we increased our reserve for losses on excess interest repayments in cash and the portion
of allowance for loan losses provided for loan principal charged-off by excess interest repayments based on our best estimation taking into account past experience and current conditions
for refunding of excess interest. The amount of provision for losses on excess interest repayments
for the year ended March 31, 2006 was ¥3,331 million.
However, taking into consideration the current business environment,
we modified our allowance to cover all estimated future repayments of excess interest derived from current loans receivable and loans previously
paid-off or charged-off. Consequently, this provision for the year ended March 31, 2007 was ¥12,664 million.
When
excess interest is refunded to borrowers, the excess amount is first applied to the outstanding loan
principal balance and charged-off from the principal. We have the legal right to offset such excess amount against the
outstanding loan principal. If the excess amount is greater than the outstanding balance of loan
principal, then we refund the deficit amount to the borrower in cash. We increased our allowance
for loan losses to provide for loan principal charged-off by excess interest repayments, in
addition to our reserve for losses on excess interest repayments in
cash. (See Operating Results Critical Accounting
Policies in Item 5.A of this annual report on Form 20-F.)
If the level of claims for repayment are higher than we anticipate, we may be forced to
increase our allowance and reserve related to losses on excess interest repayments and in turn recognize
additional provision for losses on excess interest repayments, which may substantially reduce our net interest income from lending
activities. We may also be required to further reduce the level of interest charged to customers.
Any or all of these factors could adversely affect our business, financial condition and results of
operations.
Furthermore, amendments to the Moneylending Business Law, the Contributions Law and the
Interest Rate Restriction Law were promulgated on December 20, 2006 and are scheduled to become
effective gradually over the next few years. As of an effective date to be fixed by a cabinet
order to be issued within one year from the promulgation date, moneylending businesses will become
subject to enhanced regulations (such as the introduction of additional documentary requirements
and an increase in the number of prohibited activities) and enhanced supervision (through measures
such as the introduction of business improvement orders). Within two and a half years from this
effective date and approximately three years from the promulgation date, the amendments will be
fully in force. When in force these amendments will:
|
|
|
abolish the concept of deemed valid payments under the Moneylending Business Law;
|
|
|
|
|
reduce the maximum interest rate under the Contributions Law from 29.2% per year
to 20% per year;
|
|
|
|
|
introduce administrative sanctions on charging interest in excess of the maximum
interest rate under the Interest Rate Restriction Law;
|
|
|
|
|
obligate registered moneylenders to investigate customers ability to repay and
prohibit excessive lending in respect of loans to individual customers; and
|
|
|
|
|
introduce further documentation requirements.
|
These or other such legislative or regulatory changes or court decisions could adversely
affect our business, financial condition and results of operations.
-9-
We may suffer larger loan losses if defaults on loans by our customers increase as a result of
weak economic conditions in Japan or otherwise
Weak economic conditions in Japan may lead to increased defaults on loans, including loans
that we guarantee, which in turn would cause us to increase our charge-offs of loans and our
provision for loan losses, thereby adversely affecting our results of operations and financial
condition. In recent years, the economic environment in Japan displayed improvements in corporate
profitability and business confidence, especially with respect to major companies, and rises in
the stock and real estate markets. These trends also led to improvements in employment and
personal consumption. However, disruptions to international credit markets triggered by a recent
deterioration of the subprime-mortgage market in the United States, including increased defaults
on home mortgages, have led to widespread difficulties in international markets including the New
York Stock Exchange and Tokyo Stock Exchange, where our equity securities are listed. If these
problems persist or continue to spread to other sectors, an economic downturn or recession in
Japan could occur. Moreover, the Japanese economy still faces uncertainties such as inflation in
prices for raw materials caused by the expansion of production activities, fiscal reconstruction,
and potential changes to the social security system. If the economic situation in Japan worsens,
we may be forced to charge-off loans in excess of our existing provision for loan losses, to
increase our provision for loan losses, to pay out on loans that we guarantee beyond our reserve
for guarantee losses, or to tighten our credit screening policies, which would limit our
acquisition of new customers. In addition, we may not adequately evaluate or control risks
associated with the loans we make, such as the creditworthiness of the borrower, and may
experience greater defaults than we anticipate as a result. Any such factors could adversely
affect our financial condition or results of operations.
An increasing number of our customers seeking protection from creditors under the Bankruptcy Law or
related laws could require us to increase our provision for loan losses and charge-offs
In recent years, the number of legal means with which retail borrowers can seek protection
from creditors has increased. For instance, amendments to the Bankruptcy Law of Japan (the
Bankruptcy Law) that became effective in January 2005 are aimed at achieving prompt, efficient,
effective and fair procedures for personal bankruptcy, and to simplify the procedure for, and
improve debtors protection under, personal bankruptcy. Under these amendments, an individual
debtor can take advantage of a unified discharge procedure and a larger scope of assets that may be
retained by insolvent debtors. These amendments to the Bankruptcy Law have also improved the
effectiveness of the automatic stay, preference, offset and other practical provisions for fair
treatment among creditors. We generally recover very little of any loan made to a customer that
has entered personal bankruptcy proceedings.
This and other laws of Japan, including the Special Conciliation Law and the Civil
Rehabilitation Law, may discourage borrowers who would otherwise make an effort to repay the
entirety of their loans from doing so if they perceive a relative ease of using these legal means
to discharge their debts. As a result, the number of our customers who seek legal protection from
enforcement of terms of payment or adjournment of payment may increase. If, as a result, the
number of delinquent loans increases, we may be required to charge-off those loans or increase our
provision for loan losses and our results of operations could be adversely affected. Any further
amendment to the Bankruptcy Law or related laws that increases protection of the assets of
individual debtors or reduces the burden of declaring personal bankruptcy would also have a
materially adverse impact on our results of operations.
-10-
We may change our portfolio of products and services from time to time and expand the business
areas in which we operate but may fail to achieve the intended results
While we were traditionally a finance company that specialized in unsecured lending to
individuals in Japan, we review our portfolio of products and services on an ongoing basis and
change them as appropriate to remain competitive in the markets that we serve. For example, in
June 2004, in response to the diversified needs of SMEs and consumers, as well as to maximize our
corporate value, we sold most of the outstanding balance of our unguaranteed consumer loans to
NETCARD, Inc. (formerly known as Orient Credit Co., Ltd.), a consumer finance company, in order to
concentrate our resources on providing loans with guarantors, such as our Business Assist loans,
and otherwise serving SME owners. With respect to financial services for SME owners, in addition
to extending Business Assist loans and Business Timely loans, which are unguaranteed, unsecured
loans made under pre-approved revolving credit lines to SME owners, we also concentrate on the
provision of real estate finance, and leases and installment loans. With respect to the quality of
operating assets, we seek to accumulate prime assets with lower credit risks through acquisition of
prime customers through the promotion of our alliance strategy.
Changes in our portfolio of products or services, including those described above, may fail
to generate the results we desire and adversely affect our results of operations or financial
condition. For example, deterioration of the quality of our operating assets due to deterioration
in the financial condition of SMEs caused by rapid changes in the economic environment and other
factors could adversely affect our financial condition and results of operations.
In addition, we have expanded and plan to continue to expand the business areas in which we
operate. Principally, in addition to providing integrated financial services to SMEs and their
owners in Japan, we also engage in real estate-related businesses (including providing secured
loans to property companies and principal investment in real estate), distressed loan servicing,
investment banking, securities and venture capital operations and leasing operations. As we expand
our business operations, we compete with companies that we did not previously consider to be
competitors and who often have established track records and greater name recognition,
substantially larger financial, technical, personnel and marketing resources and larger customer
bases than we do. There can be no assurances that we will be successful in expanding our
operations in each of these business areas in line with our managements expectations or at all.
If we are unable to compete, we may fail to expand our operations and our financial condition or
results of operations could be adversely affected.
Our success also depends on our ability to attract and retain employees with the skills and
market knowledge that will allow us to expand our various businesses. Competition to employ and
retain such personnel is high. There can be no assurance that we will successfully and
consistently meet personnel recruitment and retention goals, and any failure to do so may restrict
our ability to develop our businesses and may have adverse effects on our business, financial
condition and results of operations.
Our real estate-related businesses are subject to numerous risks, including the health of the
Japanese economy, regulatory and legal changes, and our ability to adequately evaluate and manage
these risks
Recently, our secured loans portfolio has grown significantly, reflecting our strategic shift
towards the promotion of financial services to SMEs and their owners centering on real estate
financing to property companies, through active sales and marketing efforts by our Real Estate
Group, which was established to supervise all the real estate-related businesses in June 2006.
Proceeds from these loans are primarily used by our customers as working capital for acquisition of
properties for property development and/or for resale. The health of the real estate market in
Japan is closely tied to larger economic trends. Thus, the value of real estate mortgaged or
pledged to us by our customers could decline if Japanese economic conditions deteriorate, exposing
us to significant risks. In addition, with respect to secured loans to property companies, we are
also exposed to risks that our customers may not complete development projects in a timely manner
or at all, resulting in the developers failure in their business and an inability to repay the
loans to us, or that the completed property will not have the value we anticipated, resulting in
lower collateral value than we expected. We may also fail to adequately evaluate or control risks
associated with the loans we make, such as the creditworthiness of the borrower or development or
other risks associated with the property, or we may fail to correctly value, or successfully
realize the value of, the collateral. As a result, we may experience greater defaults than we
anticipate or fail to recognize the amounts we anticipate upon enforcement of collateral.
Environmental liabilities unknown at the time we make loans could also impair the value of
properties securing our loans.
-11-
Secured loans for property development or resale purposes are generally made for short terms
and have relatively large principal amounts compared to other loans that we lend. This has
increased our short-term funding requirements, which we may not be successful in meeting or
accurately evaluating. This could constrain our ability to make new loans.
Furthermore, in the event taxation regimes concerning our real estate-related businesses,
including land taxation, are amended, costs of acquisition and sale of real estate may increase,
and could adversely affect our real estate-related businesses.
In addition to secured real estate finance, our direct investments in real estate have
recently grown significantly. Any deterioration in market conditions in Japans real estate
markets, including tightening of regulations with respect to real estate financing or investment,
may adversely affect the value of real estate held by us as principal and our real estate-related
businesses in general.
Any or all of the above factors could have material adverse effects on our business, financial
condition or results of operations.
The fair value of our strategic investments could decline due to a deterioration of the economic
environment or other factors and adversely affect our financial condition
We invest in various companies for which we believe that such investment will improve our
ability to provide integrated financial services or other services and expand our business network.
As of March 31, 2007, the fair value of our investment securities was ¥38,384 million,
representing 8.5% of our consolidated total assets as of the same date. However, if the stock
prices of these companies were to decline significantly, or if the financial condition of these
companies were to worsen, for example, due to a deterioration of the economic environment, we could
suffer impairment losses on these securities or our shareholders equity ratio could decline due to
a fluctuation in unrealized profits or losses in investment securities, which could adversely
affect our financial condition and results of operations.
The strategic alliances, joint ventures and strategic investments which we have entered into may not yield attractive returns and could produce losses
We have been pursuing various strategic alliances and joint ventures with financial
institutions and other finance-related companies, which include arrangements to receive customer
referrals and to provide guarantees for their loans to customers. We have also in recent years
increased our investments in companies that have the potential to complement our business
strategically. The book value of these strategic investments was
¥28,674 million and ¥23,368
million as of March 31, 2006 and 2007, respectively.
We expect to continue seeking strategic alliances, joint ventures and strategic investments to
establish a strong business infrastructure and expand sales channels, but may not be able to
successfully develop such alliances or to grow or maintain profits. These strategic alliances,
joint ventures and strategic investments may not achieve profitability and we may incur impairment
losses or other damage with respect to such investments.
We may also fail to adequately evaluate or control risks associated with these investments or
with loans that we guarantee as part of some of our strategic alliances, such as the
creditworthiness of the borrower or other risks associated with such loans, or we may fail to
correctly value, or successfully realize the value of, any collateral for loans that we guarantee.
Our rights and remedies may also be more limited under our strategic alliances, joint ventures and
strategic investments than when we engage in lending or other businesses directly. As a result, we
may experience greater payouts on guarantees than we anticipate, fail to recognize the amounts we
anticipate upon enforcement of collateral associated with loans we guarantee, or incur other
damage.
Moreover, while strategic alliances, joint ventures and strategic investments that aim at
specific markets may attract our existing customers or those of our alliance partners, we may not
be successful in attracting the new customers that we require in order to expand our customer base
which in turn could reduce the profitability of our core business. Any or all of these factors
could adversely impact our business, financial condition and results of operations.
-12-
Increasing competition in the loan servicing market in which Nissin Servicer operates could reduce
our profitability
Our subsidiary, Nissin Servicer Co., Ltd. (Nissin Servicer), is engaged in the purchase of
specific money claims from financial institutions through a process of invited tender. An increase
in the number of companies entering this market, together with the contraction in liquidity in the
market for bad debts due to the economic recovery in Japan, has lead to increasingly severe
competition. In response to these factors, and in order to maintain our competitiveness in the
purchase of specific money claims, we are pursuing a proactive approach to financial institutions,
efficient collection activities which take into consideration the customers revitalization efforts
and profitability, and enhancement of real estate-related revitalization businesses. We believe
that these activities, together with the development of new areas of business such as liquidation
of assets, securitization-related and corporate revitalization-related businesses, have allowed us
to maintain competitiveness in the current business environment. However, if we are unable to
maintain competitiveness in the purchase of specific money claims, or if there are rapid increases
in purchase prices or falls in the level of commission fees, we may be unable to purchase these
loans at favorable prices or at all, and our servicing business may have decreased profitability or
losses, which could adversely affect our business strategies and results of operations.
Our business in China is subject to a number of risks associated with doing business overseas and,
in particular, is subject to extensive Chinese government regulation that changes frequently, and
these regulations could adversely affect our business and operating results
Our subsidiary, Nissin Leasing (China) Co., Ltd. (formerly known as Matsuyama Nissin
Investment Consulting (Shanghai) Co., Ltd.; Nissin Leasing (China)), operates leasing, non-bank
financing and other businesses in China. We aim to expand our presence in China and such expansion
will require further investment of capital and management resources. Our proposed expansion also
involves a number of risks associated with doing business overseas, such as difficulties in the
political and/or economic relationship between Japan and China, social or economic turmoil due to
social unrest, terrorism or other factors and/or general strikes and other disruptions to working
conditions. Expanding our operations in China may require significantly more investment and
resources than we currently anticipate, which may lead to adverse consequences for our business,
results of operations and/or financial condition.
In addition, the Chinese government has broad discretion and authority to regulate the
leasing, non-bank finance and other industries in China. The Chinese government exercises
significant control over financial and other markets, as well as Chinas economic growth, through
the allocation of resources, controlling payment of foreign currency-denominated obligations,
setting of monetary policy and provision of preferential treatment to particular industries or
companies. Existing regulations or government action in China may constrain our operations, and
new regulations, the readjustment of previously implemented regulations or other government action
could require us to change our business operations in China, increase our costs, prevent us from
repatriating profits to Japan, or limit our ability to finance or conduct activities in China.
Furthermore, Chinas commercial legal system is still under development, and even where
adequate law exists in China, enforcement of laws or contracts may be uncertain and sporadic. The
relative inexperience of Chinas judiciary including in relation to international commercial matters creates additional
uncertainty as to the outcome of any litigation, and interpretation of statutes and regulations may
be subject to government policies reflecting domestic political changes. Our activities in China
are subject to administrative review and approval by various national and local agencies of Chinas
government. As a result of the changes occurring in Chinas legal and regulatory structure or
otherwise, we may not be able to secure requisite governmental approval for our activities, or
approvals we have received, such as the leasing license obtained by Nissin Leasing (China), may be
suspended or revoked. Any of these factors could adversely affect our business, financial
condition and operating results.
-13-
Any future inability to obtain funds from lenders or access the debt capital markets on favorable
terms could impair our ability to extend loans to borrowers, reduce our competitiveness and the
profitability of our lending and adversely affect our financial condition
Ready access to funds on favorable terms is essential to our business. We raise funds
primarily through loans from financial institutions and by issuing debt securities in the capital
markets. As of March 31, 2007, the aggregate amount of our borrowings was ¥345,075 million. The
difference between the interest rates we charge our customers and the interest rates we pay to our
financing sources is the key factor impacting our profitability. As of March 31, 2007, our
weighted period-end average contractual interest rate on outstanding loans in our loan portfolio
was 13.8% per annum, while our weighted period-end average contractual interest rate for both
short-term borrowings and long-term borrowings was 1.9% per annum.
As of March 31, 2007, 75.6% of our borrowings, or ¥260,817 million, were long-term borrowings,
62.4% of our borrowings, or ¥215,357 million, came from loans from banks, non-bank financial
companies, insurance companies and other financial institutions, 19.9% of our borrowings, or
¥68,840 million, came from issuances of corporate bonds and commercial paper, and 17.6% of our
borrowings, or ¥60,878 million, came from other sources, including securitization of certain loans
receivable. Based on their evaluations of our long-term or short-term financial prospects, any of
these lenders could cease to finance our business or to offer funds on favorable terms.
In particular, a downgrade in our credit ratings or those of similar companies or Japanese
companies generally, for instance, could result in an increase in the interest rates that lenders
charge us and also result in a shift in the sources for funding that we choose to access. For
example, the downgrades of our debt rating by the Japan Credit Rating
Agency, Ltd., or JCR, in April 2003 and December 2005, led
us to curtail our debt issuances and increase our reliance on bank
loans, which typically bear
higher interest rates. On September 27, 2007, JCR announced that it had lowered our debt rating again, which could prevent us from issuing debt in Japan at favorable rates or at all. In addition, any negative publicity about small business or consumer
finance lenders such as that seen in 1999 with respect to the unlawful or improper practices of
small business lenders could also make lenders reluctant to extend credit to us or companies in our
industry in general. Further, as a result of the recent decisions of the Supreme Court with respect to gray-zone interest rates, we have faced increasing
difficulties in obtaining bank funding on favorable terms as a result of such lenders decreasing
the amount of funds available to loan companies in general. In addition, the disruptions to
international credit markets triggered by the recent deterioration of the subprime-mortgage market
in the United States have led to widespread difficulties in international financial and capital
markets, and constrained our ability to borrow or to securitize assets.
As a result of these factors, we have recently experienced difficulty in accessing the total
amount of funds that we desire for our business operations, and we expect that our cost of
borrowing may increase in the short term. Moreover, as a result of the above factors and/or as a
result of ongoing restructuring of the Japanese financial sector, and of regional banks in
particular, our lenders may fail or adopt lending policies unfavorable to us.
-14-
A number of other factors largely beyond our control could also impair our ability to borrow,
including severe disruptions of the financial markets (such as the recent disruptions triggered by
the U.S. subprime-mortgage market difficulties), negative views about the prospects for the finance
industry generally or further downgrades of Japans sovereign debt ratings. Any impact from these
factors on our capital procurement environment could increase our interest expenses. An inability
to obtain sufficient funds from lenders or capital markets on favorable terms or at all could
impair our ability to extend loans to borrowers or reduce our competitiveness and the volume and/or
the profitability of our lending.
Although contractual borrowing interest rates that we are required to pay are subject to
fluctuations due to the market environment and other factors, the contractual lending interest rate
in our loan business is subject to various restrictions under Japanese law. Therefore, in order to
minimize our interest fluctuation risk, we are pursuing financing with fixed interest rates for
borrowings from financial institutions and issuances of corporate bonds. As of March 31, 2007, our
fixed rate borrowings, including those fixed through hedging from derivative transactions,
comprised 48.4%, and our variable rate borrowings comprised 51.6%, of our total borrowings.
However, we may not be able to effectively control our interest rates on borrowings. Moreover, we
expect that our cost of borrowings may increase in the short term, while our average contractual
interest rates on loans that we extend to our customers is decreasing, as a result of the Japanese
legal and regulatory changes reducing the interest rates that we may charge to our customers and
our focus on higher-quality credit customers. This in turn could reduce our net interest margins.
Any or all of these factors could adversely affect our financial condition and results of
operations.
An increase in prevailing market interest rates would increase our interest expense and thus could
reduce the margins we receive on our loans to our borrowers
Interest rates in Japan have been extremely low for several years, reflecting the Bank of
Japans monetary policies, including the zero interest rate policy, which was in place for most
of the period from February 1999 until it was ended in July 2006. Also, the official discount rate
offered by the Bank of Japan has remained at 0.1% since September 2001 until it was increased to
0.4% in July 2006. Partly as a result of this policy, the weighted period-end average contractual
interest rates on our own borrowings have been extremely low in recent years: 1.4% as of March 31,
2006 and 1.9% as of March 31, 2007 for our long-term borrowings.
As a result of a recent change in policy by the Bank of Japan, short-term interest rates have
recently risen in Japan and may continue to do so. In addition, market interest rates have risen
generally as a result of the recent credit market disruptions triggered by the U.S.
subprime-mortgage market difficulties. Consequently, our lenders may increase interest rates on
their loans to us, and we may not be able to pass our increased interest expenses to our customers
in the form of higher rates on our loans due to competitive considerations and to the legal limit
in Japan on interest rates that we may charge, which will be reduced. Any increase in the interest
rates our lenders charge us could thus have an adverse effect on our operating margins and
profitability.
Any failure to implement our business strategies successfully will negatively impact our ability to
achieve our financial targets and our managements expectations for business growth
Our strategies include further developing certain business areas in which we operate,
including our real estate-related businesses, our China-related
businesses, our investment banking
business and our servicing business. Further, our strategies will require us to achieve a
transformation into a comprehensive non-bank financial services provider and to continue the
reinforcement of our integrated risk management capabilities and the improvement of our brand image
through strengthening our approach to compliance. Achieving our
strategic goals will require significant management time, finances and other resources and we may not be
successful in implementing our strategies to achieve the growth or returns expected by our
management. In addition, changes in the business and/or economic environments in which we aim to
operate and other uncertain or unforeseen factors may make it difficult for us to achieve the
targets we have set. There can be no assurance that we will be successful in meeting the
quantitative or qualitative targets set out or that our management will not change such targets in
the future.
-15-
Our risk management structure is based primarily upon observed historical trends in our business
and the experience of our employees and we may not be able to predict future risk exposure
With effect from April 1, 2007, we established a new risk management division with
responsibility for assessing the risks involved in our business and the profitability and capital
efficiency of the Group in view of such risks. Because some of our methods of managing these risks
are based upon the use of observed historical trends, borrower and market behavior and other
historical measures primarily through the experience of our employees, these methods may not allow
us to accurately predict future risk exposures, which could be significantly greater than our
historical measures indicate. This in turn could have a material adverse effect on our business,
financial condition and results of operations.
Any disruption, outages, delays or other difficulties experienced by our information or
technological systems and networks could adversely affect our business
We increasingly rely on internal and external information and technological systems and
networks to generate new business, provide services to customers and manage our operations. In
particular, our business depends on:
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the ability of our automated funds transfer system to handle high volumes of phone
calls and to provide customers with a convenient system which offers reliable privacy
protection;
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the reliability and security of third-party databases from which we obtain credit
information about our customers;
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the reliability of third-party wire transfer services which we use to disburse loans
to accounts designated by our customers; and
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the reliability of the financial institutions that hold our customers accounts from
which we automatically transfer their payments to us.
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In addition, we outsource a significant part of our hardware and software responsibilities, in
order to manage our operating transaction and accounting data, confidential customer information
and other back-office data operations. (See Our Operations
Integrated Financial Services
Segment
Technology
in Item 4.B of this annual report on Form 20-F.)
Our systems are vulnerable to damage or interruption from human error, natural disasters,
power loss, computer hackers, computer viruses and similar events or the loss of support services
from third-parties such as our systems solution providers, telephone carriers and Internet backbone
service providers. Any disruption, outages, or delays or other difficulties experienced by any of
these technological and information systems and networks could affect our financial condition and
results of operations.
-16-
We may have to constrain our business activities to avoid being deemed an investment company under
the U.S. Investment Company Act of 1940
In general, a company which is or holds itself out as being engaged primarily in the business
of investing, reinvesting or trading in securities may be deemed to be an investment company under
the U.S. Investment Company Act of 1940 (the Investment Company Act). If we were to be deemed an
investment company under the Investment Company Act, we would be prohibited from issuing our
securities in the United States and may have to terminate the listing of our American Depositary
Shares (ADSs) on the New York Stock Exchange or other sponsorship promoting a U.S. trading market
for our issued securities. In order to avoid these prohibitions, we may be forced to forgo
otherwise attractive business opportunities, potentially limiting our liquidity, growth and
profitability.
Compliance with regulations on internal control could adversely affect our results of operations
We are subject to Section 404 of the Sarbanes-Oxley Act and our co-chief executive officers and
chief financial officer must include the following statements in each annual report under Section
404 of the Sarbanes-Oxley Act from the fiscal year ended March 31, 2007:
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a statement of managements responsibility for establishing and maintaining adequate
internal control over financial reporting for the Group;
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a statement identifying the framework used by management to conduct the required
evaluation of the effectiveness of the Groups internal control over financial
reporting;
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managements assessment of the effectiveness of the Groups internal control over
financial reporting as of the end of the Groups most recent fiscal year, including a
statement as to whether or not the Groups internal control over financial reporting is
effective; and
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a statement that the registered public accounting firm that audited the financial
statements included in the annual report has issued an attestation report on
managements assessment of the registrants internal control over financial reporting.
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Strengthening our corporate governance structure in order to comply with the Sarbanes-Oxley
Act has required significant costs, as well as management attention and other corporate resources,
and we expect that compliance with the Sarbanes-Oxley Act will continue to require significant
costs and resources. In addition, we will be subject to regulations on internal control over
financial reporting under Japanese law from the year ending March 31, 2009 and may require
additional costs and resources to comply with such new Japanese regulations. These compliance
costs and resource requirements may be greater than we anticipate, and focusing limited corporate
resources on these compliance matters may require us to constrain our business activities, which in
turn could adversely affect our financial condition or results of operations.
Misconduct by an employee or director could harm us and is difficult to detect and deter
Our employees and directors could engage in misconduct, which includes, among other things:
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conduct that exceeds the authority given to the employee or director, such as
approval of a transaction for which he or she does not have proper authorization;
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concealment of such unauthorized conduct or authorized but unsuccessful activities
that cause material harm to us; and
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improper use or disclosure of confidential information or leakage of personal
information.
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Any such misconduct by an employee or director could result in regulatory sanctions, legal
liability and serious reputational or financial harm to us. We have not suffered materially from
misconduct by an employee or director in the past. However, the precautions we take to prevent and
detect such misconduct may not always deter or prevent it, even though we recognize compliance as
one of the most significant challenges for management. Moreover, even if we succeed in managing
the conduct of our own employees and directors, we may suffer reputationally or financially from
misconduct by other lenders in the finance industry. This could generate an unfavorable perception
of our business activities in general among potential customers, or lead to introduction of
additional regulations or laws favoring borrowers that might erode our profitability, which could
adversely affect our financial condition and results of operations.
-17-
Any failure to maintain the confidentiality of personal information of our customers could
adversely affect our results of operations
We keep and manage sensitive personal information obtained from our customers. If we fail to
maintain the confidentiality of personal information for any reason, our results of operations
could be adversely affected in a number of ways. We could be subject to lawsuits for damages from
our customers if they are injured as a result of the release of their personal information.
Failure to maintain the confidentiality of personal information could subject us to penalty under
the Law Concerning the Protection of Personal Information of Japan (the Personal Information
Protection Law). We could incur additional expenses associated with changing our security
systems, either voluntarily or in response to administrative guidance or other regulatory
initiatives from the government, or in connection with public relations campaigns designed to
prevent or mitigate damage to our corporate image or reputation. Any damage to our reputation
could also adversely affect our ability to retain or acquire customers or to maintain or establish
strategic alliances with third-parties, or otherwise adversely affect our financial condition or
results of operations.
Our chairman and his family may exercise influence over important business decisions in a way that
conflicts with other shareholders interests
As a result of the direct and indirect ownership of or control over our outstanding shares of
common stock by Kunihiko Sakioka, the Chairman of the Board of Directors, and members of his
family, who collectively beneficially own 36.0% of our outstanding shares as of March 31, 2007,
Kunihiko Sakioka and his family members may collectively exercise a controlling influence over
important decisions affecting our business and affairs. These decisions may involve significant
corporate transactions such as a sale of any company within the Group, corporate restructuring,
investment in other businesses or assets, or the terms of future financing. The interests of these
shareholders in these and other matters may differ from those of other shareholders of the Company.
Because we expect our shares and ADSs will be treated as stock of a passive foreign investment
company, or PFIC, for U.S. federal income tax purposes, you may be subject to materially adverse
tax consequences
As we expect that 50% or more of our gross asset value constitutes passive assets, generally
meaning assets not constituting part of an active trade or business under U.S. federal tax rules,
we expect that our shares and ADSs will be treated as stock of a passive foreign investment
company, or PFIC, for U.S. federal income tax purposes. U.S. persons who hold our shares or ADSs,
either directly or indirectly, may be subject to materially adverse U.S. federal income tax
consequences upon the sale or disposition of the shares or ADSs and upon distributions with respect
to the shares or ADSs to the extent the distributions are excess distributions, distributions in
excess of a normal rate of distribution as calculated for PFICs. Gain
realized on the sale or other disposition of shares or ADSs would in general be taxed as ordinary income.
If you are a U.S. holder, you would be treated as if you had realized such gain and certain excess
distributions ratably over your holding period for the shares or ADSs, and the income allocated to
such prior tax years would be taxed at the highest tax rate in effect for each such year to which
the gain was allocated, together with an interest charge in respect of the tax attributable to each
such year. In addition, dividends that you receive from us will not be eligible for the 15% tax
rate applicable to qualified dividend income if we are a PFIC either in the taxable year of the
distribution or the preceding taxable year. (See Taxation United States Tax Considerations
Passive Foreign Investment Company Rules
in Item 10.E of this annual report on Form 20-F.)
-18-
Holders of ADSs have fewer rights than shareholders and have to act through the depositary to
exercise those rights
The rights of shareholders under Japanese law to take actions including voting their shares,
receiving dividends and distributions, bringing derivative actions, examining our accounting books
and records and exercising appraisal rights are available only to holders of record on our register
of shareholders or our register of beneficial shareholders. Because the depositary, through its
custodian agents, is the registered holder of the shares underlying the ADSs, an ADS holder cannot
take these actions except through and to the extent permitted by the depositary. If we instruct
the depository to provide ADS holders with the opportunity to vote in a timely manner, the
depositary will make efforts to vote the shares underlying the ADSs as instructed by ADS holders.
ADS holders, however, may not be provided with such rights on a timely basis or at all.
If you hold fewer than 100 shares, you do not have the right to vote the shares or transfer them
and if you have ADSs representing fewer than 100 shares, you cannot withdraw the shares underlying
the ADSs and cannot require us to purchase the underlying shares
One hundred of our shares constitute one unit. A holder who owns fewer than 100 shares owns
less than a whole unit. The Japanese Corporate Law restricts the rights of a shareholder who holds
shares of less than a whole unit. In general, holders of shares constituting less than one unit do
not have the right to vote under the unit share system. Our Articles of Incorporation also provide
that no share certificates will be issued with respect to any number of shares constituting less
than one unit. As the transfer of shares normally requires delivery of share certificates, any
fraction of one unit for which no share certificates are issued is non-transferable. Furthermore,
under the unit share system, holders of shares constituting less than one unit have the right to
require us to purchase their shares. However, holders of ADSs that represent other than multiples
of a whole unit cannot withdraw the underlying shares representing less than one unit and,
therefore, they will be unable to exercise the right to require us to purchase the underlying
shares. As a result, holders of ADSs representing shares in lots of less than one unit will not
have access to the Japanese markets to sell their shares through the withdrawal mechanism. (See
Memorandum and Articles of Association Limitations
Affecting Security Holders
Japanese Unit
Share System
in Item 10.B of this annual report on Form 20-F.)
-19-
Item 4. Information on the Company
A. History and Development of the Company.
The Company was established in 1960 in Matsuyama, Ehime Prefecture in the northern part of the
island of Shikoku (one of Japans four major islands) as a joint stock corporation under the laws
of Japan. Our first business was dealing in discount commercial bills. We widened our business
activities by extending operations to real estate-secured loans in 1967 and consumer loans in 1972,
and became a registered moneylender under the Moneylending Business Law in 1984. We created loan
products with the aim of better meeting our customers needs at different stages of their business
development, such as Small Business Owner loans (currently Business Assist loans) in 1981,
Wide loans (currently Smart Assist loans) in 1990 and Business Timely loans in 2000. We
steadily expanded our areas of operation by opening offices in Hiroshima in 1988, Osaka in 1990,
Kyushu in 1992, Tokyo in 1994, and Nagoya, Sendai, Hokkaido and Shizuoka in 1995. In 1998, we
adopted a dual head-office system, with one head office in Tokyo, through which our operations are
primarily managed, and the other in Matsuyama. As of March 31, 2007, we had 35 loan offices
throughout Japan. In recent years, we have also expanded our customer base through strategic
alliances with banks, consumer finance, leasing and other financial services companies.
In July 2001, we established Nissin Servicer to acquire and service non-performing assets of
banks and other financial institutions. Nissin Servicer has listed its stock on the Mothers market
of the Tokyo Stock Exchange and was Japans first loan servicing company to become a public
company.
In November 2003, we established NIS Lease Co., Ltd. (NIS Lease) to commence finance and
operating lease operations in Japan.
In June 2004, NIS Property Co., Ltd. (NIS Property) was renamed from a subsidiary previously
established by us and commenced real estate-related businesses operations in Japan.
In June 2004, we sold most of the outstanding balance of our unguaranteed consumer loans to
NETCARD, Inc. (formerly known as Orient Credit Co., Ltd.) in line with our strategic shift to
operate our traditional consumer loan business on a substantially reduced scale.
In July 2004, we established Matsuyama Nissin Investment Consulting (Shanghai) Co., Ltd.
(currently Nissin Leasing (China) Co., Ltd.) to commence arrangement of investments and other
businesses such as providing market research services and assistance to Japanese companies planning
to establish a presence in China, as well as to operate a real estate agency and a leasing business
in China.
In December 2004, we acquired 100% of the outstanding shares (99.5% as of March 31, 2007) of
Yamagen Securities Co., Ltd. (currently NIS Securities Co., Ltd.; NIS Securities) to commence
securities and investment banking business operations in Japan.
In September 2005, Nissin Leasing (China) obtained a leasing license from the Chinese
authorities and began operating full-scale leasing business in China.
In December 2005, we acquired 69.3% of the outstanding shares of APREK Co., Ltd. (APREK) to
enhance provision of financial services to owners of SMEs in Japans Kyushu region.
With effect from October 2006, we changed our name to NIS Group Co., Ltd.
In December 2006, we acquired 37.5% of the outstanding shares of Araigumi Co., Ltd.
(Araigumi), currently an affiliate accounted for under the equity method, through a subscription
to a third-party allotment of new shares, in order to mutually cooperate and promote services in
the field of real estate investment, real estate development and construction-related businesses.
In April 2007, we established the Investment Banking Department, and in May 2007, we
established NI Strategic Partners Co., Ltd. (NI Strategic Partners), to enhance our investment
banking businesses, such as support services for corporate real estate transactions, mergers and
acquisitions (M&A), management buyouts (MBOs) and leveraged buyouts (LBOs).
Our principal executive office is located at Shinjuku L-Tower 25F, 6-1, Nishi Shinjuku
1-chome, Shinjuku-ku, Tokyo 163-1525, Japan, and its phone number is +81-3-3348-2424. Our
principal Internet website is http://www.nisgroup.jp. Information on this website does not form
part of this annual report on Form 20-F.
Information about our principal capital expenditures and divestitures is provided in Item 5.B
of this annual report on Form 20-F.
-20-
B. Business Overview.
Overview
We provide integrated financial services to SMEs and their owners in Japan, tailored to their
stages of development and particular needs. We provide our services both directly and through
alliances and joint ventures with other companies including financial institutions. We also
service distressed loans purchased from third-parties and engage in leasing and related businesses
in Japan, as well as investment banking, securities and principal investment businesses. In
addition, we also engage in real estate-related businesses, including providing secured loans to
property companies and principal investment in real estate. In recent years, we have commenced
leasing and other operations in China. We currently report our business activities in accordance
with the following four business segments:
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integrated financial services;
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servicing business;
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real estate business; and
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other businesses.
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For
the year ended March 31, 2007, our operating income was
¥1,321 million and our net losses were
¥1,610 million.
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Our Strategies
Transform from a Mono-line Lending Business into an Integrated Financial Business
We seek to further diversify our business lines in order to better meet the broader needs of
SMEs, while we continue to position the lending business as our principal business. We aim to
gradually decrease our relatively high dependence on interest income by diversifying revenue
sources, and to increase the proportion of revenue from fee businesses. In line with this
strategy, we intend to focus on real estate-related businesses (including real estate investment and real estate secured loans), investment banking,
securities and venture capital businesses, servicing business and businesses in China. We believe
that the diversification of our business lines will contribute to securing stable revenues as well
as to minimizing the impact of business and/or market-specific risks.
Provide Integrated Financial Services to SMEs in Japan
We seek to provide a broad range of integrated financial services to SMEs in Japan and their
owners. These services include the following:
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Broad Range of Services to SMEs
. We provide a variety of financial services to
SMEs, depending on their growth stage, in an effort to be our customers primary source
for financial services. In addition to SME loans, we provide leasing and other
services, including secured loans.
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Services to SME Owners.
For SME owners, we provide SME loans (described in Our
Operations below), as well as installment credit. We seek to customize our products
to the needs of SME owners. For example, we may extend loans to the owners business
directly, with a guarantee from the owner or a third-party, or secure such loans if
appropriate collateral is available.
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In addition to our direct channels, we also seek to provide our services through alliances and
joint ventures with other financial service companies. We apply our credit expertise as a lender
to SMEs and their owners to take advantage of our alliance companies customer bases and
established brand values to more effectively offer our products and services, as well as to develop
new products for these customers. Depending on the alliance, we market these products under our
own or our allied brands.
-21-
Expand Real Estate-related Businesses
We
have recently experienced significant growth in our real
estate-related businesses whereby
our real estate assets have increased approximately threefold in March 31, 2007 compared to March
31, 2006. We have additionally achieved a significant increase in revenues from real estate
investment. We seek to continue expanding our real estate-related businesses in Japan in order to
take advantage of our credit and secured lending expertise in Japans real estate markets. We
believe that the recent stabilization or increase of asset values in major real estate markets in
Japan, particularly major urban areas such as Tokyo, provides an opportunity for secured real
estate financing and principal investment in real estate. We seek to leverage our credit and
secured lending expertise in relation to SMEs, as well as our experience in servicing distressed
loans, to grow various real estate-related businesses, including the following:
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Providing real estate secured loans to property companies for working capital.
This
is currently our fastest growing business line, and we focus primarily on small to
medium-sized property companies, which develop small commercial and residential
properties or resell such properties that they purchase. In addition, we established
the Real Estate Structured Finance Department in September 2006, and started providing
non-recourse loans, which generally carried larger loan principal, mainly to special
purpose companies for real estate-related projects.
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Investing in real property with a view to resale.
We
seek to purchase real estate,
particularly commercial as well as residential rental properties, that we believe can
be operated for profit or resold at a higher price following renovations of the
property or improvements in property management. We conduct this business primarily
through NIS Property.
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Acquisition of distressed real estate.
Taking advantage of our network of financial
institutions selling distressed loans collateralized by real estate and our experience
in servicing such loans, we seek to acquire distressed real estate assets that we
believe can be restructured and resold at a higher price. We conduct this business
through Nissin Servicer.
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While we endeavor to expand our real estate-related businesses, we also intend to strengthen
our risk management in relation to real estate-related businesses.
Develop Servicing Business
We have been increasing revenues from our servicing business, of which revenues from sales of
real estate purchased through our servicing business have significantly increased for the year
ended March 31, 2007 compared to the previous fiscal year. We seek to continue to grow our
servicing business in Japan by expanding into new business areas and customer bases as well as
further developing the existing businesses, such as servicing of unsecured loans and real
estate-related loans, and revitalization-related businesses.
Develop Overseas Business, Particularly in China
We seek to expand our full-scale leasing business in China, which we operate through Nissin
Leasing (China). We believe that economic and commercial growth in China has created a demand for
sophisticated leasing and other financial services, particularly among growing enterprises.
Through Nissin Leasing (China), we seek to become one of Chinas premier leasing companies. We
also seek to use our financial expertise and experience in operating a large-scale business in
China to provide consulting services for companies looking to conduct business in China, and to
provide trading, factoring and other integrated financial services in China.
Develop Investment Banking, Securities and Venture Capital Business
Through NIS Securities, we provide investment banking services targeted at SMEs in Japan,
including the arrangement of financing in the capital markets, initial public offerings and other
financial advisory services. We seek to take advantage of our network of relationships with SMEs
to provide customized investment banking services tailored to their stages of growth. We also seek
to expand our proprietary trading and brokerage services.
In addition, we believe that attractive principal investment opportunities, including equity
investments and financing through leveraged buyouts and management buyouts, exist with many of our
financial services clients, which are SMEs in relatively early stages of their growth. With NI
Strategic Partners and our Investment Banking Department, we seek to take advantage of our network
of relationships with such companies to make proprietary venture capital investments in growth
enterprises with a view to capital gain. We believe such principal investments may also lead to
other investment banking opportunities.
In this manner, we seek to integrate investment banking, securities and venture capital
businesses into our overall package of integrated financial services that we offer to SMEs and
their owners in Japan.
-22-
Our Markets
We provide integrated financial services to SMEs and their owners in Japan, tailored to their
stages of development and particular needs. In recent years, we have also commenced leasing and
other operations in China. Below is a summary of the major industries in which we operate.
Integrated Financial Services
Japanese SME Finance Industry.
We operate in the Japanese small business finance industry,
which provides secured or unsecured loans to SMEs and their owners. Many of our loan products are
extended principally to individuals who own SMEs on the basis of individual creditworthiness,
rather than to entities based upon business creditworthiness, which is the focus of general
business finance companies. However, to the extent that we provide loans to SMEs as well as their
owners, we compete with lenders in the business finance industry that loan to SMEs.
Japanese Real Estate Finance Industry.
We operate in the Japanese real estate finance
industry, which provides secured loans for the purpose of financing the purchase or development of
real estate. Our secured loans are generally provided to small and medium-sized property companies
as working capital for the purpose of acquiring properties for resale and/or developing small
commercial and residential properties. Real estate finance to property companies is one of our
largest growth businesses and a strategic focus for us. We also provide secured general-purpose
loans to individual customers.
Japanese Leasing Industry.
Through our subsidiary, NIS Lease, we compete in the Japanese
leasing industry, which provides finance and operating lease products and services to customers in
Japan. Our target market is SMEs in Japan. We therefore compete with other leasing and non-bank
finance companies that provide services to such companies.
Chinese Leasing and Other Industries.
We operate in the Chinese leasing market through Nissin
Leasing (China). We have also been expanding, and will continue to
expand, into other markets in
China and have begun engaging in consultancy services, import and export services and factoring
businesses through subsidiaries of Nissin Leasing (China).
Japanese Consumer Finance Industry.
We operate in the Japanese consumer finance industry,
which provides mainly unsecured loans without restrictions on the purpose of use to individuals in
Japan. We compete with traditional consumer finance companies, as well as banks and credit finance
companies outside the consumer finance industry which have started in recent years to provide
loan products similar to ours for consumers seeking to consolidate loans from multiple lenders.
Japanese Investment Banking and Securities Industries.
Through our subsidiary NIS Securities
and NI Strategic Partners as well as our Investment Banking Department, we operate in the Japanese
investment banking and securities industries. Japan has sophisticated financial markets and we
compete with Japanese and foreign investment banks to provide investment banking and securities
services to SMEs. We also operate a principal investment business in Japan. We focus on SME
markets in Japan in order to take advantage of our expertise and relationships with SMEs that we
have developed mainly through our traditional financial services.
Servicing Business
Japanese Loan Servicing Industry.
We operate in the Japanese loan servicing industry through
our subsidiary, Nissin Servicer. We are primarily focusing on collection activities in a manner
that takes into consideration our customers revitalization efforts and profitability, and the
enhancement of real estate-related businesses. In addition, we are developing new areas of
business under this business segment, such as liquidation of assets, and securitization-related and
corporate revitalization-related businesses. The Japanese loan servicing industry has grown
rapidly in the last few years due to the accelerated disposal of non-performing loans by Japanese
financial institutions as a result of Japanese government measures to combat non-performing loans.
We compete with a variety of companies for loan servicing opportunities and, in particular, we
consider affiliated companies of the major consumer finance or SME
loan companies to be our primary competitors. According to the Ministry of Justice, as of December 31, 2006, 96
companies were registered as licensed servicing companies, of which we believe 13 were affiliated
with major consumer finance or SME loan companies.
Real Estate Business
Japanese Real Estate Industry.
We conduct integrated real estate businesses in Japan, with a
primary focus on real estate located in Tokyo, Osaka and other major cities. In our real estate
renovation business, we purchase commercial properties and increase tenant occupancy rates through
renovations to improve cash flows, resulting in resale of the properties at higher prices. We also
retain some of these properties to obtain stable cash flows. Real estate development is another
major focus of our real estate business. While competition to acquire land for development has
been increasing recently in Japan, we believe that we have the ability to successfully compete for
small to medium-sized development projects including development of commercial properties, where
competition is, to a certain extent, less intense. We believe that our value-creating real estate
business model provides us with a strong competitive factor in the recently growing real estate
business in Japan.
-23-
Our Operations
From the fiscal year ended March 31, 2007, we reclassified the way we report our business
segments into the following four business segments:
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integrated financial services;
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servicing business;
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real estate business; and
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other businesses.
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Our integrated financial services segment includes the provision of loan products, such as
secured loans, Business Assist loans, Business Timely loans, Smart Assist loans and First
Plan loans, to individuals and SMEs, as well as the provision of credit guarantees and leasing and
securities business.
In our servicing business segment, we mainly acquire for our own portfolio and service
non-performing debts from banks and other financial institutions in Japan, as well as invest in
real estate properties acquired in connection with the disposal of non-performing loans by
financial institutions.
Our real estate business segment, which was previously included in our other businesses
segment, is now disclosed as a separate business segment, from the year ended March 31, 2007, due
to its increased significance in our business. In this business segment, we invest in, develop and
manage real estate properties as well as conduct asset management business.
Operations in our other businesses segment include a consultancy business for business owners,
an insurance agency business, and other businesses.
Integrated Financial Services Segment
Our net interest income from lending activities in the integrated financial services was
¥18,568 million, ¥17,970 million and ¥6,319 million for the years ended March 31, 2005, 2006 and
2007, respectively. Operating income from the integrated financial services segment was ¥6,542
million, or 80.4% of our consolidated operating income for the year ended March 31, 2005, and
¥7,426 million, or 63.6% of our consolidated operating income for the year ended March 31, 2006.
We had ¥4,108 million of operating losses from the integrated financial services segment for the
year ended March 31, 2007.
-24-
The following tables provide the balance of loans outstanding for each category of our
loan products as of the end of each fiscal year shown and the average balance of loans outstanding
for each category of our loan products during each fiscal year shown:
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March 31,
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2003
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2004
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2005
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2006
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2007
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(In millions)
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Balance of loans outstanding by category
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Secured loans
(1)
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¥
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1,587
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¥
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10,003
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¥
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18,812
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¥
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91,610
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¥
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139,691
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SME loans
(2)
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71,218
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75,827
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79,823
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90,729
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81,688
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Consumer loans
(3)
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104,931
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93,064
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50,431
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44,158
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34,959
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Other loans
(4)
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36
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573
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6,296
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10,681
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14,605
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Total balance of loans outstanding
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¥
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177,772
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¥
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179,467
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¥
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155,362
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¥
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237,178
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¥
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270,943
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Year Ended March 31,
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2003
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2004
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2005
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2006
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2007
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(In millions)
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Average balance of loans outstanding by category
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Secured loans
(1)
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¥
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1,252
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¥
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2,235
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¥
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9,976
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¥
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39,496
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¥
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115,779
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SME loans
(2)
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62,567
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73,556
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76,651
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86,976
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88,159
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Consumer loans
(3)
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104,836
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100,192
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58,018
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47,250
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39,621
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Other loans
(4)
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13
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261
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4,166
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10,243
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12,236
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Total average balance of loans outstanding
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¥
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168,668
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¥
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176,244
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¥
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148,811
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¥
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183,965
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¥
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255,795
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(1)
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Secured loans comprise secured loans to property companies and secured loans to individuals
and SMEs.
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(2)
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SME loans comprise Business Assist loans (formerly Small Business Owner loans) and Business
Timely loans.
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(3)
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Consumer loans comprise Smart Assist loans (formerly Wide loans) and First Plan loans
(formerly consumer loans). In addition, we sold most of the outstanding balance of our
unguaranteed consumer loans to NETCARD, Inc. (formerly known as Orient Credit Co., Ltd.) for
¥32,697 million on June 1, 2004.
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(4)
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Other loans comprise investment in direct finance leases, installment loans, discount notes and
others.
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(5)
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Names of loan products were changed from October 1, 2006.
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Recent changes in the laws, regulations and judicial interpretations affecting the
moneylending business in Japan have affected the rates of interest that we charge on loans that we
extend to our customers. See Regulation below for a discussion of the laws, regulations and
judicial interpretations affecting our business. Taking into consideration the regulatory
environment in the moneylending industry, as well as our intention to diversify our business and
accelerate our alliance strategy partly by targeting lower interest rate loans to higher quality
customers, we lowered the maximum interest rates we charge with respect to all loan products
originated on or after October 1, 2006. In general, interest rates for all loan products will be
15% or less for loans in a principal amount of ¥5 million or more and 18% or less for loans in a
principal amount of less than ¥5 million.
-25-
Secured Loans
Secured loans comprised 51.6% of our total balance of loans outstanding as of March 31,
2007. Secured loans represented our growing loan product during the year ended March 31, 2007,
with growth of 52.5% in secured loans outstanding during this period. Secured loans are primarily
loans made to property companies that are secured by real property. Also, we make secured loans to
individuals and SMEs in Japan that are secured by real estate or securities, in many cases as
consolidation loans for customers who do not qualify for our unsecured Smart Assist loans. In
addition, we commenced providing non-recourse loans through the Real Estate Structured Finance
Department. Loans to property companies for the purpose of property development or acquisition of
properties for resale represented a significant majority of our secured loans as of March 31, 2007
and are the strategic focus of our secured loan business. Our gross interest income from secured loans significantly increased to ¥7,818 million in the year ended March 31, 2007 from
¥2,886 million in the year ended March 31, 2006. In addition, we achieved a charge-off ratio of
0.02% for secured loans for the year ended March 31, 2007.
Secured Loans to Property Companies.
We established our Real Estate Finance Department in
February 2004 in order to focus on loans designed for property companies secured by real property.
In addition, we established the Real Estate Structured Finance Department in September 2006 to
provide real estate-related services particularly for securitization, including non-recourse loans,
loan arrangement and other services. These loans have grown significantly in the last three fiscal
years from a balance of ¥7,433 million as of March 31, 2004 to ¥97,260 million as of March 31,
2007. These loans are primarily used as working capital for the development of small commercial or
residential buildings by property companies. Our primary customers for secured loans are small to
medium-sized property companies in Japan. We determine the interest rates for these loans on an
individual basis, and the weighted period-end average interest rate on secured loans to property
companies at March 31, 2007 was 7.5% per year. We also generally charge an up-front origination
fee of typically around 2% on each of these loans. These loans have a high degree of liquidity and
typically mature in a period ranging from 1 month to 2 years. The average maturity of secured
loans to property companies as of March 31, 2007 was 0.6 years.
The following table shows the total number of accounts, the balance of loans outstanding, and
the average balance of loans per account with respect to secured loans to property companies:
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As of March 31,
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2003
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2004
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2005
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2006
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2007
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(In millions except number of accounts)
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Number of secured loan accounts
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20
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99
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204
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339
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Balance of loans outstanding
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¥
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¥
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7,433
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¥
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11,890
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¥
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52,330
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¥
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97,260
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Balance of loans outstanding per account
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372
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120
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257
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287
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The following table shows advances of secured loans, recognized on the disbursement date,
to property companies:
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Year Ended March 31,
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2003
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2004
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2005
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2006
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2007
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(In millions)
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Advances
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¥
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¥
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10,397
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¥
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18,716
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¥
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72,587
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¥
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167,895
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Unlike many of our other loans, the principal amounts of secured loans made to property
companies are generally relatively large. This is because these loans are used for property
acquisition or development, typically in Tokyo or other large urban areas in Japan, where land
prices and development costs are relatively high. During the fiscal year ended March 31, 2007, the
average principal amount of our new secured loans to property companies per account was ¥308
million. As a result, we are subject to the risk that declines in real estate values, and in turn
the value of our collateral for such loans, could subject us to significant unsecured risk on these
loans.
Secured Loans to Individuals and SMEs.
Our secured loans to individuals and SMEs are
typically general purpose loans secured by real property or securities. Many of our customers for
these loans do not qualify for our unsecured Smart Assist loans or other consumer loans. Our
customers for these loans often have other outstanding secured loans, and we make loans secured by
second mortgages over the customers property in amounts generally based on the market value of the
mortgaged property in excess of the outstanding balances of other loans to that customer secured
with such property. The weighted period-end average interest rate on secured loans to individuals
and SMEs as of March 31, 2007 was 7.1% per year. We also
generally charge an up-front origination fee of typically around 2%,
and no greater than 5%,
on each of these loans. The average maturity of secured loans to individuals and SMEs as March 31,
2007 was 1.6 years.
-26-
SME Loans
Our SME loans comprised 30.1% of our total balance of loans outstanding as of March 31, 2007.
SME loans consist mainly of Business Assist loans (formerly called Small Business Owner loans)
and Business Timely loans. Business Assist loans are, in general, guaranteed, unsecured loans of
up to ¥30 million in principal amount that require one or more guarantees from individuals with an
income source that is separate from that of the borrower. Business Timely loans are unguaranteed,
unsecured loans made under pre-approved revolving credit lines to more creditworthy SME owners. We
do not restrict the use of proceeds from SME loans. We believe that customers generally use the
proceeds of SME loans to obtain working capital for their businesses or to repay existing loans.
SME loans are generally contracted at a fixed interest rate of up to 18% per year and payable
monthly. Customers may prepay their SME loans at any time without penalty.
For
Business Assist loans, we charge an up-front origination fee of
basically around 2%, and no
greater than 5%, for each loan at the time of cash disbursement. These loans have initial repayment
terms of up to 7 years and 2 months. The average maturity of our Business Assist loans at March
31, 2007 was 2.7 years. Under normal circumstances, we do not extend additional credit to Business
Assist loan customers until they pay off their existing Business Assist loans.
Business Timely loans are our unguaranteed, unsecured loans to SME owners under pre-approved
revolving credit lines. A Business Timely loan contract is
automatically renewed after three years.
However, the credit line is forfeited under certain conditions such as a delinquent loan for 16
days or more. We generally conduct a credit assessment of an account holder every three months,
and may terminate the account for a number of reasons. Business Timely Cards are issued to
customers who enter into a Business Timely loan contract, under which they may borrow unguaranteed
and unsecured Business Timely loans of up to ¥4.99 million. As a general rule, a customer seeking
to enter into a Business Timely loan contract may have loans outstanding from only up to two other
companies at the time of application. Of customers who entered into a Business Timely loan
contract, 46.4% had outstanding balances as of March 31, 2007.
In contrast to other lenders in Japan that target corporations and other business entities, we
serve almost entirely self-employed individuals, primarily individual SME owners in a wide range of
industries, through our SME loans. As of March 31, 2007, a significant portion of the borrowers of
SME loans were self-employed individuals in wholesale, retail and restaurant businesses, while the
remaining borrowers were primarily self-employed individuals in industries such as manufacturing,
construction, transportation, communication, agriculture, fishery and other services. Our loan
process for Business Assist loans often begins when staff at our general branches or loan offices
call a prospective customer to determine the loan amount to be applied for, followed by a credit
check. Our staff then hold a face-to-face meeting with the customer and the guarantor to ensure
that all parties understand the content and implications of the loan agreement. We market Business
Timely loans to more creditworthy SME owners from whom we do not require a guarantor.
-27-
The following table shows the total number of SME loan accounts and the balance of SME loans
per account:
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As of March 31,
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2003
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2004
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2005
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2006
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2007
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Number of SME loan accounts
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Business Assist loans
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23,439
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24,739
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24,414
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25,797
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21,398
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Business Timely loans
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14,511
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16,163
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17,493
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17,228
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15,225
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Total
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37,950
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40,902
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41,907
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43,025
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36,623
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Balance of loans outstanding per account (in thousands)
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Business Assist loans
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¥2,300
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¥2,311
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¥2,415
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¥2,537
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¥2,729
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Business Timely loans
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1,192
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1,154
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1,193
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1,467
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1,531
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The following table shows advances on a contractual basis, recognized on the disbursement
date, to our customers of SME loans:
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Year Ended March 31,
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2003
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2004
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2005
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2006
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2007
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(In millions)
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Advances
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Business Assist loans
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¥
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36,560
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¥
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35,061
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¥
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45,834
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¥
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53,134
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¥
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37,129
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Business Timely loans
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14,330
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13,936
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17,408
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22,249
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14,573
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Total
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¥
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50,890
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¥
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48,997
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¥
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63,242
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¥
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75,383
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¥
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51,702
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We do not make additional advances under existing Business Assist loan contracts. The
majority of advances of Business Assist loans are to new customers, with the balance being made to
existing customers under new contracts.
Consumer Loans
Consumer loans consist primarily of debt-consolidation loans to individuals who are indebted
to multiple lenders, which we refer to as Smart Assist loans (formerly called Wide loans).
Consumer loans comprised 12.9% of our total balance of loans outstanding as of March 31, 2007. Our
balances of consumer loans have declined both in absolute amounts and as a percentage of total
loans outstanding in recent fiscal years, primarily as a result of the growth of our secured loan
and business owner loan products and our sales and marketing emphasis in such areas.
We extend Smart Assist loans of up to ¥10 million at a fixed contractual interest rate of no
greater than 18% per year. In addition, we charge an up-front origination fee of no greater than
3% at the time of disbursement. The loans are repaid in equal monthly payments, comprising both
interest and principal, over a period of up to 10 years and 2 months. The average maturity of
Smart Assist loans as of March 31, 2007 was 3.4 years. The borrower must supply one or more
guarantors with an income source separate from that of the borrower. We require the proceeds from
these loans to be applied to the consolidation of loans from other consumer finance companies.
Under normal circumstances we do not extend additional credit to Smart Assist loan customers until
they pay off their existing Smart Assist loan contracts.
-28-
The following table provides information on the total number of Smart Assist loan accounts and
the balance of Smart Assist loans per account:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
Number of Smart Assist loan accounts
|
|
|
36,482
|
|
|
|
35,126
|
|
|
|
31,440
|
|
|
|
27,701
|
|
|
|
22,259
|
|
Balance of loans outstanding per account (in thousands)
|
|
¥
|
1,754
|
|
|
¥
|
1,636
|
|
|
¥
|
1,514
|
|
|
¥
|
1,486
|
|
|
¥
|
1,471
|
|
The following table shows advances on a contractual basis, recognized on the disbursement
date, to our customers of Smart Assist loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
|
(In millions)
|
Advances
|
|
¥
|
34,294
|
|
|
¥
|
20,709
|
|
|
¥
|
15,897
|
|
|
¥
|
14,977
|
|
|
¥
|
10,494
|
|
We do not make additional advances under existing Smart Assist loan contracts. Almost
all advances of Smart Assist loans are to new Smart Assist loan customers, with the balance being
made to existing Smart Assist loan customers under new contracts.
In
recent years, we have increasingly shifted our resources away from our consumer loan
business because of competition from the major consumer finance companies, which benefit
significantly from the scale of their consumer loan operations. In line with this strategic shift,
on June 1, 2004, we sold most of the outstanding balance of our consumer loans other than Smart
Assist loans (comprising mainly unguaranteed consumer loans) to NETCARD, Inc. (formerly known as
Orient Credit Co., Ltd.) for ¥32,697 million. These other consumer loans are no longer material to
our business, and we expect that they will continue to decrease. As of March 31, 2007, the total
balance of consumer loans outstanding other than Smart Assist loans was ¥2,212 million,
representing only 0.8% of our total balance of loans outstanding.
Other Loans
Other loans comprised 5.4% of our total balance of loans outstanding as of March 31, 2007 and
4.7% of our total average loans outstanding for the year ended March 31, 2007. The average
maturity of other loans as of March 31, 2007 was 4.1 years. These loans mainly consist of direct
financing leases and installment loans to SMEs through our wholly-owned subsidiary, NIS Lease, in
order to meet capital needs of SMEs in Japan to expand their businesses.
Leasing
Our leasing business is a key growth business and we are also strengthening our leasing
business in China. In July 2004, we established Nissin Leasing (China), which obtained a leasing
license from the Chinese government and began operating a full-scale leasing business in China in
September 2005. With the Company providing the necessary funding and capital, Nissin Leasing
(China) provides operating leases, finance leases and services for offices and commercial
facilities in China. Nissin Leasing (China) also engages in the consulting business with respect
to Chinese incorporation procedures, credit investigations and product test marketing.
-29-
Other Products and Services
Credit Guarantee.
We guarantee loans to customers of third-party lenders for which we receive
guarantee fees. We provide credit-guarantee services, including for third-party loan transactions,
to customers of several third-parties, including Chuo Mitsui Finance Service Co., Ltd. (Chuo
Mitsui Finance), our former affiliate, Shinsei Business Finance Co., Ltd. (Shinsei Business
Finance), our former affiliate, and Sanyo Club Co., Ltd. (Sanyo Club).
Investment Banking, Securities and Venture Capital Business.
In December 2004, we started
investment banking and securities business through the acquisition of current NIS Securities, which
provides investment banking services. We seek to take advantage of our network established through
existing customers as well as those customers of our business alliances. As these businesses grow,
we believe that we can take advantage of our knowledge gained through lending in this market to
provide investment banking and securities services to emerging companies, such as the arrangement
of financing, initial public offerings, securities brokerage and listings on exchanges and other
financial advisory, asset financing and asset management services. In December 2005, we completed
our first transaction as lead underwriter in an initial public offering with the listing of Gamepot
Inc. on the Ambitious market of the Sapporo Securities Exchange. NIS Securities also engages in
trading for its own account, realizing trading profits of ¥60 million in the fiscal year ended
March 31, 2007.
In addition, we established our Investment Banking Department and NI Strategic Partners which
engage in principal investment activities, focusing on growing enterprises and promoting support
services for real estate transactions, and mergers and acquisitions, as well as financing through
leveraged buyouts and management buyouts. During the year ended March 31, 2007, we invested
¥35,984 million in 227 companies of which ¥16,938 million was invested in 25 listed companies,
¥16,215 million was invested in 193 non-listed companies and ¥2,831 million was invested in 9 of
our affiliates. We seek principal investment opportunities primarily through our network of
relationships with SMEs in Japan.
Opening of Loan Accounts
Effective screening and approval of loan applicants and guarantors are critical factors in the
success of our business. The application procedures for loans we extend focus principally on
confirmation through an interview of the identity and credit capacity of the customer and, if
relevant, the guarantor. A new customer or guarantor must first provide proof of identity, date of
birth, address, place of work, length and nature of employment, family situation, existing
borrowings from other lenders, and other details. To establish their credit standing, we check the
customer information and, if relevant, guarantor information against our proprietary database and
also check the customer information against other databases. One such database is maintained by
numerous credit information centers solely for use by consumer and small business finance
companies, sales finance companies and credit sales companies. These credit information centers
for consumer and small business finance companies record all transactions on a real-time basis.
Participating companies are required to provide customer credit information on an ongoing basis.
Another database with information on delinquent loans is shared by moneylenders, banks and
installment sales finance companies.
For secured loans, we principally provide loans backed by real estate to property companies.
The terms and conditions of these loans are heavily negotiated. To determine the creditworthiness
of a potential customer, we examine various factors including publicly available information (such
as its financial statements) and the value and quality of the real estate to be secured. We also
consider whether the potential customer has a concrete business plan.
Loan approvals for Business Assist loans, Business Timely loans and Smart Assist loans depend
on both telephone and face-to-face interviews. The staff in the local loan office, a loan office
manager and our credit screening department review the information provided by applicants for
Business Assist loans, Business Timely loans and Smart Assist loans. The credit screening
department reviews and makes a decision based on the information relating to the customer and, if
applicable, the guarantor forwarded by the loan office after it completes its check. The
information we examine may include information about the applicants employer or business including
its registration and financial information.
-30-
To determine the creditworthiness of potential borrowers, we examine a combination of factors
including their history of borrowings, employment, and outstanding loans, particularly those that
are secured.
For Business Assist loans and Smart Assist loans, within two or three business days from a
successful initial application, the staff at the local loan office normally visit the applicant and
the guarantor to execute the loan and guarantee agreements and to discuss the consequences of the
guarantee provision to ensure that both the applicant and the guarantor know the purpose of the
loan and the obligations they separately incur. We have never used blanket guarantees, a practice
for which some small business lenders came under widespread social criticism in 1999. A blanket
guarantee holds the guarantors liable for all current and future loans of the borrower, even those
of which the guarantor is not aware.
For Business Timely loans, a credit line is established immediately following a successful
application. We generally conduct a credit assessment of an account holder every three months.
This credit assessment is conducted based on a credit reference on each customer from a credit
information center for consumer and small business finance companies. This credit reference,
together with our own data, helps us to maintain the customers credit level at what we believe is
an appropriate level. We may terminate the account for a number of reasons.
Collection
If a borrower fails to make a timely repayment, the loan office that holds the loan account
has initial responsibility for collection of any overdue repayment. Overdue balances on loans
accrue interest at a penalty rate of up to 29.2% per year depending on loan products. We have the
right in case of non-payment of a loan installment or any other specified event of default to
accelerate the maturity of the loan only if the borrower fails to repay the interest portion within
the maximum rate set forth in the Interest Rate Restriction Law. Under loan agreements that we
have used from July 1, 2006, non-payment of gray-zone interest (which is interest in excess of
the maximum rate set forth in the Interest Rate Restriction Law) generally does not trigger
acceleration. From the first day of delinquency, our computer system produces automatic daily
reports on overdue repayment. Then, loan office personnel attempt to contact the customer by
telephone and, if applicable, the guarantor. Most delinquent customers pay their overdue balances
shortly after this notice. When initial collection efforts fail, loan office personnel continue
their collection efforts, and if necessary, we transfer the loan collection responsibility to our
legal section for collection.
Each loan office is in charge of collection efforts for a loan account until it is deemed to
be a bad loan account. A loan account becomes bad when the borrower has deceased or become
bankrupt, or a legal proceeding has begun to recover the loan or in the following cases:
|
|
|
In the case of a secured loan, Business Assist loan or Smart Assist loan, when
interest payments are delinquent for 44 days;
|
|
|
|
|
In the case of a Business Timely loan, when contractual payments are past due for 7 days; and
|
|
|
|
|
In the case of a consumer loan, when interest payments are delinquent for 67 days.
|
We transfer all bad loan accounts to our Research Group, which then takes on the collection
responsibility. When we choose to provide an allowance, the Research Group continues to examine
the possibility of collection and compile information with which to determine whether or not to
charge-off the debts. See Allowance for Loan Losses, Reserve for
Losses on Excess Interest Repayments, and Loan Charge-offs in Item 5.A of this annual report on
Form 20-F for discussion of the determination of our allowance for loan losses.
-31-
Since February 2004, we began extending real estate financing to property companies mainly
through our Real Estate Finance Department. Although the amount of these real estate-backed loans
has grown significantly, the charge-off ratio was only 0.02% for the year ended March 31, 2007.
Collection responsibility is, in principle, held by the loan office that holds the loan account.
However, in October 2006, the Company established its Central Credit Management Section in the
Companys Research Group, which specializes in monitoring and collecting secured loans and loans
with an outstanding balance of more than ¥10 million, to enhance the promptness and effectiveness
of responses to collections of large debts of the Company.
Technology
Branch and Office Network.
The application and e-mail servers in our branches and offices are
connected through dedicated lines. We outsource maintenance and operation of the networks to an
affiliate of NEC Corporation (NEC).
Customer Information.
An outsourcing center in Matsuyama houses our main computer, which
stores all customer information. Our main computer stores information for approximately 2.7
million customers and can store information for up to approximately 4 million customers.
Transaction data is transferred to our main computer in real time. We outsource maintenance and
operation of the main computer to another affiliate of NEC. Although we make back-up copies of our
data on a daily basis, we do not maintain a back-up system that can immediately replace our main
computer in the event our main computer becomes inoperative.
Loan Disbursements.
We wire loan funds to accounts designated by borrowers, using wire
transfer services provided by Sanyo Financial Technology. Unlike many of our competitors, we do
not use proprietary automated loan machines to disburse loans, in order to minimize our physical
infrastructure. Until May 31, 2004, we disbursed loans through
ATMs operated by third-parties such
as local and regional banks with whom we had entered into access agreements. On May 31, 2004, we
ceased all arrangements to use these ATMs. As a result, we now rely on bank accounts designated by
borrowers to disburse cash, in addition to cash disbursement at our loan offices.
Servicing Business Segment
Our
operating revenues from the servicing business segment were
¥3,893 million, or 12.0% of
our consolidated operating revenues for the year ended March 31,
2005, ¥7,918 million, or 20.9% of
our consolidated operating revenues for the year ended March 31, 2006, and ¥10,375 million, or
26.9% of our consolidated operating revenues for the year ended March 31, 2007. Operating income
from the servicing business segment was ¥1,738 million, or 21.4% of our consolidated operating
income for the year ended March 31, 2005, ¥4,648 million, or 39.8% of our consolidated operating
income for the year ended March 31, 2006, and ¥5,198 million, or 393.5% of our consolidated
operating income for the year end March 31, 2007.
The following table shows information on the operating assets for the servicing business
segment as of the end of each fiscal year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
Purchased loans
|
|
¥
|
3,078
|
|
|
¥
|
5,059
|
|
|
¥
|
14,863
|
|
|
¥
|
25,947
|
|
|
¥
|
31,565
|
|
Real estate for
sale
|
|
|
20
|
|
|
|
|
|
|
|
668
|
|
|
|
6,126
|
|
|
|
19,439
|
|
-32-
Purchased Loans
Mainly through Nissin Servicer, we service distressed loans that we purchase from banks and
other financial institutions for our own portfolio. We renegotiate the terms and conditions of
these loans with the borrowers and carry and service the loans through their maturities. These
loans are normally collateralized or carry personal guarantees.
The following table shows information on the aggregate purchase price and aggregate principal
and interest collection of the purchased loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
Aggregate purchase price of distressed
loans
|
|
¥
|
4,854
|
|
|
¥
|
4,502
|
|
|
¥
|
16,896
|
|
|
¥
|
19,779
|
|
|
¥
|
19,565
|
|
Aggregate principal and interest
collection of distressed loans
|
|
|
2,859
|
|
|
|
4,538
|
|
|
|
10,095
|
|
|
|
11,923
|
|
|
|
18,856
|
|
Real Estate for Sale
In addition to our loan purchasing operations, we acquire real properties in connection with
disposal by financial institutions of non-performing loans. In addition, we provide our customers
with services in connection with the real properties that secure our customers loans, such as loan
revaluation services and purchase plans, with a view to increasing their property market value as
well as re-negotiating terms of repayment, which we believe will assist our customers corporate
revitalization plans and increase our revenue from our servicing business.
Real Estate Business Segment
Our operating revenues from the real estate business segment were ¥18 million, or 0.1% of our
consolidated operating revenues for the year ended March 31,
2005, ¥901 million, or 2.4% of our
consolidated operating revenues for the year ended March 31,
2006, and ¥5,307 million, or 13.7% of
our consolidated operating revenues for the year ended March 31, 2007. Operating losses from the
real estate business segment were ¥130 million for the year ended March 31, 2005. Operating income
from the real estate business segment was ¥250 million, or 2.1% of our consolidated operating
income for the year ended March 31, 2006, and ¥3,499 million, or 264.9% of our consolidated
operating income for the year ended March 31, 2007.
We purchase, renovate and develop primarily commercial as well as residential real estate in
Japan to operate for profit and for resale. We conduct this business mainly through our
wholly-owned subsidiary, NIS Property, as well as through our other consolidated subsidiaries. We
target real estate predominantly in the greater Tokyo metropolitan area, as well as other major
metropolitan areas in Japan, such as the greater Osaka area.
As of March 31, 2007, our real estate for sale and real estate under construction for sale had
a net book value of ¥26,599 million, an increase of ¥17,492 million, or 192.1%, compared with the
end of the previous fiscal year. This property consisted of 31 commercial properties and 2
residential properties.
-33-
The following table sets forth real estate for sale and real estate under construction for
sale in the real estate business by location in terms of number of properties and asset book value
as of March 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2007
|
|
|
|
Number of
|
|
|
Asset Book
|
|
|
|
Properties
|
|
|
Value
|
|
|
|
(In millions)
|
|
Tokyo
|
|
|
13
|
|
|
¥
|
15,595
|
|
Greater Tokyo metropolitan area
|
|
|
4
|
|
|
|
3,190
|
|
Osaka
|
|
|
5
|
|
|
|
2,669
|
|
Kyushu
|
|
|
1
|
|
|
|
142
|
|
Hokkaido
|
|
|
2
|
|
|
|
863
|
|
Other areas in Japan
|
|
|
8
|
|
|
|
4,140
|
|
|
|
|
|
|
|
|
Total
|
|
|
33
|
|
|
¥
|
26,599
|
|
|
|
|
|
|
|
|
The following table sets forth real estate for sale and real estate under construction
for sale in the real estate business by property type in terms of number of properties and asset
book value as of March 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2007
|
|
|
|
Number of
|
|
|
Asset Book
|
|
|
|
Properties
|
|
|
Value
|
|
|
|
(In millions)
|
|
Commercial properties:
|
|
|
|
|
|
|
|
|
Service and retail properties
|
|
|
24
|
|
|
¥
|
20,987
|
|
Office properties
|
|
|
3
|
|
|
|
1,985
|
|
Other properties
|
|
|
4
|
|
|
|
2,747
|
|
Residential properties
|
|
|
2
|
|
|
|
880
|
|
|
|
|
|
|
|
|
Total
|
|
|
33
|
|
|
¥
|
26,599
|
|
|
|
|
|
|
|
|
We operate our real estate businesses in collaboration with other group businesses. We
seek to take advantage of our network of relationships with SMEs and allied companies in Japan and
information we receive from our group companies. In particular, we take advantage of the networks
of Nissin Servicer with respect to our real estate-related servicing business, NIS Lease with
respect to our leasing business and our Real Estate Group with respect to our secured loan
business. We seek to obtain information from these companies regarding potential acquisitions of
properties that meet our investment criteria. In addition, we believe that our expertise in real
estate-related servicing business, leasing and secured lending supports our ability to effectively
manage our property portfolio. We also believe that the ability of our group companies to support
our real estate business through financing, leasing and other activities gives us an advantage in
the development, renovation, operation and sale of real estate.
Other Businesses Segment
Our other businesses segment includes business owner support services, such as an agency
business for life or non-life insurance companies, energy conservation and other consulting
businesses. Our operating losses from the other businesses segment were ¥19 million, ¥335 million and
¥423 million for the years ended March 31, 2005, 2006 and 2007, respectively.
Business in China
Through Nissin Leasing (China) and its subsidiaries, Shanghai Matsuyama Nissin Investment &
Consulting Co., Ltd. and Shanghai Nissin Trading Import & Export Co., Ltd., we provide various
non-bank financial services to our customers in connection with their businesses in China. We
operate a full-scale leasing business in China under a leasing license obtained from the Chinese
government in September 2005. We provide leasing services to our customers that seek to lease
equipment including construction machinery, office equipment and medical equipment. As of December
2006, we have finance lease assets of ¥2,818 million and 331 customer accounts. During the year
ended March 31, 2007, we began trading activities focusing on
equipment import and export services and factoring services. We have also recently commenced a consultancy
business in China to provide consulting services for companies contemplating conducting business in
China, as well as for Chinese companies contemplating conducting business in Japan.
-34-
Channels for the Origination, Guarantee and Acquisition of Loans and Real Estate
We have various loan acquisition channels for the origination and guarantees of loans for our
integrated financial services segment and for the acquisition of distressed loans for our servicing
business segment. For our real estate business segment, real properties are acquired mainly
through referrals and utilization of the Group, allied company and customer networks.
Within our integrated financial services segment, our direct channels include our loan offices
and automated telephone services. In addition, through alliances primarily with financial
institutions, we originate business through affiliates and third-parties, taking advantage of their
customer databases and brand recognition. We refer to this as our financial OEM strategy, in the
sense that we provide our original financial products through our alliance companies brands and
marketing channels.
Integrated Financial Services
We have sought to improve our operating efficiency by relying less on costly physical
infrastructure. Most of our competitors rapidly spread their physical presence throughout Japan,
particularly in the 1990s, with the establishment of networks of automated loan machines and
proprietary ATMs. Instead, we shifted our focus to eliminate unnecessary physical infrastructure,
relying on telephone, loan office and Internet interaction with our customers. More recently, we
have diversified our loan acquisition channels by using the channels of our alliance companies, as
we seek alternative ways, other than direct channels, to develop our loan business while avoiding
deterioration in the credit levels of our customers. However, the amount of loan origination from
our direct channels is increasing, primarily because of our focus in recent years on real estate
financing, which usually originates from our direct marketing and typically entails a large
principal amount.
In addition, we guarantee secured and unsecured SME loans receivable and unsecured consumer
loans receivable of alliance companies. We have sought alliances, especially with regional
financial institutions, to expand our customer base of SMEs, and focused efforts on business
expansion and promoting efficiency by pursuing group synergies. The following tables show loans
originating from new customers and loans guaranteed through our various distribution channels:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In millions)
|
|
Loan origination channels:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct channels
|
|
¥
|
59,363
|
|
|
¥
|
109,524
|
|
|
¥
|
192,762
|
|
Affiliate channels
|
|
|
18,822
|
|
|
|
16,125
|
|
|
|
10,228
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
¥
|
78,185
|
|
|
¥
|
125,649
|
|
|
¥
|
202,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In millions)
|
|
Channels for loans that we guarantee:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct channels
|
|
¥
|
318
|
|
|
¥
|
482
|
|
|
¥
|
489
|
|
Affiliate channels
|
|
|
7,383
|
|
|
|
12,368
|
|
|
|
17,974
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
¥
|
7,701
|
|
|
¥
|
12,850
|
|
|
¥
|
18,463
|
|
|
|
|
|
|
|
|
|
|
|
-35-
Direct Channels
The following are our principal direct channels, which have traditionally been and continue to
be our most important channels to acquire loans for our loan business:
|
|
|
Loan Offices
. Our loan offices enable loan applicants and current borrowers to meet
with our employees, who provide a full range of services, including disbursement of
cash, collection of repayments and responses to balance inquiries. Loan offices are
generally located near train stations and city centers in buildings owned or used by
banks and insurance companies. The total number of loan offices as of March 31, 2005
decreased significantly compared to that as of March 31, 2004, because we eliminated a
substantial number of our general branches following the sale of most of the
outstanding balance of our consumer loans to NETCARD, Inc. (formerly known as Orient
Credit Co., Ltd.) in June 2004 and concentrated our resources in providing loans to SME
owners. The total number of loan offices, however, increased from March 31, 2005 to
March 31, 2006, because of the acquisition of APREK, which also originates loans to SME
owners. We have recently integrated a number of our loan offices, while at the same
time expanding loan offices, and shifted our managerial resources into major
metropolitan areas in Japan to promote real estate financing, investment banking and
venture capital businesses, as well as other businesses. We established the Real
Estate Finance Department in February 2004, the Tokyo Sales Department in July 2004,
the Osaka Sales Department in February 2005, the Kyushu Sales Department in June 2006,
and the Nagoya Sales Department in March 2007. As a net result of this expansion in
major metropolitan areas and integration of offices, our total loan offices decreased
to 44 offices as of March 31, 2007.
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The following table shows selected information regarding our loan offices:
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As of March 31,
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2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
Total loan offices
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|
|
72
|
|
|
|
70
|
|
|
|
50
|
|
|
|
60
|
|
|
|
44
|
|
Full-time employees
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|
|
832
|
|
|
|
851
|
|
|
|
818
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|
|
|
998
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|
|
|
1,166
|
|
of which are dedicated to loan origination
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|
|
615
|
|
|
|
571
|
|
|
|
487
|
|
|
|
571
|
|
|
|
543
|
|
|
|
|
The number of full-time employees at loan offices decreased from March 31, 2003 to
March 31, 2005, because we increased the number of seconded employees to affiliates and
alliance partners in connection with our alliance strategy. Also, the sale of our
unguaranteed consumer loans in June 2004 contributed to the decrease in the number of
employees at loan offices. Subsequently, as of March 31, 2006 the number of full-time
employees and employees dedicated to loan origination increased because of our
acquisition of APREK for the development of the SME financing market in Japans Kyushu
region. The number of employees dedicated to loan origination as of March 31, 2007
subsequently decreased as a result of our integration of loan offices in line with our
strategic shift of managerial resources as described above, despite a steady increase
in the number of full-time employees from March 31, 2005 mainly due to recruitment of
new and mid-career employees for our real estate financing operations and leasing
business in the Peoples Republic of China.
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Automated Telephone Service
. We primarily serve our Business Timely and
unguaranteed consumer loan customers through our automated telephone service, which we
call the telephone cashing system. Loan applications through the telephone currently
comprise a majority of all applications and all loans extended. After opening an
account, customers place a toll-free call and follow pre-recorded instructions on our
computer system to receive computerized services such as for balance inquiries and withdrawal of funds up to their authorized limit. These
services enhance convenience for our customers by eliminating the need, and for some
customers, embarrassment of visiting a loan office or ATM of a consumer finance company.
They also greatly reduce the need and costs of personal service from our staff.
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-36-
Alliances
With the aim of establishing a strong business infrastructure and expanding our sales
channels, we have entered into business and capital alliances with various companies, including
banks. We maintain numerous referral relationships with other finance companies. These
relationships provide an opportunity for these alliance companies to generate fees, in the form
of commissions we pay based on acquired loan balances, in respect of loans that these companies
would otherwise reject because of the indebtedness level of the applicants. We benefit from
these relationships because we believe our credit assessment expertise gives us an advantage in
evaluating the creditworthiness of such borrowers. In addition, we currently rely mainly on the
channels of our alliance companies to provide loan guarantees. The following table shows our
major strategic alliances and loans originated to new customers and loans guaranteed through
each alliance company:
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Year Ended March 31,
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March 31,
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Alliance
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2006
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2007
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2006
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2007
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Commencement
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Alliance Company
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Alliance Details
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Loans Originated
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Loans Guaranteed
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(In millions
)
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June 2002
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Sanyo Electric Credit
Co., Ltd. and Sanyo
Club Co., Ltd.
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Provide funds to
users of Sanyo
Electric Credit
Co., Ltd.s leasing
finance, which we
partially
guarantee.
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¥
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409
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¥
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209
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¥
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6,806
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¥
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7,611
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April 2003
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Shinsei Bank, Ltd.
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Provide business
loans to SMEs
through a joint
venture with the
bank.
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866
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840
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3,178
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1,913
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November 2003
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USEN Corp.
USEN Partner Services
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Provide financial,
credit and
collection know-how
to USEN Corp. with
respect to USEN
service users
(mostly SMEs).
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3,445
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1,433
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|
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December 2003
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Venture Link Co., Ltd.
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Provide finance
support, leasing
and credit tools to
Venture Link
franchise members.
Also, provide funds
to customers of
subsidiary of
Venture Link.
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57
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71
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|
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|
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November 2004
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Chuo Mitsui Trust &
Banking Co., Ltd.
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Provide flexible
financial services
according to
business owners
needs by using our
credit expertise
and Chuo Mitsui
Trust & Banking
Co., Ltd.s network
of real estate
agents and SMEs.
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570
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698
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|
|
591
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2,041
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December 2005
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ShinGinko Tokyo, Ltd.
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Guarantee start-up
loans provided by
ShinGinko Tokyo,
Ltd. which target
owners of start-up
companies with
business history of
less than two years
and provide
financial and other
services.
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|
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205
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|
|
|
670
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June 2006
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USS Support Service
Co., Ltd.
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Guarantee credit
payment by users of
fund support
services provided
by USS Support
Service Co., Ltd.
in relation to the
purchase of used
cars.
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|
|
|
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|
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221
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|
September 2006
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The Bank of Fukuoka,
Ltd.
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Guarantee new loans
provided by the
Bank of Fukuoka,
Ltd. to mainly
start-up companies
with business
history of less
than two years.
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|
|
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|
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292
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|
November 2006
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The Hokkaido Bank,
Ltd.
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Guarantee new loans
provided by the
Hokkaido Bank, Ltd.
to mainly
companies, sole
proprietors and
potential
proprietors.
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14
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December 2006
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Kumamoto Family Bank,
Ltd.
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|
Guarantee new loans
provided by
Kumamoto Family
Bank, Ltd. to
mainly companies,
sole proprietors
and potential
proprietors.
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9
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-37-
Servicing Business
We acquire distressed loans for our servicing business segment through various channels
including banks, domestic/foreign investment funds, non-bank financial companies and the Resolution
and Collection Corporation (RCC). Auctions are another channel for us to acquire distressed loans.
We typically seek to bid in auctions based on a target of recovering 200% of the amount invested
over the next five years. However, an increase in the number of companies entering the loan servicing
market, together with the contraction in liquidity in the market for non-performing loans due to
the economic recovery in Japan, has led to increasingly severe competition. In response to these
factors, and in order to maintain our competitiveness in the purchase of distressed loans, we have
pursued a proactive approach to financial institutions, efficient collection activities which take
into consideration the customers revitalization efforts and profitability, and enhancement of real
estate-related businesses. We believe that these activities, together with the development of new
areas of business such as liquidation of assets and securitization-related and corporate
revitalization-related businesses, have allowed us to maintain competitiveness in the current
business environment.
Real Estate Business
Through NIS Property, we purchase real estate, particularly commercial properties as well as
residential rental properties, which we believe can be operated for profit or resale at a higher
price following renovations of the property or improvements in property management. The
information about these real estate properties is brought to us predominantly through referrals
from existing customers, trade connections and group companies, in particular Nissin Servicer, NIS
Lease, Araigumi and our Real Estate Group. We also utilize our Group network of relationships with
SMEs and allied companies in Japan as well as the personal networks of our employees to find
investment grade real estate properties. In addition, taking advantage of our network of financial
institutions selling distressed loans collateralized by real estate properties and our experience
in servicing such loans, we acquire distressed real estate properties that we believe can be
restructured and resold at a higher price. We conduct this business through Nissin Servicer.
-38-
Competition
Business Owner Finance Industry
Japans small business finance industries are becoming increasingly competitive. In the past,
the countrys financial system was more strictly regulated. In recent years, however, the
Financial Services Agency of Japan (FSA) and other government bodies have taken steps to
deregulate the financial system and allow increased competition.
We strategically target SMEs and their owners for our products and services. In this regard,
our products and services include those targeted at individual business owners as well as those
targeted at businesses, in some cases enhanced by guarantees or
collateral of the owners or third-parties. We compete with bank and non-bank finance companies in relation to our products and
services to SMEs. The major categories of competitors include the following:
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large Japanese non-bank finance and leasing companies that provide financing,
leasing and related services to SMEs, including Lopro Corporation, SFCG Co., Ltd., Orix
Corporation, Sumisho Lease Co., Ltd. and Mitsubishi UFJ Lease & Finance Co., Ltd.;
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Japanese banks and other financial institutions expanding out of their traditional
markets, particularly by forming joint ventures and alliances with finance companies,
to the extent that they provide loans or other financial services to SMEs and
individual business owners;
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foreign financial institutions, a number of which have been entering the Japanese
finance industry;
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credit card companies, particularly overseas companies such as MasterCard
Incorporated, which have formed distribution relationships with major Japanese consumer
finance companies; and
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non-financial institutions, including East Japan Railway Company, a railway company
that provides consumer credit services through in-house cards with electronic money
functions, and information technology companies including Yahoo Japan Corporation and
Rakuten, Inc., that provide consumer credit services through the Internet.
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We compete in our market on the basis of interest rates, speed and effectiveness of credit
assessment and credit risk management, product mix, ability to identify and maintain relationships
with strategic partners for customer referrals, brand recognition, location and network of offices
and marketing.
Although we sold most of the outstanding balance of our unguaranteed consumer loans to
NETCARD, Inc. (formerly known as Orient Credit Co., Ltd.) in June 2004, we continue to provide
services for a few of our remaining customers. With respect to these products, we compete with
large Japanese consumer finance companies and credit sales companies, including Takefuji
Corporation, Acom Co., Ltd., Promise Co., Ltd. and Aiful Corporation, which continue to seek
greater market share in the consumer finance market through extensive marketing.
Loan Servicing Industry
We compete in the Japanese loan servicing industry through Nissin Servicer. The industry has
grown rapidly in the last few years due to the accelerated disposal of non-performing loans by
Japanese financial institutions. However, the competition is also intensifying as the number of
entrants into the industry has increased, resulting in increased prices of distressed loans.
According to the Ministry of Justice, 96 companies were registered as licensed servicing companies
as of December 31, 2006, of which we believe 13 companies were affiliated with consumer finance or
SME loan companies. Our current and potential competitors include the Japanese financial
institutions that have obtained or may obtain a license to operate in the loan servicing market.
We compete in this market on the basis of our ability to identify loan servicing opportunities, the
purchase price we offer, loan servicing capability, effectiveness of credit assessment and credit
risk management and brand recognition.
Chinese Leasing Industry
We compete in the Chinese leasing industry through Nissin Leasing (China), which provides
leasing, consulting and factoring services in China. Though competition is increasing with major
Japanese leasing companies strengthening their businesses in the China region, we believe we can
differentiate ourselves by focusing our business mainly on local Chinese entities.
Real Estate Industry
We compete with major Japanese and foreign real estate and property companies, including
property development companies and real estate investment funds. Acquiring suitable land in Japan
at favorable prices has become increasingly difficult as competition in this industry has
intensified over the past few years. However, we believe we can successfully compete by taking
advantage of our network of relationships with SMEs and alliance companies in Japan and support
from our group companies, as described in Our Operations
Real Estate Business Segment
above.
-39-
Regulation
The Moneylending Business Law, the Contributions Law and the Interest Rate Restriction Law
We are subject to an extensive regulatory scheme under Japanese law, including:
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The Law Concerning Regulations on Moneylending Business, etc., which will be renamed
the Moneylending Business Law by mid-December 2007 as explained in
Recent
Developments
below (the Moneylending Business Law);
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The Law Concerning the Regulation on Acceptance of Contributions, Money Deposits and
Interest (the Contributions Law); and
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|
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The Law Concerning the Regulation of Interest Rates (the Interest Rate Restriction
Law).
|
The FSA has also released administrative guidelines (FSA Guidelines) to clarify the
administrative application of, business practices under and supervision procedures of the
Moneylending Business Law.
Registration Requirements
Under the Moneylending Business Law, any company wishing to engage in moneylending is required
to be registered as a moneylender with the Commissioner of the FSA if it lends money through offices in
more than one prefecture of Japan. Such registration is required to be renewed every three years.
The FSA must reject a registration or renewal application if it contains any untrue statement or
omission of a material fact, or the applicant is disqualified under the Moneylending Business Law.
A disqualified person includes:
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any person who has had his/her registration revoked as a result of misconduct or
other reasons specified under the Moneylending Business Law within five years of the
application;
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any person who has been fined for violating the Moneylending Business Law or the
Contributions Law or other specified statues and five years have not passed since the
person completed the payment of the fine (or became excused from paying it);
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any person who was sentenced to imprisonment for any reason and five years have not yet
passed since person completed the term of imprisonment (or became excused from serving
it);
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any person in respect of which any of the Directors, Statutory Auditors or specified
senior employees thereof is a disqualified person;
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any person who is identified as a member of a crime syndicate; and
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any person who does not meet the minimum net asset requirement of ¥3 million, in the
case of an individual, or ¥5 million, in the case of a corporation.
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We registered under the Moneylending Business Law in 1984, and have since renewed our
registration periodically as required. Our registration permits us to engage in the moneylending
business in all prefectures of Japan in which we presently conduct the business.
-40-
Government Supervision
The FSA has general authority to supervise and discipline registered moneylenders in Japan
under the Moneylending Business Law. A registered moneylender with an outstanding loan balance of
more than ¥50 billion at the end of its fiscal year is required to submit an operational report to
the FSA concerning its operations during the fiscal year, including information with respect to
officers, employees, loan offices, sources of funding and status of loans, together with its
financial statements for the fiscal year, within two months of the end of such fiscal year. As
explained in
Recent Developments
below, according to amendments to the Moneylending Business Law
that will come into effect by mid-December 2007, all registered moneylenders will become required
to submit operational reports within three months after the end of every fiscal year end.
The FSA may also request that a registered moneylender make further reports under the
Moneylending Business Law. An official of the FSA may also enter a registered moneylenders
offices, inspect its books, documents and other materials or interview its officers, employees and
other related persons as may be necessary to protect the interest of the moneylenders customers.
The FSA may suspend all or part of a registered moneylenders business for up to one year under
specific circumstances, including any violation of the provisions of the Moneylending Business Law.
The FSA must revoke the registration of a registered moneylender under certain specific
circumstances, including when the moneylender becomes a disqualified person for the purpose of
registration or renewal or when the moneylender is in significant violation of the provisions of
the Moneylending Business Law. Under the amendments to the Moneylending Business Law, supervision
by the FSA will be enhanced, and the FSA will be able to issue business improvement orders to
registered moneylenders.
Restrictions on Usury
The Contributions Law, the Interest Rate Restriction Law and the Moneylending Business Law
primarily regulate the interest rates we may charge with respect to our operations conducted in
Japan.
Under the Contributions Law, charging or receiving interest at a rate exceeding 29.2% per year
is subject to criminal penalty. Any violation of such maximum interest rate is subject to a
criminal sanction of imprisonment of up to five years and/or a penalty of up to ¥10 million, in the
case of an individual, and up to ¥30 million, in the case of a corporation.
The Moneylending Business Law provides that any loan made by any person who engages in the
moneylending business that carries an interest rate in excess of 109.5% per year is invalid.
The Interest Rate Restriction Law further provides that a loan that carries an interest rate
exceeding a prescribed rate per year is invalid with respect to the portion of interest exceeding
the maximum rate. As of the date of this annual report on Form 20-F, the prescribed rates are:
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20% per year for loans of less than ¥100,000;
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18% per year for loans of ¥100,000 or more but less than ¥1,000,000; and
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15% per year for loans of ¥1,000,000 or more.
|
The Moneylending Business Law provides, however, that a payment by a borrower or guarantor of
interest in excess of the rate prescribed by the Interest Rate Restriction Law to a registered
moneylender is valid and non-refundable so long as the excess interest is paid voluntarily without
coercion, mistake or threat and additional requirements are satisfied, including:
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delivery by the registered moneylender to the borrower or the guarantor, as the case
may be, upon execution of the relevant loan or guarantee agreement, of a prescribed
written instrument setting forth the principal terms of the loan or the guarantee; and
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delivery by the registered moneylender to the borrower or guarantor, upon the
payment of the excess interest, of a written receipt for the payment.
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-41-
In addition, the FSA Guidelines require a registered moneylender to provide the borrower with
written notice of the terms of any loans extended under a loan agreement at the time of each
disbursement, if multiple loans may be provided under the same loan agreement.
It had been typical for most lenders in the Japanese consumer finance and business finance
industries including us to charge so-called gray-zone interest rates on loans that exceed the
relevant maximum rates permitted under the Interest Rate Restriction Law. Collection of unpaid
interest in excess of the maximum levels per year under the Interest Rate Restriction Law is
legally unenforceable by us. The gray-zone rates charged by us, however, are below the levels
that would subject us to criminal penalty under the Contributions Law. When paid by the borrower,
the excess interest portion of loans subject to gray-zone rates is non-refundable, so long as we
have met the requirements stated above (subject to the recent Supreme
Court decisions as described below). Despite the historical practice in the Japanese consumer
finance and business finance industries, we have generally reduced the interest rates applicable to
our loans originated on and after October 1, 2006 to the maximum amounts under the Interest Rate
Restriction Law, and, accordingly, the amount of our current loans with gray-zone interest has
significantly decreased.
Previously the number of borrowers refusing to pay interest in excess of the Interest Rate
Restriction Law was limited. More recently, the number of borrowers that refuse to pay this
gray-zone interest or request refunds of gray-zone interest previously paid has increased.
This has been due to a combination of factors, including increases in the number of individuals in
Japan experiencing financial difficulties as a result of economic difficulties in Japan, greater
consumer activism and decisions reached by the Supreme Court of Japan concerning excess interest
and the necessary requirements pertaining to excess interest, which were interpreted in favor of
consumers, resulting in an increase in demands by borrowers for refunds of excess interest. Since
January 13, 2006, the Supreme Court of Japan has decided a number of cases relating to the
ability of moneylenders like us to enforce deemed valid payments of gray-zone interest. In particular, in
January 2006, the court ruled that the voluntary payment requirement
for deemed valid payments under the Moneylending Business Law should
be interpreted strictly, that an acceleration clause in a
loan agreement is invalid with respect to a delay in the payment of
excess interest and that, unless there is some particular situation
such that the borrower is not misled into believing that such a
clause is valid, the voluntary nature of excess interest payments,
which is the requirement for deemed valid payments, will not be
recognized. As a result of these court decisions and regulatory changes, when a
borrower exercises his or her legal right to refuse to pay interest in excess of the level set by
the Interest Rate Restriction Law, we cannot collect the excess interest, despite the terms of our
contract. In addition, we are no longer able to demand immediate repayment of the remaining
balance in such instances. Also, following such court decisions, the Enforcement Regulation of the
Moneylending Business Law was amended effective as of July 1, 2006 such that our loan documentation
must now specifically provide that we may not accelerate a loan as a result of non-payment if such
non-payment relates only to interest charged in excess of the prescribed maximum rates under the
Interest Rate Restriction Law (i.e., gray-zone interest). Therefore, borrowers who fail to repay
the unpaid excess interest portion will not be subject to the general collection procedures
applicable to borrowers. We negotiate refunds of previously paid excess interest in
certain situations primarily involving threatened customer bankruptcy or threatened litigation.
The Interest Rate Restriction Law also applies to discounted loans. A discounted loan results
when an interest amount is deemed to have been deducted in advance because the stated value of the
loan exceeds the actual cash disbursement in respect of the loan. This deemed interest amount is
subject to the general restrictions on interest under the Interest Rate Restriction Law. We do not
make any discounted loans.
-42-
Recent Developments
Amendments to the Moneylending Business Law, the Contributions Law and the Interest Rate
Restriction Law were promulgated on December 20, 2006 and are scheduled to become effective gradually over the next
few years. As of an effective date to be fixed by a cabinet order to be issued and within one year
from the promulgation date, moneylending businesses will become subject to enhanced regulations,
such as the introduction of additional documentary requirements and an increase in the number of
prohibited activities, including an expansion of prohibited collection activities. Furthermore,
supervision over moneylending businesses will be enhanced including by enabling the FSA to issue to
registered moneylenders business improvement orders to take measures to improve their business.
Within two and a half years from this effective date and approximately three years from the
promulgation date, the amendments will be fully in force. When in force, these amendments will:
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abolish the concept of deemed valid payments under the Moneylending Business Law;
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|
reduce the maximum interest rate under the Contributions Law from 29.2% per year to
20% per year;
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introduce administrative sanctions on charging interest in excess of the maximum
interest rate under the Interest Rate Restriction Law, even if the rate charged is
below the maximum interest under the Contributions Law;
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obligate a registered moneylender to investigate customers ability to repay and
prohibit excessive lending in respect of loans to individual customers, based on the
aggregate amount which a customer owes to moneylenders; and
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introduce further documentation requirements such as deliver of a prescribed written
instrument prior to entering into a loan agreement.
|
Servicer Law
With the purpose of protecting borrowers from unfair collection practices, the Practicing
Attorney Law of Japan (the Attorney Law) stipulates that no person other than a qualified
attorney can engage in providing legal services and that no person can engage in acquiring claims
in order to enforce them against debtors. In February 1999, the Law on Debt Servicing Business by
Servicing Companies (the Servicer Law) was enacted in order to facilitate third-party debt
servicing for performing and non-performing loans of financial institutions and to deal effectively
with the sale, liquidation, and servicing of their bad loans.
The Servicer Law requires a minimum capital of ¥500 million in order to be eligible to be
licensed by the Minister of Justice of Japan to conduct third-party servicing business. In
addition, to make this law consistent with the provisions of the Attorney Law, at least one
attorney must be appointed as a director of a licensed debt servicing company.
The Servicer Law covers a range of financial assets including:
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loans receivable held by financial institutions (including banks, insurance
companies and finance companies licensed under the Moneylending Business Law and other
miscellaneous financial entities), money claims prescribed by the Law Concerning the
Securitization of Assets, and other claims provided for in cabinet orders; and
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|
loans receivable under bankruptcy or rehabilitation proceedings and loans receivable
which are securitized through special purpose vehicles.
|
A company operating as a licensed servicer under the Servicer Law is entitled to manage and
collect receivables in relation to claims on behalf of its clients or its own account. A licensed
servicer is also able to engage in real estate transactions in connection with secured loans.
-43-
The Personal Information Protection Law
The Law Concerning the Protection of Personal Information (the Personal Information
Protection Law) clarifies the legal duty of a business operating in Japan to protect personal
information by setting out basic principles for the proper treatment of such information. The
Personal Information Protection Law applies to information concerning individuals and does not
extend to corporate information. The Personal Information Protection Law applies to personal
information-handling enterprises or data collectors, defined as persons that use databases that
contain the personal information of 5,000 or more people. A personal information database is
defined as a collection of information which is systematically arranged to conduct searches.
Guidelines issued by Japanese governmental authorities have further supplemented the Personal
Information Protection Law, in particular, the guidelines concerning Protection of Personal
Information in Financial Areas issued by the FSA govern the moneylending business. Industry
associations have also established guidelines for their member organizations, detailing how such
organizations must comply with the Personal Information Protection Law.
Personal information, as defined by the Personal Information Protection Law, includes any
information that distinguishes a living individual from another living individual. This includes a
persons name, address, birth date, birthplace, phone number, financial history, employment
history, academic history and occupation.
The Personal Information Protection Law provides the following general restrictions on the use
of personal information:
|
|
|
the purpose of the use of information must be specified as much as possible;
|
|
|
|
|
personal information may not be obtained through fraud or by other illegal means;
|
|
|
|
|
upon acquiring the personal information, the use of information must be notified to
the relevant individual or published;
|
|
|
|
|
personal information collected should be relevant to the purposes for which it is to
be used and, to the extent necessary for those purposes, should be accurate and kept up
to date;
|
|
|
|
|
to prevent loss, unauthorized access, destruction, use, modification or disclosure
of personal information, security safeguards must be implemented;
|
|
|
|
personal data may not be disclosed or made available to third-parties without the
prior consent of the individual to whom the personal information relates;
|
|
|
|
|
the purpose of use of all personal data and the procedures of amendment,
suspensions, etc., of the use or deletion of personal data must be made available to
the individual to whom the personal information relates; and
|
|
|
|
|
use must correspond to a persons requests to control his or her personal
information, including amendment, suspension of the use or deletion of his or her
personal data.
|
Data collectors must deal adequately and promptly with complaints regarding their use of
personal information. For example, a data collector is expected to appoint a person who is
responsible for customer information, and establish complaint hotlines. If data collectors violate
their duty by disregarding the competent ministers orders, they may be subject to imprisonment not
exceeding six months, or a fine not exceeding ¥300,000.
-44-
Properties
Our head office in Tokyo, Japan occupies 5,137.97 square meters of office space, and our head
office in Matsuyama, Ehime, occupies 1,986.38 square meters of office space on 642.78 square meters
of land. We lease the Tokyo Head Office space and own the Matsuyama Head Office space. We lease
most of our 44 loan offices which are located throughout Japan. Approximately one-third of the
total number of our loan offices operate in the metropolitan regions surrounding Tokyo and Osaka.
Legal Proceedings
We are not aware of any pending or threatened litigation or other legal or regulatory
proceedings that would, individually or in aggregate, have a material adverse effect on our results
of operations or financial condition, or those of the Group.
C. Organizational Structure.
The table below provides information about our principal subsidiaries, all of which were
incorporated under the laws of Japan, except for Nissin Leasing (China), which was incorporated
under the laws of China:
|
|
|
|
|
|
|
|
|
Shares and voting
|
|
|
|
|
rights held by us,
|
|
|
Name
|
|
directly or indirectly
|
|
Principal business
|
Nissin Servicer Co., Ltd.
|
|
73.8%
|
|
Servicing business
|
NIS Lease Co., Ltd.
(1)
|
|
|
100.0
|
|
|
Leasing business
|
NIS Property Co., Ltd.
(1)
|
|
|
100.0
|
|
|
Real estate-related businesses
|
Nissin Leasing (China) Co., Ltd.
(2)
|
|
|
100.0
|
|
|
Leasing business
|
NIS Securities Co., Ltd.
(3)
|
|
99.5
|
|
Securities business
|
APREK Co., Ltd.
(4)
|
|
69.3
|
|
Loan business
|
|
|
|
(1)
|
|
Prior to June 22, 2004, NIS Property Co., Ltd. was named Nissin Credit Guarantee Co., Ltd.
and its principal business was providing credit guarantees. On June 15, 2004, Nissin Credit
Guarantee Co., Ltd. transferred its credit guarantee business operations to NIS Lease Co.,
Ltd.
|
|
(2)
|
|
Established on July 9, 2004, obtained leasing license from Chinese government on September
14, 2005, and changed its name from Matsuyama Nissin Leasing (Shanghai) Co., Ltd. on March 13,
2006.
|
|
(3)
|
|
Acquired on December 3, 2004 and changed its name from Yamagen Securities Co., Ltd. on May 1,
2005.
|
|
(4)
|
|
Acquired on December 2, 2005 through a cash tender offer.
|
D. Property, Plants and Equipment.
The information required by this item is provided in Item 4.B of this annual report on Form 20-F.
Item 4A. Unresolved Staff Comments
None.
-45-
Item 5. Operating and Financial Review and Prospects
A. Operating Results.
You should read the following discussion and analysis of our financial condition and results
of operations together with Item 3.A of this annual report on
Form 20-F
and our audited U.S. GAAP
financial statements, including the notes to these statements, beginning on page F-1 of this annual
report on
Form 20-F
. This discussion and analysis is based on U.S. GAAP financial information
except as noted otherwise. This discussion and analysis contains forward-looking statements that
involve risks, uncertainties and assumptions. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of factors including but not limited to
those in Item 3.D of this annual report on
Form 20-F
.
We focused mainly on the moneylending business in the past. However, we recently have been
diversifying our financial businesses. In order to reflect the strategic business changes in our
consolidated financial condition and results of operations, we changed the format of our
consolidated financial statements of operations. Accordingly, the following discussion and
analysis of our financial condition and results of operations has been stated based on the current
presentation of the consolidated financial statements of operations as so reformatted.
Overview
We derive our revenues primarily from the business of providing integrated financial services
to SMEs and their owners in Japan. We provide our services, and receive revenues, both directly
and through alliances and joint ventures with other companies including financial institutions. We
also derive revenues from servicing distressed loans purchased from
third-parties and engage in
leasing and related businesses in Japan, as well as investment banking, securities and principal
investment businesses. In addition, we derive revenues from real estate-related businesses,
including providing secured loans to property companies and principal investment in real estate.
In recent years, we have commenced leasing and other operations in
China.
Our net interest income from lending activities was ¥18,568 million for the year ended March
31, 2005, ¥17,970 million for the year ended March 31, 2006 and ¥6,319 million for the year ended
March 31, 2007. Interest income from loans receivable is our largest source of revenues, however,
the proportion of interest income to other revenues has fallen in recent years, as we have
diversified and expanded our business operations. In the loan business, we have reduced interest
rates on our financial products and shifted our operations to target more creditworthy customers,
and we have focused intensively on secured lending. We sold most of the outstanding balance of our
unguaranteed consumer loans in June 2004 and we have been strategically shifting away from consumer
loans in recent years in order to concentrate our resources on providing financial services to SMEs
and their owners, with secured lending as a focus.
As part of our strategic transition of the loan business, we established our Real Estate
Finance Department to focus on loans designed for property companies. We also established our Real
Estate Group to supervise all real estate-related businesses. We subsequently established our Real
Estate Structured Finance Department under the Real Estate Group in order to provide non-recourse
loans, arrange loans and provide other services to property companies, including special purpose
companies for real estate-related businesses. Profits derived from these strategic changes in our
loan business have contributed to our results, particularly in the recent severe business
environment for moneylending companies in Japan resulting from recent
decisions by the Supreme Court of Japan concerning gray-zone interest and other factors.
In addition, we have prioritized allocation of consolidated managerial resources to growing
business, such as the servicing business and the real estate business, and also seek to establish a
business platform and system to expand our financial business in the Peoples Republic of China,
centering on the leasing business. This has contributed to a growth in revenues other than
interest income from lending activities in recent years. Other revenues were ¥5,003 million for
the year ended March 31, 2005, ¥11,445 million for the year ended March 31, 2006 and ¥17,585
million for the year ended March 31, 2007.
Our net income was ¥7,262 million for the year ended March 31, 2005 and ¥8,455 million
for the year ended March 31, 2006. We sustained net losses of ¥1,610 million for the year ended
March 31, 2007. Our net income fell significantly into net losses for the fiscal year ended March 31, 2007, primarily
as a result of our recognition of ¥12,664 million as provision for losses on excess interest
repayments, in order to respond to adverse changes in the business environment for the moneylending
industry in Japan. (See Critical Accounting Policies
Reserve and Provision for Losses on Excess Interest Repayments
below.)
-46-
We currently report our business activities in accordance with the following four business segments:
|
|
|
integrated financial services;
|
|
|
|
|
servicing business;
|
|
|
|
|
real estate business; and
|
|
|
|
|
other businesses.
|
Integrated Financial Services
We categorize our loans in the integrated financial services into the following four primary
categories:
|
|
|
Secured Loans
. Secured loans are conventional loans secured by real property or
securities to SMEs or individuals. Recently, our secured loan portfolio has grown
significantly, reflecting our strategic shift toward promotion of financial services to
property companies, SMEs and their owners centering on real estate financing, through
active sales and marketing efforts by our Real Estate Finance Department, which was
established in February 2004. In order to strengthen these operations, we established
the Real Estate Group in June 2006, which supervises all real estate-related
businesses, and the Real Estate Structured Finance Department under the Real Estate
Group in September 2006, to provide real estate-related services particularly for
securitization, including non-recourse loans, loan arrangement, and other services. As
a result of these efforts, the percentage of interest income derived from secured loans
has been increasing.
|
|
|
|
|
SME Loans
. SME loans are primarily unsecured loans to SMEs and their owners
guaranteed by, in general, one or more guarantors. SME loans also include
unguaranteed, unsecured loans made under pre-approved revolving credit lines to more
creditworthy SME owners. As of March 31, 2007, the amount of total SME loans
outstanding and number of customer accounts decreased compared to the end of the
previous fiscal year, primarily as a result of our strategic shift in focus to real
estate financing. SME loans are generally originated through the direct telemarketing
efforts of our loan offices and our newly established sales departments in metropolitan
areas in Japan, such as Tokyo, Osaka, Kyushu and Nagoya. SME loans are also originated
through referrals from companies with whom we have strategic alliances. Interest
income derived from SME loans has contributed significantly to our total interest
income.
|
|
|
|
|
Consumer Loans
. Consumer loans are unguaranteed, unsecured loans to individuals.
In line with a strategic shift over the last several years toward promotion of
financial services to SMEs and their owners, on June 1, 2004, we sold most of the
outstanding balance of our unguaranteed consumer loans to NETCARD, Inc. (formerly known
as Orient Credit Co., Ltd.) for ¥32,697 million. See Factors Affecting Our Financial
Results
Sale of Consumer Loans
below for a further discussion.
|
|
|
|
|
Other Loans.
Other loans mainly consist of investment in direct financing leases
and installment loans to SMEs through our wholly-owned subsidiary, NIS Lease. Such
loans are generally designed to meet the capital needs of SMEs in Japan for expansion
of their businesses.
|
In
addition, we guarantee loans to customers of third-party lenders for which we receive
guarantee fees. Also, we engage in investment banking and securities business through our
Investment Banking Department and our subsidiaries, NIS Securities and NI Strategic Partners.
-47-
The following table provides information on the average balance of loans outstanding for each
of the years indicated for each of our main product categories and the percentage of total average
loans outstanding represented by each loan category for the years ended March 31, 2005, 2006 and
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In millions except percentages)
|
|
Secured loans
|
|
¥
|
9,976
|
|
|
|
6.7
|
%
|
|
¥
|
39,496
|
|
|
|
21.5
|
%
|
|
¥
|
115,779
|
|
|
|
45.3
|
%
|
SME loans
|
|
|
76,651
|
|
|
|
51.5
|
|
|
|
86,976
|
|
|
|
47.3
|
|
|
|
88,159
|
|
|
|
34.5
|
|
Consumer loans
|
|
|
58,018
|
|
|
|
39.0
|
|
|
|
47,250
|
|
|
|
25.7
|
|
|
|
39,621
|
|
|
|
15.5
|
|
Other loans
|
|
|
4,166
|
|
|
|
2.8
|
|
|
|
10,243
|
|
|
|
5.5
|
|
|
|
12,236
|
|
|
|
4.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average balance of loans outstanding
|
|
¥
|
148,811
|
|
|
|
100.0
|
%
|
|
¥
|
183,965
|
|
|
|
100.0
|
%
|
|
¥
|
255,795
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows the interest income from loans receivable and the percentage of
our net interest income from loans receivable derived from each major category of loans for the
years ended March 31, 2005, 2006 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In millions except percentages)
|
|
Secured loans
|
|
¥
|
960
|
|
|
|
3.5
|
%
|
|
¥
|
2,886
|
|
|
|
10.9
|
%
|
|
¥
|
7,818
|
|
|
|
37.2
|
%
|
SME loans
|
|
|
16,113
|
|
|
|
58.9
|
|
|
|
16,951
|
|
|
|
64.0
|
|
|
|
16,566
|
|
|
|
78.7
|
|
Consumer loans
|
|
|
12,453
|
|
|
|
45.5
|
|
|
|
9,325
|
|
|
|
35.2
|
|
|
|
7,525
|
|
|
|
35.8
|
|
Other
|
|
|
502
|
|
|
|
1.9
|
|
|
|
1,095
|
|
|
|
4.1
|
|
|
|
1,517
|
|
|
|
7.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest revenue from loans receivable
|
|
|
30,028
|
|
|
|
109.8
|
|
|
|
30,257
|
|
|
|
114.2
|
|
|
|
33,426
|
|
|
|
158.9
|
|
Less
amortization of loan origination
|
|
|
(540
|
)
|
|
|
(2.0
|
)
|
|
|
(431
|
)
|
|
|
(1.6
|
)
|
|
|
280
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
interest income
|
|
|
29,488
|
|
|
|
107.8
|
|
|
|
29,826
|
|
|
|
112.6
|
|
|
|
33,706
|
|
|
|
160.2
|
|
Provision
for losses on excess interest repayments
|
|
|
2,132
|
|
|
|
7.8
|
|
|
|
3,331
|
|
|
|
12.6
|
|
|
|
12,664
|
|
|
|
60.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income from loans receivable
|
|
¥
|
27,356
|
|
|
|
100.0
|
%
|
|
¥
|
26,495
|
|
|
|
100.0
|
%
|
|
¥
|
21,042
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing Business
Through our subsidiary, Nissin Servicer, we mainly service distressed loans that we purchased
from third-party financial institutions for our own portfolio. The table below shows the aggregate
purchase price and aggregate principal and interest collection amount of distressed loans for the
years ended March 31, 2005, 2006 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In millions)
|
|
Aggregate purchase price of distressed loans
|
|
|
¥16,896
|
|
|
|
¥19,779
|
|
|
|
¥19,565
|
|
Aggregate principal and interest collection of distressed loans
|
|
|
10,095
|
|
|
|
11,923
|
|
|
|
18,856
|
|
In addition, we also acquire real estate for sale in line with the disposal by financial
institutions of non-performing loans. The following table shows the aggregate purchase price of
real estate for sale and revenue from sales of real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In millions)
|
|
Aggregate purchase price of real estate for sale
|
|
|
¥1,642
|
|
|
|
¥8,069
|
|
|
|
¥20,503
|
|
Revenue from sales of real estate in the servicing business
|
|
|
1,404
|
|
|
|
4,210
|
|
|
|
10,678
|
|
We expect that the relative importance of this operating segment will continue to
increase in the short to medium term.
-48-
Real Estate Business
We operate our real estate business (excluding secured lending and real estate servicing)
mainly through our subsidiary, NIS Property. We purchase, renovate and develop commercial and
residential real estate to operate for profit and for resale in Japan. In the real estate business
segment, we purchased real estate for sale in the aggregate amount of ¥468 million, ¥16,702 million
and ¥34,834 million for the years ended March 31, 2005, 2006 and 2007, respectively.
With respect to real estate operated for profit, we seek to increase property value
through renovation and other improvements in order to ensure stable revenues and occupancy rates.
With respect to real estate sold for profit, we sold four and seven commercial properties during
the years ended March 31, 2006 and 2007, respectively, mainly to property companies in Japan. The
following table sets forth our primary revenues from the real estate business for the periods
shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In millions)
|
|
Rental revenue from the real estate business
|
|
|
¥ 2
|
|
|
|
¥ 119
|
|
|
|
¥1,575
|
|
Revenue from sales of real estate in the real estate business
|
|
|
|
|
|
|
2,832
|
|
|
|
8,692
|
|
Due to an increase in its significance, the real estate business segment has been
disclosed as a separate business segment beginning with the year ended March 31, 2007. This rise
in significance in part reflects our strategic shift in managerial resources to real estate-related
businesses.
Other Businesses
Our other businesses segment includes business owner services, such as agency business for
life and non-life insurance companies, energy conservation and other consulting businesses. Our
operating losses from other businesses were ¥19 million, ¥335 million and ¥423 million for the
years ended March 31, 2005, 2006 and 2007, respectively.
-49-
Factors Affecting Our Financial Results
The principal determinants of our profitability are revenues from our core businesses, the
levels of provision for losses on excess interest repayments and provision for loan losses, and the
amount of interest expense for lending activities and operating expense that we incur.
Revenues from Our Core Businesses
Gross Interest Income from Lending Activities
The principal determinants of gross interest income from lending activities are our loan portfolio
size, which is the average balance of loans outstanding, and the average interest rate we charge on
our loans. The difference between the interest rates we charge our customers and the interest
rates we pay to finance our loans to customers largely determines our margins and profitability.
Because the average interest rate per account and average outstanding balance per account vary by
loan product, changes in the relative composition of loan products in our total portfolio also
affect gross interest income from lending activities. For the year ended March 31, 2007, despite a
decrease in our average interest rate as described below, our gross interest income from lending
activities increased favorably due to an increase in the average balance of loans outstanding,
especially our secured loans mainly reflecting our ongoing strategic shift to focus our managerial
resources on real estate financing.
Loan Portfolio Size
. Our loan portfolio grew steadily until June 2004, at which time we sold
most of the outstanding balance of our unguaranteed consumer loans to
a third-party, which
contributed to a significant decline in the size of our loan portfolio in the year ended March 31,
2005. (See
Sale of Consumer Loans
below.) In line with our shift away from consumer lending,
our average balance of loans outstanding for our consumer loans continues to decline. However, our
loan portfolio size resumed growth significantly as a result of the increase in the average balance
of loans outstanding for our secured loans, on which we have been focusing as part of our emphasis
in recent years on real estate financing. Generally, over recent years, balances per account for
our SME loans and secured loans have increased, although balances per account for our consumer
loans have decreased. For additional information on account numbers and balances per account, see
Business Overview Our Operations in Item 4.B of this annual report on Form 20-F. We believe
that our loan portfolio size will grow steadily over the medium to long term centering on secured
loans, as we continue to develop expertise in real estate financing, mainly through our Real Estate
Group, which was established to supervise all real estate-related businesses in June 2006. In
addition, we also believe that our expansion of sales departments in major metropolitan areas in
Japan, our referral arrangements with other financial companies and the overall demand for SME and
SME-owner financing in Japan will contribute to growth in our loan portfolio size.
Interest Rates
. We determine the interest rates we charge on our loans based on factors
including competition from other lenders, legal restrictions on interest rates as discussed under
Regulation The Moneylending Business Law, Contributions Law and Interest Rate Restriction Law
in Item 4.B of this annual report on Form 20-F and the willingness of our customers to borrow at
the interest rates we charge. The weighted period-end average contractual interest rate on our
outstanding loans has been decreasing, from 22.1% as of March 31, 2005 to 16.1% as of March 31,
2006, then to 13.8% as of March 31, 2007. The weighted period-end average is determined by
calculating the average interest rate for each of our loan products on the period-end date,
weighting these rates by the proportion of total loans outstanding represented by the loan category
on this date, and averaging these weighted interest rates. We reduced interest rates charged to
borrowers to the interest rates stipulated by the Interest Rate Restriction Law for most of our
loan products on October 1, 2006 for new loan contracts made on and after October 1, 2006. The
downward trend in our weighted period-end average interest rates mainly reflects the change in our loan
portfolio mix, resulting from increased acquisition of higher quality receivables with lower
interest rates, mainly through the enhancement of our secured real estate financing. Also, the
sale of most of the outstanding balance of our unguaranteed consumer loans in June 2004 contributed
to a decrease in the weighted period-end average contractual interest rate on our outstanding
loans, because these loans typically carry higher interest rates than other types of loans in our
portfolio.
-50-
Interest Income from Purchased Loans
Our net interest income from the servicing business is driven by our interest income minus our
interest expense from purchased loans. The factors that affect our interest expense in our
servicing business segment are largely similar to those affecting our integrated financial services
segment. However, the principal determinants of our total interest income from purchased loans
differ significantly from those affecting our total interest income from lending activities. The
principal determinants of interest income from purchased loans are the amount of purchased loans in
our portfolio, our ability to service distressed loans, including through negotiation with the
borrowers and restructuring of the loan terms, and the prices at which we purchase the distressed
loans. Because we generally do not recognize interest income on a distressed loan until we fully
recover the purchase cost, our recognition of interest income from purchased loans may be
significantly delayed compared to the recognition of interest income from lending activities. (See
Critical Accounting Policies
Purchased Loans
Receivable and Revenue Recognition
below.) Also,
due to increasing competition in this market, which has created an upward pressure on the purchase
prices for the distressed loans, we expect our interest income from purchased loans as a percentage
of the amount of our purchased loans to decrease over the long term.
Revenues from Real Estate
Our revenues from real estate mainly consist of capital gain on sales of real estate in the
servicing business and real estate business, and rental revenues from real estate in the real
estate business.
Gain on Sales of Real Estate.
We sell some of our real properties for profit mainly to
property companies in Japan. In addition to properties we acquire directly as part of our real
estate business, we also acquire real estate for sale in connection with disposal by financial
institutions of non-performing loans in the servicing business. (See Risk Factors in Item 3.D of
this annual report on Form 20-F.) Gain on sales of real estate is
dependent primarily on the
acquisition price at which we purchased the property and the net proceeds to us on disposal.
Purchase and sale prices of properties are affected by a number of factors including the health of
the Japanese economy, regulatory and legal changes affecting properties, including property taxes,
property values in the relevant markets, levels of rental or other revenues generated by the
properties and liquidity and supply and demand trends in the relevant property market.
Rental Revenues from Real Estate.
We seek to operate a portion of our properties for profit,
targeting properties that can achieve stable revenues and occupancy rates, in particular, following
renovation and other improvements intended to increase property value. Rental revenues from such
properties increased significantly for the year ended March 31, 2007, generally in proportion to an
increase in the number of real properties held. A number of factors affect the rental revenues we
receive from our properties. These factors include occupancy rates at our properties, leasable
area of our properties, the attractiveness of our properties compared to neighboring or alternative
properties, the performance of property managers and other parties that service the properties, the
demand for space in relevant rental markets, the supply of relevant properties in such markets and
the rate of inflation or deflation in the Japanese economy.
-51-
Provision for Losses on Excess Interest Repayments
Provision for losses on excess interest repayments comprises provision for the portion
refunded in cash and provision for the portion applied to the
outstanding loan principal charged-off
by excess interest repayments as well as the amount of the actual cash refunded to borrowers for repayments of excess interest.
Our provision for losses on excess interest repayments increased substantially for the year ended March 31,
2007, due to increases in an allowance for losses on loans charged-off by excess interest
repayments and a reserve for potential cash refunds of excess
interest as increases to this allowance and reserve are made by charges to our provision for losses on excess interest repayments. Reserve for losses on excess
interest repayments, included in Other liabilities in our consolidated balance sheet, is provided
based on past experience and current repayment conditions in order to cover estimated future cash
repayments or principal charge-offs of excess interest derived from current loans receivable and
loans previously paid-off or charged-off. When the excess interest is refunded to borrowers, we
refund cash to borrowers if the excess amount is larger than the outstanding balance of loan
principal or there is no loan principal, which is the case for loans previously paid-off or
charged-off.
Our provision for losses on excess interest repayments increased substantially in order to
respond to the recent adverse changes in the business environment for moneylending companies,
particularly as a result of recent decisions by the Supreme Court of Japan concerning gray-zone
interest that has resulted in substantial increases in claims for excess interest repayments. (See
Risk Factors in Item 3.D of this annual report on Form 20-F.)
To the extent that our provision for loan losses and provision for excess interest repayments
increase, it signifies that management believes that our loan portfolio carries increasing risk.
Additional detail on provision for loan losses for our various loan products is included below
under Allowance for Loan Losses, Reserve for Losses on Excess Interest
Repayments, and Loan Charge-offs. Although the recent adverse conditions in the moneylending
business have already had a significant impact on our financial results for the year ended March
31, 2007, if the level of claims for repayments continues to be high and, consequently, we need to
maintain our reserve for losses on excess interest repayments at a high level, our financial
results could continue to be adversely affected. (See Critical
Accounting Policies
Reserve and Provision for Losses on Excess
Interest Repayments
below.)
Provision for Loan Losses
Our provision for loan losses are allocations made each period to our existing allowance for
loan losses. Our allowances for possible loan losses are based upon our estimates of probable
uncollectible loan losses from known and inherent risks in our loan portfolio. We determine these
allowances based upon various factors including the status and risk profile of the borrower and, if
applicable, guarantor, economic conditions, unemployment rates, bankruptcy cases and our historical
loss experience. Increases to our allowance are made by charges to our provision for loan losses. Based upon our estimated allowance needs, we then
supplement the remaining balance through provision for loan losses. Following the sale of most of
the outstanding balance of our unguaranteed consumer loans to a third party in 2004 (see
Sale of
Consumer Loans
below). Our provision for loan losses decreased during the year ended March 31,
2005 generally in line with the decrease in the size of our loan portfolio. However, our provision
for loan losses slightly increased during the year ended March 31, 2006, primarily reflecting the growth in
the amount of our total loans outstanding. In addition, our provision for loan losses increased significantly for the year ended March 31, 2007, mainly due to an increase in our specific allowance for loan losses provided for delinquent loans centering on SME loans. Also, our provision for loan losses in any given fiscal
year depends partly on the adequacy of our allowance for loan losses for the previous fiscal year,
because we must make up for any such inadequacy, if any, with increased provision for loan losses
in the following fiscal year.
-52-
Interest Expense
Our interest expense fluctuates with changes in market interest rates, market conditions, the
mix of our funding sources, the amount of our borrowings and our credit ratings.
|
|
|
Market Interest Rates and Market Conditions
. Interest
rates in Japan have been
extremely low for several years, reflecting the Bank of Japans monetary policy to
combat economic weakness, including the zero interest rate policy, which was in place
for most of the period from February 1999 until it was ended in July 2006. The
weighted period-end average interest rate of our long-term borrowings was 1.9%, 1.4%
and 1.9% at March 31, 2005, 2006 and 2007, respectively. The weighted period-end
average interest rate of our short-term borrowings was 1.2%, 1.0% and 1.9% as of March
31, 2005, 2006 and 2007, respectively. Our average borrowing rate gradually increased
primarily due to current market interest rates reflecting the Bank of Japan lifting its
quantitative easing policy, thereby ending its zero interest rate policy, as well as
the current adverse conditions for moneylenders in Japan. We expect that interest
rates on our borrowings will continue to rise.
|
|
|
|
|
Mix of Our Funding Sources and Credit Ratings
. Beginning in the year ended March
31, 2000, when legal restrictions on debt issuances to fund our lending business were
eliminated, we have increased our borrowings through debt issuances relative to bank
loans, which had previously accounted for substantially all of our borrowings. To the
extent that the debt capital markets have been available to us, we have benefited from
typically lower funding costs in the debt capital markets than we can achieve from bank
loans. The percentage of our debt issuances to our total borrowings was 22.6%, 31.1%
and 37.6% at March 31, 2005, 2006 and 2007, respectively, reflecting our issuance of
bonds and asset-backed securities, including asset-backed commercial paper. The
percentage of our debt issuance slightly decreased as of March 31, 2007, compared with
the end of the previous fiscal year, because we procured a significant amount of funds
by the issuance of new shares through a third-party allotment. The increasing trend in
capital needs for our real estate-related businesses continued for the year ended
March 31, 2007. In addition, while any downgrades of our credit ratings by rating
agencies could harm our ability to tap the debt markets, our current intention, subject
to market conditions and other uncertainties, is to balance our proportion of direct
and indirect financing.
|
|
|
|
|
Amount of Our Borrowings
. To the extent that the size of our loan portfolio grows,
we rely primarily on borrowings to finance the growth of our loan portfolio. We expect
the amount of borrowings to increase in the near term, reflecting the expected growth
of our loan portfolio centering on real estate financing.
|
-53-
Operating Expense
The most significant components of our operating expense are salaries and employee benefits,
occupancy, furniture and equipment, and other general and administrative expenses.
Salaries and Employee Benefits.
Our salaries and employee benefits depend on the number of
our employees and the compensation and benefits we provide to each employee. The number of
full-time employees increased from 818 as of March 31, 2005 to 998 as of March 31, 2006, then to
1,166 as of March 31, 2007. Despite a slight decrease in our salaries and employee benefits for
the year ended March 31, 2005 due to a reduction in the scale of our consumer loan business
following the sale of our unguaranteed consumer loans, our salaries and employee benefits increased
for the year ended March 31, 2006 in proportion to an increase in the number of full-time employees
reflecting development in the business activities of our subsidiaries. Salaries and employee
benefits for the year ended March 31, 2007 increased steadily, reflecting a steady increase in the
number of full-time employees, mainly due to recruitment of new and mid-career employees for our
real estate financing operations and leasing business in the Peoples Republic of China, in
accordance with our business expansion plans.
Occupancy, Furniture and Equipment.
Our expenses in connection with occupancy, furniture and
equipment depend largely on the number of our loan offices and branches and the associated rents.
The number of loan offices was 50 as of March 31, 2005, and then increased to 60 as of March 31,
2006, due to the acquisition of APREK. However, we integrated loan offices resulting in a
reduction to 44 offices as of March 31, 2007, as we gradually shifted our managerial resources into
Japans major metropolitan areas to promote real estate financing, investment banking and venture
capital business. Accordingly, we also expanded the office space of our Tokyo Head Office.
Consequently, despite the decrease in the number of loan offices, our rent expense increased for
the year ended March 31, 2007, due to the concentration of our offices in major metropolitan areas
in Japan, where the office rents have risen as a result of recent strong central urban real
estate markets in Japan. Also, an increase in depreciation expense for our operating lease assets
held by our subsidiary, NIS Lease, reflecting the expansion of our leasing business in Japan,
contributed to an increase in occupancy, furniture and equipment expense for the year ended March
31, 2007.
Other General and Administrative Expenses.
The major items in other general and
administrative expense include communication expenses, taxes and duties, travel and transportation
expenses, recruiting expenses and commission fees. Although we continue to make efforts to reduce
operational inefficiencies, we expect our other general and administrative expenses as a percentage
of our non-interest expenses to increase in the short term reflecting the increase in our
recruiting expenses and commission fees in line with the growth of our business activities in real
estate-related businesses, China-related businesses, investment banking business and servicing
business.
Sale of Consumer Loans
As
part of our strategy to migrate away from the consumer lending
business and diversify our operations, in June 2004, we sold most of the outstanding balance of our unguaranteed consumer loans to
NETCARD, Inc. (formerly known as Orient Credit Co., Ltd.) for
¥32,697 million. Under our purchase and sale agreement with
NETCARD, Inc., we retain no interest in the loans sold, and we have
no guarantee, repurchase, or other obligations or contingent
liabilities with respect to the loans sold. The effect of this
sale was a decrease in our interest income and net interest income from lending activities for the
year ended March 31, 2005, as compared to what our results would have been without the sale.
However, our net income increased slightly for the year ended March 31, 2005, as compared to what
our net income would have been without the sale because the reduction of expenses associated with
our consumer loan business, such as loan loss-related expenses and non-interest expenses, offset
the decline in our interest income. In addition, for the year ended March 31, 2005, we recognized
a non-interest gain as a result of the sale. Following the sale, we continue to offer consumer
loans to prospective customers, particularly those who are referred to us by alliance companies,
but we expect that our consumer loan business will operate at a substantially reduced scale for the
foreseeable future.
-54-
Results of Operations
Consolidated Information
The following table shows selected data of consolidated statements of operations in yen
amounts for the years ended March 31, 2005, 2006 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In millions)
|
|
Interest income
|
|
¥
|
29,488
|
|
|
¥
|
29,826
|
|
|
¥
|
33,706
|
|
Provision for losses on excess interest repayments
|
|
|
2,132
|
|
|
|
3,331
|
|
|
|
12,664
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
27,356
|
|
|
|
26,495
|
|
|
|
21,042
|
|
Interest expense
|
|
|
2,971
|
|
|
|
2,602
|
|
|
|
3,870
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
income before provision for loan losses
|
|
|
24,385
|
|
|
|
23,893
|
|
|
|
17,172
|
|
Provision for loan losses
|
|
|
5,817
|
|
|
|
5,923
|
|
|
|
10,853
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income from lending activities
|
|
|
18,568
|
|
|
|
17,970
|
|
|
|
6,319
|
|
Other revenue
|
|
|
5,003
|
|
|
|
11,445
|
|
|
|
17,585
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
188
|
|
|
|
503
|
|
|
|
1,037
|
|
Salaries and employee benefits
|
|
|
6,521
|
|
|
|
7,181
|
|
|
|
8,534
|
|
Occupancy, furniture and equipment
|
|
|
2,395
|
|
|
|
2,654
|
|
|
|
3,196
|
|
Advertising
|
|
|
333
|
|
|
|
629
|
|
|
|
264
|
|
Other general and administrative expenses
|
|
|
6,001
|
|
|
|
6,765
|
|
|
|
9,552
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
15,438
|
|
|
|
17,732
|
|
|
|
22,583
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
8,133
|
|
|
|
11,683
|
|
|
|
1,321
|
|
Other income (losses)
|
|
|
4,061
|
|
|
|
3,604
|
|
|
|
(881
|
)
|
Other expense
|
|
|
286
|
|
|
|
618
|
|
|
|
453
|
|
|
|
|
|
|
|
|
|
|
|
Income (losses) before income taxes
|
|
|
11,908
|
|
|
|
14,669
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
4,646
|
|
|
|
6,214
|
|
|
|
1,597
|
|
|
|
|
|
|
|
|
|
|
|
Net income (losses)
|
|
¥
|
7,262
|
|
|
¥
|
8,455
|
|
|
¥
|
(1,610
|
)
|
|
|
|
|
|
|
|
|
|
|
-55-
Segment Information
The Group operates under the integrated financial services segment, the servicing business
segment, the real estate business segment, and the other businesses segment. The integrated financial
services segment is comprised of loan businesses, as well as credit guarantee, leasing and
securities businesses. In the servicing business segment, Nissin Servicer mainly acquires and
services non-performing debts from banks and financial institutions in Japan. The real estate
business is now disclosed as a separate segment, because this business has become significant. The
other businesses segment includes insurance agency, consultancy and other businesses. The Group currently
conducts its operating activities mainly in Japan. The Group has recently begun activities in
China, but these activities are currently insignificant. Selected financial information for the
Groups business segments for the years ended March 31, 2005, 2006 and 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions
of Yen
|
|
|
Integrated
|
|
Servicing
|
|
Real Estate
|
|
Other
|
|
|
|
|
|
|
Financial Services
|
|
Business
|
|
Business
|
|
Businesses
|
|
Eliminations
|
|
Consolidated
|
|
Year Ended/As of March 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
¥
|
27,356
|
|
|
¥
|
|
|
|
¥
|
|
|
|
¥
|
|
|
|
¥
|
|
|
|
¥
|
27,356
|
|
Other revenue
|
|
|
1,107
|
|
|
|
3,893
|
|
|
|
18
|
|
|
|
210
|
|
|
|
(225
|
)
|
|
|
5,003
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
3,012
|
|
|
|
153
|
|
|
|
90
|
|
|
|
9
|
|
|
|
(105
|
)
|
|
|
3,159
|
|
Provision for loan losses
|
|
|
5,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,817
|
|
Other provision
|
|
|
123
|
|
|
|
821
|
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
984
|
|
Other expense
|
|
|
12,969
|
|
|
|
1,181
|
|
|
|
58
|
|
|
|
180
|
|
|
|
(122
|
)
|
|
|
14,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (losses)
|
|
|
6,542
|
|
|
|
1,738
|
|
|
|
(130
|
)
|
|
|
(19
|
)
|
|
|
2
|
|
|
|
8,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
208,493
|
|
|
|
21,818
|
|
|
|
2,643
|
|
|
|
572
|
|
|
|
(5,125
|
)
|
|
|
228,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions of Yen
|
|
|
Integrated
|
|
Servicing
|
|
Real Estate
|
|
Other
|
|
|
|
|
|
|
Financial Services
|
|
Business
|
|
Business
|
|
Businesses
|
|
Eliminations
|
|
|
Consolidated
|
|
Year Ended/As of March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
¥
|
26,495
|
|
|
¥
|
|
|
|
¥
|
|
|
|
¥
|
|
|
|
¥
|
|
|
|
¥
|
26,495
|
|
Other revenue
|
|
|
3,251
|
|
|
|
7,918
|
|
|
|
901
|
|
|
|
279
|
|
|
|
(904
|
)
|
|
|
11,445
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
2,656
|
|
|
|
408
|
|
|
|
311
|
|
|
|
11
|
|
|
|
(281
|
)
|
|
|
3,105
|
|
Provision for loan losses
|
|
|
5,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,923
|
|
Other provision
|
|
|
122
|
|
|
|
1,186
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
1,334
|
|
Other expense
|
|
|
13,619
|
|
|
|
1,676
|
|
|
|
340
|
|
|
|
577
|
|
|
|
(317
|
)
|
|
|
15,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (losses)
|
|
|
7,426
|
|
|
|
4,648
|
|
|
|
250
|
|
|
|
(335
|
)
|
|
|
(306
|
)
|
|
|
11,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
313,127
|
|
|
|
43,000
|
|
|
|
25,074
|
|
|
|
244
|
|
|
|
(21,502
|
)
|
|
|
359,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions of Yen
|
|
|
Integrated
|
|
Servicing
|
|
Real Estate
|
|
Other
|
|
|
|
|
|
|
Financial Services
|
|
Business
|
|
Business
|
|
Businesses
|
|
Eliminations
|
|
Consolidated
|
|
Year Ended/As of March 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
¥
|
21,215
|
|
|
¥
|
|
|
|
¥
|
|
|
|
¥
|
|
|
|
¥
|
(173
|
)
|
|
¥
|
21,042
|
|
Other revenue
|
|
|
5,610
|
|
|
|
10,375
|
|
|
|
5,307
|
|
|
|
319
|
|
|
|
(4,026
|
)
|
|
|
17,585
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
3,892
|
|
|
|
933
|
|
|
|
981
|
|
|
|
116
|
|
|
|
(1,015
|
)
|
|
|
4,907
|
|
Provision for loan losses
|
|
|
10,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,853
|
|
Other provision
|
|
|
530
|
|
|
|
1,696
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
2,229
|
|
Other expense
|
|
|
15,658
|
|
|
|
2,548
|
|
|
|
824
|
|
|
|
626
|
|
|
|
(339
|
)
|
|
|
19,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (losses) income
|
|
|
(4,108
|
)
|
|
|
5,198
|
|
|
|
3,499
|
|
|
|
(423
|
)
|
|
|
(2,845
|
)
|
|
|
1,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
370,481
|
|
|
|
62,649
|
|
|
|
56,466
|
|
|
|
8,599
|
|
|
|
(44,118
|
)
|
|
|
454,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We mainly focused on the moneylending business in the past. However, we recently have been
diversifying our financial and other businesses. In order to reflect our strategic business
changes in the presentation of our consolidated financial results, we changed the format of our
consolidated statements of operations. Consolidated financial statements for previous fiscal
years were modified to conform to the current presentation and, consequently, the presentation
of segment information was also modified in conformity with such
changes. In addition, Real Estate
Business, which was previously included in Integrated Financial Services, is disclosed as a
separate segment, due to an increase in its significance, and Other Businesses is also
disclosed as a separate segment, beginning with the year ended March 31, 2007. Segment
information for the years ended March 31, 2005 and 2006 are modified in conformity with this new
segment classification. These modifications have no effect on previously reported net income
and shareholders equity.
-56-
Year Ended March 31, 2007, Compared to Year Ended March 31, 2006
Interest Income
Interest income from lending activities was ¥33,706 million, an increase of ¥3,880 million, or
13.0%, compared to ¥29,826 million for the previous fiscal year, due to an increase in the average
balance of outstanding loans from ¥183,965 million for the year ended March 31, 2006 to ¥255,795
million for the year ended March 31, 2007. In addition, a decrease of ¥711 million in amortization
of loan origination costs, which offset interest income, from ¥431 million for the previous fiscal
year to ¥280 million of appropriation of loan origination
income for the year ended March 31, 2007,
due to an increase in upfront loan origination fees received from secured loans, contributed to the
increase in interest income.
The increase in the average balance of our loans outstanding was led by an increase in our
average balance of secured loans of ¥76,283 million, or 193.1%, to ¥115,779 million for the year
ended March 31, 2007 compared to ¥39,496 million for the previous fiscal year. Consequently,
interest income from secured loans for the year ended March 31, 2007 increased by ¥4,932 million,
or 170.9%, to ¥7,818 million compared to ¥2,886 million for the previous fiscal year. This
reflected our strategic enhancement of real estate financing, including provision of non-recourse
loans to special purpose companies engaged in real estate-related projects.
The increase in loan origination fees received was led by an increase in total advances of
secured loans of ¥104,217 million, or 86.7%, to ¥224,399 million for the year ended March 31, 2007,
compared to ¥120,182 million for the previous fiscal year. We generally charge an upfront
origination fee of typically around 2% on the amount of contractual loan principal for each loan.
Therefore, the increase in total advances of secured loans, which have a relatively large principal
amount among our loan products, contributed to an increase in loan origination fees.
Provision for Losses on Excess Interest Repayments
Provision for losses on excess interest repayments increased by ¥9,333 million, or 280.2% to
¥12,664 million from ¥3,331 million for the previous fiscal year, in order to increase our reserve
for losses on excess interest repayments in cash and the portion of allowance for loan losses
provided for loan principal charged-off by excess interest repayments. This increase in provision
for losses on excess interest repayments reflected the recent adverse changes in the business
environment for moneylending companies, particularly as a result of the recent decisions by the
Supreme Court of Japan concerning gray-zone interest that has resulted in substantial increases
in claims of excess interest repayments. Provision for losses on excess interest repayments for the
year ended March 31, 2007 includes provision for cash refunds of ¥6,136 million and provision for
charge-offs by excess interest repayments of ¥6,528 million. During the year ended March 31, 2007,
we agreed to offset our loan principal and/or return excess interest payments in cash totaling
¥5,230 million, compared with ¥2,532 million for the year ended March 31, 2006. As a result,
provision for losses on excess interest repayments as a percentage of total interest income
increased from 11.2% for the previous fiscal year to 37.6% for the year ended March 31, 2007. (See
Critical Accounting Policies
Reserve and Provision for Losses on Excess Interest Repayment
s
below.)
We expect our allowance and reserve related to excess interest repayments to fully cover claims for
current and past recognized excess interest income and the future provision for cash refunds and
charge-offs by excess interest repayments to substantially diminish in time over the coming several
years.
Net Interest Income
Despite the increase in our interest income from lending activities, the significant increase in
provision for losses on excess interest repayments offset the increase of our interest income from
lending activities. As a result, net interest income for the year ended March 31, 2007 decreased by
¥5,453 million, or 20.6%, to ¥21,042 million from ¥26,495 million for the previous fiscal year.
Interest Expense
Interest expense for lending activities for the year ended March 31, 2007 increased by
¥1,268 million, or 48.7%, to ¥3,870 million from ¥2,602 million for the previous fiscal year. The
increase in interest expense was primarily attributable to an increase of ¥61,184 million, or
37.7%, in our overall weighted-average balance of borrowings for the year ended March 31, 2007 to
¥223,525 million from ¥162,341 million for the previous fiscal year, reflecting our increasing
capital needs for real estate financing. In addition, the weighted period-end average interest
rate of our long-term borrowings as of March 31, 2007 increased by 0.6 points to 1.9% from 1.3% as
of the end of the previous fiscal year, primarily caused by the Bank of Japan lifting the
quantitative easing policy and zero interest rate policy, as well as the adverse conditions for
moneylenders in Japan.
Net Interest Income before Provision for Loan Losses
As a result of the decrease in our net interest income and the increase in our interest expense, net interest income before provision for loan losses for the year ended March 31, 2007 decreased by ¥6,721 million, or 28.1%, to ¥17,172 million from ¥23,893 million for the previous fiscal year.
-57-
Net Interest Income from Lending Activities
Net interest income from lending activities,
namely net interest income after provision for
loan losses, for the year ended March 31, 2007 decreased by ¥11,651 million, or 64.8%, to ¥6,319 million
from ¥17,970 million for the previous fiscal year. Provision for loan losses increased substantially by
¥4,930 million, or 83.2%, to ¥10,853 million for
the year ended March 31, 2007, compared to
¥5,923 million for the previous fiscal year. This increase
was primarily attributable to an increase in our specific allowance for
loan losses provided for delinquent loans centering on SME loans in
the amount of ¥3,366 million.
Other Revenue
Other revenue increased by ¥6,140 million, or 53.6%, to ¥17,585 million for the year ended
March 31, 2007 from ¥11,445 million for the previous fiscal year. This increase was primarily
attributable to an increase in net gain on sales of real estate of ¥3,795 million, or 239.6%, to
¥5,379 million for the year ended March 31, 2007 from ¥1,584 million for the previous fiscal year,
and an increase in rental revenues from real estate of ¥3,098 million, or 563.3%, to ¥3,648 million
from ¥550 million for the previous fiscal year, which was included in rents, dividends and other.
These contributing factors were led by the growth of our real estate-related businesses. Further,
interest income from purchased loans for the year ended March 31, 2007 increased by ¥1,029 million,
or 20.7%, to ¥5,989 million from ¥4,960 million for the previous fiscal year, due to a continuous
and steady growth of our servicing business through our subsidiary, Nissin Servicer. The increase
in other revenue was partially offset by a decrease of ¥533 million in commission fees from our
securities business to ¥179 million for the year ended March 31, 2007 from ¥712 million for the
previous fiscal year.
Operating Expense
Operating expense increased by ¥4,851 million, or 27.4%, to ¥22,583 million for the year ended
March 31, 2007 from ¥17,732 million for the previous fiscal year. We experienced an increase in
our selling, general and administrative expenses, such as salaries and employee benefits and
occupancy, furniture and equipment, of ¥4,317 million, or 25.1%, to ¥21,546 million for the year
ended March 31, 2007 from ¥17,229 million for the previous fiscal year, reflecting increases in the
scale of our operations, including our subsidiaries such as Nissin Servicer and NIS Property, due
to our strategic shift to real estate and servicing businesses.
Other Income
Other income decreased by ¥4,485 million, or 124.4%, to other losses of ¥881 million for the
year ended March 31, 2007 from ¥3,604 million of other income for the previous fiscal year. This
decrease was primarily due to a decrease of ¥4,876 million, or 131.5% in net gains on sales and
impairment of investment securities to net losses of ¥1,168 million, compared to net gains of
¥3,708 million for the previous fiscal year, mainly due to an increase of ¥1,945 million, or 409.5%
in impairment of investment securities to ¥2,420 million from ¥475 million for the previous fiscal
year, resulting from review of our non-marketable equity securities for other-than-temporary
declines in their fair value.
Other Expense
Other expense decreased by ¥165 million, or 26.7%, to ¥453 million for the year ended March
31, 2007 from ¥618 million for the previous fiscal year. This decrease was primarily attributable
to a decrease in income transferred to minority interests of ¥338 million to ¥264 million for the year ended
March 31, 2007 from ¥602 million for the previous fiscal year. This decrease was partially offset
by impairment of fixed assets of ¥141 million incurred for the year ended March 31, 2007.
Income before Income Taxes
Income before income taxes decreased by ¥14,682 million, or 100.1%, to losses before income
taxes of ¥13 million for the year ended March 31, 2007 from ¥14,669 million of income for the
previous fiscal year. This decrease resulted primarily from the
substantial increase in provision for losses on excess interest
repayments and provision
for loan losses for the year ended March 31,
2007, despite the increase in our gross interest income from lending activities.
Income Taxes
Income taxes decreased by ¥4,617 million, or 74.3%, to ¥1,597 million for the year ended March
31, 2007 from ¥6,214 million for the previous fiscal year. The effective tax rate applicable to us
increased from 40.7% for the previous fiscal year to 637.1% for the year ended March 31, 2007.
This was primarily attributable to a valuation allowance of ¥1,355 million, established by APREK
and other subsidiaries, for deferred tax assets because it was more likely than not that part of
the deferred tax assets would not be realized taking into consideration the projections of future
taxable income. (See Note 20 of our consolidated financial statements beginning on page F-1 of
this annual report on Form 20-F for details.)
Net Income
As a result of these factors, net income decreased by ¥10,065 million, or 119.0%, from ¥8,455
million for the previous fiscal year to net losses of ¥1,610 million for the year ended March 31,
2007.
-58-
Year Ended March 31, 2006, Compared to Year Ended March 31, 2005
Interest Income
Interest income from lending activities was ¥29,826 million, an increase of ¥338 million, or
1.1%, compared to ¥29,488 million for the previous fiscal year, due to an increase in the average
balance of outstanding loans from ¥148,811 million for the year ended March 31, 2005 to ¥183,965
million for the year ended March 31, 2006. This increase was partially offset by a decline in the
weighted period-end average contractual rate on our outstanding loans from 22.1% as of March 31,
2005 to 16.1% as of March 31, 2006.
The increase in the average balance of our loans outstanding was led by an increase in our
average balance of secured loans of ¥29,520 million, or 295.9%, to ¥39,496 million for the year
ended March 31, 2006 compared to ¥9,976 million for the previous fiscal year, and an increase in
our average balance of SME loans of ¥10,325 million, or 13.5%, to ¥86,976 million for the year
ended March 31, 2006, compared to ¥76,651 million for the previous fiscal year. This increase was
partially offset by a decrease in our average balance of consumer loans of ¥10,768 million, or
18.6%, to ¥47,250 million for the year ended March 31, 2006, compared to ¥58,018 million for the
previous fiscal year.
The decline of the weighted period-end average contractual rate was primarily attributable to
a decline in the weighted period-end average rate of secured loans of 2.1 points to 6.5% at March
31, 2006, compared to 8.6% at March 31, 2005, due to the growing share of real estate financing in
our loan portfolio, which generally carries the lowest interest rates among our products, as well
as a decline in the weighted period-end average rate of SME loans of 1.2 points to 22.8% at March
31, 2006, compared to 24.0% at March 31, 2005, due to our increased acquisition of high quality
loans receivable derived from referral relationships, including our affiliates. The amount of
total loans receivable derived from referral relationships was ¥33,029 million as of March 31,
2006, an increase of ¥739 million, or 2.3%, compared to ¥32,290 million as of the end of the
previous fiscal year.
Provision for Losses on Excess Interest Repayments
Provision for losses on excess
interest repayments increased by ¥1,199 million, or 56.2% to
¥3,331 million from ¥2,132 million for the previous fiscal year, in order to increase our reserve for
losses on excess interest repayments in cash and the portion of allowance for loan losses provided
for loan principal charged-off by excess interest repayments. Provision for losses on excess
interest repayments for the year ended March 31, 2006 includes provision for cash refunds of ¥977
million and provision for charge-offs by excess interest repayments
of ¥2,354 million. During the
year ended March 31, 2006, we agreed to offset our loan principal and/or return excess interest
payments in cash totaling ¥2,532 million, compared with
¥1,454 million for the year ended March 31,
2005. As a result, provision for losses on excess interest repayments as a percentage of total
interest income increased from 7.2% for the previous fiscal year to
11.2% for the year ended March 31, 2006. (See Critical Accounting Policies
Reserve and Provision for Losses on Excess Interest
Repayment
s below.)
Net Interest Income
Despite the increase in our interest
income from lending activities, the significant increase in
provision for losses on excess interest repayments offset the increase of our interest income from
lending activities. As a result, net interest income for the year ended March 31, 2006 decreased by
¥861 million, or 3.1%, to ¥26,495 million from
¥27,356 million for the previous fiscal year.
Interest Expense
Interest expense for lending activities for the year ended March 31, 2006 decreased by ¥369
million, or 12.4%, to ¥2,602 million from ¥2,971 million for the previous fiscal year. The
decrease in interest expense for lending activities reflected our efforts in negotiating improved
borrowing terms, particularly from banks, which reduced our weighted period-end average rate of
long-term borrowings from 1.9% as of March 31, 2005 to 1.3% as of March 31, 2006, despite our
overall average balance of borrowings for the year ended March 31, 2006 increased by ¥36,879
million, or 29.4%, to ¥162,341 million from ¥125,462 million for the previous fiscal year,
reflecting increased capital requirements for loan originations centering on secured loans.
Net
Interest Income before Provision for Loan Losses
Despite
the decrease in our interest expense for lending activities, the
decrease in our net interest income was relatively large for the year
ended March 31, 2006. As a result, net interest income before
provision for loan losses for the year ended March 31, 2006
slightly decreased by ¥492 million, or 2.0%, to
¥23,893 million from ¥24,385 million for the
previous fiscal year.
-59-
Net Interest Income from Lending Activities
Net
interest income from lending activities, namely net interest income
after provision for loan losses, for the year ended March 31, 2006 decreased by ¥598 million, or 3.2%, to ¥17,970 million
from ¥18,568 million for the previous fiscal year.
Provision for loan losses increased by ¥106 million, or
1.8%, to ¥5,923 million for the year ended March 31,
2006, compared to ¥5,817 million
for the previous fiscal year. Accordingly, provision for loan losses as a percentage of interest
income increased slightly from 19.7% for the previous fiscal year to
19.9% for the year ended March
31, 2006. The increase in provision for loan losses reflected the increase in the outstanding
balance of our loans receivable, resulting in a roughly proportionate increase in our provision for
loan losses.
Other Revenue
Other revenue increased by ¥6,442 million, or 128.8%, to ¥11,445 million for the year ended
March 31, 2006 from ¥5,003 million for the previous fiscal year. This increase was primarily
attributable to an increase in interest income from purchased loans of ¥1,705 million, or 52.4%, to
¥4,960 million for the year ended March 31, 2006 from ¥3,255 million for the previous fiscal year.
This was principally due to growth of our servicing business through our subsidiary, Nissin
Servicer, as well as income from investment funds of ¥1,857 million and commission fees from
securities business of ¥712 million, which were included in rents, dividends and other. Further,
an increase in net gain on sales of real estate of ¥1,107 million, or 232.1%, to ¥1,584 million for
the year ended March 31, 2006 from ¥477 million for the previous fiscal year, also contributed to
an increase in other revenue.
Operating Expense
Operating expense increased by ¥2,294 million, or 14.9%, to ¥17,732 million for the year ended
March 31, 2006 from ¥15,438 million for the previous fiscal year. The increase resulted primarily
from increases in the operations of our subsidiaries, including APREK, a subsidiary newly acquired
during the year ended March 31, 2006, which contributed to increases in our selling, general and
administrative expense of ¥1,979 million, or 13.0%, to ¥17,229 million for the year ended March 31,
2006 from ¥15,250 million for the previous fiscal year, due to increases in expenses such as
salaries and employee benefits and occupancy, furniture and equipment, and advertising costs.
Other Income
Other income decreased by ¥457 million, or 11.3%, to ¥3,604 million for the year ended March
31, 2006 from ¥4,061 million for the previous fiscal year. This decrease was primarily due to the
absence of any gain on sale of consumer loans receivable for the year ended March 31, 2006,
compared to ¥3,327 million for the previous fiscal year. Further, a decrease of ¥1,382 million in
net gain on sales of subsidiaries and affiliates to net losses of ¥43 million for the year ended
March 31, 2006 from net gain of ¥1,339 million for the previous fiscal year, reflecting a gain on
equity interest in Nissin Servicer recognized in the previous fiscal year in connection with its
listing on the Mothers market of the Tokyo Stock Exchange. These contributing factors were
partially offset by an increase of ¥4,221 million in net gains on sales of investment securities of
¥3,708 million for the year ended March 31, 2006, compared to net losses of ¥513 million for the
previous fiscal year.
Other Expense
Other expense increased by ¥332 million, or 116.1%, to ¥618 million for the year ended March
31, 2006 from ¥286 million for the previous fiscal year. The increase was primarily attributable
to an increase of ¥410 million in income transferred to minority interests to ¥602 million for the
year ended March 31, 2006 from ¥192 million for the previous fiscal year, which reflected an
increase in net income of Nissin Servicer, despite a decrease of ¥78 million, or 83.0%, in net
losses on sale, disposal and impairment of long-lived assets to ¥16 million for the year ended
March 31, 2006 from ¥94 million for the previous fiscal year.
Income before Income Taxes
Income
before income taxes increased by ¥2,761 million, or 23.2%, to ¥14,669 million for the
year ended March 31, 2006 from ¥11,908 million for the
previous fiscal year. This increase resulted primarily from an increase in net gains on sales of investment
securities, despite the decrease in net interest income from lending
activities.
Income Taxes
Income taxes increased by ¥1,568 million, or 33.7%, to ¥6,214 million for the year ended March
31, 2006 from ¥4,646 million for the previous fiscal year. The effective tax rate applicable to us
increased from 38.4% for the previous fiscal year to 40.7% for the year ended March 31, 2006. For
the year ended March 31, 2006, the absence of a non-taxable gain on change of equity interest in
Nissin Servicer, which was recognized for the previous fiscal year, contributed to the increase in
the effective tax rate applicable to us.
Net Income
As a result of these factors, net income increased by ¥1,193 million, or 16.4%, to ¥8,455
million for the year ended March 31, 2006 from ¥7,262 million for the previous fiscal year.
-60-
Financial Condition
The following table provides selected balance sheet data as of March 31, 2006 and 2007:
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(In millions)
|
|
Total assets
|
|
¥
|
359,943
|
|
|
¥
|
454,077
|
|
Cash and cash equivalents
|
|
|
22,860
|
|
|
|
28,344
|
|
Loans receivable, net
|
|
|
225,947
|
|
|
|
250,780
|
|
Purchased loans receivable, net
|
|
|
24,155
|
|
|
|
28,910
|
|
Real estate for sale
|
|
|
20,792
|
|
|
|
67,327
|
|
Investment securities
|
|
|
42,071
|
|
|
|
38,384
|
|
Property and equipment, net
|
|
|
11,169
|
|
|
|
8,448
|
|
Deferred income taxes
|
|
|
721
|
|
|
|
6,488
|
|
Other assets
|
|
|
7,173
|
|
|
|
11,115
|
|
Total liabilities
|
|
|
277,006
|
|
|
|
367,322
|
|
Short-term borrowings
|
|
|
60,411
|
|
|
|
84,258
|
|
Long-term borrowings
|
|
|
198,924
|
|
|
|
260,817
|
|
Deferred income taxes
|
|
|
1,382
|
|
|
|
256
|
|
Other
liabilities
|
|
|
7,514
|
|
|
|
16,123
|
|
Total shareholders equity
|
|
¥
|
80,504
|
|
|
¥
|
82,563
|
|
Total assets increased by ¥94,134 million to ¥454,077 million as of March 31, 2007,
compared to ¥359,943 million as of the end of the previous fiscal year. This increase was
primarily due to a significant increase in real estate for sale, reflecting our strategy to focus
managerial resources on the growing real estate business through our consolidated subsidiaries, as
well as investment in variable interest entities consolidated under Financial Accounting Standard
Board (FASB) Interpretation (FIN) No. 46(R), Consolidation of Variable Interest Entities, or
VIEs, which engage in real estate acquisition or development. Another main contributing factor is
an increase in loans receivable, reflecting enhanced real estate financing activities such as
lending to property companies and SMEs and their owners, including lending non-recourse loans to
VIEs engaged in real estate acquisition or development. In addition,
other assets increased by ¥3,942 million to
¥11,115 million as of March 31, 2007, compared to
¥7,173 million as of the end of the previous fiscal year,
mainly due to an increase in assets related to our operations in the
Peoples Republic of China, and this increase also contributed to the
increase in total assets. These contributing factors were partially
offset by the increase of allowance for loan losses mainly due to the
increase in allowance for loan principal charged-off by excess
interest repayments, and a decrease in investment securities, reflecting declines in market valuations of our
marketable securities and sales of certain investment securities.
Total liabilities increased by ¥90,316 million to ¥367,322 million as of March 31, 2007,
compared to ¥277,006 million as of the end of the previous fiscal year. This change was
attributable to an increase in our borrowings, especially in long-term borrowings procured through
securitization of our loans receivable and others, primarily reflecting our increased capital
requirement for loan originations centering on real estate financing.
In addition, an increase in our reserve for losses on excess interest
repayments, which was included in Other liabilities in
the accompanying consolidated balance sheets, from
¥590 million as of the previous fiscal year to
¥4,952 million as of March 31, 2007, also contributed
to the increase in total liabilities.
Total shareholders equity increased by ¥2,059 million to ¥82,563 million as of March 31,
2007, compared to ¥80,504 million as of the end of the previous fiscal year. This was mainly
attributable to an increase in common stock and additional paid-in capital primarily due to factors
such as a new share issuance of ¥8,000 million through a third-party allotment to Sumitomo Mitsui
Banking Corporation on June 12, 2006 and conversion of convertible bonds, offset by a decrease in
retained earnings mainly due to net losses for the year ended March 31, 2007 and a decrease in
cumulative other comprehensive income due to a decrease in unrealized gains on marketable
securities, which reflects declines in market valuations of our marketable securities compared to
the previous fiscal year, as well as sales of certain marketable securities during the year ended
March 31, 2007. However, as our total borrowings increased considerably, shareholders equity as a
percentage of total assets decreased by 4.2 points to 18.2% as of March 31, 2007, compared to 22.4%
as of the end of the previous fiscal year.
-61-
Allowance for Loan Losses, Reserve for Losses on Excess Interest
Repayments, and Loan Charge-offs
We maintain our allowances for loan losses at a level that we believe is adequate to provide
for estimated probable uncollectible loan losses from known and inherent risks in our loan
portfolio. For all of our loan products, we generally determine our allowance for loan losses
based on various factors including the risk profile and status of the borrower and, if applicable,
guarantor, economic conditions, unemployment rates, bankruptcy cases and historical loss
experience. Also, in response to recent court decisions relating to gray-zone interest in excess of the interest rates stipulated by the
Interest Rate Restriction Law, and
subsequent changes in the business environment for moneylending companies
in Japan, we decided to provide an allowance for loans charged-off by excess
interest repayments and reserve for losses on excess interest repayments in cash beginning from the
year ended March 31, 2006. (See Risk Factors in Item 3.D of this annual report on Form 20-F.)
Integrated Financial Services
Allowance for Loan Losses
Increases
in our allowance are made by charges to our provision for loan losses
and provision for losses on excess interest repayments. Based on the
amount of our loans outstanding and our allowance ratio, we then supplement the remaining balance
through our provision for loan losses. In addition to the allowance provided by the above method,
we provide an allowance for loans charged-off by excess interest repayments, included in our
allowance for loan losses, based on managements best estimation taking into account the past
experience and the current conditions for loans charged-off by excess
interest repayments, through our provision for losses on excess
interest repayments. (See Critical Accounting
Policies
Reserve and Provision for Losses on Excess Interest Repayments
below.) The following table provides
information on our allowance for loan losses along with amounts of
provision for our loan losses, provision for charge-offs by excess
interest repayments and
charge-offs, net of recoveries, with respect to our integrated financial services segment for the
years ended March 31, 2005, 2006 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In millions)
|
|
Balance at beginning of year
|
|
¥
|
13,528
|
|
|
¥
|
10,034
|
|
|
¥
|
11,003
|
|
Provision for loans receivable sold
|
|
|
(3,327
|
)
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
5,817
|
|
|
|
5,923
|
|
|
|
10,853
|
|
Provision
for charge-offs by excess interest repayments
|
|
|
1,942
|
|
|
|
2,354
|
|
|
|
6,528
|
|
Charge-offs, net of recoveries
|
|
|
(7,926
|
)
|
|
|
(7,308
|
)
|
|
|
(9,847
|
)
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
¥
|
10,034
|
|
|
¥
|
11,003
|
|
|
¥
|
18,537
|
|
|
|
|
|
|
|
|
|
|
|
Of
the above allowance for loan losses, the amount included as the
allowance provided for charge-offs by repayments of excess interest
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In millions)
|
|
Amount related to loan losses
|
|
¥
|
8,102
|
|
|
¥
|
8,862
|
|
|
¥
|
13,324
|
|
Amount related to charge-offs by excess interest repayments
|
|
|
1,932
|
|
|
|
2,141
|
|
|
|
5,213
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance for loan losses
|
|
¥
|
10,034
|
|
|
¥
|
11,003
|
|
|
¥
|
18,537
|
|
|
|
|
|
|
|
|
|
|
|
Our allowance for loan losses increased significantly
from March 31, 2006 to 2007, because we
increased allowance for loans charged-off by excess interest repayments as described
above,
reflecting the recent adverse changes in the business environment for moneylending
companies in
Japan. In addition, recent growth in our total loans outstanding reflecting the growth of
secured
loans to property companies, as well as an increase in our specific allowance for loan
losses
provided for delinquent loans centering on SME loans, contributed to the rise in our
allowance for
loan losses from March 31, 2006 to 2007.
Upon
closing each reporting period, we charge-off our loans in the following manner:
|
|
|
Secured Loans
. We generally charge-off or provide an allowance for loan losses on
secured loans in default at the end of the semi-annual period in which the default
occurs after considering the availability and value of collateral.
|
|
|
|
|
Unsecured Loans on Deeds
. We generally charge-off or provide an allowance for loan
losses on Business Assist and Smart Assist loans in default at the end of the
semi-annual period in which the default occurs for which we believe the likelihood of
any future collection from the borrower as well as the guarantor is
minimal. We charge-off guaranteed loans to customers who have declared bankruptcy at the end of the
semi-annual period in which we become aware of the bankruptcy filing.
|
|
|
|
|
Revolving Loans
. We generally charge-off Business Timely and First Plan loans for
which interest payments have been delinquent for 67 days. We
charge-off revolving
loans to customers who have declared bankruptcy immediately after we become aware of
the bankruptcy filing. Because of our rapid charge-off, we do not place these loans
that have become delinquent loans (which we define as loans on which interest payments
are delinquent) on non-accrual status before they are charged-off.
|
-62-
Reserve for Losses on Excess Interest Repayments
In order to respond to the adverse changes in the business environment for moneylending
companies in Japan as described above, we established a reserve for losses on excess interest
repayments to provide for cash refunds in respect of excess interest beginning from the year ended
March 31, 2006, taking into account past experience and current repayment conditions, in order to
cover estimated future repayments of excess interest derived from current loans receivable and
loans previously paid-off or charged-off. (See Critical
Accounting Policies
Reserve and Provision for Losses on Excess
Interest Repayments
below.) Based on our quarterly review of the adequacy of our reserve for losses on excess interest
repayments, taking into consideration the historical loss experience
of excess interest repayments in cash and current conditions with respect to cash refunds, we then supplement the remaining
balance through provision for losses on excess interest repayments. The following table provides information on our reserve for losses on
excess interest repayments along with amounts of provision for cash refunds of excess interest and actual cash refunds, with respect to our integrated financial services segment for the years
ended March 31, 2005, 2006 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In millions)
|
|
Balance at beginning of year
|
|
¥
|
|
|
|
¥
|
|
|
|
¥
|
590
|
|
Provision
for cash refunds of excess interest
|
|
|
190
|
|
|
|
977
|
|
|
|
6,136
|
|
Excess interest repayments in cash
|
|
|
(190
|
)
|
|
|
(387
|
)
|
|
|
(1,774
|
)
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
¥
|
|
|
|
¥
|
590
|
|
|
¥
|
4,952
|
|
|
|
|
|
|
|
|
|
|
|
Charge-off Ratios and Allowance Ratios
The following table provides information on our loans outstanding, allowance for loan losses,
the ratio of allowance for loan losses to total loans outstanding, as well as average balance of
loans outstanding, loans charged-off and the ratio of loans charged-off to the average balance of
loans outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended/As of March 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In millions except percentages)
|
|
Secured loans
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding
|
|
¥
|
18,812
|
|
|
¥
|
91,610
|
|
|
¥
|
139,691
|
|
Allowance
for loan losses
(1)
|
|
|
761
|
|
|
|
558
|
|
|
|
624
|
|
Ratio of allowance for loan losses to loans outstanding
|
|
|
4.0
|
%
|
|
|
0.6
|
%
|
|
|
0.4
|
%
|
Average balance of loans outstanding
|
|
|
9,976
|
|
|
|
39,496
|
|
|
|
115,779
|
|
Loans charged-off
|
|
|
22
|
|
|
|
22
|
|
|
|
20
|
|
Ratio of loans charged-off to average balance of loans
outstanding
|
|
|
0.2
|
%
|
|
|
0.1
|
%
|
|
|
|
%
|
SME loans
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding
|
|
¥
|
79,823
|
|
|
¥
|
90,729
|
|
|
¥
|
81,688
|
|
Allowance
for loan losses
(1)
|
|
|
5,837
|
|
|
|
7,405
|
|
|
|
13,250
|
|
Ratio of allowance for loan losses to loans outstanding
|
|
|
7.3
|
%
|
|
|
8.2
|
%
|
|
|
16.2
|
%
|
Average balance of loans outstanding
|
|
|
76,651
|
|
|
|
86,976
|
|
|
|
88,159
|
|
Loans charged-off
|
|
|
4,808
|
|
|
|
5,302
|
|
|
|
6,954
|
|
Ratio of loans charged-off to average balance of loans
outstanding
|
|
|
6.3
|
%
|
|
|
6.1
|
%
|
|
|
7.9
|
%
|
Consumer loans
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding
|
|
¥
|
50,431
|
|
|
¥
|
44,158
|
|
|
¥
|
34,959
|
|
Allowance
for loan losses
(1)
|
|
|
3,205
|
|
|
|
2,585
|
|
|
|
3,750
|
|
Ratio of allowance for loan losses to loans outstanding
|
|
|
6.4
|
%
|
|
|
5.9
|
%
|
|
|
10.7
|
%
|
Average balance of loans outstanding
|
|
|
58,018
|
|
|
|
47,250
|
|
|
|
39,621
|
|
Loans charged-off
|
|
|
3,594
|
|
|
|
2,687
|
|
|
|
2,872
|
|
Ratio of loans charged-off to average balance of loans
outstanding
|
|
|
6.2
|
%
|
|
|
5.7
|
%
|
|
|
7.2
|
%
|
Other loans
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding
|
|
¥
|
6,296
|
|
|
¥
|
10,681
|
|
|
¥
|
14,605
|
|
Allowance
for loan losses
(1)
|
|
|
231
|
|
|
|
455
|
|
|
|
913
|
|
Ratio of allowance for loan losses to loans outstanding
|
|
|
3.7
|
%
|
|
|
4.3
|
%
|
|
|
6.3
|
%
|
Average balance of loans outstanding
|
|
|
4,166
|
|
|
|
10,243
|
|
|
|
12,236
|
|
Loans charged-off
|
|
|
83
|
|
|
|
108
|
|
|
|
29
|
|
Ratio of loans charged-off to average balance of loans
outstanding
|
|
|
2.0
|
%
|
|
|
1.1
|
%
|
|
|
0.2
|
%
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding
|
|
¥
|
155,362
|
|
|
¥
|
237,178
|
|
|
¥
|
270,943
|
|
Allowance
for loan losses
(1)
|
|
|
10,034
|
|
|
|
11,003
|
|
|
|
18,537
|
|
Ratio of allowance for loan losses to loans outstanding
|
|
|
6.5
|
%
|
|
|
4.6
|
%
|
|
|
6.8
|
%
|
Average balance of loans outstanding
|
|
|
148,811
|
|
|
|
183,965
|
|
|
|
255,795
|
|
Loans charged-off
|
|
|
8,507
|
|
|
|
8,119
|
|
|
|
9,875
|
|
Ratio of loans charged-off to average balance of loans
outstanding
|
|
|
5.7
|
%
|
|
|
4.4
|
%
|
|
|
3.9
|
%
|
(1) The
amount includes the allowance provided for loan principal charged-off
by excess interest repayments.
-63-
Charge-off Ratios
. Our traditional loans, such as SME loans and consumer loans, have
higher charge-off ratios among our loan categories. In SME loans and consumer loans, our Business
Timely loans and First Plan loans have higher charge-off ratios than our Business Assist loans and
Smart Assist loans, because Business Timely loans and First Plan loans do not require guarantors
and have less rigorous screening requirements than Business Assist loans and Smart Assist loans. We
attempted to restructure our loan portfolio by shifting our target customers and promoting
efficiency through a review of credit screening standards and our branch network, in order to
accumulate high-quality loans receivable. Despite these efforts, charge-off ratios of SME loans
and consumer loans increased from 6.1% and 5.7% for the year ended March 31, 2006 to 7.9% and 7.2%
for the year ended March 31, 2007, respectively. This is attributable to an increase in loans
charged-off in connection with the significant increase in excess interest repayments. (See
Critical Accounting Policies
Reserve and Provision
for Losses on Excess Interest Repayments
below.) However, following
the decrease in charge-off ratios from 5.7% for the year ended March 31, 2005 to 4.4% for the year
ended March 31, 2006, our overall charge-off ratio decreased to 3.9% as of March 31,
2007, due to steady growth in our secured loans, which have a lower charge-off ratio, in line with
our strategic shift in recent years toward real estate financing.
Allowance Ratios
. The overall ratio of allowance for loan losses to total loans outstanding
decreased from 6.5% as of March 31, 2005 to 4.6% as of March 31, 2006, resulting from the expansion
of secured loans centering on real estate financing, despite an increase in the ratio of allowance
for loan losses to loans outstanding of our SME loans, reflecting uncertainty in Japans economic
environment which negatively affected the repayment ability of many of our long-standing customers.
Regarding secured loans, the ratio of allowance for loan losses to loans outstanding declined
considerably from 4.0% as of March 31, 2005 to 0.6% as of March 31, 2006, and decreased to 0.4% as
of March 31, 2007. This decline reflected a significant increase in real estate financing,
including non-recourse loans, to property companies through our Real Estate Finance Group. We
started offering these loans beginning in February 2004, and we have not experienced significant
charge-offs on these loans. Therefore we maintained the allowance at a very low level, which we
believe is adequate to provide for the estimated charge-offs from these loans. This factor
contributed to a decline of approximately 9.1 points in the ratio of secured loans with specific
allowance provided to secured loans outstanding from 9.4% as of March 31, 2005 to 0.3% as of March
31, 2006, and remained low at 0.6% as of March 31, 2007. This represented an increase of high
quality secured loans receivable in our loan portfolio. Despite these efforts, our overall ratio of
allowance for loan losses to total loans outstanding increased to 6.8% as of March 31, 2007, due to
a significant increase in our allowance for loan losses for our SME loans and consumer loans in
order to provide for loans charged-off by excess interest repayments, taking into consideration the
recent adverse changes in the business environment for moneylending companies in Japan, and the significance of excess interest repayments. (See
Critical Accounting Policies
Reserve and Provision
for Losses on Excess Interest Repayments
below.)
-64-
Delinquent Loans and Non-accrual Loans
Delinquent Loans
. Delinquent loans still accruing interest are loans with respect to which
interest payments are delinquent, but which have not been put on
non-accrual status or charged-off.
Non-accrual Loans
. Non-accrual loans are loans that no longer accrue interest, as collection
of the entire principal is deemed unlikely. We place loans on non-accrual status when they are
either partially or fully reserved for or are charged-off due to our assessment that full or
partial collection is unlikely.
Our non-accrual loans comprise restructured loans and loans with a specific allowance
provided, as follows:
|
|
|
Restructured Loans
. Restructured loans are comprised of loans with respect to which
terms have been revised such as waiver, postponement or partial forgiveness of interest
or principal payments for the benefit of the borrower in order to secure some return on
the loan. Impaired loans are included in restructured loans and represent loans we
have specifically identified as partially or wholly uncollectible due to the bankruptcy
of the borrower, lack of collateral or other various reasons. We reserve for the
amounts of impaired loans and related accrued interest deemed uncollectible in our
allowance for loan losses. The decrease in impaired loans between March 31, 2005 and
2006 reflected the decrease in impaired consumer loans as we strategically have shifted
toward promotion of financial services to SMEs and their owners. However, the amount
of impaired loans increased between March 31, 2006 and 2007 due to an increase of loans
partially charged-off by excess interest repayments. (See Critical Accounting
Policies
Reserve and Provision for Losses on Excess Interest Repayments
below.) In addition, the amount of
restructured secured loans increased significantly due to an increase in the average
balance of secured loans per account, despite the fact that the ratio of the number of
restructured secured loan accounts to the number of entire secured loan accounts
decreased from 4.9% as of March 31, 2006 to 3.6% as of March 31, 2007.
|
|
|
|
|
Loans with Specific Allowances Provided
. Loans with specific allowances provided
are delinquent loans for which we increase allowances beyond the general allowance. We
provide specific allowances only for secured loans, guaranteed SME and consumer loans,
and other loans.
|
The following table provides information on our delinquent loans still accruing interest and
our non-accrual loans, which comprise restructured loans, including impaired loans, and loans with
specific allowances provided:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In millions)
|
Secured loans
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquent loans still accruing interest
|
|
¥
|
186
|
|
|
¥
|
77
|
|
|
¥
|
870
|
|
Non-accrual loans
(1)
|
|
|
1,836
|
|
|
|
963
|
|
|
|
5,903
|
|
Restructured loans
|
|
|
71
|
|
|
|
665
|
|
|
|
5,108
|
|
Impaired loans included in restructured loans
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans with specific allowance provided
|
|
|
1,765
|
|
|
|
298
|
|
|
|
795
|
|
SME loans
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquent loans still accruing interest
|
|
¥
|
1,070
|
|
|
¥
|
1,537
|
|
|
¥
|
2,606
|
|
Non-accrual loans
(1)
|
|
|
9,631
|
|
|
|
11,496
|
|
|
|
15,583
|
|
Restructured loans
|
|
|
6,938
|
|
|
|
7,696
|
|
|
|
8,528
|
|
Impaired loans included in restructured loans
|
|
|
1,546
|
|
|
|
1,438
|
|
|
|
1,788
|
|
Loans with specific allowance provided
|
|
|
2,693
|
|
|
|
3,800
|
|
|
|
7,055
|
|
Consumer loans
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquent loans still accruing interest
|
|
¥
|
594
|
|
|
¥
|
817
|
|
|
¥
|
997
|
|
Non-accrual loans
(1)
|
|
|
8,762
|
|
|
|
7,486
|
|
|
|
7,211
|
|
Restructured loans
|
|
|
6,866
|
|
|
|
6,037
|
|
|
|
5,138
|
|
Impaired loans included in restructured loans
|
|
|
1,776
|
|
|
|
1,432
|
|
|
|
1,340
|
|
Loans with specific allowance provided
|
|
|
1,896
|
|
|
|
1,449
|
|
|
|
2,073
|
|
Other loans
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquent loans still accruing interest
|
|
¥
|
|
|
|
¥
|
10
|
|
|
¥
|
21
|
|
Non-accrual loans
(1)
|
|
|
29
|
|
|
|
68
|
|
|
|
107
|
|
Restructured loans
|
|
|
|
|
|
|
12
|
|
|
|
12
|
|
Impaired loans included in restructured loans
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Loans with specific allowance provided
|
|
|
29
|
|
|
|
56
|
|
|
|
95
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquent loans still accruing interest
|
|
¥
|
1,850
|
|
|
¥
|
2,441
|
|
|
¥
|
4,494
|
|
Non-accrual loans
(1)
|
|
|
20,258
|
|
|
|
20,013
|
|
|
|
28,804
|
|
Restructured loans
|
|
|
13,875
|
|
|
|
14,410
|
|
|
|
18,786
|
|
Impaired loans included in restructured loans
|
|
|
3,322
|
|
|
|
2,870
|
|
|
|
3,131
|
|
Loans with specific allowance provided
|
|
|
6,383
|
|
|
|
5,603
|
|
|
|
10,018
|
|
|
|
|
(1)
|
|
The amounts of non-accrual loans represent the balance of non-accrual loans outstanding
before netting of allowances for loan losses.
|
-65-
Servicing Business
We record purchased loans at cost. We then establish an allowance for estimated loan losses,
and employ one of two methods to determine if further allowances are appropriate. Under the cost
recovery method, if we determine that we cannot recover our cost, an allowance for the expected
uncollectible portion is established, and the loan is charged-off once we deem the loan
uncollectible. Under the level yield method, which is used for those purchased loans for which we
can reasonably estimate the expected timing and amount of cash flows, if the carrying amounts of
those loans are greater than the present value of expected future cash flows from those loans, the
difference is recorded as an allowance for the uncollectible portion.
The following table provides information on our allowance for loan losses along with amounts
provided for loan losses and charge-offs with respect to our servicing business segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In millions)
|
|
Balance at beginning of year
|
|
¥
|
717
|
|
|
¥
|
1,282
|
|
|
¥
|
1,792
|
|
Provision for loan losses
|
|
|
817
|
|
|
|
1,186
|
|
|
|
1,696
|
|
Charge-offs
|
|
|
(252
|
)
|
|
|
(676
|
)
|
|
|
(833
|
)
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
¥
|
1,282
|
|
|
¥
|
1,792
|
|
|
¥
|
2,655
|
|
|
|
|
|
|
|
|
|
|
|
See
also Critical Accounting Policies
Purchased Loans Receivable and Revenue
Recognition
below.
-66-
Critical Accounting Policies
The following describes our critical accounting policies that affect our more significant
judgments and estimates used in the preparation of our financial statements. The preparation of
our financial statements in conformity with U.S. GAAP requires us to make estimates and judgments
that affect the reported amounts of assets and liabilities, revenues and expenses, and related
disclosures of contingent liabilities. These estimates are based on, but not limited to,
historical results, industry standards and current economic conditions, giving due consideration to
materiality. Our estimates are based on information that is currently available to us and on
various other assumptions that we believe are reasonable under the circumstances. Actual results
may vary from those estimates, and those estimates could differ, under different assumptions or
conditions.
On an ongoing basis, we evaluate our critical accounting policies, including those related to
interest income from loans receivable, losses on excess interest repayments, loans receivable and
allowance for loan losses, loan origination costs, and purchased loans receivable and revenue
recognition.
Interest Income from Loans Receivable
We recognize interest income from our loans, except for certain amounts exceeding a statutory
interest rate, on an accrual basis based on the principal amount outstanding. In Japan, the
maximum interest rates applied to moneylending companies are set by the Moneylending Business Law
at two general levels: an absolute maximum rate subject to the Contributions Law (the legal
limit) and a lower interest rate subject to the Interest Rate Restriction Law based on the
principal amount of the loan (the restricted rate).
Our contractual loan interest rates of certain loan products do not exceed the legal limit but
may exceed the restricted rate. However, we do not accrue unpaid interest in excess of the
restricted rate, even though an interest payment by a borrower in excess of the restricted rate may
be deemed to be valid. The borrower may make a claim for repayment of excess interest paid to us. We continue to recognize
interest income on excess interest as received, because we believe we
are able to estimate amounts potentially refunded on excess
interest previously collected. (See
Reserve and Provision for Losses on Excess Interest Repayments
below.)
Based on our recognition of the risk involved in charging interest rates above the restricted
rate, even if under the legal limit, we recognize accrued interest income on our loans receivable
outstanding as of the balance sheet date at the lower of the restricted rate or the contractual
interest rate. Contractual interest in excess of the restricted rate is recognized as interest
income when collected. Accrual of interest income is ceased when loan
principal is charged-off or
is wholly or partially reserved. The accrued interest portion of a charged-off loan balance is
deducted from the current period interest income and the principal
amount is charged-off against
the allowance for loan losses.
-67-
Reserve
and Provision for Losses on Excess Interest Repayments
The Interest Rate Restriction Law provides that the portion of interest on a loan with an interest
rate exceeding the restricted rate under the Interest Rate Restriction Law (excess interest) is
invalid but that a borrower cannot demand repayment of excess interest as long as it is paid
voluntarily. The Moneylending Business Law provides that a payment by a
borrower or guarantor of excess interest to a registered moneylender is valid within the legal
limit of the maximum interest rate under the Contributions Law, so long as the excess interest is
paid voluntarily and certain documentation requirements are satisfied (deemed valid payments),
despite the provisions of the Interest Rate Restriction Law.
However,
the Supreme Court of Japan has recently decided several cases that have negatively affected
the application by moneylenders of deemed valid payments of excess interest and have resulted in
increased claims for repayments of excess interest. In particular, in January 2006, the court ruled that the voluntary payment requirement for deemed valid payments under the Moneylending
Business Law should be interpreted strictly, that an
acceleration clause in a loan agreement
is invalid with respect to a delay in the payment of excess interest
and that, unless there is some particular situation such that the
borrower is not misled into believing that such a clause is valid,
the voluntary nature of excess interest payments, which is
the requirement for deemed valid payments, will not be recognized.
Following
these court decisions, the prospects for resolutions of disputes over claims for repayments of excess interest have been
altered in favor of borrowers, and borrowers claims for repayments of excess interest have
substantially increased for the year ended March 31, 2007. Consequently, we increased our reserve for losses on excess interest repayments and the
portion of allowance for loan losses provided for loan principal charged-off by excess interest
repayments. The statute of limitations on claims for repayments of excess interest is 10 years from
the date of the relevant excess interest payment by the borrower.
Determining the amount of reserve for losses on excess interest repayments and the portion of
allowance for loan losses provided for loan principal charged-off by excess interest repayments is
a significant estimate and subject to substantial judgment by us. We set the reserve and allowance
related to excess interest repayments based on managements best estimation taking into account
past experience and current conditions for refunding of excess interest. However, taking into
consideration the current business environment, we modified our allowance to cover all estimated
future repayments of excess interest derived from current loans receivable and loans previously
paid-off or charged-off. This reserve methodology is consistent with the Audit Treatment of
Reserve for Losses on Excess Interest Repayment Claims in Consumer Finance Companies issued by the
Japanese Institute of Certified Public Accountants on October 13, 2006. In particular, we analyze
the trends in claims for repayments of excess interest, typical life
of lending by loan product, timing of claims on loans previously
paid-off or charged-off and other factors.
We have not historically tracked amounts of interest income specifically related to excess
interest. Interest income on excess interest approximated 30% of total interest income in the
past several years including approximately ¥11,776 million and ¥9,858 million ($83,507
thousand), respectively, for the years ended March 31, 2006 and 2007. While claims for
repayments of excess interest are substantially less than the amount of excess interest
collected, our total gross exposure may theoretically be up to the amount of excess interest
received by us over the past 10 years. While we may not be obligated to refund historical collection of
excess interest, we refund excess interest for business purposes. We continue to recognize revenue as collected, because we believe we are reasonably
able to estimate repayments of excess interest.
When excess interest is refunded to borrowers, the excess amount is first applied to the
outstanding loan principal balance and charged-off from the
principal. We have the legal right to offset such excess amount against
the outstanding loan principal. If the excess amount is
greater than the outstanding balance of loan principal or there is no loan principal, which is the
case for loans previously paid-off or charged-off, then we refund the deficit amount to the
borrower in cash. In our balance sheet, of the amount refunded upon demands for repayments of
excess interest, (i) the portion applied to the outstanding loan principal is offset by allowance
for loan losses and (ii) the portion refunded in cash is offset by the reserve for losses on excess
interest repayments. In addition, provision for the portion applied to the outstanding loan
principal balance upon demands for repayment of excess interest and
provision for the portion refunded in cash are recorded as provision for losses on
excess interest repayments in the accompanying consolidated
statements of operations. The reserve for losses on excess interest repayments is included in Other liabilities in the
accompanying consolidated balance sheet. This amount was ¥590 million as of March 31, 2006 and
¥4,952 million as of March 31, 2007. The portion of allowance for loan losses
provided for loan principal charged-off by excess interest repayments was ¥2,141 million as of March 31, 2006 and ¥5,213 million as of March 31, 2007.
We previously deducted the excess interest repayment-related costs, which comprised excess interest
repayments in cash and provision for the portion refunded in cash, directly from interest income.
However, taking into consideration the significant increase in excess interest repayments in cash,
we decided to disclose the excess interest repayment-related costs plus provision for the portion
applied to the outstanding loan principal charged-off by excess
interest repayments, which was
previously included in provision for loan losses, as a separate item in the consolidated
statements of operations as provision for losses on excess interest repayments.
Following the abovementioned Supreme Courts decisions, amendments to the Moneylending Business
Law, the Contributions Law and the Interest Rate Restriction Law were promulgated on December 20,
2006 and are scheduled to become effective gradually over the next three years. When in force,
these amendments will (i) abolish the concept of deemed valid payments under the Moneylending
Business Law in approximately three years after the promulgation; (ii) reduce the legal limit on
the maximum interest rate under the Contributions Law from 29.2% per year to 20% per year in
approximately three years after the promulgation; and (iii) introduce further documentation
requirements within one year after the promulgation, among other things.
Because
of the above, effective June 2006, we removed the acceleration clause
with respect to a delay in the payment of excess interest in all
lending contracts. Further, we reduced interest rates charged to
borrowers to the restricted rate under the Interest Rate Restriction Law for most moneylending
products for new contracts made on and after October 1, 2006. Accordingly, we expect the risk of
borrowers requesting refunds for excess interest to decrease in respect of loans originated on and
after October 1, 2006.
-68-
Loans Receivable and Allowance for Loan Losses
We
report loans receivable at the principal amount including deferred
origination costs, net of an allowance for loan losses, which includes
an allowance provided for loan principal charged-off by excess
interest repayments. The allowance for loan losses requires
substantial judgment by management and is a significant estimate. The
allowance for loan losses is maintained at a level that, in managements judgment, is adequate to
provide for estimated probable uncollectible loan losses from known and inherent risks in our loan
portfolios. Increases in the allowance are made by charges to the provision for loan losses.
Allowances are reviewed both on an individual loan and portfolio basis. In evaluating the adequacy
of the allowance, we consider various factors, including current economic conditions, such as
unemployment rates, corporate insolvencies and personal bankruptcy cases, and historical loss
experience. Restructured loans include any loans for which interest, principal or term is
restructured. Allowances for restructured loans are based on the collection history or legal
classification of the borrowers.
Our
policy is to generally charge-off loan balances and cease accrual of interest as follows,
in accordance with reasonably estimated collectability and delinquency period based on the past
experience for each product of loans receivable:
|
|
|
Secured Loans
. Loan balances are charged-off when we believe the likelihood of any
future collection is minimal. We consider the availability and value of collateral in
determining the level of charge-off. Interest accrual is terminated at the earlier of
the date when contractual payments are 97 days delinquent or the date when all or a
part of loan principal is deemed uncollectible.
|
|
|
|
|
Unsecured Loans on Deeds.
Loan balances are charged-off when we believe the
likelihood of any future collection from the borrower as well as the guarantor is
minimal. Events triggering charge-offs include bankruptcy of both the borrower and
guarantor. Interest accrual is terminated at the earlier of the date when contractual
interest payments are 97 days delinquent or the date when all or a part of loan
principal is deemed uncollectible.
|
|
|
|
|
Revolving Loans.
Loan balances are charged-off and interest accrual is terminated
when a loans contractual interest payment becomes 67 days delinquent or upon the
occurrence of other events such as the bankruptcy of the borrower.
|
Other
than above, in the case that loans are restructured, we charge-off the amount of the
recorded loan balance less the restructured loan balance.
Loan Origination Costs
We capitalize direct origination costs and defer fees on successful loan originations. Loan
origination costs, net of loan origination fees, are deferred and amortized over the contractual
life of loans, which averaged approximately 48 months as of March 31, 2007.
-69-
Purchased Loans Receivable and Revenue Recognition
In December 2003, the Accounting Standards Executive Committee issued Statement of Position
(SOP) 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer. SOP 03-3
addresses accounting for differences between contractual cash flows and cash flows expected to be
collected from an investors initial investment in loans or debt securities acquired in a transfer. We adopted
SOP 03-3 beginning April 1, 2005.
Cost Recovery Method
Purchased
loans represent loans purchased from third-party originators and are reported at
purchased cost less an allowance for loan losses. We establish an allowance for estimated loan
losses on reduced credit quality subsequent to our acquisition. Due to the non-performing status
of loans that we typically purchase in our servicing business and the lack of history with the
borrowers, subsequent to our acquisition, we initially recognize revenue from these loans using the
cost recovery method. Under this method, payments from a borrower are first applied to loan
principal. Once the purchased cost is fully recovered, subsequent receipts are recognized as
interest income. If we determine that we cannot recover our cost, an allowance for the expected
uncollectible portion is established. This determination is made based on numerous factors
including the length of non-payment, extent of deviation from the agreed upon payment plan,
accessibility of the borrower and bankruptcy or death of the borrower. The loan is written off
once we deem the loan uncollectible. The amount of the book value of the loans accounted for under
this method was ¥23,228 million, or 96.2% of our net purchased loans receivable as of March 31,
2006, and ¥27,626 million, or 95.6% of our net purchased loans receivable as of March 31, 2007.
Level Yield Method
For those purchased loans for which we can reasonably estimate the expected timing and amount
of cash flows, we use those expected future cash flows to record the loans receivable and amortize
the implied interest into revenue using the level yield method. Our determination to use the level
yield method, rather than the cost recovery method, to account for a purchased loan depends on our
judgment regarding the borrowers ability to meet the restructured payments following our
negotiation with the borrower. We will adjust the future yield rate for expected changes in
interest rates or collections. If the carrying amounts of those loans are greater than the present
value of expected future cash flows from those loans due to delinquency in payment or use of legal
means by the borrower, the difference is recorded as an allowance for the uncollectible portion.
The amount of the book value of the loans accounted for under the level yield method was ¥927
million, or 3.8% of our net purchased loans receivable as of March 31, 2006, and ¥1,284 million, or
4.4% of our net purchased loans receivable as of March 31, 2007.
Accounting Developments
In
June 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109 which clarifies the accounting for uncertainty in income
taxes recognized in the financial statements in accordance with Statements of Financial Accounting
Standards (SFAS) No. 109, Accounting for
Income Taxes. FIN No. 48 prescribes a recognition
threshold and measurement attribute for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. FIN No. 48 also provides guidance on
derecognition, classification, interest and penalties, disclosure and
transitional measures. FIN No.
48 has become effective for us from the fiscal year beginning April 1, 2007. We are currently
evaluating the impact of adoption of FIN No. 48 in our financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157
establishes a framework for measuring fair value, clarifies the definition of fair value, and
expands disclosures about the use of fair value measurements. SFAS No. 157 applies under other
accounting pronouncements that require or permit fair value measurements and does not require any
new fair value measurements. SFAS No. 157 will be effective for us from the fiscal year beginning April 1, 2008. We are currently
assessing the potential effect of SFAS No. 157 on our financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities. SFAS No. 159 permits companies to choose to measure, on an
instrument-by-instrument basis, financial instruments and certain other items at fair value that
are not currently required to be measured at fair value. We are currently evaluating whether to
elect the option provided for in this statement. If elected, SFAS No. 159 would be effective for
us from the fiscal year beginning April 1, 2008.
-70-
B. Liquidity and Capital Resources.
Cash Flows
We had cash and cash equivalents (Cash) totaling ¥28,344 million as of March 31, 2007, an
increase of ¥5,484 million, or 24.0% from ¥22,860 million as of March 31, 2006. We had Cash
totaling ¥22,860 million as of March 31, 2006, a decrease of ¥2,849 million, or 11.1%, from ¥25,709
million as of March 31, 2005.
The following table shows information about our cash flows during the years ended March 31,
2005, 2006 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
(In millions)
|
Net cash provided by operating activities
|
|
¥
|
14,686
|
|
|
¥
|
24,270
|
|
|
¥
|
23,676
|
|
Net cash used in investing activities
|
|
|
(12,546
|
)
|
|
|
(135,976
|
)
|
|
|
(99,843
|
)
|
Net cash provided by financing activities
|
|
|
3,335
|
|
|
|
108,675
|
|
|
|
81,438
|
|
Effect of exchange rate changes on cash
|
|
|
(9
|
)
|
|
|
182
|
|
|
|
213
|
|
Net increase (decrease) in cash
|
|
|
5,466
|
|
|
|
(2,849
|
)
|
|
|
5,484
|
|
Cash Flows Activities during the Year Ended March 31, 2007
Operating Activities
Net Cash provided by operating activities for the year ended March 31, 2007 was ¥23,676
million, a decrease of ¥594 million, or 2.4%, compared to ¥24,270 million for the previous fiscal
year. This change was primarily attributable to a decrease of ¥7,682 million in net changes in
accrued income taxes and expenses to ¥2,161 million due to a decline in our taxable income, and a
decrease of ¥2,720 million in our deferred income tax
benefits to ¥4,180 million due to an increase in deferred
income taxes generated from allowance for loan losses and reserve for
losses on interest repayments. These contributing factors were partially
offset by an increase of ¥4,930 million in our provision
for loan losses to ¥10,853 million, and an
increase of ¥9,333 million in our provision for losses on
excess interest repayments to ¥12,664 million for the
year ended March 31, 2007, reflecting recent adverse changes in
the business environment for moneylending companies in Japan. In addition, stock compensation costs of ¥383 million, and an increase
of ¥4,876 million compared to net gains on sales of
investment securities of ¥3,708 million for the
previous fiscal year to net losses of ¥1,168 million also offset the decrease in Cash inflows for
the year ended March 31, 2007.
As
discussed earlier, due to several decisions by the Supreme Court of
Japan concerning gray-zone interest and subsequent
changes in our business environment in Japan, we experienced a significant increase in claims for
refund of excess interest paid by borrowers. This excess interest may need to be refunded to the
borrower should the borrower claim refund of excess interest amount previously paid to us.
Borrowers may claim the repayment of excess interest for up to
10 years from the date of the relevant excess interest payment. During the years ended March 31, 2006 and 2007, we charged-off our
loan principal and/or refunded in cash for repayments of excess interest totaling ¥2,532 million
and ¥5,230 million, respectively. We expect this amount to substantially increase and in order to
respond this situation, we substantially increased our allowance and reserve related to excess
interest repayments for the year ended March 31, 2007. As of March 31, 2007, the total amount of
allowance and reserve related to excess interest repayments was ¥10,165 million. Because we ceased
to charge interest in excess of the restricted rate on most of our loan products, we expect the
demand for repayments of excess interest to diminish over time.
Investing Activities
Net Cash used in investing activities for the year ended March 31, 2007 was ¥99,843 million, a
decrease of ¥36,133 million, or 26.6%, compared to ¥135,976 million for the previous fiscal year.
This change was primarily attributable to a decrease of ¥41,766 million in origination of loans
receivable, net of collection, to ¥40,581 million reflecting the growth in our secured loans
centering on real estate financing to property companies which generally carry a short-term lending
period, and a decrease of ¥5,405 million in acquisition of purchased loans receivable, net of
collection, to ¥6,707 million reflecting our favorable collecting activities, in addition to a
decrease of ¥12,203 million in net purchases of investment securities to ¥1,884 million reflecting
a decrease in the number of companies we invested in during the year ended March 31, 2007 compared to
the previous fiscal year. These contributing factors were partially offset by an increase of
¥22,494 million in net acquisition of real estate for sale to ¥41,798 million reflecting expansion
of our real estate business and an increase of ¥3,686 million in investment in affiliates to ¥3,732
million mainly due to an acquisition of new shares of Araigumi through subscription to a
third-party allotment in December 2006.
Financing Activities
Net Cash provided by financing activities for the year ended March 31, 2007 was ¥81,438
million, a decrease of ¥27,237 million, or 25.1%, compared to ¥108,675 million for the previous
fiscal year. This change was primarily attributable to a decrease of ¥22,988 million in our net
proceeds from short-term borrowings to ¥23,840 million mainly due to an increase in our repayments
of short-term borrowings in relation to an increase in our total short-term borrowings for our
lending activities centering on real estate financing. This decrease in net Cash provided by
financing activities was partially offset by proceeds from issuance of new shares of ¥8,000 million
through a third-party allotment to Sumitomo Mitsui Banking Corporation in June 2006.
-71-
Cash Flows Activities during the Year Ended March 31, 2006
Operating Activities
Net cash provided by operating activities for the year ended March 31, 2006 was ¥24,270
million, an increase of ¥9,584 million, or 65.3%, compared to ¥14,686 million for the previous
fiscal year. Cash inflows were primarily attributable to an increase of ¥1,193 million, or 16.4%,
in our net income to ¥8,455 million for the year ended
March 31, 2006, ¥5,923 million in provision
for loan losses ¥3,331 million in provision for losses on excess
interest repayments and ¥5,521 million in net increase of accrued income taxes and expenses. These
factors, resulting in the increase in net cash provided by operating activities, were partially
offset by ¥3,708 million in net gains on sales of investment securities, as well as ¥1,460 million
in deferred income tax benefits.
Investing Activities
Net cash used in investing activities for the year ended March 31, 2006 was ¥135,976 million,
an increase of ¥123,430 million, or 983.8%, compared to ¥12,546 million for the previous fiscal
year. Cash outflows were primarily attributable to ¥82,347 million used in net origination of
loans receivable reflecting the growth in our secured loans centering on real estate financing to
property companies, ¥12,112 million used in net acquisition of purchased loans receivable
reflecting the active operations in our servicing business, ¥14,087 million used in net purchases
of investment securities reflecting increases of investments in venture business in hopes of
producing synergies with our existing businesses, ¥19,304 million used in net acquisition of real
estate for sale reflecting expansion of real estate-related businesses mainly operated by NIS
Property, and ¥6,365 million used in net purchases of property and equipment reflecting
acquisitions of real estate by VIEs consolidated by us in accordance
with FIN No. 46(R).
Financing Activities
Net cash provided by financing activities was ¥108,675 million for the year ended March 31,
2006, an increase of ¥105,340 million, or 3,158.6%, compared to ¥3,335 million for the previous
fiscal year. Cash inflows were primarily attributable to ¥65,493 million provided by net proceeds
from long-term borrowings and ¥46,828 million provided by net proceeds from short-term borrowings
reflecting the increased capital requirements for our loan business, centering on real estate
financing, as well as ¥2,207 million provided by net proceeds from sale of treasury stock
reflecting exercises of stock acquisition rights by our Directors and employees. Inflow factors
were partially offset by ¥2,571 million in net increase of deposit of restricted cash mainly
pledged as collateral for borrowings from banks by Nissin Servicer and Nissin Leasing (China), and
¥2,670 million used for dividend payments to our shareholders and minority shareholders of a
subsidiary.
-72-
Capital Requirements
In our business operations, our principal capital and liquidity needs are for funding loans to
customers, purchases of distressed loans from banks and other financial institutions, acquisition
of real properties, payment of principal and interest on outstanding borrowings, general and
administrative expenses, capital expenditures for growth of our businesses, strategic investments
and payment of cash dividends and stock repurchases.
Funding Our Core Businesses
We require capital to provide new loans, to purchase distressed loans from banks and other
financial institutions, and to acquire real properties.
Loan Origination.
Providing loans to customers is the primary business in our integrated
financial services segment. Accordingly, our most critical capital requirement is loan
origination. As of March 31, 2007, our total loans outstanding were in the amount of ¥270,943
million, an increase of ¥33,765 million, or 14.2%, as compared to ¥237,178 million as of the end of
the previous fiscal year, reflecting the enhancement of secured loans, centering on real estate
financing such as non-recourse loans to special purpose entities for real estate-related
businesses, mainly through our Real Estate Group. We expect our loan portfolio to grow due to
increasing demand for real estate financing and financing for SMEs and their owners. As a result,
our capital requirements to fund loan origination may become more demanding.
Distressed Loans.
We purchase distressed loans for our servicing business from banks,
domestic/foreign investment funds, non-bank financial companies and others. Due to increasingly
severe competition in acquisition of distressed loans resulting from an increase in the number of
companies entering the loan servicing market in recent years and the improved economic environment
in Japan, we expect our capital requirements to purchase distressed loans for our servicing
business segment to increase in the short to medium term. We purchased distressed loans in the
aggregate amount of ¥19,779 million and ¥19,565 million for the years ended March 31, 2006 and
2007, respectively.
Real Estate.
Through NIS Property, we purchase, renovate and develop in Japan primarily
commercial as well as residential real estate to operate for profit and for resale. We target real
estate mainly in the greater Tokyo metropolitan area as well as other major metropolitan areas in
Japan, such as the greater Osaka area. For the years ended March 31, 2006 and 2007, we purchased
real estate for sale in our real estate business segment in the aggregate amount of ¥16,702 million
and ¥34,834 million, respectively. In addition, we acquire real properties for sale, through
Nissin Servicer, in connection with disposal by financial institutions of non-performing loans. We
purchase real estate for sale in our servicing business segment in the aggregate amount of ¥8,069
million and ¥20,503 million for the years ended
March 31, 2006 and 2007, respectively. Although our real
estate-related businesses are highly dependent on the health
of the Japanese economy and are susceptible to regulatory and legal changes, we expect our capital
requirements for real estate in both the real estate and the servicing business to increase in the
short to medium term, in light of the current brisk conditions in Japans real estate market.
Payments of Interest and Principal on Borrowings
We require capital for payments of interest and principal on our outstanding borrowings. For
a further discussion, see Capital Resources below.
-73-
Selling, General and Administrative Expenses
We also require capital for selling, general and administrative expenses, including salaries
and employee benefits, occupancy, furniture and equipment and other items. In recent years, we
have made efforts to reduce our selling, general and administrative expenses as a percentage of our
total revenue, and intend to continue these efforts. Due to these efforts, our selling, general
and administrative expenses have generally continued to be flat as a percentage of our total
revenue, although it has increased in aggregate amount. Our selling, general and
administrative expenses were ¥15,250 million, or 44.2% of our total revenue, for the year ended
March 31, 2005, ¥17,229 million, or 41.7%, for the year ended March 31, 2006, and ¥21,546 million,
or 42.0%, for the year ended March 31, 2007, respectively.
Capital Expenditures
The following table provides our capital expenditures calculated on a cash basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
(In millions)
|
Capital expenditures
|
|
¥
|
1,754
|
|
|
¥
|
6,368
|
|
|
¥
|
5,270
|
|
Our capital expenditures for the above stated periods were mainly used to acquire
property and equipment in connection with the establishment and relocation of our loan and other
offices and branches throughout Japan, relocation of our subsidiarys head offices, as well as
acquisition of intangible assets with the implementation and development of our new operating
system. Recently, we used our capital expenditures in acquisition of property and equipment
through VIEs which were consolidated by us in accordance with FIN No. 46(R) and acquisition of assets
by NIS Lease in connection with operating leases. We have budgeted main capital expenditures in
the amount of approximately ¥244 million for the year ending March 31, 2008 for
installment of equipment to improve operational efficiency of the Group and for relocation and
renovation of branches and loan offices in order to enhance sales and marketing operations.
Strategic Investments
We invest in enterprises that have the potential to complement our business strategically
whose values we expect to appreciate:
|
|
|
Affiliates
. Some of these enterprises are our affiliates. Our total initial
investments in these affiliates amounted to ¥792 million as
of March 31, 2006 and ¥2,787 million
as of March 31, 2007. These affiliates had a book carrying value of
¥617 million as of March 31, 2006 and ¥2,826 million as of March 31, 2007.
|
|
|
|
Non-affiliates
. These are investments in enterprises that we view as potential
strategic alliance parties, rather than sources of potential capital gains. Our total
initial investments in these enterprises amounted to ¥19,490 million as of March 31,
2006 and ¥21,677 million as of March 31, 2007. These enterprises had a book carrying
value of ¥28,057 million as of March 31, 2006 and ¥20,542 million as of March 31, 2007.
|
-74-
Dividends and Stock Repurchases
Cash Dividends
. Historically we have paid cash dividends twice per year. Our Board of
Directors presently intends to continue to pay cash dividends on a semi-annual basis and to provide
a stable level of dividends to our shareholders. Pursuant to the Corporate Law, the Board of
Directors, instead of the Shareholders Meeting, has the right to distribute retained earnings on
the stipulated record dates and/or other dates as the record date. Starting from the year ended
March 31, 2005, in order to reflect our consolidated results as an indicator for our business
performance, we changed our dividend policy to target a dividend payout ratio of 30% on a
consolidated net income basis, taking into consideration economic and financial circumstances,
industry trends, and our consolidated financial position and business performance. The declaration
and payment of dividends also depends on other factors, including statutory and other restrictions
on the payment of dividends. Our actual dividends may vary from this target, or we may pay no
dividends, based on these or other factors. We paid cash dividends in an amount of ¥1,300 million,
¥2,571 million and ¥1,958 million for the years ended March 31, 2005, 2006 and 2007, respectively.
For a further discussion of cash dividends, see Dividend Policy
Cash Dividends
in Item 8.A of
this annual report on Form 20-F.
Stock Repurchases
. We repurchased 1,404 shares for an aggregate price of ¥1 million, 1,875
shares for an aggregate price of ¥2 million, and 203 shares for an aggregate price of ¥0.3 million
during the years ended March 31, 2005, 2006 and 2007, respectively. We sold 1,514,592 shares for
an aggregate price of ¥909 million, 2,641,688 shares for an aggregate price of ¥2,209 million, and
587,864 shares for an aggregate price of ¥496 million during the years ended March 31, 2005, 2006
and 2007, respectively, as a result of exercises of stock acquisition rights. In addition, we
repurchased 3,000,054 shares for an aggregate price of ¥2,394 million between April 1, 2007 and
August 31, 2007, mainly due to our stock repurchase program approved by the Board of Directors on
June 23, 2007. We also sold an additional 163,536 shares between April 1, 2007 and August 31, 2007
for an aggregate price of ¥75 million as a result of exercise of stock acquisition rights. For a
further discussion of stock repurchases, see Dividend Policy
Stock Repurchases
in Item 8.A of
this annual report on Form 20-F.
-75-
Capital Resources
We seek to manage our capital resources and liquidity to provide adequate funds for current
and future financial obligations. We derive the funds we require to meet our capital requirements
principally from cash flow provided by operations, borrowings from financial institutions and
issuances of bonds and commercial paper. We also may raise proceeds from the sale of our
shareholdings in our subsidiaries and affiliates.
We derive the funding necessary to provide loans to our customers through borrowings from
financial institutions, long-term debt issuances and interest income. We seek to enhance our
ability to tap a diverse range of funding sources and to lower our funding costs. In support of
this strategy, since the year ended March 31, 2000, when legal restrictions on debt issuances to
fund our lending business were eliminated, we have increased our borrowings from capital markets
through issuances of commercial paper and medium-term and long-term bonds, and we have reduced the
proportion of our borrowings from banks, insurance companies and other financial institutions. Our
current intention, subject to market conditions and other uncertainties, is to increase our
proportion of direct financing to around 50%.
We believe that our existing Cash and the amount of Cash that we anticipate will be generated
from our business operations, together with our existing access to borrowings and capital markets,
will be sufficient for us to continue to operate our business at current levels through the year
ending March 31, 2008. We do not have current plans for any equity offerings for the Company and
we do not currently expect to significantly increase our indebtedness through the year ending March
31, 2008. However, the disruptions to international credit markets triggered by the recent
deterioration of the subprime-mortgage market in the United States have led to widespread
difficulties in international financial and capital markets and constrained our ability to borrow
or to securitize assets. As a result of this and the recent adverse conditions for moneylenders in
Japan, we have recently experienced difficulty in accessing the total amount of funds that we
desire for our business operations. If such conditions persist, we may need to borrow at higher
interest rates or constrain our business activities.
Borrowings
Long-term Borrowings
We require a significant amount of funds for payment of principal and interest on our
borrowings, most of which are used for extending loans to our customers. Generally, our borrowings
are denominated in yen. As of March 31, 2007, we had long-term borrowings, including asset backed
securities, totaling ¥260,817 million.
Of our total long-term borrowings at March 31, 2007, ¥219,077 million were from loans,
principally from banks and other financial institutions, including asset backed securities.
Generally, our long-term loans have a maturity of 1 to 5 years, and accrue interest on a fixed rate
basis or on a variable rate basis. At March 31, 2007, the
weighted-average contractual rate at
period-end of our long-term loans from banks and other financial institutions was 2.0%. As is
customary in Japan, bank loans are made under general agreements which provide that under certain
circumstances, security and guarantees for present and future indebtedness will be given upon
request of the bank, and that the bank shall have the right, as the obligations become due, or in
the event of their default, to offset cash deposits against such obligations due to the bank.
In addition, ¥41,740 million of our total long-term borrowings at March 31, 2007 were from the
issuance of long-term bonds. We have a limited history of debt issuances, because consumer finance
companies and small business lenders were barred in Japan from using direct financing to fund
lending operations until May 1999. Long-term bonds outstanding as of March 31, 2006 and 2007
comprised the following:
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(In millions)
|
|
1.90% unsecured bonds, due July 31, 2006
|
|
¥
|
500
|
|
|
¥
|
|
|
0.45% unsecured bonds, due September 27, 2006
|
|
|
500
|
|
|
|
|
|
0.64% unsecured bonds, due March 26, 2007
|
|
|
500
|
|
|
|
|
|
0.67% unsecured bonds, due September 27, 2007
|
|
|
500
|
|
|
|
500
|
|
1.18% unsecured bonds, due February 25, 2008
|
|
|
7,500
|
|
|
|
7,500
|
|
1.55% unsecured bonds, due September 19, 2008
|
|
|
150
|
|
|
|
90
|
|
1.17% unsecured bonds, due June 20, 2008
|
|
|
7,500
|
|
|
|
7,500
|
|
1.08% unsecured bonds, due September 16, 2008
|
|
|
10,000
|
|
|
|
10,000
|
|
1.21% unsecured bonds, due September 18, 2009
|
|
|
|
|
|
|
450
|
|
1.45% unsecured bonds, due March 27, 2009
|
|
|
1,000
|
|
|
|
700
|
|
2.73% unsecured bonds, due February 26, 2010
|
|
|
|
|
|
|
5,000
|
|
2.29% unsecured bonds, due March 23, 2009
|
|
|
|
|
|
|
10,000
|
|
1.70% unsecured convertible bonds, due September 29, 2006
|
|
|
822
|
|
|
|
|
|
|
|
|
|
|
|
|
Total bonds
|
|
¥
|
28,972
|
|
|
¥
|
41,740
|
|
|
|
|
|
|
|
|
-76-
The aggregate future annual maturity of bonds, long-term loans from banks and other
financial institutions as of March 31, 2007 are as follows:
|
|
|
|
|
|
Year Ending March 31,
|
|
|
(In millions)
|
|
2008
|
|
¥
|
108,475
|
|
2009
|
|
|
80,552
|
|
2010
|
|
|
34,110
|
|
2011
|
|
|
36,777
|
|
2012 and thereafter
|
|
|
903
|
|
|
|
|
|
Total future payments for long-term borrowings
|
|
¥
|
260,817
|
|
|
|
|
|
Short-term Borrowings
Our short-term borrowings are comprised of bank loans and commercial paper. Our short-term
borrowings were ¥60,411 million as of March 31, 2006, of which ¥30,283 million were bank loans,
¥30,000 million were commercial paper and the remainder were rediscounted notes, and ¥84,258
million as of March 31, 2007, of which ¥57,037 million were bank loans, ¥27,100 million were
commercial paper and the remainder were rediscounted notes.
Information regarding interest rates of short-term borrowings as of March 31, 2006 and 2007 is
as follows:
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
2006
|
|
2007
|
Bank loans (under fixed or variable rate contracts)
|
|
|
|
|
|
|
|
|
Minimum interest rate
|
|
|
1.0
|
%
|
|
|
1.1
|
%
|
Maximum interest rate
|
|
|
5.0
|
|
|
|
2.5
|
|
Weighted-average contractual interest rates
|
|
|
1.4
|
|
|
|
2.0
|
|
Commercial paper
|
|
|
|
|
|
|
|
|
Minimum interest rate
|
|
|
0.3
|
|
|
|
1.3
|
|
Maximum interest rate
|
|
|
1.0
|
|
|
|
2.2
|
|
Weighted-average contractual interest rates
|
|
|
0.7
|
|
|
|
1.9
|
|
Rediscounted notes
|
|
|
|
|
|
|
|
|
Minimum interest rate
|
|
|
2.4
|
|
|
|
2.6
|
|
Maximum interest rate
|
|
|
2.4
|
|
|
|
2.9
|
|
Weighted-average contractual interest rates
|
|
|
2.4
|
|
|
|
2.7
|
|
All
short-term borrowings have terms ranging from approximately 1 month
to 12
months and are usually renewed at maturity subject to renegotiation of interest rates and other
factors. We pledge some of our loans receivable, cash and certain other assets as collateral for
these loans.
Commitment Facilities
As of March 31, 2007, the total amount of prescribed limits of syndicated loans, overdraft
facilities, and loan commitment limits available from banks was ¥16,200 million. Outstanding
borrowings within the limits were ¥15,150 million and the unused balances totaled ¥1,050 million.
-77-
Debt Service
As of March 31, 2007, we had contractual commitments to repay ¥108,475 million in long-term
borrowings through the year ending March 31, 2008. We expect to repay this amount through a
combination of new or existing loan credits from banks, bond offerings and new cash from
operations.
Collateral for Borrowings
As of March 31, 2007, we had pledged as collateral for short-term and long-term borrowings
with banks and other financial institutions the following assets: ¥361 million in restricted cash,
¥50,717 million in loans receivable, ¥8,779 million in purchased real property, and ¥2,913 million
in real estate for sale. The lender may obtain this collateral in the event of financial default,
including missed or delinquent payments as provided for in the loan agreements.
In
addition, certain entities which are consolidated by us in accordance
with FIN No. 46(R)
obtained non-recourse loans from financial institutions. For these loans, ¥25,491 million in these
entities assets were pledged as collateral as of March 31, 2007.
Unfunded Credit Lines
Under the terms and conditions of our credit line agreements, we may, but are not committed
to, lend funds to our Business Timely loan, consumer loan and other loan customers. We review
credit lines and our related funding needs based on account usage and customer creditworthiness.
We had unfunded credit lines of ¥53,508 million as of March 31, 2007, of which ¥7,398 million were
unfunded credit lines with loans outstanding and ¥46,110 million were unfunded credit lines without
loans outstanding.
Operating and Capital Leases
We lease office space under operating lease agreements that generally allow us to cancel
leases with six months advance notice. We have paid approximately ¥1,135 million under our office
lease agreements for the year ended March 31, 2007. In addition, we lease certain equipment,
software and vehicles under capital lease obligations. We have paid ¥641 million under our capital
lease agreements for the year ended March 31, 2007. Consequently, total lease payments under these
operating lease and capital lease agreements were ¥1,776 million for the year ended March 31, 2007.
C. Research and Development, Patents and Licenses, etc.
We have not implemented any material research and development policy and have not conducted
any material research and development activities during the period from April 1, 2004 through the
date of this annual report on Form 20-F.
D. Trend Information.
The information required by this item is provided in Item 5.B of this annual report on Form
20-F.
-78-
E. Off-balance Sheet Arrangements.
Our off-balance sheet arrangements that have or are reasonably likely to have a current or
future material effect on us are those pursuant to which we guarantee the borrowings of customers
of third parties and bank loans borrowed by our equity method affiliates, as follows:
Sanyo Club
Pursuant to an agreement with Sanyo Club, in exchange for guaranteeing 40% of the outstanding
balance of specified loans to its customers, we receive 40% of the interest received from the total
amount of these borrowings and pay 40% of the related administrative expenses and other expenses
incurred by Sanyo Club. We are required to pay out on our guarantees for 40% of the outstanding
balance of specified loans for which contractual payments are overdue by 120 days or more as of the
end of each month, and distressed loans due to legal processes. Under a loan agreement, borrowers
are neither required to have a guarantor nor to provide collateral. We maintain reserves for
estimated guarantee losses in our other liabilities on our balance sheets.
Shinsei Business Finance
We guarantee loans to customers of Shinsei Business Finance and corresponding interest
receivable, and receive guarantee fees. Shinsei Business Finance was our 25%-owned affiliate
accounted for under the equity method until April 14, 2006. We receive guarantee fees from the
following loan products that Shinsei Business Finance sells:
|
|
|
3S Loans
. We guarantee 100% of loans and corresponding interest receivable from
customers for 3S loans and receive a guarantee fee at the loan contract rate less 4%.
We are required to pay out on our guarantees on loans for which contractual payments
are overdue by 14 days or more as of the end of each month. 3S loans are unsecured
loans that require one or more guarantees from third-party individuals with an income
source separate from the customer, and are designed for SMEs.
|
|
|
|
|
Business Loans
. We guarantee 10% of loans and corresponding interest receivable
from customers for Business loans and receive 10% of the interest received from these
loans. We are required to pay out on our guarantees on loans for which
contractual payments are overdue by 90 days or more as of the end of each month.
Business loans are unsecured loans designed for SMEs.
|
We were also liable as a guarantor for bank loans borrowed by Shinsei Business Finance, and
received guarantee fees. However, during the year ended March 31, 2006, we were released from our
obligations as a guarantor for bank loans borrowed by Shinsei Business Finance.
We maintain reserves for estimated guarantee losses in other liabilities on our balance sheet.
Chuo Mitsui Finance
We guarantee loans to customers of Chuo Mitsui Finance and corresponding interest receivable,
and receive guarantee fees. Chuo Mitsui Finance was our 30%-owned affiliate accounted for under
the equity method until February 22, 2007. We receive guarantee fees from the following loan
products that Chuo Mitsui Finance sells:
|
|
|
Business Card loans
. We guarantee 10% of loans and corresponding interest
receivable from customers for Business Card loans and receive 10% of the interest
received from these loans. We are required to pay out on our guarantees on loans
for which contractual payments are overdue by 90 days or more. Business Card loans are
unsecured loans designed for SMEs.
|
|
|
|
Real Estate Finance loans
. We guarantee 10% of loans and corresponding interest
receivable from customers for Real Estate Finance loans and receive 10% of the interest
received from these loans. We are required to pay out on our guarantees on loans
for which contractual payments are overdue by 30 days or more.
|
We were also liable as a guarantor for bank loans borrowed by Chuo Mitsui Finance, and
received guarantee fees. However, during the year ended March 31, 2007, we were released from our
obligations as a guarantor for bank loans borrowed by Chuo Mitsui Finance.
We maintain reserves for estimated guarantee losses in our other liabilities on our balance
sheet.
-79-
Other
Our consolidated subsidiary NIS Lease guarantees accounts receivable of certain borrowers for
a fee determined based on each borrowers creditworthiness and contract duration. As of March 31,
2006 and 2007, the fee rate ranged from 0.38% to 21.60% and 0.15% to 4.00%, with weighted-average
fee rates of 2.25% and 1.08%, respectively.
We maintain reserves for estimated guarantee losses in other liabilities on our balance
sheets.
Upon payment of any guarantee, we record corresponding guaranteed loans receivable from the
borrowers, which are offset by allowances for deemed uncollectible amounts. Receivables from
payment of guarantees were ¥663 million and ¥1,166 million as of March 31, 2006 and 2007,
respectively. Those were offset by allowances of ¥588 million and ¥923 million as of March 31,
2006 and 2007, respectively, and the resulting amounts were recorded in our other assets on our
balance sheets.
The following table shows information about our guaranteed borrowings, guaranteed accounts
receivable, guarantees for borrowing of other companies and reserve for guarantee losses as of
March 31, 2006 and 2007:
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
2006
|
|
2007
|
|
|
(In millions)
|
Guaranteed borrowings
|
|
¥
|
11,886
|
|
|
¥
|
17,555
|
|
Guaranteed accounts receivable
|
|
|
964
|
|
|
|
908
|
|
Guarantees for borrowings of other companies:
|
|
|
|
|
|
|
|
|
Chuo Mitsui
Finance Service Co., Ltd.
|
|
|
1,920
|
|
|
|
|
|
Reserve for guarantee losses
|
|
|
629
|
|
|
|
1,066
|
|
The following table shows information about our guarantee fees received and related
administrative and other expenses paid by us during the years ended March 31, 2005, 2006 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In millions)
|
|
Guarantee fees received from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed loans and accounts receivable
|
|
¥
|
845
|
|
|
¥
|
1,386
|
|
|
¥
|
1,880
|
|
Guarantees for borrowings of other companies
|
|
|
34
|
|
|
|
20
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
Total guarantee fees received
|
|
|
879
|
|
|
|
1,406
|
|
|
|
1,925
|
|
Administrative expenses and other expenses paid
|
|
|
(562
|
)
|
|
|
(898
|
)
|
|
|
(1,337
|
)
|
|
|
|
|
|
|
|
|
|
|
Guarantee fees received, net
|
|
¥
|
317
|
|
|
¥
|
508
|
|
|
¥
|
588
|
|
|
|
|
|
|
|
|
|
|
|
As a result of our guarantee commitments, we paid ¥270 million for the year ended March
31, 2005, ¥607 million for the year ended March 31, 2006 and ¥1,299 million for the year ended
March 31, 2007.
-80-
F. Tabular Disclosure of Contractual Obligations.
The following table shows our contractual payment obligations under our agreements as of March
31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
April 1, 2007
|
|
|
April 1, 2008
|
|
|
April 1, 2010
|
|
|
|
|
|
|
|
|
|
|
to March 31,
|
|
|
to March 31,
|
|
|
to March 31,
|
|
|
After
|
|
Contractual obligations
|
|
Total
|
|
|
2008
|
|
|
2010
|
|
|
2012
|
|
|
April 1, 2012
|
|
|
|
(In millions)
|
|
Long-term borrowings
(1)
|
|
¥
|
260,817
|
|
|
¥
|
108,475
|
|
|
¥
|
114,662
|
|
|
¥
|
37,680
|
|
|
¥
|
|
|
Capital (finance) lease obligations
|
|
|
882
|
|
|
|
468
|
|
|
|
354
|
|
|
|
60
|
|
|
|
|
|
Operating lease obligations
|
|
|
1,361
|
|
|
|
961
|
|
|
|
400
|
|
|
|
|
|
|
|
|
|
Purchase commitments
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
¥
|
263,060
|
|
|
¥
|
109,904
|
|
|
¥
|
115,416
|
|
|
¥
|
37,740
|
|
|
¥
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes only principal payment obligations.
|
|
(2)
|
|
These are obligations pursuant to agreements to purchase goods or services that are
enforceable and legally binding on us and that specify all significant terms.
|
G. Safe Harbor.
|
1.
|
|
The safe harbor provided in Section 27A of the Securities Act and Section 21E of the
Exchange Act (statutory safe harbors) shall apply to forward-looking information
provided pursuant to Item 5.E and F of this annual report on Form 20-F, provided that
the disclosure is made by: an issuer; a person acting on behalf of the issuer; an outside
reviewer retained by the issuer making a statement on behalf of the issuer; or an
underwriter, with respect to information provided by the issuer or information derived
from information provided by the issuer.
|
|
|
2.
|
|
For purposes of Item 5.G.1 of this Item only, all information required by Item 5.E
of this Item is deemed to be a forward-looking statement as that term is defined in the
statutory safe harbors, except for historical facts.
|
|
|
3.
|
|
With respect to Item 5.E of this annual report on Form 20-F, the meaningful
cautionary statements element of the statutory safe harbors will be satisfied if a company
satisfies all requirements of that same Item 5.E of this annual report on Form 20-F.
|
-81-
Item 6. Directors, Senior Management and Employees
A. Directors and Senior Management.
Directors and Statutory Auditors
All of our Directors except Hidenori Nakagawa are engaged in our business on a full-time
basis. The business address of all of our Directors except Hideo Sakioka is Shinjuku L-Tower 25F,
6-1, Nishi-Shinjuku l-chome, Shinjuku-ku, Tokyo 163-1525, Japan. The business address of Hideo
Sakioka is 7-6, Chifunemachi 5-chome, Matsuyama City, Ehime 790-8584, Japan. No Director or member
of senior management was selected pursuant to any arrangement or understanding with major
shareholders, customers, suppliers or others.
Except as described below with respect to Kunihiko Sakioka, Hideo Sakioka and Akio Sakioka,
none of our Directors are related to one another.
The following table provides detailed information about our Directors and Statutory Auditors.
|
|
|
|
|
|
|
Name
|
|
Position
|
|
|
(Date of Birth)
|
|
(Executive Officer Position)
|
|
Business Career
|
Kunihiko
Sakioka
(1) (2)
|
|
Chairman,
Representative
Director of the
Board and
Co-CEO
|
|
April 1986
|
|
Joined the Company
|
(January 10, 1962)
|
|
|
September 1988
|
|
Manager of Hiroshima Branch Office
|
|
|
|
March 1989
|
|
Director of the Board
|
|
|
|
December 1989
|
|
Director of the Board and General Manager of
Finance Department
|
|
|
|
|
February 1991
|
|
Executive Director of the Board, Advice to
Finance and System Information
|
|
|
|
|
December 1992
|
|
Senior Executive Director of the Board and Head
of Sales & Marketing Control
|
|
|
|
|
October 1996
|
|
Representative Senior Executive Director of the
Board and Head of Tokyo Branch, Advice to Sales
Department
|
|
|
|
|
April 1998
|
|
Representative Senior Executive Director of the
Board and Head of Sales & Marketing Control
|
|
|
|
|
June 2000
|
|
President, Representative Director of the Board
and Head of Sales & Marketing Control
|
|
|
|
|
March 2004
|
|
Representative Director of the Board of Shuho,
Ltd. (current position)
|
|
|
|
|
July 2005
|
|
President, Representative Director of the Board
and Executive Officer
|
|
|
|
|
June 2006
|
|
Chairman, Representative Director of the Board
and Co-CEO (current position)
|
|
|
|
|
|
|
|
Shinsuke Amiya
(2)
(October 3, 1957)
|
|
President,
Representative
Director of the
Board and
Co-CEO
|
|
June 1994
|
|
Joined Merrill Lynch Securities Inc. (currently
Merrill Lynch Japan Securities Co., Ltd.)
|
|
|
June 2003
|
|
Director and Head of Investment Banking Group
|
|
|
|
March 2005
|
|
Vice-Chairman and Head of Investment Banking Group
|
|
|
|
|
May 2006
|
|
Joined the Company
|
|
|
|
|
|
|
Special Advisor
|
|
|
|
|
June 2006
|
|
President, Representative Director of the Board
and Co-CEO (current position)
|
-82-
|
|
|
|
|
|
|
Name
|
|
Position
|
|
|
|
|
(Date of Birth)
|
|
(Executive Officer Position)
|
|
|
|
Business
Career
|
Hideo Sakioka
(1) (4)
|
|
Director of the
Board and Advisor
|
|
August 1953
|
|
Started moneylending business
|
(May 14, 1928)
|
|
|
May 1960
|
|
Founded Nissin Shoji Co., Ltd. (currently NIS Group
Co., Ltd.)
President and Representative Director of the Board
|
|
|
|
|
January 1980
|
|
Founded Nissin Building Co.,
Ltd.
President and Representative Director of the Board
|
|
|
|
|
March 1989
|
|
Representative Director of the Board of Shuho, Ltd.
|
|
|
|
|
June 2000
|
|
Chairman and Representative Director of the Board
|
|
|
|
|
May 2001
|
|
President and Representative Director of the Board
of Nissin Building Co., Ltd. (current position)
|
|
|
|
|
January 2004
|
|
Director of the Board of Nissin Servicer Co., Ltd.
(current position)
|
|
|
|
|
June 2006
|
|
Director of the Board and Advisor (current position)
|
|
|
|
|
|
|
|
Toshioki Otani
(2)
|
|
Senior Executive
Director of the
Board and Executive
Officer
(Head of Investment
Banking, Sales &
Marketing, and
Investment Banking
Group Manager)
|
|
April 1994
|
|
Joined the Company
|
(December 22, 1970)
|
|
|
September 1995
|
|
Manager of Kumamoto Branch Office
|
|
|
|
July 2000
|
|
General Manager of Finance Department
|
|
|
|
January 2001
|
|
General Manager of Finance Department and Strategic
Business Development Department
|
|
|
|
April 2002
|
|
General Manager of Eastern Japan Sales & Marketing
Control Department
|
|
|
|
|
June 2002
|
|
Director of the Board
|
|
|
|
|
April 2003
|
|
Director of the Board and General Manager of
Strategic Business Development Department
|
|
|
|
|
November 2003
|
|
President and Representative Director of the Board
of NIS Lease Co., Ltd. (current position)
|
|
|
|
|
July 2004
|
|
Director of the Board, Deputy Head of Sales &
Marketing Control and General Manager of Strategic
Business Development Department
|
|
|
|
|
July 2005
|
|
Executive Director of the Board, Executive Officer,
Head of Sales & Marketing Control and General
Manger of Sales Department
|
|
|
|
|
November 2005
|
|
Concurrently Head of Osaka Branch
|
|
|
|
|
June 2006
|
|
Executive Director of the Board, Executive Officer
and Head of Sales & Marketing
|
|
|
|
|
June 2007
|
|
Senior Executive Director of the Board, Executive
Officer, Head of Investment Banking, Sales &
Marketing and Investment Banking Group Manager
(current position)
|
|
|
|
|
|
|
|
Akihiro Nojiri
|
|
Senior Executive
Director of the
Board and Executive
Officer
(Head of Strategy &
Operations Control)
|
|
April 1991
|
|
Joined Ministry of Finance
|
(November 15, 1968)
|
|
|
August 2003
|
|
Joined the Company
|
|
|
|
|
|
General Manager, Assistant to President
|
|
|
|
June 2004
|
|
Director of the Board
|
|
|
|
|
July 2004
|
|
Director of the Board and General Manager of
Finance Department
|
|
|
|
|
July 2005
|
|
Executive Director of the Board, Executive Officer,
Head of Operations Control, and General Manager of
Finance Department
|
|
|
|
|
February 2006
|
|
Executive Director of the Board, Executive Officer
and Head of Operations Control
|
|
|
|
|
June 2007
|
|
Senior Executive Director of the Board, Executive
Officer and Head of Strategy & Operations Control
(current position)
|
-83-
|
|
|
|
|
|
|
Name
|
|
Position
|
|
|
|
|
(Date of Birth)
|
|
(Executive Officer Position)
|
|
|
|
Business
Career
|
Yunwei Chen
|
|
Senior Executive
Director of the
Board and Executive
Officer
(Officer-in-Charge
East Asia Region)
|
|
April 1998
|
|
Joined the Company
|
(January 16, 1969)
|
|
|
April 2001
|
|
Manager of Corporate Planning Department 2nd Section
|
|
|
|
September 2002
|
|
Concurrently Assistant General Manager of Corporate
Planning Department
|
|
|
|
|
April 2003
|
|
General Manager of Investor Relations Department
|
|
|
|
|
June 2003
|
|
Director of the Board
|
|
|
|
|
July 2004
|
|
Chairman of Matsuyama Nissin Investment Consulting
(Shanghai) Co., Ltd. (currently Nissin Leasing
(China) Co., Ltd.) (current position)
|
|
|
|
|
July 2005
|
|
Executive Director of the Board, Executive Officer,
General Manager of Investor Relations Department
and Officer-in-Charge East Asia Region
|
|
|
|
|
June 2007
|
|
Executive Director of the Board, Executive Officer
and Officer-in-Charge East Asia Region (current
position)
|
|
|
|
|
|
|
|
Katsutoshi Shimizu
(April 9, 1954)
|
|
Executive Director
of the Board and
Executive Officer
(Deputy Head of
Investment Banking,
Sales & Marketing
and Real Estate
Group Manager)
|
|
April 1999
|
|
Joined RISA Partners, Inc.
Director of the Board
|
|
|
October 2002
|
|
Joined A-MAX Co., Ltd.
Director of the Board
|
|
|
|
June 2003
|
|
Joined Nissin Servicer Co., Ltd.
|
|
|
|
January 2004
|
|
Director of the Board and General Manager of Credit
Screening Department
|
|
|
|
March 2004
|
|
Director of the Board and General Manager of Asset
Management Department
|
|
|
|
|
September 2005
|
|
Director of the Board, Advice to Asset Management
Department (current position)
Joined the Company
General Manager of Real Estate Business Control
Department
|
|
|
|
|
February 2006
|
|
Concurrently Executive Officer
|
|
|
|
|
June 2006
|
|
Director of the Board, Executive Officer, Deputy
Head of Sales & Marketing, Real Estate Group
Manager and General Manager of Real Estate Business
Control Department
|
|
|
|
|
June 2007
|
|
Executive Director of the Board, Executive Officer,
Deputy Head of Investment Banking, Sales &
Marketing and Real Estate Group Manager (current
position)
|
|
|
|
|
|
|
|
Keishi Ishigaki
|
|
Director of the
Board and Executive
Officer
(Deputy Head of
Investment Banking,
Sales & Marketing)
|
|
April 1995
|
|
Joined the Company
|
(April 3, 1971)
|
|
|
April 1996
|
|
Manager of Koriyama Branch Office
|
|
|
|
April 2001
|
|
General Manager of Finance Department
|
|
|
|
April 2002
|
|
Head of Osaka Branch and General Manager of Western
Japan Sales & Marketing Control Department
|
|
|
|
|
June 2002
|
|
Director of the Board
|
|
|
|
|
July 2004
|
|
Director of the Board and General Manager,
Assistant to Head of Sales & Marketing Control
|
|
|
|
|
August 2004
|
|
Director of the Board of Venture Link Co., Ltd.
(current position)
|
|
|
|
|
July 2005
|
|
Concurrently Executive Officer
|
|
|
|
|
June 2006
|
|
Director of the Board, Executive Officer, Deputy
Head of Sales & Marketing and Sales & Marketing
Group Manager
|
|
|
|
|
March 2007
|
|
Director of the Board of Araigumi Co., Ltd.
(current position)
|
|
|
|
|
April 2007
|
|
Director of the Board, Executive Officer and Deputy
Head of Investment Banking, Sales & Marketing
(current position)
|
-84-
|
|
|
|
|
|
|
Name
|
|
Position
|
|
|
|
|
(Date of Birth)
|
|
(Executive Officer Position)
|
|
|
|
Business
Career
|
Akira Imaki
(February 15, 1949)
|
|
Director of the
Board and Executive
Officer
(Deputy Head of
Strategy &
Operations Control,
and General Manager
of Strategic
Planning
Department)
|
|
April 1973
|
|
Joined Long-term Credit Bank of Japan Co., Ltd.
(currently Shinsei Bank, Ltd.)
|
|
|
September 2004
|
|
Joined Mercer Human Resource Consulting LLC.
Director of the Board
|
|
|
|
November 2005
|
|
Joined the Company
General Manager, Assistant to Head of Sales &
Marketing Control
|
|
|
|
April 2006
|
|
Concurrently Executive Officer
|
|
|
|
|
June 2006
|
|
Director of the Board, Executive Officer, Deputy Head
of Sales & Marketing and Strategic Business
Development Group Manager
|
|
|
|
|
March 2007
|
|
Director of the Board of Araigumi Co., Ltd. (current
position)
|
|
|
|
|
April 2007
|
|
Director of the Board, Executive Officer, Deputy Head
of Strategy & Operations Control and General Manager
of Strategic Planning Development (current position)
|
|
|
|
|
|
|
|
Hidetoshi Sawamura
(December 25, 1950)
|
|
Director of the
Board and Executive
Officer
(Head of Risk
Management)
|
|
April 1975
|
|
Joined The Industrial Bank of Japan, Ltd. (currently
Mizuho Bank, Ltd.)
|
|
|
September 2004
|
|
Joined Koken Boring Machine Co., Ltd.
Executive Officer and Deputy Director of Groundwater
Usage Department
|
|
|
|
|
September 2005
|
|
Joined the Company
Assistant General Manager, Assistant to Head of
Operations Control
|
|
|
|
|
February 2006
|
|
General Manager, Assistant to Head of Operations
Control
|
|
|
|
|
February 2006
|
|
General Manager of Internal Control Department
|
|
|
|
|
June 2006
|
|
Concurrently Executive Officer
|
|
|
|
|
April 2007
|
|
Executive Officer and Head of Risk Management
|
|
|
|
|
June 2007
|
|
Director of the Board (current position)
|
|
|
|
|
|
|
|
Hidenori
Nakagawa
(3)
(November 20, 1967)
|
|
Director of the
Board
(Outside)
|
|
April 1992
|
|
Registered with Daiichi Tokyo Bar
Association,
Joined the Law Offices of Nagashima & Ohno (currently
the Law Offices of Nagashima Ohno & Tsunematsu)
|
|
|
|
|
September 1999
|
|
Joined Merrill Lynch Securities Inc. (currently
Merrill Lynch Japan Securities Co., Ltd.)
|
|
|
|
|
June 2004
|
|
Joined TMI Associates
Partner of TMI Associates (current position)
|
|
|
|
|
June 2005
|
|
Special Committee Member of Marusan Securities Co.,
Ltd. (current position)
|
|
|
|
|
June 2006
|
|
Director of the Board of the Company (current position)
|
-85-
|
|
|
|
|
|
|
Name
|
|
Position
|
|
|
|
|
(Date of Birth)
|
|
(Executive Officer Position)
|
|
|
|
Business
Career
|
Hitoshi Higaki
|
|
Standing Statutory
Auditor
|
|
November 1983
|
|
Joined the Company
|
(December 14, 1959)
|
|
|
March 1994
|
|
General Manager of Accounting Department and
Finance Department
|
|
|
|
|
June 1994
|
|
Director of the Board and General Manager of
General Affairs
|
|
|
|
|
May 1995
|
|
Director of the Board, General Manager of
Corporate Planning Department and Accounting
Department
|
|
|
|
|
June 1996
|
|
Director of the Board, Advice to Accounting
Department and General Manager of Corporate
Planning Department
|
|
|
|
|
June 2000
|
|
Executive Director of the Board and General
Manager of Corporate Planning Department
|
|
|
|
|
April 2003
|
|
Executive Director of the Board and Head of
Operations Control
|
|
|
|
|
July 2004
|
|
Concurrently General Manager of Corporate Planning
Department
|
|
|
|
|
August 2004
|
|
Statutory Auditor of Venture Link Co., Ltd.
(current position)
|
|
|
|
|
July 2005
|
|
Senior Executive Director of the Board and
Executive Officer
|
|
|
|
|
June 2006
|
|
Concurrently Head of Group Strategy
|
|
|
|
|
April 2007
|
|
Senior Executive Director of the Board and
Executive Officer
|
|
|
|
|
June 2007
|
|
Retired from Director of the Board
Standing Statutory Auditor (current position)
|
|
|
|
|
|
|
|
Akio Sakioka
(4)
|
|
Standing Statutory
Auditor
|
|
April 1971
|
|
Joined the Company
|
(September 22,1950)
|
|
|
January 1976
|
|
Manager of Takamatsu Branch Office
|
|
|
|
|
April 1984
|
|
Director of the Board
|
|
|
|
|
July 1994
|
|
Executive Director of the Board and General
Manager of Tokyo Office
|
|
|
|
|
October 1996
|
|
Executive Director of the Board and General
Manager of Finance Department
|
|
|
|
|
October 2000
|
|
Executive Director of the Board, Advice to
Business Audit Department
|
|
|
|
|
June 2002
|
|
Retired from Director of the Board
Standing Statutory Auditor (current position)
|
|
|
|
|
|
|
|
Masaaki Uchino
(5)
|
|
Statutory Auditor
(Outside)
|
|
April 1968
|
|
Joined Ministry of Finance
|
(April 1, 1945)
|
|
|
July 1996
|
|
Deputy Director of National Tax Tribunal
|
|
|
|
|
July 1997
|
|
Senior Executive Director of Japan Finance
Corporation for Municipal Enterprises
|
|
|
|
|
June 2001
|
|
Chairman of Promise Co., Ltd.
|
|
|
|
|
June 2007
|
|
Statutory Auditor of the Company (current position)
|
|
|
|
|
|
|
|
Katsuhiko Asada
(5)
(February 10, 1955)
|
|
Statutory Auditor
(Outside)
|
|
October 1979
|
|
Joined Arthur Andersen Co., Tokyo Office
(currently KPMG AZSA & Co.)
|
|
|
|
September 1985
|
|
Opened Katsuhiko Asada Certified
Public Accountant Firm
|
|
|
|
|
December 2001
|
|
Opened Konishi Asada Certified
Public Accountant Firm
|
|
|
|
|
June 2004
|
|
Statutory Auditor of the Company (current position)
|
|
|
|
(1)
|
|
Kunihiko Sakioka is the second son of Hideo Sakioka.
|
|
(2)
|
|
Pursuant to a resolution of the Board of Directors adopted on
September 25, 2007, effective October 1, 2007, Kunihiko
Sakioka will become Chairman, Representative Director of the Board,
President and CEO (Head of Investment Banking, Sales &
Marketing), Shinsuke Amiya will become Vice-Chairman of the Board
and Executive Officer and Toshioki Otani will become Senior Executive
Director of the Board and Executive Officer.
|
|
(3)
|
|
Hidenori Nakagawa is an outside director pursuant to Article 2-15 of the Corporate Law.
|
|
(4)
|
|
Akio Sakioka is the nephew of Hideo Sakioka.
|
|
(5)
|
|
Masaaki Uchino and Katsuhiko Asada are each an outside statutory auditor pursuant to
Article 2-16 of the Corporate Law.
|
-86-
The aggregate compensation to our Directors and Statutory Auditors for the year ended March
31, 2007 was ¥369 million, which included ¥286 million for their services as Directors and
Statutory Auditors, ¥30 million as compensation to the Directors as our employees and ¥53 million
in bonuses.
Previously, in accordance with customary Japanese business practices, a retiring Director or
Statutory Auditor would receive a lump-sum retirement payment, which amount was reserved, subject
to the approval of the general meeting of shareholders. However, all of our retirement plans were
completely terminated. Some of the retirement liabilities were paid as of the termination date,
and the remaining liabilities will be paid to a retiring Director or Statutory Auditor who held
such position when the relevant plan was terminated. During the year ended March 31, 2007, we made
retirement payments in an amount of ¥2 million to one Director. As of March 31, 2007, the balance of
our retirement liabilities for our Directors and Statutory Auditors was ¥328 million.
During the year ended March 31, 2007, we did not issue any stock acquisition rights to
Directors and Statutory Auditors. During this same period, no Director and Statutory Auditor
exercised stock acquisition rights. For a description of our stock option plans, see Share
Ownership Stock Option Plans below.
The following table shows the terms of office of our Directors and Statutory Auditors and
certain other information:
|
|
|
|
|
|
|
|
|
|
|
Start of
|
|
Expiration of
|
Name
|
|
Start of first term
|
|
current term
|
|
current term
|
Directors:
|
|
|
|
|
|
|
Kunihiko Sakioka
|
|
March 1989
|
|
June 2007
|
|
June 2008
|
Shinsuke Amiya
|
|
June 2006
|
|
June 2007
|
|
June 2008
|
Hideo Sakioka
|
|
May 1960
|
|
June 2007
|
|
June 2008
|
Toshioki Otani
|
|
June 2002
|
|
June 2007
|
|
June 2008
|
Akihiro Nojiri
|
|
June 2004
|
|
June 2007
|
|
June 2008
|
Yunwei Chen
|
|
June 2003
|
|
June 2007
|
|
June 2008
|
Katsutoshi Shimizu
|
|
June 2006
|
|
June 2007
|
|
June 2008
|
Keishi Ishigaki
|
|
June 2002
|
|
June 2007
|
|
June 2008
|
Akira Imaki
|
|
June 2006
|
|
June 2007
|
|
June 2008
|
Hidetoshi Sawamura
|
|
June 2007
|
|
June 2007
|
|
June 2008
|
Hidenori Nakagawa
(1)
|
|
June 2006
|
|
June 2007
|
|
June 2008
|
|
|
|
|
|
|
|
Statutory Auditors:
|
|
|
|
|
|
|
Hitoshi Higaki
|
|
June 2007
|
|
June 2007
|
|
June 2011
|
Akio Sakioka
|
|
June 2002
|
|
June 2005
|
|
June 2009
|
Masaaki Uchino
(2)
|
|
June 2007
|
|
June 2007
|
|
June 2011
|
Katsuhiko Asada
(2)
|
|
June 2004
|
|
June 2004
|
|
June 2008
|
|
|
|
(1)
|
|
Outside director pursuant to the Article 2-15 of the Corporate Law.
|
|
(2)
|
|
Outside statutory auditors pursuant to the Article 2-16 of the Corporate Law.
|
-87-
Board of Directors
Our Board of Directors has the ultimate responsibility for the administration of the affairs
of the Company. Our Articles of Incorporation provide for the number of Directors being not more
than twelve. Directors are elected at a general meeting of shareholders. The normal term of
office of any Director expires at the close of the ordinary general meeting of our shareholders
held with respect to the last fiscal year ended within one year after such Directors assumption of
office, although they may serve any number of consecutive terms. Our Board of Directors elects
from among its members one or more Representative Directors who have the authority individually to
represent the Company. Our Board of Directors may also elect from among its members a Chairman, a
Vice-Chairman, a President and one or more Vice-Presidents, Senior Executive Directors, Executive
Directors and Directors and Advisors. Our executive officers serve at the discretion of the Board
of Directors.
None of our Directors have service contracts with us or any of our subsidiaries providing for
benefits upon termination of employment.
Board of Statutory Auditors
Our Articles of Incorporation provide for not more than four Statutory Auditors, and the
Japanese Corporate Law requires that large companies, including us, shall have at least three
statutory auditors and that at least 50% of such statutory auditors must be from outside our
company. Statutory Auditors are elected at a general meeting of shareholders, and the normal term
of office of a Statutory Auditor is four years, although they may serve any number of consecutive
terms. Statutory Auditors are under a statutory duty to review the administration of our affairs
by the Directors and to examine our financial statements and business reports to be submitted by
the Board of Directors to the general meetings of shareholders. Statutory Auditors also have a
statutory duty to provide their report to the Board of Statutory Auditors, which must submit its
auditing reports to the Board of Directors. They have the duties to attend meetings of the Board
of Directors and to express their opinions, but they are not entitled to vote. The Statutory
Auditors elect from among themselves one or more standing statutory auditors who serve on a
full-time basis. See Exhibit 1.4 to this annual report on Form 20-F for our internal regulations
relating to Regulations of the Board of Statutory Auditors.
Independent Registered Public Accounting Firm
In addition to Statutory Auditors, we must appoint an independent auditor who performs the
statutory duties of auditing the consolidated and non-consolidated financial statements to be
submitted by the Representative Director to the general meetings of shareholders and reporting
thereon to the designated Statutory Auditors and the designated Director under the Corporate Law.
The independent auditor usually audits the consolidated and non-consolidated financial statements
to be included in periodic reports to be filed by us with the Director of the Kanto Local Finance
Bureau under the Securities and Exchange Law of Japan (effective as of September 30, 2007, the
Financial Instruments and Exchange Law). Our independent auditor under the Corporate Law and
independent registered public accounting firm is BDO Sanyu & Co., a member of the Japanese
Institute of Certified Public Accountants and a PCAOB registered public accounting firm. Its
address is Aqua Dojima Nishi-kan 14F, 4-16, Dojimahama 1-chome, Kita-ku, Osaka 530-0004, Japan.
-88-
Significant Differences Between Our Corporate Governance Practices and Those of New York Stock
Exchange-listed U.S. Companies
Companies listed on the New York Stock Exchange, or NYSE, must comply with certain standards
regarding corporate governance under Section 303A of the NYSE Listed Company Manual. However,
listed companies that are foreign private issuers, such as us, are permitted to follow home country
practice in lieu of certain provisions of Section 303A.
The following table shows the significant differences between the corporate governance
practices followed by U.S. listed companies under Section 303A of the NYSE Listed Company Manual
and those followed by us:
|
|
|
Corporate Governance Practices Followed
by NYSE-listed
U.S. Companies
|
|
Corporate Governance Practices Followed
by Us
|
A NYSE-listed U.S.
company must have a
majority of directors
meeting the
independence
requirements under
Section 303A of the
NYSE Listed Company
Manual.
|
|
Under the Corporate Law, Japanese joint stock
corporations are permitted to choose between the
traditional corporate governance system based on
a board of statutory auditors (the statutory
auditor system) and a corporate governance
system based on committees (the committee
system). The vast majority of Japanese
companies employ the statutory auditor system.
For Japanese companies with the statutory
auditor system, including us, the Corporate Law
of Japan has no independence requirement with
respect to directors. The statutory auditors,
who are separate from the companys management,
monitor performance of directors and oversee
accounting firms and have separate staff to
assist them in completing their tasks. Pursuant
to the Corporate Law, Japanese companies with a
board of statutory auditors, including us, are
required to have at least 50% of the statutory
auditors to be outside statutory auditors as
defined in the Corporate Law and who must meet
independence requirements under the Corporate
Law. Statutory auditors must not have served as
a director, accounting officer (kaikei-sanyo),
executive officer, manager or any other employee
of the company or any of its subsidiaries.
Currently, we have two outside Statutory
Auditors.
|
|
|
|
A NYSE-listed U.S.
company must have an
audit committee
composed entirely of
independent directors,
and the audit committee
must have at least
three members.
|
|
As discussed above, we employ the statutory
auditor system. Under this system, our Board of
Statutory Auditors is a legally separate and
independent body from our Board of Directors.
The function of our Board of Statutory Auditors
is similar to that of independent directors,
including those who are members of the audit
committee, of a U.S. company. In particular,
their function is to monitor the performance of
our Directors, and review and express an opinion
on the method of auditing by our independent
public accounting firm and on such accounting
firms audit reports, for the protection of our
shareholders.
Japanese companies with a board of statutory
auditors, including us, are required to have at
least three statutory auditors. Currently, we
have four Statutory Auditors. The term of each
Statutory Auditor is four years. In contrast,
the term of each of our Directors is one year.
Since July 31, 2005, when the requirements of
Rule 10A-3 under the U.S. Securities Exchange
Act of 1934 relating to listed company audit
committees become applicable to foreign private
issuers, we have relied on an exemption under
that rule available to foreign private issuers
with boards of auditors (or similar bodies), or statutory auditors meeting
certain criteria. We make disclosure regarding
such reliance in Item 16.D to our annual report
on Form 20-F.
|
-89-
|
|
|
Corporate Governance Practices Followed
by NYSE-listed U.S. Companies
|
|
Corporate Governance Practices Followed
by Us
|
A NYSE-listed U.S.
company must have a
nominating/corporate
governance committee
composed entirely of
independent directors.
|
|
Directors are elected at a meeting of
shareholders. The Board of Directors does not
have the power to fill vacancies in the board.
Statutory Auditors are also elected at a meeting
of shareholders. Under the Corporate Law,
before our Board of Directors submits a proposal
to a meeting of our shareholders to elect a
Statutory Auditor, the proposal must be approved
by a resolution of our Board of Statutory
Auditors. Our Board of Statutory Auditors is
empowered to adopt resolutions requesting that
our Directors submit a proposal for the election
of Statutory Auditors to a meeting of our
shareholders. Statutory Auditors have the right
to state their opinion concerning the election
or resignation of Statutory Auditors at meetings
of our shareholders.
|
|
|
|
A NYSE-listed U.S.
company must have a
compensation committee
composed entirely of
independent directors.
|
|
Under the statutory auditor system, unless
otherwise provided in our Articles of
Incorporation, total amounts of compensation for
our Directors and Statutory Auditors are
respectively proposed to, and voted on by, a
meeting of our shareholders. Our Articles of
Incorporation do not provide for any such total
amounts. Once the proposals for the total
amounts of compensation are approved at a
meeting of our shareholders, our Board of
Directors allocates the total amount for the
Directors among its members in its discretion
and our Statutory Auditors allocate the total
amount for the Statutory Auditors among
themselves in their discretion, unless there is
a resolution at the shareholders meeting or a
provision in the Articles of Incorporation
relating to the allocation of compensation.
|
|
|
|
A NYSE-listed U.S.
company must generally
obtain shareholders
approval with respect
to any equity
compensation plan.
|
|
Under the Corporate Law, our Board of Directors
is authorized to issue stock acquisition rights
unless the issuance is made under specially favorable conditions. The issuance of stock
acquisition rights to our Directors, Statutory
Auditors and employees as stock options would
not be deemed to be an issuance under
specially favorable conditions, even if the
stock options are issued at no charge, since we
would receive benefits corresponding to the
value of such stock options in the form of
services from the recipients. However, because
the Corporate Law provides that compensation for
our Directors and Statutory Auditors shall be
determined at a meeting of our shareholders
unless otherwise provided in our Articles of
Incorporation, we must obtain shareholders
approval for the issuance of stock options if
the options are to be issued as compensation for
our Directors and Statutory Auditors.
|
|
|
|
A NYSE-listed U.S.
company must have an
internal audit
function, which must be
the sole responsibility
of the audit committee
and may not be
allocated to a
different committee.
|
|
As discussed above, we employ the statutory
auditor system under which our Statutory
Auditors monitor the performance of our
Directors. In addition, in order to enhance our
internal audit function, we voluntarily
established a Group Audit Department, which
checks our internal audit function regularly.
Our Group Audit Department is different from our
Board of Statutory Auditors, and reports
directly to our president.
|
-90-
Our employees are mainly located in Japan. The following table shows the number of our
full-time, part-time and temporary employees at the end of the each of the years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
2005
|
|
2006
|
|
2007
|
Full-time:
|
|
|
|
|
|
|
|
|
|
|
|
|
Integrated Financial Services
|
|
|
726
|
|
|
|
901
|
|
|
|
1,042
|
|
Servicing Business
|
|
|
59
|
|
|
|
74
|
|
|
|
85
|
|
Real Estate Business
|
|
|
3
|
|
|
|
13
|
|
|
|
16
|
|
Other Businesses
|
|
|
30
|
|
|
|
10
|
|
|
|
23
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
818
|
|
|
|
998
|
|
|
|
1,166
|
|
Part-time
(1)
|
|
|
89
|
|
|
|
101
|
|
|
|
90
|
|
Temporary
(2)
|
|
|
181
|
|
|
|
198
|
|
|
|
186
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,088
|
|
|
|
1,297
|
|
|
|
1,442
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The average number of part-time employees was 85 for the year ended March 31, 2005, 100
for the year ended March 31, 2006 and 90 for the year ended March 31, 2007.
|
|
(2)
|
|
Temporary employees are employees dispatched from personnel agencies.
|
We have never experienced any labor disputes and consider our labor relations to be
excellent. None of our employees are members of a trade union or participate in any collective
bargaining organizations.
We consider our levels of remuneration, fringe benefits, working conditions and other
allowances, which include lump-sum payments, to be generally competitive with those offered in
Japan by other enterprises in our industry. Our full-time employees normally must retire when they
reach 60 years of age. We terminated all of our sponsored pension and retirement plans, and now
only participate in the mandatory fully-funded contributory plan under the Japanese Welfare Pension
Insurance Law.
-91-
Share Ownership by Directors and Statutory Auditors
The following table provides information about our Directors, who include our senior
management and our Statutory Auditors. The shareholdings of certain Directors in the table below
overlap to the extent that multiple individuals may be deemed to share beneficial ownership over
the same shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Percentage of
|
|
|
|
|
|
|
Beneficially
|
|
Common Stock
|
|
|
|
|
|
|
Owned as of
|
|
Outstanding as of
|
Name
|
|
Position
|
|
Date of Birth
|
|
March 31, 2007
(1)
|
|
March
31, 2007
(2)
|
Directors:
|
|
|
|
|
|
|
|
|
|
|
|
Kunihiko Sakioka
(3)
|
|
Chairman, Representative
Director
of the Board and Co-CEO
|
|
January 10, 1962
|
|
|
37,631,210
|
(4)
|
|
26.4
|
%
(4)
|
Shinsuke Amiya
(3)
|
|
President, Representative
Director of the Board and
Co-CEO
|
|
October 3, 1957
|
|
|
50,000
|
|
|
*
|
|
Hideo Sakioka
|
|
Director of the Board and
Advisor
|
|
May 14, 1928
|
|
|
37,084,700
|
(5)
|
|
26.0
|
(5)
|
Toshioki Otani
(3)
|
|
Senior Executive Director of
the Board and Executive Officer
|
|
December 22, 1970
|
|
|
183,945
|
|
|
*
|
|
Akihiro Nojiri
|
|
Senior Executive Director of
the Board and Executive Officer
|
|
November 15, 1968
|
|
|
34,936
|
|
|
*
|
|
Yunwei Chen
|
|
Senior Executive Director of
the Board and Executive Officer
|
|
January 16, 1969
|
|
|
175,800
|
|
|
*
|
|
Katsutoshi Shimizu
|
|
Executive Director of the Board
and Executive Officer
|
|
April 9, 1954
|
|
|
9,600
|
|
|
*
|
|
Keishi Ishigaki
|
|
Director of the Board and
Executive Officer
|
|
April 3, 1971
|
|
|
150,988
|
|
|
*
|
|
Akira Imaki
|
|
Director of the Board and
Executive Officer
|
|
February 15, 1949
|
|
|
4,000
|
|
|
*
|
|
Hidetoshi Sawamura
|
|
Director of the Board and
Executive Officer
|
|
December 25, 1950
|
|
|
|
|
|
|
|
Hidenori Nakagawa
|
|
Director of the Board (Outside)
|
|
November 20, 1967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory Auditors:
|
|
|
|
|
|
|
|
|
|
|
|
Hitoshi Higaki
|
|
Statutory Auditor (Standing)
|
|
December 14, 1959
|
|
|
392,981
|
|
|
*
|
|
Akio Sakioka
|
|
Statutory Auditor (Standing)
|
|
September 22, 1950
|
|
|
1,231,826
|
|
|
*
|
|
Masaaki Uchino
|
|
Statutory Auditor (Outside)
|
|
April 1, 1945
|
|
|
|
|
|
|
|
Katsuhiko Asada
|
|
Statutory Auditor (Outside)
|
|
February 10, 1955
|
|
|
7,200
|
|
|
*
|
|
|
|
|
(1)
|
|
As adjusted for our August 2007 reverse stock split.
|
|
(2)
|
|
Asterisks indicate beneficial ownership of less than 1%.
|
|
(3)
|
|
Pursuant to a resolution of the Board of Directors adopted on
September 25, 2007, effective October 1, 2007, Kunihiko
Sakioka will become Chairman, Representative Director of the Board,
President and CEO (Head of Investment Banking, Sales &
Marketing), Shinsuke Amiya will become Vice-Chairman of the Board
and Executive Officer and Toshioki Otani will become Senior Executive
Director of the Board and Executive Officer.
|
|
(4)
|
|
Comprised of 4,481,347 shares over which Kunihiko Sakioka has sole voting and dispositive
power; 16,785,100 shares held by Nissin Building Co., Ltd. (Nissin Building) over which
Kunihiko Sakioka may be deemed to share voting or dispositive power with Hideo Sakioka,
Michimasa Sakioka and Midori Moriyama; and 16,364,763 shares held by Shuho, Ltd. (Shuho)
over which Kunihiko Sakioka may be deemed to share voting or dispositive power with Hideo
Sakioka. Excludes shareholdings of other Sakioka family members. Members of the Sakioka
family, including the ones listed above, directly and indirectly held an aggregate of
51,328,261 shares, or 36.0%, of our outstanding shares of common stock, as of March 31, 2007.
|
-92-
|
|
|
(5)
|
|
Comprised of 3,934,837 shares over which Hideo Sakioka has sole voting and dispositive power;
16,785,100 shares held by Nissin Building over which Hideo Sakioka may be deemed to share
voting or dispositive power with Kunihiko Sakioka, Michimasa Sakioka and Midori Moriyama; and
16,364,763 shares held by Shuho over which Hideo Sakioka may be deemed to share voting or
dispositive power with Kunihiko Sakioka. Excludes shareholding of other Sakioka family
members. Members of the Sakioka family, including the ones listed above, directly and
indirectly held an aggregate of 51,328,261 shares, or 36.0%, of our outstanding shares of
common stock, as of March 31, 2007.
|
|
(6)
|
|
During the period beginning April 1, 2007, through the date of this annual report on Form
20-F, the number of shares beneficially owned by certain of our Directors increased due to
exercises of stock acquisition rights or purchases either in the open market or through
negotiated transactions, as follows:
|
|
|
|
Shinsuke Amiyas shareholding increased by 50,000 shares through an acquisition of shares from
Shuho. As a result, the number of shares beneficially owned by Kunihiko Sakioka and Hideo
Sakioka by virtue of their interests in Shuho decreased by 50,000 shares, respectively.
Akihiro Nojiris shareholding increased by 19,200 shares.
Katsutoshi Shimizus shareholding increased by 19,200 shares.
Akio Sakiokas shareholding increased (net of sales) by 5,000 shares.
Yunwei Chens shareholding increased by 17,500 shares.
|
As of March 31, 2007, our Directors and Statutory Auditors, as a group, owned 52,477,214
shares of common stock, if the shares of Nissin Building and Shuho are included, representing 36.8%
of our outstanding shares of common stock. Other than Kunihiko Sakioka and Hideo Sakioka, whose
shareholdings are disclosed above, no Director or Statutory Auditor owned 1% or more of our shares.
Stock Option Plans
We
have the following stock option plans, where, upon issuance of stock acquisition rights, we
grant to Directors, employees and certain other parties (as described below) a specified number of
shares:
|
|
|
|
March 2006 Stock Option Plan
. We granted stock acquisition rights exercisable for a
total of 96,000 shares at a purchase price per share of ¥2,620 to 28 of our Directors
and employees and those of our subsidiaries and affiliates on March 23, 2006. These
are exercisable until March 31, 2009.
|
|
|
|
|
July 2005 Stock Option Plan
. We granted stock acquisition rights exercisable for a
total of 720,000 shares at a purchase price per share of ¥1,160 to 251 of our Directors
and employees and those of our subsidiaries and affiliates on July 15, 2005. These are
exercisable until July 31, 2008.
|
|
|
|
|
April 2005 Stock Option Plan
. We granted stock acquisition rights exercisable for a
total of 357,120 shares at a purchase price per share of ¥1,340 to 120 of our employees
and those of our subsidiaries and affiliates on April 21, 2005. These are exercisable
until April 30, 2008.
|
|
|
|
|
January 2005 Stock Option Plan
. We granted stock acquisition rights exercisable for
a total of 38,400 shares at a purchase price per share of ¥1,100 to 9 of our employees
on January 20, 2005. These are exercisable until January 31, 2008.
|
|
|
|
|
July 2004 Stock Option Plan
. We granted stock acquisition rights exercisable for a
total of 3,196,800 shares at a purchase price per share of ¥1,060 to 1,149 of our
Directors and employees and those of our subsidiaries and affiliates on July 15, 2004.
These are exercisable until July 31, 2007.
|
Under
the Corporate Law, we are not required to obtain shareholders approval for issuance of
stock acquisition rights to our Directors and employees. However, we
must obtain shareholders
approval for issuance of such acquisition rights to our Directors as compensation for their services. A resolution
adopted at our general shareholders meeting on June 23, 2007 allowed us to issue stock options for
up to a maximum annual total of 2,500,000 shares to our Directors as compensation, separately from,
and in addition to, the aggregate compensation to our Directors as provided in Compensation
above.
-93-
The following table shows the stock acquisition rights exercisable by our Directors and
Statutory Auditors as of March 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
Number of shares
|
|
|
|
|
issuable upon exercise of
|
|
|
|
|
stock acquisition rights
|
Name
|
|
Position
|
|
as of March 31, 2007
|
Directors:
|
|
|
|
|
|
|
Kunihiko Sakioka
(1)
|
|
Chairman, Representative Director of the Board and
Co-CEO
|
|
|
8,000
|
Shinsuke Amiya
(1)
|
|
President, Representative Director of the Board and
Co-CEO
|
|
|
|
Hideo Sakioka
|
|
Director of the Board and Advisor
|
|
|
|
Toshioki Otani
(1)
|
|
Senior Executive Director of the Board and Executive
Officer
|
|
|
8,000
|
Akihiro Nojiri
|
|
Senior Executive Director of the Board and Executive
Officer
|
|
|
27,200
|
Yunwei Chen
|
|
Senior Executive Director of the Board and Executive
Officer
|
|
|
27,200
|
Katsutoshi Shimizu
|
|
Executive Director of the Board and Executive Officer
|
|
|
21,200
|
Keishi Ishigaki
|
|
Director of the Board and Executive Officer
|
|
|
|
Akira Imaki
|
|
Director of the Board and Executive Officer
|
|
|
6,000
|
Hidetoshi Sawamura
|
|
Director of the Board and Executive Officer
|
|
|
|
Hidenori Nakagawa
|
|
Director of the Board (Outside)
|
|
|
|
|
|
|
|
|
|
|
Statutory Auditors:
|
|
|
|
|
|
|
Hitoshi Higaki
|
|
Statutory Auditor (Standing)
|
|
|
|
Akio Sakioka
|
|
Statutory Auditor (Standing)
|
|
|
|
Masaaki Uchino
|
|
Statutory Auditor (Outside)
|
|
|
|
Katsuhiko Asada
|
|
Statutory Auditor (Outside)
|
|
|
22,400
|
|
|
|
|
|
|
|
|
|
|
|
|
120,000
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Pursuant to a resolution of the Board of Directors adopted on
September 25, 2007, effective October 1, 2007, Kunihiko
Sakioka will become Chairman, Representative Director of the Board,
President and CEO (Head of Investment Banking, Sales &
Marketing), Shinsuke Amiya will become Vice-Chairman of the Board
and Executive Officer and Toshioki Otani will become Senior Executive
Director of the Board and Executive Officer.
|
|
(2)
|
|
During the period beginning April 1, 2007 through the date of this annual report on Form 20-F,
stock acquisition rights exercised by Directors and Statutory
Auditors were as follows:
Akihiro Nojiri exercised stock acquisition rights to acquire 19,200 shares.
Katsutoshi Shimizu exercised stock acquisition rights to acquire 19,200 shares.
|
Employee Stock Purchase Plan
Our full-time employees are eligible to participate in our employee shareholders association,
which purchases our shares with contributions from our employees deducted from their salaries. As
of March 31, 2007, the association owned 1,398,890 shares of common stock. We provide a 10%
subsidy in cash on top of the contribution of any employee who has participated in the association
for less than a year and a 13% subsidy for those who have participated for one year or longer. The
board of our employee shareholders association makes decisions as to how to vote all of its
shares.
-94-
Item 7. Major Shareholders and Related Party Transactions
A. Major Shareholders.
To our knowledge, the persons in the following table are the only owners or beneficial owners
or holders of 5% or more of our outstanding shares of common stock as of March 31, 2007. We are
not required by Japanese law to disclose beneficial ownership of our shares of common stock. As
explained in Memorandum and Articles of Association
Reporting Requirements of Shareholders
Report of
Substantial Shareholdings
in Item 10.B of this annual report on Form 20-F, any person
who solely or jointly, becomes a beneficial holder of more than 5% of our outstanding shares of
common stock must file a report with the relevant local finance bureau of the Ministry of Finance
and with the Financial Services Agency of Japan. The information in this table is based upon our
shareholders of record and reports filed with the Financial Services Agency of Japan and U.S.
Securities and Exchange Commission. The shareholdings of the major shareholders in the table below
overlap to the extent that multiple individuals may be deemed to share beneficial ownership over
the same shares:
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Percentage of
|
|
|
of Common Stock
|
|
Common Stock
|
|
|
Owned as of
|
|
Outstanding as of
|
Shareholders
|
|
March 31, 2007
(5)
|
|
March 31, 2007
(5)
|
Kunihiko Sakioka
(1) (5) (6)
|
|
|
37,631,210
|
|
|
|
26.4
|
%
|
Hideo Sakioka
(2) (5) (6)
|
|
|
37,084,700
|
|
|
|
26.0
|
|
Midori Moriyama
(3) (5)
|
|
|
18,801,305
|
|
|
|
13.2
|
|
Michimasa Sakioka
(4) (5)
|
|
|
18,640,341
|
|
|
|
13.1
|
|
|
|
|
(1)
|
|
Comprised of 4,481,347 shares over which Kunihiko Sakioka has sole voting and dispositive
power; 16,785,100 shares held by Nissin Building over which Kunihiko Sakioka may be deemed to
share voting and dispositive power with Hideo Sakioka, Michimasa Sakioka and Midori Moriyama;
and 16,364,763 shares held by Shuho, over which Kunihiko Sakioka may be deemed to share voting
and dispositive power with Hideo Sakioka.
|
|
(2)
|
|
Comprised of 3,934,837 shares over which Hideo Sakioka has sole voting and dispositive power;
16,785,100 shares held by Nissin Building over which Hideo Sakioka may be deemed to share
voting and dispositive power with Kunihiko Sakioka, Michimasa Sakioka and Midori Moriyama; and
16,364,763 shares held by Shuho, over which Hideo Sakioka may be deemed to share voting and
dispositive power with Kunihiko Sakioka.
|
|
(3)
|
|
Comprised of 2,016,205 shares over which Midori Moriyama has sole voting and dispositive
power; and 16,785,100 shares held by Nissin Building over which Midori Moriyama may be deemed
to share voting and dispositive power with Hideo Sakioka, Kunihiko Sakioka and Michimasa
Sakioka.
|
|
(4)
|
|
Comprised of 1,855,241 shares over which Michimasa Sakioka has sole voting and dispositive
power; and 16,785,100 shares held by Nissin Building over which Michimasa Sakioka may be
deemed to share voting and dispositive power with Hideo Sakioka, Kunihiko Sakioka and Midori
Moriyama.
|
|
(5)
|
|
Excludes shareholding of other Sakioka family members. Members of the Sakioka family,
including the ones listed above, directly and indirectly held an aggregate of 51,328,261
shares, or 36.0%, of our outstanding shares of common stock, as of March 31, 2007.
|
|
(6)
|
|
In June 2007, Shinsuke Amiya, our President, Representative Director of the Board and
Co-CEO, acquired 50,000 shares from Shuho. As a result, the number of shares beneficially
owned by Kunihiko Sakioka and Hideo Sakioka by virtue of their interests in Shuho decreased
by 50,000 shares, respectively.
|
According to our register of shareholders, as of March 31, 2007, 36 shareholders of
record with addresses in the United States held 1.06% of our outstanding shares of common stock.
To our knowledge, we are not directly or indirectly owned or controlled by any government. We
know of no arrangements the operation of which may at a later time result in a change of control of
us. Our major shareholders have the same voting rights as other holders of our common stock. There
were no major changes in our major shareholders between March 31, 2005 and March 31, 2007.
-95-
B. Related Party Transactions.
Except as described below, during the period beginning April 1, 2004 through the date of this
annual report on Form 20-F, there has been no material transaction with or loan between us or any
of our subsidiaries and:
|
|
any enterprise that directly or indirectly controls, is
controlled by, or is in common control with us or any of our
subsidiaries;
|
|
|
|
any director, officer, statutory auditor or family member of any
of the preceding or any enterprise over which such person
directly or indirectly is able to exercise significant influence;
|
|
|
|
any individual shareholder directly or indirectly having
significant influence over us or any of our subsidiaries or a
family member of such individual or any enterprise over which
such person directly or indirectly is able to exercise
significant influence, or their respective family members or
enterprises over which they exercise significant influence; or
|
|
|
|
any unconsolidated enterprise in which we have a significant
influence or which has a significant influence over us.
|
Transactions with Our Directors, Corporate Officers, Statutory Auditors or Companies with Whom They
Have a Relationship
Transactions with Shuho
As of March 31, 2007, members of the Sakioka family owned 100% of Shuho. We lease office
space to this entity. The following table shows transactions with this entity for the years ended
March 31, 2005, 2006 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
(In millions)
|
Rent income received
|
|
¥
|
1
|
|
|
¥
|
1
|
|
|
¥
|
1
|
|
The terms of these transactions were determined with reference to equivalent transactions
with unrelated parties, and the prices for these transactions were equivalent to those set for
equivalent transactions with unrelated parties.
Transactions with Nissin Building
As of March 31, 2007, members of the Sakioka family owned 93.3% of Nissin Building. We lease
office space and parking lots to this entity. The following table shows transactions with this
entity for the years ended March 31, 2005, 2006 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
(In millions)
|
Rent income received
|
|
¥
|
2
|
|
|
¥
|
1
|
|
|
¥
|
2
|
|
The terms of these transactions were determined with reference to equivalent transactions
with unrelated parties, and the prices for these transactions were equivalent to those set for
equivalent transactions with unrelated parties.
-96-
Transactions with Our Principal Shareholders or Affiliates
Transactions with Shinsei Business Finance
As of March 31, 2006, we owned 25% of Shinsei Business Finance. However, our interest in
Shinsei Business Finance became less than 20% as of April 14, 2006. The following table shows
transactions with this entity for the years ended March 31, 2005, 2006 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
(In millions)
|
Commissions on customer referrals paid
|
|
¥
|
32
|
|
|
¥
|
13
|
|
|
¥
|
1
|
|
Agency commissions received
|
|
|
13
|
|
|
|
4
|
|
|
|
36
|
|
Loan guarantee fees received
|
|
|
316
|
|
|
|
467
|
|
|
|
|
|
Bank loan guarantee fees received
|
|
|
34
|
|
|
|
9
|
|
|
|
|
|
Shinsei Business Finance became an unrelated party during the year ended March 31, 2007.
Although transactions between us and Shinsei Business Finance are continuous in nature,
transactions with Shinsei Business Finance after it became an unrelated party are not included
above. The terms of these transactions were determined with reference to equivalent transactions
with unrelated parties, and the prices for these transactions were equivalent to those set for
equivalent transactions with unrelated parties.
Transactions with Webcashing.com
As
of March 31, 2006, we owned 38% of Webcashing.com Co., Ltd.
(Webcashing.com); however, we sold our entire interest in
Webcashing.com on September 5, 2006. The following table shows transactions with this entity for
the years ended March 31, 2005, 2006 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
(In millions)
|
Commissions on customer referrals paid
|
|
¥
|
205
|
|
|
¥
|
151
|
|
|
¥
|
|
|
Advertising expenses and other fees paid
|
|
|
175
|
|
|
|
518
|
|
|
|
1
|
|
Proceeds from sale of equipment and software
|
|
|
|
|
|
|
|
|
|
|
|
|
No transactions between us and Webcashing.com have taken place subsequent to the sale of
all our ownership interest in Webcashing.com to an outside investor. The terms of these
transactions were determined with reference to equivalent transactions with unrelated parties, and
the prices for these transactions were equivalent to those set for equivalent transactions with
unrelated parties.
-97-
Transactions with Chuo Mitsui Finance
As of March 31, 2006, we owned 30% of Chuo Mitsui Finance. However, our interest in Chuo
Mitsui Finance became less than 20% as of February 22, 2007. The following table shows
transactions with this entity for the years ended March 31, 2005, 2006 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
(In millions)
|
Commissions on customer referrals paid
|
|
¥
|
|
|
|
¥
|
9
|
|
|
¥
|
11
|
|
Loan guarantee fees received
|
|
|
|
|
|
|
26
|
|
|
|
89
|
|
Bank loan guarantee fees received
|
|
|
|
|
|
|
11
|
|
|
|
41
|
|
Chuo Mitsui Finance became an unrelated party during the year ended March 31, 2007.
Although transactions between the Group and Chuo Mitsui Finance are continuous in nature,
transactions with Chuo Mitsui Finance after it became an unrelated party are not included above.
The terms of these transactions were determined with reference to equivalent transactions with
unrelated parties, and the prices for these transactions were equivalent to those set for
equivalent transactions with unrelated parties.
C. Interests of Experts and Counsel.
Not applicable.
-98-
Item 8. Financial Information
A. Consolidated Statements and Other Financial Information.
Financial Statements
The
consolidated financial statements required by this item begin on page
F-1 of this annual
report on Form 20-F.
Legal or Arbitration Proceedings
The information on legal or arbitration proceedings required by this item is set forth in Item
4.B of this annual report on Form 20-F.
Dividend Policy
Cash Dividends
Historically we have paid cash dividends twice per year. Our Board of Directors recommended
the year-end dividend be paid following the end of each fiscal year, subject to approval by
shareholders at the general meeting of shareholders held in June of each year, until our Articles
of Incorporation were amended in June 2006. However, our Articles of Incorporation now provide that
the Board of Directors is authorized to decide distribution of
dividends without shareholders
approval pursuant to the Corporate Law. Following the approval by resolution of our Board of
Directors, we pay the year-end dividend to shareholders of record as of March 31 and semi-annual
dividends to our shareholders of record as of September 30 in each year. In addition to these
annual and semi-annual dividends, our Board of Directors may resolve the record date for interim
dividends and distribute the profits to our shareholders as further explained in Rights of Our
Shareholders
Rights with Respect to Distribution of
Surplus, Stock Repurchase and Stock Splits
Dividends
in Item 10.B of this annual report on Form 20-F.
The following table shows the year-end and interim dividends paid to shareholders of record of
our common stock. Dividends per share (As adjusted) presents each dividend payments as adjusted
to reflect a 2-for-1 stock split on each of May 21, 2002, May 20, 2003, May 20, 2004, November 19,
2004, November 18, 2005, and April 1, 2006, respectively, a 1.2-for-1 stock split on May 20, 2005
and a 1-for-20 reverse stock split on August 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
Dividends per
|
|
Dividends per
|
|
|
share
|
|
share
|
Record Date
|
|
(Actual)
|
|
(As adjusted)
|
September 30, 2002 (interim)
|
|
¥
|
6.50
|
|
|
¥
|
3.40
|
|
March 31, 2003
|
|
|
8.50
|
|
|
|
4.40
|
|
September 30, 2003 (interim)
|
|
|
3.75
|
|
|
|
4.00
|
|
March 31, 2004
|
|
|
4.75
|
|
|
|
5.00
|
|
September 30, 2004 (interim)
|
|
|
1.375
|
(1)
|
|
|
5.80
|
|
March 31, 2005
|
|
|
2.50
|
|
|
|
10.40
|
|
September 30, 2005 (interim)
|
|
|
1.00
|
(2)
|
|
|
10.00
|
|
March 31, 2006
|
|
|
1.10
|
|
|
|
11.00
|
|
September 30, 2006 (interim)
|
|
|
0.16
|
|
|
|
3.20
|
|
March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Adjusted to reflect the 2-for-1 stock split that took effect on November 19, 2004. The
actual interim dividend payment per share was ¥2.75.
|
|
(2)
|
|
Adjusted to reflect the 2-for-1 stock split that took effect on November 18, 2005. The
actual interim dividend payment per share was ¥2.00.
|
We presently intend to continue to pay cash dividends, generally on a semi-annual basis,
and to provide a stable level of dividends to our shareholders. Since the year ended March 31,
2005, in order to reflect our consolidated results as an indicator of our business performance, we
have generally followed a dividend policy to target a dividend payout ratio of 30% of consolidated
net income, taking into consideration economic and financial circumstances, industry trends, and
our consolidated financial position and business performance. The declaration and payment of
dividends also depend on other factors, including statutory and other restrictions on the payment
of dividends. Our actual dividend may vary from this target, or we may pay no dividend, based on
these or other factors.
Dividends paid to shareholders outside Japan on shares of our common stock, including shares
represented by ADSs, are generally subject to a Japanese withholding tax at the maximum rate of
20%. Reduced rates for withholding apply to shareholders in some countries that have income tax
treaties with Japan. The withholding rate for U.S. holders is generally 10%, subject to a
temporary measurement. (See Taxation Japanese Tax Considerations in Item 10.E of this annual
report on Form 20-F.)
There are generally no U.S. or Japanese governmental restrictions on the distribution of
dividends to our shareholders.
-99-
Stock Repurchases
The following table shows information about our stock repurchases, net of distributions in the
past:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Aggregate
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Net aggregate
|
|
|
repurchased
|
|
repurchase
|
|
Number of
|
|
Aggregate
|
|
repurchased
|
|
purchase
|
Year
Ended/Ending March 31,
|
|
shares
|
|
price
|
|
shares sold
|
|
sale price
|
|
shares, net
|
|
price
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
(In millions)
|
2003
|
|
|
5,185,509
|
|
|
|
¥2,493
|
|
|
|
38,400
|
|
|
|
¥ 20
|
|
|
|
5,147,109
|
|
|
|
¥ 2,473
|
|
2004
|
|
|
2,883,560
|
|
|
|
1,209
|
|
|
|
643,392
|
|
|
|
338
|
|
|
|
2,240,168
|
|
|
|
871
|
|
2005
|
|
|
1,404
|
|
|
|
1
|
|
|
|
1,514,592
|
|
|
|
909
|
|
|
|
(1,513,188
|
)
|
|
|
(908
|
)
|
2006
|
|
|
1,875
|
|
|
|
2
|
|
|
|
2,641,688
|
|
|
|
2,209
|
|
|
|
(2,639,813
|
)
|
|
|
(2,207
|
)
|
2007
|
|
|
203
|
|
|
|
|
|
|
|
587,864
|
|
|
|
496
|
|
|
|
(587,611
|
)
|
|
|
(496
|
)
|
2008 (through August 31,
2007)
(1)
|
|
|
3,000,054
|
|
|
|
2,394
|
|
|
|
163,536
|
|
|
|
75
|
|
|
|
2,836,518
|
|
|
|
2,319
|
|
|
|
|
(1)
|
|
On June 23, 2007, the Board of Directors approved the repurchase of shares of the Companys
common stock up to 3,000,000 shares for an aggregate amount of up to ¥3 billion. We completed
all stock repurchases to be made under this stock repurchase program during the period from
June 25, 2007 to August 24, 2007.
|
Our Articles of Incorporation permit us to repurchase our shares by resolution of our
Board of Directors. We may hold the repurchased shares in compliance with the Corporate Law and
may generally cancel or dispose of those shares by a resolution of our Board of Directors. We may
also sell the repurchased shares to Directors and employees upon exercise of their stock
acquisition rights as stock options.
B. Significant Changes.
Except as otherwise disclosed in this annual report on Form 20-F, there has been no
significant change since March 31, 2006, the date of our last audited financial statements.
-100-
Item 9. The Offer and Listing
A. Offer and Listing Details.
Tokyo Stock Exchange
The following table shows the reported high and low trading prices and the average daily
trading volume of our common stock on the Tokyo Stock Exchange as adjusted to reflect the 2-for-1
stock split that took effect on May 21, 2002, the 2-for-1 stock split that took effect on May 20,
2003, the 2-for-1 stock split that took effect on May 20, 2004, the 2-for-1 stock split that took
effect on November 19, 2004, the 1.2-for-1 stock split that took effect on May 20, 2005, the
2-for-1 stock split that took effect on November 18, 2005, the 2-for-1 stock split that took effect
on April 1, 2006, and the 1-for-20 reverse stock split that took effect on August 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Daily
Trading
|
|
|
Price Per Share
|
|
Volume
|
Year Ended/Ending March 31,
|
|
High
|
|
Low
|
|
(In shares)
|
2003
|
|
¥
|
600
|
|
|
¥
|
380
|
|
|
|
241,938
|
|
2004
|
|
|
960
|
|
|
|
400
|
|
|
|
334,608
|
|
2005
|
|
|
1,380
|
|
|
|
680
|
|
|
|
474,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
3,080
|
|
|
|
1,000
|
|
|
|
1,552,872
|
|
First Quarter
|
|
|
1,280
|
|
|
|
1,000
|
|
|
|
426,966
|
|
Second Quarter
|
|
|
1,660
|
|
|
|
1,040
|
|
|
|
766,150
|
|
Third Quarter
|
|
|
3,080
|
|
|
|
1,400
|
|
|
|
3,124,108
|
|
Fourth Quarter
|
|
|
2,900
|
|
|
|
2,000
|
|
|
|
1,920,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2,620
|
|
|
|
960
|
|
|
|
969,460
|
|
First Quarter
|
|
|
2,620
|
|
|
|
1,540
|
|
|
|
965,599
|
|
Second Quarter
|
|
|
1,820
|
|
|
|
1,040
|
|
|
|
1,300,966
|
|
Third Quarter
|
|
|
1,500
|
|
|
|
960
|
|
|
|
692,215
|
|
Fourth Quarter
|
|
|
1,460
|
|
|
|
1,080
|
|
|
|
910,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
1,400
|
|
|
|
960
|
|
|
|
438,379
|
|
First Quarter
|
|
|
1,400
|
|
|
|
960
|
|
|
|
438,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Daily
Trading
|
|
|
Price Per Share
|
|
Volume
|
Calendar Month
|
|
High
|
|
Low
|
|
(In shares)
|
January 2007
|
|
¥
|
1,420
|
|
|
¥
|
1,080
|
|
|
|
738,055
|
|
February 2007
|
|
|
1,460
|
|
|
|
1,220
|
|
|
|
1,396,778
|
|
March 2007
|
|
|
1,420
|
|
|
|
1,240
|
|
|
|
627,621
|
|
April 2007
|
|
|
1,400
|
|
|
|
1,180
|
|
|
|
334,308
|
|
May 2007
|
|
|
1,300
|
|
|
|
1,060
|
|
|
|
506,498
|
|
June 2007
|
|
|
1,100
|
|
|
|
960
|
|
|
|
469,375
|
|
July 2007
|
|
|
1,040
|
|
|
|
660
|
|
|
|
692,542
|
|
August 2007
|
|
|
960
|
|
|
|
560
|
|
|
|
1,048,961
|
|
-101-
Share prices on Japanese stock exchanges are determined on a real-time basis by the
equilibrium between bids and offers. These exchanges set daily price limits, which limit the
maximum range of fluctuation within a single trading day. Daily price limits are set according to
the previous days closing price or special quote. Although transactions may continue at the
upward or downward limit price if the limit price is reached on a particular trading day, no
transactions may take place outside these limits. Consequently, an investor wishing to sell at a
price above or below the relevant daily limit may not be able to sell his shares at such price on a
particular trading day, or at all.
On
September 28, 2007, the closing price of our shares on the Tokyo
Stock Exchange was ¥418
per share. The following table shows selected daily price limits for a stock on the Tokyo Stock
Exchange:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum daily
|
Previous
days closing price or special quote
|
|
price
movement
|
Over
|
|
¥100
|
|
Less than
|
|
¥ 200
|
|
¥ 50
|
Over
|
|
200
|
|
Less than
|
|
500
|
|
80
|
Over
|
|
500
|
|
Less than
|
|
1,000
|
|
100
|
New York Stock Exchange
The ADS/share ratio as of March 31, 2007 was one ADS representing 10 shares of our common
stock. Effective August 31, 2007, the ADS/share ratio was changed to two ADSs representing one
share of our common stock, pursuant to a resolution of the Board of Directors on July 18, 2007.
This ratio change was concurrent with a 1-for-20 reverse stock split effective the same day. The
following tables indicate the trading price of our ADSs on the New York Stock Exchange:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Daily
|
|
|
New York Stock Exchange price
|
|
Trading
Volume of
|
|
|
per ADS
|
|
ADSs
|
Year Ended/Ending March 31,
|
|
High
|
|
Low
|
|
|
|
|
2003 (since August 2, 2002)
|
|
$
|
1.89
|
|
|
$
|
1.56
|
|
|
|
14,089
|
|
2004
|
|
|
4.76
|
|
|
|
1.66
|
|
|
|
6,202
|
|
2005
|
|
|
4.33
|
|
|
|
3.03
|
|
|
|
4,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
14.69
|
|
|
|
4.50
|
|
|
|
10,345
|
|
First Quarter
|
|
|
5.74
|
|
|
|
4.51
|
|
|
|
2,555
|
|
Second Quarter
|
|
|
7.50
|
|
|
|
4.50
|
|
|
|
2,971
|
|
Third Quarter
|
|
|
14.69
|
|
|
|
6.13
|
|
|
|
15,596
|
|
Fourth Quarter
|
|
|
12.72
|
|
|
|
8.69
|
|
|
|
20,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
11.00
|
|
|
|
4.30
|
|
|
|
23,205
|
|
First Quarter
|
|
|
11.00
|
|
|
|
6.64
|
|
|
|
5,679
|
|
Second Quarter
|
|
|
7.39
|
|
|
|
4.88
|
|
|
|
8,981
|
|
Third Quarter
|
|
|
6.29
|
|
|
|
4.30
|
|
|
|
14,411
|
|
Fourth Quarter
|
|
|
6.36
|
|
|
|
4.60
|
|
|
|
54,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
6.02
|
|
|
|
3.99
|
|
|
|
32,823
|
|
First Quarter
|
|
|
6.02
|
|
|
|
3.99
|
|
|
|
32,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New York Stock Exchange price
|
|
Average
Daily
Trading
Volume of
|
|
|
per ADS
|
|
ADSs
|
Calendar Month
|
|
High
|
|
Low
|
|
|
|
|
January 2007
|
|
$
|
5.73
|
|
|
$
|
4.60
|
|
|
|
13,010
|
|
February 2007
|
|
|
5.83
|
|
|
|
5.05
|
|
|
|
107,184
|
|
March 2007
|
|
|
6.36
|
|
|
|
5.48
|
|
|
|
47,532
|
|
April 2007
|
|
|
6.02
|
|
|
|
5.10
|
|
|
|
33,025
|
|
May 2007
|
|
|
5.46
|
|
|
|
4.43
|
|
|
|
27,725
|
|
June 2007
|
|
|
4.61
|
|
|
|
3.99
|
|
|
|
37,971
|
|
July 2007
|
|
|
4.31
|
|
|
|
3.00
|
|
|
|
45,200
|
|
August 2007
|
|
|
4.50
|
|
|
|
2.61
|
|
|
|
59,622
|
|
The table above has been adjusted to reflect the 2-for-1 stock split that took effect on
May 20, 2004, the 2-for-1 stock split that took effect on November 19, 2004, the 1.2-for-1 stock
split that took effect on May 20, 2005, the 2-for-1 stock split that took effect on November 18,
2005, the 2-for-1 stock split that took effect on April 1, 2006, and the change in the ratio of
shares represented by each ADS from one ADS representing two shares to one ADS representing 10
shares that took effect on November 18, 2005. Because the ADS/share ratio change on August 31,
2007 mirrored proportionally the ratio for the reverse stock split on that same day, no adjustment
has been made to the figures in the table above as a result of this change.
-102-
B. Plan of Distribution.
Not applicable.
C. Markets.
In Japan, our shares of common stock have been listed on the First Section of the Tokyo Stock
Exchange since September 1999. In September 2002, we delisted our shares from the Osaka Securities
Exchange, where our shares had been traded since September 1999. Our shares of common stock began
trading on the Japan Securities Dealers Associations over-the-counter market in April 1994.
In August 2002, we listed our shares of common stock on the New York Stock Exchange in the
form of ADSs evidenced by ADRs. For further information regarding our American Depositary Receipt
program, see our registration statement filed with the Securities and Exchange Commission on Form
F-1 (File No. 333-97229) declared effective on August 1, 2002.
D. Selling Shareholders.
Not applicable.
E. Dilution.
Not applicable.
F. Expenses of the Issue.
Not applicable.
-103-
Item 10. Additional Information
A. Share Capital.
Not required.
B. Memorandum and Articles of Association.
Purposes in Our Articles of Incorporation
Article 2 of our Articles of Incorporation states our purposes as follows:
|
|
|
Consumer credit business, enterprise credit business, and financial mediation,
guarantee and agency of these;
|
|
|
|
|
Credit management and collection business;
|
|
|
|
|
The business of leasing, rental, buying and purchasing (including buying and
purchasing by installments), and managing all types of movable estates;
|
|
|
|
|
The buying and selling, exchange, rental, mediation, appraisement, management,
possession and operation of real estate;
|
|
|
|
|
Civil engineering, building work and contracting business;
|
|
|
|
|
The buying and selling, mediation, commissioning or agency of securities;
|
|
|
|
|
Non-life insurance agent business, business related to the offering of life
insurance, and insurance agent business based on the Automobile Liability Security Law;
|
|
|
|
|
Investment and management consultancy business for enterprises;
|
|
|
|
|
Business agency for rental contracts for corporate housing, offices and parking
space and sales contracts;
|
|
|
|
|
The business of supplying temporary labor;
|
|
|
|
|
Importing and exporting products and distribution business;
|
|
|
|
|
Collection agency business;
|
|
|
|
|
Computing work agency business;
|
|
|
|
|
Contracting for advertising and publicity;
|
|
|
|
|
Factoring business;
|
|
|
|
|
Development and distribution of computer software;
|
|
|
|
|
Distribution of computers and peripherals devices;
|
|
|
|
|
Management and rental of sports facilities;
|
-104-
|
|
|
Office work agency business such as enterprise accounting or
labor services;
|
|
|
|
|
Internet provider business;
|
|
|
|
|
Internet advertising and publicity business;
|
|
|
|
|
Mediation of money borrowing and lending using the Internet;
|
|
|
|
|
Business related to the planning and development of Internet software and the
commissioning of its production, as well as consulting business related to these;
|
|
|
|
|
Business related to agency and contract for sales of products and services;
|
|
|
|
|
Business related to the planning, management and coordination of all types of events;
|
|
|
|
|
Business related to all types of training and courses for the acquisition of all types of licenses;
|
|
|
|
|
Planning and production of advertising and publicity, as well as advertising agency business;
|
|
|
|
|
Business of offering automobile inspection services;
|
|
|
|
|
Trust business;
|
|
|
|
|
Other businesses that a trust company is permitted to conduct under law;
|
|
|
|
|
Research, planning, intermediary and consulting services for M&A, alliances and
transfers of businesses, etc.;
|
|
|
|
|
Type 1 financial instruments business defined under the Financial Instruments and
Exchange Law of Japan (the FIEL);
|
|
|
|
|
Type 2 financial instruments business defined under the FIEL;
|
|
|
|
|
Investment advisory and agency businesses defined under the FIEL;
|
|
|
|
|
Investment management business defined under the FIEL;
|
|
|
|
|
Financial instruments intermediation business defined under the FIEL; and
|
|
|
|
|
All business that is ancillary to each of the preceding items.
|
-105-
Provisions Regarding Our Directors
There is no provision in our Articles of Incorporation as to our Directors power to vote on a
proposal, arrangement or contract in which a Director is materially interested. The Corporate Law
of Japan, however, requires such a Director to refrain from voting on such matters at meetings of
the Board of Directors.
The Corporate Law provides that compensation for Directors be determined at a general
meeting of shareholders. Our Board of Directors will determine the compensation for each Director
without exceeding the upper limit on the aggregate amount of compensation for Directors as a group
approved by the shareholders meeting. Our Board of Directors may, by its resolution, leave this
decision to the discretion of our president.
The Corporate Law provides that the Board of Directors must approve significant loans from any
third-party to the Company. Our regulations of the Board of Directors have adopted this policy.
Neither the Corporate Law nor our Articles of Incorporation set a mandatory retirement age for
our Directors.
There is no requirement concerning the number of shares an individual must hold to be
qualified as a Director under the Corporate Law or our Articles of Incorporation.
Rights of Our Shareholders
Rights with Respect to Distribution of Surplus, Stock Repurchases and Stock Splits
Dividends
Under the Corporate Law, distributions of cash or other assets by joint stock corporations to
their shareholders, so called dividends, are referred to as distributions of Surplus (Surplus
is defined in
Restriction on Distributions of Surplus
below). The Japanese Corporate Law permits
a joint stock corporation to distribute Surplus to its shareholders any number of times per fiscal
year, subject to certain limitations on the distributable profits as described in
Restriction on
Distributions of Surplus
. Under the Corporate Law, distributions of Surplus are required to be
authorized by a resolution of a general meeting of shareholders, or by the Board of Directors if
its Articles of Incorporations so provide and the following requirements are met:
|
(a)
|
|
the company employs an independent certified public accountant and a corporate
governance system based on a board of statutory auditor system or the committee system
under the Corporate Law, and the normal term of office of Directors is not longer than
one year; and
|
|
|
(b)
|
|
non-consolidated annual financial statements and certain documents for the last
fiscal year present fairly the companys assets and profit or
losses, as required by the
ordinances of the Ministry of Justice.
|
After the amendment of our Articles of Incorporation approved by the ordinary general meeting
of shareholders on June 24, 2006, our Articles of Incorporation provide that our Board of Directors
is authorized to decide distributions of Surplus. Because we meet the relevant corporate
governance requirements of (a) above, including one-year office term of directors, our Board of
Directors has the authority to decide to make future distributions of Surplus upon meeting the
financial statements requirement of (b) above. When we distribute Surplus to shareholders, the
Corporate Law requires that we set a record date in order to identify the shareholders (or
pledgees) who are entitled to the dividends through a public announcement, unless we set fixed
record dates in our Articles of Incorporation. Our Articles of Incorporation provide that March 31
of each year shall be a fixed record date for the year-end dividends and September 30 of each year
shall be a fixed record date for the semi-annual dividends. Therefore we may distribute dividends
to shareholders (or pledgees) appearing in the register of shareholders as of March 31 and
September 30 of each year, respectively, pursuant to a resolution of our Board of Directors. Under
our Articles of Incorporation, we are not obligated to pay any dividends left unclaimed for a
period of three years after the date on which they first became payable. For information as to
Japanese taxes on dividends, see Taxation Japanese Tax Considerations below.
Dividends may be distributed in cash or in kind in proportion to the number of shares held by
each shareholder. A resolution of our Board of Directors (or, if a shareholder has no option to
receive cash, a special resolution of shareholders meeting) authorizing a distribution of Surplus
must specify the kind and aggregate book value of the assets to be distributed, the manner of allocation of such assets
to shareholders, and the effective date of the distribution. If a distribution in kind is
authorized by a resolution of our Board of Directors, the approval by a special resolution of a
general meeting of shareholders is required, unless we grant a right to shareholders to receive
such distribution in cash instead of in kind.
-106-
Restriction on Distributions of Surplus
When we make a distribution of Surplus, we must, until the aggregate amount of our general
additional paid-in capital and legal reserve reaches one-quarter of our common stock (share
capital), set aside in our general additional paid-in capital and/or legal reserve an amount equal
to one-tenth of the amount of Surplus so distributed.
The amount of Surplus at any given time must be calculated in accordance with the following
formula:
A + B + C + D - (E + F + G)
In the above formula:
|
A =
|
|
the total amount of other additional paid-in capital (other than general
additional paid-in capital) and other retained earnings (other than legal reserve),
each such amount being that appearing on our non-consolidated balance sheet as of the
end of the last fiscal year;
|
|
|
B =
|
|
if we have disposed of our treasury stock after the end of the last fiscal
year, the amount of the consideration for such treasury stock received by us less the
book value thereof;
|
|
|
C =
|
|
if we have reduced our common stock (share capital) after the end of the
last fiscal year, the amount of such reduction less the portion thereof that has been
transferred to general additional paid-in capital or legal reserve (if any);
|
|
|
D =
|
|
if we have reduced our general additional paid-in capital or legal reserve
after the end of the last fiscal year, the amount of such reduction less the portion
thereof that has been transferred to common stock (share capital) (if any);
|
|
|
E =
|
|
if we have retired any of our treasury stock after the end of the last
fiscal year, the book value of such treasury stock;
|
|
|
F =
|
|
if we have distributed Surplus to our shareholders after the end of the
last fiscal year, the total book value of the Surplus so distributed;
|
|
|
G =
|
|
certain other amounts set forth in the ordinances of the Ministry of
Justice, including, if we have reduced Surplus and increased our common stock (share
capital), general additional paid-in capital or legal reserve after the end of the
last fiscal year, the amount of such reduction, and, if we have distributed Surplus to
our shareholders after the end of the last fiscal year, the amount set aside in our
general additional paid-in capital or legal reserve (if any), as required by
ordinances of the Ministry of Justice.
|
The amount of Surplus distributed by us may not exceed a prescribed distributable amount (the
Distributable Amount), as calculated on the effective date of such distribution. The
Distributable Amount at any given time shall be equal to the amount of Surplus less the aggregate
of the following:
|
(a)
|
|
the book value of our treasury stock;
|
|
|
(b)
|
|
the amount of consideration for our treasury stock disposed of by us after
the end of the last fiscal year; and
|
|
|
(c)
|
|
certain other amounts set forth in ordinances of the Ministry of Justice,
including, if the sum of one-half of goodwill and the deferred assets exceeds the
total of common stock (share capital), general additional paid-in capital and legal
reserve (each such amount being that appearing on our non-consolidated balance sheet as of the end of the last fiscal year), all or a
certain part of such excess amount as calculated in accordance with the ordinances
of the Ministry of Justice.
|
-107-
If we elect to become a company with respect to which consolidated balance sheets should also
be taken into consideration in the calculation of the Distributable Amount (
renketsu haito kisei
tekiyo kaisha
), it will be required to further deduct from the amount of Surplus the excess amount
(or if the amount is zero or below zero, zero) of (x) the total amount of shareholders equity
appearing on our non-consolidated balance sheet as at the end of last fiscal year and certain other
amounts set forth in ordinances of the Ministry of Justice over (y) the total amount of
shareholders equity and certain other amounts set forth in ordinances of the Ministry of Justice
appearing on our consolidated balance sheet as at the end of the last fiscal year. We have not
made such an election.
If we have prepared interim financial statements as described below, and if such interim
financial statements have been approved by (unless exempted by the Corporate Law) a general meeting
of shareholders, the Distributable Amount must be adjusted to take into account the amount of
profit or losses, and the amount of consideration for our treasury stock disposed of by us, during
the period in respect of which such interim financial statements have been prepared. We may
prepare non-consolidated interim financial statements consisting of a balance sheet as of any date
subsequent to the end of the last fiscal year and an income statement for the period from the first
day of the current fiscal year to the date of such balance sheet. Interim financial statements so
prepared by us must be approved by the Board of Directors and audited by our independent auditors,
as required by the ordinances of the Ministry of Justice.
Repurchase of Our Shares
Under the Corporate Law and our Articles of Incorporation, we may, pursuant to the same
requirement as the authorization of distribution of the Surplus, upon approval by the Board of
Directors, flexibly acquire our own shares during a fiscal year and may determine the amount and
timing of the purchase of our shares without having pre-approval at a
shareholders meeting of the
total number of shares or aggregate price of shares to be acquired. In such case, we may acquire
our shares:
|
|
|
by way of purchase on any Japanese stock exchange on which our shares are listed or
by way of takeover bids (TOB);
|
|
|
|
|
by soliciting all our shareholders to offer to sell our shares held by them (on a
pro-rata basis); or
|
|
|
|
|
from any of our subsidiaries.
|
In addition, we may also acquire our shares from a specific shareholder other than any of our
subsidiaries pursuant to a special resolution of a general meeting of shareholders. In such case,
any other shareholder may make a request to the Board of Directors that such other shareholder be
included as a seller in the proposed purchase, provided that no such right will be available if the
purchase price or any other consideration to be received by the relevant specific shareholder will
not exceed the last trading price of the shares on the Tokyo Stock Exchange on the day immediately
preceding the date on which the resolution was adopted (or, if there is no trading in the shares on
the Tokyo Stock Exchange or if the Tokyo Stock Exchange is not open on such day, the price at which
the shares are first traded on the Tokyo Stock Exchange thereafter).
However, under the Corporate Law, any acquisition of our shares pursuant to our Articles of
Incorporation must satisfy the requirement that the total purchase price (the amount of the cash or
the book value of the consideration in kind) should not exceed the Distributable Amount as at the
effective date of such acquisition (as described in
Restriction on Distributions of Surplus
above).
-108-
Further, if such acquisition of our shares causes a deficit of the Surplus at the end of the
fiscal year, our Directors shall be liable to compensate the deficit of the Company.
In addition, subsequent to the acquisition of these shares, we are required to provide certain
disclosure pursuant to the Securities and Exchange Law and the relevant Stock Exchange regulations.
We may hold our own shares acquired in compliance with the Corporate Law and may generally
cancel or dispose of those shares by a resolution of our Board of Directors, although the disposal
of such shares is subject to the same proceeding for the issuance of new shares, in general.
In addition, we may acquire our shares by:
|
|
|
repurchasing those that constitute less than one unit upon the request of their holder;
|
|
|
|
|
redeeming redeemable shares (
shutoku jyo-kou-tsuki kabusiki
) or shares with
redemption right (
shutoku seikyu-ken-tsuki kabushiki
); or
|
|
|
|
|
a business transfer, merger or spin-off.
|
Stock Splits
We may, at any time, split our issued shares by resolution of our Board of Directors. When
our Board of Directors approves a stock split, we may amend our Articles of Incorporation without
shareholders approval to increase the total number of shares issuable in proportion to the stock
split if we have only one class of outstanding shares.
Generally, shareholders do not need to exchange share certificates for new ones following a
stock split, but certificates representing the additional shares resulting from the stock split
will be issued to shareholders. Before a stock split, we must give public notice of the stock
split, specifying the record date for the stock split, not less than two weeks prior to the record
date.
Voting Rights
A shareholder is generally entitled to one vote per one unit of our shares. In general, under
the Corporate Law of Japan, a general meeting of shareholders may adopt a resolution by a majority
of voting rights held by shareholders with exercisable voting rights at the meeting. The Corporate
Law and our Articles of Incorporation require a quorum for the election of Directors and Statutory
Auditors of no less than one-third of the total number of voting rights held by shareholders with
exercisable voting rights. Our shareholders are not entitled to cumulative voting in the election
of Directors. We have no voting rights with respect to our own common stock. In addition, a
corporate holder of our shares, one-quarter or more of whose voting rights are directly or
indirectly held by us, does not have any voting rights with respect to our shares held by it.
Shareholders may exercise their voting rights through proxies, provided that those proxies are also
shareholders who have voting rights. Our shareholders also may cast their votes in writing. Our
Board of Directors may entitle our shareholders to cast their votes by electronic devices.
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The Corporate Law provides that certain important matters shall be approved by a special
resolution of general meeting of shareholders. Our Articles of Incorporation provide for a quorum
of one-third of voting rights and approval of two-thirds of the voting rights held by shareholders with exercisable
voting rights presented at the meeting of any material corporate actions such as:
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a reduction of the common stock (share capital);
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amendment of the Articles of Incorporation (except amendments that the Board of
Directors is authorized to make under the Corporate Law);
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the removal of a Statutory Auditor;
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establishment of a 100% parent-subsidiary relationship through a share exchange or
share transfer requiring shareholders approval;
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a dissolution, merger or consolidation requiring shareholders approval;
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a company spin-off requiring shareholders approval;
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a transfer of the whole or an important part of our business;
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the taking over of the whole of the business of any other corporation requiring
shareholders approval;
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purchase of shares of common stock by us from a specific shareholder other than our
subsidiary;
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any issuance of new shares or transfer of existing shares as treasury stock to
persons other than the shareholders at a specially favorable price; and
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any issuance of stock acquisition rights (as defined in
Stock Acquisition Rights
below, including those incorporated in bonds with stock acquisition rights) to persons
other than the shareholders under specially favorable conditions.
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The depositary will endeavor to vote deposited shares based in accordance with instructions
from ADR holders. With respect to voting by holders of ADRs, see Exhibit 2.2 to this annual report
on Form 20-F for a form of our deposit agreement.
Rights to be Allotted Shares
Holders of our shares have no preemptive rights under our Articles of Incorporation. Under
the Corporate Law, the Board of Directors is authorized to issue authorized but unissued shares of
common stock at such times and upon such terms as the Board of Directors determines unless it is
made at a specially favorable price. The Board of Directors may also determine that shareholders
will be given rights to receive allotments of new shares in connection with a particular issue of
new shares. In this case, we must give the rights on uniform terms to all of our shareholders as
of a specified record date by at least two-week prior public notice to shareholders of the record
date. Each of these shareholders must receive an individual notice at least two weeks prior to the
date of expiration of the rights to receive allotments of new shares.
The rights to receive allotments of new shares of common stock may not be transferred.
However, we may allot stock acquisition rights to shareholders without consideration, and such
stock acquisition rights are transferable. (See
Stock
Acquisition Rights
below.)
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Stock Acquisition Rights
We may issue stock acquisition rights (
shinkabu yoyakuken
). Holders of stock acquisition
rights are entitled to acquire shares from us, upon payment of the applicable exercise price, and
subject to other terms and conditions thereof. We may also issue bonds with stock acquisition
rights (
shinkabu yoyakuken-tsuki shasai
). Under the Corporate Law, the Board of Directors is
authorized to issue stock acquisition rights and bonds with stock acquisition rights unless such
issuance is made under specially favorable conditions.
Liquidation Rights
In the event of liquidation, our assets remaining after payment of all debts, liquidation
expenses and taxes will be distributed among our shareholders in proportion to the number of shares
they own.
Liability to Further Calls or Assessments
All of our currently outstanding shares are fully paid and non-assessable.
Shareholders Rights to Bring Actions Against Directors
The Japanese Corporate Law contains clauses that allow shareholders who have held our shares
for six months to claim proposals for pursuing Directors management responsibilities. Derivative
actions may be brought in situations including those where the Company lends money to Directors, engages
in self-interested transactions or violates any law, ordinance or the Articles of Incorporation.
If our Board of Directors has not instituted an action within 60 days of a shareholders demand,
the shareholder may initiate a lawsuit as a derivative action. The Corporate Law also provides an
exception to the 60-day waiting period, when a wait of 60 days might cause a company
irreparable damage. In these cases, the shareholder may institute the action immediately, but must
notify the company without delay. For example, if we could suffer irreparable damage from an
illegal act of our Director, a shareholder who has owned a share continuously for the previous six
months may seek a provisional injunction prohibiting the Director from performing the illegal act.
In addition, pursuant to the Corporate Law, shareholders have a right to institute a direct lawsuit
for recovery of monetary damages against directors, statutory auditors, a companys independent
accountant, and others if any such person causes damage to a third-party, including shareholders,
by their gross negligence or willful conduct.
Limitations Affecting Security Holders
Japanese Unit Share System
Our Articles of Incorporation provide that 100 shares constitute one unit. The Corporate
Law permits our Board of Directors to reduce the number of shares
that constitute one unit or abolish
the unit system entirely without a resolution at the shareholders meeting. An increase in the
number of shares that constitute one unit requires an amendment of the Articles of Incorporation by a
special resolution at the shareholders meeting. In any case,
the number of shares constituting one
unit may not exceed 1,000 shares.
Under the Corporate Law, shareholders have one voting right for each unit of shares they hold.
Any number of shares less than a full unit will carry no voting rights and be excluded for the
purposes of calculating the quorum for voting purposes. Moreover, in accordance with the Corporate
Law, our Articles of Incorporation provide that a holder of shares constituting less than one unit
does not have any other rights of a shareholder in respect of those shares, other than those
provided by our Articles of Incorporation, including the following rights:
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to receive distributions of Surplus;
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to receive cash or other assets in case of a consolidation or split of shares,
exchange or transfer of shares or corporate merger;
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to be allotted rights to subscribe for free for new shares and stock acquisition
rights when such rights are granted to shareholders; and
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to participate in any distribution of surplus assets upon liquidation.
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Our Articles of Incorporation provide that no share certificates will be issued with respect
to any number of shares constituting less than one unit. As the transfer of shares normally
requires delivery of share certificates, any fraction of a unit for which no share certificates are
issued is non-transferable.
Right of a Holder of Shares Representing Less Than One Unit to Require Us to Purchase Its
Shares
A holder of our shares representing less than one unit may at any time require us (through a
participating institution in the case of a beneficial shareholder under the central clearing
system) to purchase them at the last selling price as reported by the Tokyo Stock Exchange on the
day of the request. Alternatively, if the stock exchange does not report any sale of our shares on
the day of the request, the holder of these shares may require us to purchase them at their first
subsequent trading price on the stock exchange, less any applicable brokerage commission. However,
because holders of our ADRs representing less than one unit cannot withdraw the underlying shares
from a depositary institution, these holders will not be able to exercise this right as a practical
matter.
Voting Rights of a Holder of Shares Representing Less Than One Unit
A holder of our shares representing less than one unit cannot exercise any voting rights
pertaining to those shares. For calculation of the quorum for various voting purposes, we will
exclude the aggregate number of shares representing less than one unit from the number of voting
rights. A holder of shares representing one or more units will have one vote for each one unit of
shares except as stated in Rights of Our Shareholders
Voting Rights
above.
Rights of Foreign Investors
Other than the Japanese unit share system described above, the laws of Japan, our Articles of
Incorporation and our other constituent documents do not limit the rights of non-residents or
foreign shareholders to hold or exercise voting rights on our shares.
Reporting Requirements of Shareholders
Report of Substantial Shareholdings
The Securities and Exchange Law of Japan requires any holder of shares, including in the form
of ADRs, who has become a holder of more than 5% of the total issued shares of a company listed on
any Japanese stock exchange to file with the relevant local finance bureau of the Ministry of
Finance, within five business days, a report concerning those shareholdings. A holder must file a
similar report to reflect any change of 1% or more in any shareholding. Copies of any reports must
also be furnished to us and to all Japanese stock exchanges on which our shares are listed. For
this purpose, shares issuable upon exercise of share subscription options are taken into account in
determining both the number of shares held by that holder and our
total issued share capital. As a result, the above reporting requirements will apply to holders of more
than 5% of our total issued shares including such subscription options and bonds with share
subscription options.
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Acquisition or Disposition of Shares or ADSs
In general, non-residents of Japan and corporations whose principal offices are located
outside Japan may acquire shares of stock of a Japanese company listed on any Japanese stock
exchange from residents of Japan without any restriction but subject to the requirements under the
foreign exchange regulations and securities laws as described below. Under the Foreign Exchange
and Foreign Trade Law, foreign exchange and foreign trade transactions are, with minor exceptions
relating to inward direct investments generally inapplicable to our
shares, subject only to post-transaction reporting requirements. Non-residents of Japan, including foreign corporations not
resident in Japan, who acquire or dispose of shares of common stock or ADSs, are generally not
required to submit post-transaction reports. The Minister of Finance of Japan, however, has the
power to impose a licensing requirement for transactions in limited circumstances.
If a foreign investor:
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acquires shares of a Japanese company listed on a Japanese stock exchange; and
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as a result of this acquisition, directly or indirectly holds, aggregated with
existing holdings, 10% or more of the issued shares of the company,
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the foreign investor is, in general, required to report the acquisition to the Minister of Finance
and any other competent ministers via the Bank of Japan within 15 days from and including the date
of acquisition. In exceptional cases, a prior notification is required in respect of the
acquisition.
Ordinary General Meeting of Shareholders
We normally hold our ordinary general meeting of shareholders in June of each year in
Matsuyama, or in a neighboring area, or Shinjuku, Tokyo. In addition, we may hold an extraordinary
general meeting of shareholders whenever necessary by giving at least
two-week advance notice
stating the place, time, and purpose of the meeting. Under the Corporate Law, notice of any
shareholders meeting must be given to each shareholder having voting rights or, in the case of a
non-resident shareholder, to its resident proxy or mailing address in Japan in accordance with our
share handling regulations, at least two weeks prior to the date of the meeting.
Clearing System for Our Shares
A holder of our shares may choose to participate, directly or indirectly, in the central
clearing system for share certificates under the Law Concerning Central Clearing of Share
Certificates and Other Securities of Japan. Participating shareholders must deposit certificates
representing all of their shares with the Japan Securities Depository Center, or JASDEC, the
depositary under the clearing system. If a holder is not a participating institution such as a
securities company or bank having a clearing account with the clearing system, it must participate
through a participating institution. All shares deposited with the clearing system will be
registered in the name of the clearing system on our register of shareholders. Each participating
shareholder will in turn be registered on our register of beneficial shareholders and be treated in
the same way as shareholders registered on our register of shareholders. Delivery of share
certificates is not necessary for transfer of deposited shares. Entry of the share transfer in the
books maintained by the clearing system for participating institutions, or in the book maintained
by a participating institution for its customers, has the same effect as delivery of share
certificates. The registered beneficial owners may exercise the
rights attached to their shares, such as voting rights, and will receive dividends (if any) and notices to
shareholders directly from us. The shares held by a person as a registered shareholder and those
held by the same person as a registered beneficial owner are aggregated for these purposes.
Beneficial owners may at any time withdraw their deposited shares and receive share certificates.
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Settlement for Our Shares
Settlement of a transaction concerning shares listed on any of the stock exchanges in Japan
will normally occur on the fourth dealing day after the transaction. Settlement in Japan is made
by physical delivery of share certificates or through JASDEC as described above.
As described above, shareholders not resident in Japan are required to provide a mailing
address within Japan or to appoint a standing proxy in Japan. A local standing proxy can usually
handle the transfer of shares and registration of purchases and the application for reduced
withholding tax. (See Taxation Japanese Tax Considerations below.)
Share Registrar for Our Shares
The Chuo Mitsui Trust and Banking Co., Ltd. acts as the share registrar for our shares. Its
office is located at 33-1, Shiba 3-chome, Minato-ku, Tokyo 168-0063, Japan. The Chuo Mitsui Trust
and Banking Co., Ltd. maintains our register of shareholders and records transfers of record
ownership upon presentation of share certificates.
Record Dates for Our Shares
March 31 is the record date for our year-end dividends, if paid, and September 30 is the
record date for our semi-annual dividends, if paid. We set March 31 as the record date for
determining shareholders entitled to vote at the ordinary general meeting of shareholders. In
addition, we may set a record date for determining the shareholders entitled to other rights and
for other purposes by giving at least two-week prior public notice.
Our shares are generally traded ex-dividend or ex-rights on the Tokyo Stock Exchange on the
third business day before a record date (or if the record date is not a business day, the fourth
business day prior thereto), for the purpose of dividends or rights offerings.
C. Material Contracts.
We are not a party to any material contract, other than contracts entered into in the ordinary
course of business, during the period beginning April 1, 2005 through the date of this annual
report on Form 20-F.
D. Exchange Controls.
There are no laws, decrees, regulations or other legislation that affect our ability to import
or export capital for our use or our ability to pay dividends to non-resident holders of our
shares.
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E. Taxation.
United States Tax Considerations
This section, United States Tax Considerations, describes the material U.S. federal income
tax consequences of owning shares or ADSs. This section applies to you only if you hold your
shares or ADSs as capital assets for tax purposes. This section does not apply to you if you are a member of a
special class of holders subject to special rules, including:
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a dealer in securities;
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a trader in securities that elects to use a mark-to-market method of accounting for
your securities holdings;
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a tax-exempt organization;
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a life insurance company;
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a person liable for alternative minimum tax;
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a person that actually or constructively owns 10% or more of our voting stock;
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a person that holds shares or ADSs as part of a straddle or a hedging or conversion
transaction; or
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a person whose functional currency is not the dollar.
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This section is based on the U.S. Internal Revenue Code of 1986, as amended, its legislative
history, existing and proposed regulations, published rulings and court decisions, all as currently
in effect, as well as on the Convention Between the Government of the United States of America and
the Government of Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion
with Respect to Taxes on Income (the Treaty). These laws are subject to change, possibly on a
retroactive basis. In addition, this section is based in part upon the representations of the
depositary and the assumption that each obligation in the deposit agreement and any related
agreement will be performed in accordance with its terms.
You are a U.S. holder if you are a beneficial owner of shares or ADSs and you are:
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a citizen or resident of the United States;
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a corporation created or organized under the laws of the United States or any of its
political subdivisions;
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an estate whose income is subject to U.S. federal income tax regardless of its
source; or
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a trust if a U.S. court can exercise primary supervision over the trusts
administration and one or more U.S. persons are authorized to control all substantial
decisions of the trust.
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You should consult your own tax advisor regarding the United States federal, state and local
and other tax consequences of owning and disposing of shares and ADSs in your particular
circumstances.
In general, and taking into account the earlier assumptions, for U.S. federal income tax
purposes, if you hold ADRs evidencing ADSs, you will be treated as the owner of the shares
represented by those ADRs. Exchanges of shares for ADRs and ADRs for shares generally will not be
subject to U.S. federal income tax.
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Passive Foreign Investment Company Rules
As we expect 50% or more of our gross asset value will constitute passive assets, generally
meaning assets not constituting part of a trade or business, as determined for passive foreign
investment company purposes, we expect that our shares and ADSs will be treated as stock of a passive foreign
investment company, or PFIC, for U.S. federal income tax purposes, and except as otherwise stated,
the remainder of this discussion so assumes. This conclusion is a factual determination made
annually, which we will update in our future reports on Form 20-F. In addition, we expect that our
subsidiaries will be treated as PFICs for U.S. federal income tax purposes. You will be treated as
an indirect shareholder of your proportionate interest in the shares of such subsidiaries.
U.S. holders of shares or ADSs of a PFIC must file U.S. Internal Revenue Service Form 8621
every year in which they continue to hold such shares.
If you are a U.S. holder you will be subject to the special PFIC tax rules or, if you make a
mark-to-market election, the mark-to-market rules.
Special PFIC Tax Rules
This subsection applies to you if you are a U.S. holder and do not make a mark-to-market
election. You will be subject to special PFIC tax rules with respect to:
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any gain you realize on the sale or other disposition of your shares or ADSs
(including the pledging of your shares or ADSs as security for a loan); and
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any excess distribution that we make to you (generally, any distributions to you
during a single taxable year that are greater than 125% of the average annual
distributions received by you in respect of the shares or ADSs during the three
preceding taxable years or, if shorter, your holding period for the shares or ADSs).
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In addition, if any of our subsidiaries are deemed a PFIC, a distribution from that subsidiary
to us, a disposition of that subsidiary by us, or a transaction through which your indirect
ownership of such subsidiary is decreased (including additional offerings of our shares or ADSs)
will be treated as a distribution or disposition subject to the special PFIC tax rules. You will
be entitled, however, to increase your basis in the shares or ADSs you directly own to reflect the
gain realized upon such distributions, or dispositions. Moreover, you will not be taxed when we
distribute to you the income that you already included in income for tax purposes.
Under these special PFIC tax rules:
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the gain or excess distribution will be allocated ratably over your holding period
for the shares or ADSs;
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the amount allocated to the taxable year in which you realized the gain or excess
distribution will be taxed as ordinary income;
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the amount allocated to each prior year, with certain exceptions, will be taxed at
the highest tax rate in effect for that year; and
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the interest charge generally applicable to underpayments of tax will be imposed in
respect of the tax attributable to each such prior year.
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Amounts subject to these special PFIC tax rules will not be eligible for the
dividends-received deduction generally allowed to U.S. corporations in respect of dividends
received from other U.S. corporations. In addition, dividends that you receive from us will not
constitute qualified dividend income to you if we are a PFIC either in the taxable year of the distribution or the preceding taxable
year. Dividends that you receive that do not constitute qualified dividend income are not eligible
for taxation at the 15% maximum rate applicable to qualified dividend income even if the dividend
does not constitute an excess distribution. Instead, you must include the gross amount of any such
dividend paid by us out of our accumulated earnings and profits (as determined for United States
federal income tax purposes) in your gross income, and it will be subject to tax at rates
applicable to ordinary income.
If you receive distributions that are not subject to the special PFIC tax rules, you must
include in your gross income the gross amount of any dividend paid by us out of our current or
accumulated earnings and profits (as determined for U.S. federal income tax purposes). You must
include any Japanese tax withheld from the dividend payment in this gross amount even though you do
not in fact receive it. The dividend is ordinary income that you must include in income at the
ordinary income tax rate when you, in the case of shares, or the depositary, in the case of ADSs,
receive the dividend, actually or constructively. The dividend will not be eligible for the
dividends-received deduction generally allowed to U.S. corporations in respect of dividends
received from other U.S. corporations. The amount of any distribution that you must include in
your income as a U.S. holder will be the dollar value of the yen payments made, determined at the
spot yen/dollar rate on the date the distribution is includible in your income, regardless of
whether the payment is in fact converted into dollars. Generally, any
gains or losses resulting from
currency exchange fluctuations during the period from the date you include the dividend payment in
income to the date you convert the payment into dollars will be
treated as ordinary income or losses and will not be eligible for the special tax rate applicable to qualified dividend income. The
gains or losses generally will be income or losses from sources within the United States for foreign tax
credit limitation purposes. If you receive distributions that are not subject to the special PFIC
tax rules and that are in excess of current and accumulated earnings and profits, as determined for
U.S. federal income tax purposes, you will be treated as having received a non-taxable return of
capital to the extent of your basis in the shares or ADSs and thereafter you will recognize capital
gain, which will be taxed in accordance with the special PFIC tax rules described above.
Mark-to-market Rules
The special PFIC tax rules described above will not apply to you if you make an effective
mark-to-market election, that is, you elect to mark-to-market annually the gains and losses in our
shares or ADSs and our shares or ADSs are treated as marketable stock. We believe that our
shares of common stock are and will continue to be marketable
stock as long as they continue to be
traded on the New York Stock Exchange, other than in de minimis quantities, on at least 15 days
during each calendar quarter. Under the mark-to-market rules, you will include as ordinary income
each year the excess, if any, of the fair market value of your shares or ADSs at the end of the
taxable year over your adjusted basis in your shares or ADSs. These amounts of ordinary income
will not be eligible for the favorable tax rates applicable to qualified dividend income or
long-term capital gains. You may also take ordinary losses in respect of the excess, if any, of
the adjusted basis of your shares or ADSs over their fair market value at the end of the taxable
year (but only to the extent of the net amount of previously included income as a result of the
mark-to-market election). Your basis in the shares or ADSs will be adjusted to reflect any such
income or losses amounts. In addition, notwithstanding any election you make with regard to the
shares or ADSs, dividends that you receive from us will not constitute qualified dividend income to
you if we are a PFIC either in the taxable year of the distribution or the preceding taxable year
and such dividends will therefore not be eligible for taxation at the 15% maximum rate applicable
to qualified dividend income. It is unclear how the mark-to-market rules apply to a PFIC whose
shares are marketable stock, but owns subsidiary PFICs whose shares are not marketable stock.
Please consult your tax advisor as to the availability and tax consequences of a
mark-to-market election.
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Foreign Tax Credit
Subject to the general limitations that apply to the creditability of foreign income taxes,
the Japanese tax withheld in accordance with the Treaty and paid over to Japan will be creditable
against your U.S. federal income tax liability. To the extent a refund of the tax withheld is
available to you under Japanese law or under the Treaty, the amount of tax withheld that is
refundable will not be eligible for credit against your U.S. federal income tax liability.
Special rules apply for calculating the amount of the foreign tax credit with respect to
excess distributions if you are governed by the special PFIC tax rules described above. For
example, if you did not make a mark-to-market election, the section 904 tax credit limitation would
be applied separately with respect to the amount of excess distribution allocable to each such
taxable year and carryovers, if any, are not allowed.
Dividends that are not excess distributions will generally be passive income which is
treated separately from other types of income for purposes of computing the foreign tax credit
allowable to you. Such dividends will be income from sources outside the United States.
Japanese Tax Considerations
This section, Japanese Tax Considerations, is a summary of the principal Japanese tax
consequences to owners of our shares or ADSs who are non-resident individuals or non-Japanese
corporations without a permanent establishment in Japan to which the relevant income is
attributable. As tax laws are frequently revised, the statements regarding Japanese tax laws below
are subject to changes in the applicable Japanese laws or tax treaties, conventions or agreements,
or in their interpretation, occurring after the date of this prospectus. This summary is not
exhaustive of all possible tax considerations that may apply to specific investors under particular
circumstances. Potential investors should satisfy themselves as to:
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the overall tax consequences of the acquisition, ownership and disposition of our
shares or ADSs, including specifically the tax consequences under Japanese law;
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the laws of the jurisdiction of which they are resident; and
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any tax treaty between Japan and their country of residence, by consulting with
their own tax advisers.
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Generally, a non-resident shareholder is subject to Japanese withholding tax on dividends paid
on our shares. Stock splits are generally not subject to Japanese
income or corporation tax, as they are characterized merely as an increase of number of shares, as opposed to an increase of value of
shares, from Japanese tax perspectives. Due to the 2001 Japanese tax legislation effective from
April 1, 2001, a conversion of retained earnings or legal reserve (but, in general, other than
additional paid-in capital) into common stock (share capital) on a non-consolidated basis is not
characterized as a deemed dividend for Japanese tax purposes, and therefore such a conversion does
not trigger Japanese withholding taxation (Article 2 (16) of the Japanese Corporation Tax Law and
Article 8 (1) (xv) of the Japanese Corporation Tax Law Enforcement Order).
Under the 2001 tax legislation, if we purchase our listed shares (i) by a tender offer or (ii)
from a specific shareholder other than through a market purchase for the purpose of cancellation
with retained earnings, the selling shareholders, whether individuals or corporations, are in
general required to recognize:
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the deemed dividend corresponding to a distribution of retained earnings
proportionally computed by a statutory formula on a pro rata basis allocating the
selling price into the repayment of share capital portion, including general additional paid-in capital, and retained earnings
portion on a non-consolidated basis under Article 24 (1) (v) of the Japanese Corporation
Tax Law; and
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capital gains or losses computed as a difference between the basis of shares subject to
the tender offer at the shareholder level and the amount of the consideration for the
tender offer, deducting the amount corresponding to the deemed dividend computed as (i)
above under Article 61-2 (1) of the same law.
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On
the other hand, no deemed dividend is required to be recognized if we purchase our shares
at/through the stock market due to the difficulty to identify each shareholder sold our shares
(Articles 24 (1) (iv) and 61-2 (xi) of the Japanese Corporation Tax Law and Article 23 (3) of the
Japanese Corporation Tax Law Enforcement Order). In addition, in the case of individual
shareholders, no deemed dividend is required to be recognized until
March 31, 2009 (a two-year
extension is promulgated under the 2007 Japanese tax legislation) due to the operation of a
temporary measurement (Article 9-6 of the Japanese Special Tax Measurement Law). Therefore, they
are only required to recognize capital gains or losses of the shares subject to the tender offer. In
the meantime, when shares are acquired by us, whether by way of a tender offer or otherwise, for
the purpose of cancellation with retained earnings, the shareholders, whether individuals or
corporations, whose shares are not acquired by us were previously deemed to have received a
dividend corresponding to the notional increase of share value by the share cancellation under the
old tax law before the 2001 tax legislation. However, under the 2001 tax legislation, no deemed
dividend taxation occurs for the remaining shareholders, whether individuals or corporations, whose
shares are not cancelled.
Unless a tax treaty, convention or agreement reduces the maximum rate of withholding tax, the
rate of Japanese withholding tax applicable to dividends on the listed shares paid by us to
non-resident shareholders is:
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7% for dividends to be paid between January 1, 2004 and
March 31, 2009 (a one-year
extension is promulgated under the 2007 Japanese tax legislation) as a temporary
measurement; and
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15% thereafter, except for dividends paid to any individual shareholder who holds 5%
or more of our issued shares, in which case the applicable rate is 20%.
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Japan has income tax treaties, conventions or agreements that generally promulgate the
above-mentioned withholding tax rate to 15% for portfolio investors with, among others, Australia,
Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy,
Luxembourg, the Netherlands,
New Zealand, Norway, Singapore, Spain, Sweden, and Switzerland. Under the new
tax treaty between United States and Japan, of which withholding tax treatment is applicable
effective from July 1, 2004 to dividends declared thereafter, the withholding tax rate on dividends
is 10% for portfolio investors, if they do not have a permanent establishment in Japan and the
shares with respect to which such dividends are paid are not related in-fact to such permanent
establishment, and if they are qualified U.S. residents eligible to enjoy treaty benefits. Note
that, under the new tax treaty between U.S. and Japan, withholding tax on dividends declared after
July 1, 2004 is exempt from Japanese taxation by way of withholding or otherwise for pension funds
which are qualified U.S. residents eligible to enjoy treaty benefits unless such dividends are
derived from the carrying on of a business, directly or indirectly, by such pension funds. The
similar changes are made to the new tax treaty between the United Kingdom and Japan which is
applicable to dividends declared on or after January 1, 2007. By virtue of the operation of the
preservation doctrine under each tax treaty (e.g., under Article 1 (2) of the tax treaty between
United States and Japan), and/or under Article 3-2 of the Special Measures Law for the Income Tax
Law, Corporation Tax Law and Local Taxes Law with respect to the Implementation of Tax Treaties, if
the Japanese statutory rate is lower than the maximum rate applicable under the Tax Treaty, the
Japanese statutory rate shall apply. If the domestic tax rate still applies, no treaty application
is required to be filed, consequently. In the case where the treaty rate applies, non-resident
shareholders entitled to a reduced Japanese withholding tax rate on our dividends are required
to submit an Application Form for Income Tax Convention regarding Relief from Japanese Income Tax
on Dividends through us to the relevant tax authority before payment of dividends. A standing
proxy for non-resident shareholders may provide this application service. (See Settlement for Our
Shares above.) With respect to ADSs, this reduced rate is applicable if the depositary or its
agent submits two Application Forms for Income Tax Convention one before payment of dividends and
the other within eight months of our fiscal year end. To claim this reduced rate, a non-resident
holder of ADSs will be required to file proof of taxpayer status, residence and beneficial
ownership, as applicable, and to provide other information or documents as may be required by the
depositary. Non-resident holders who do not submit an application in advance will be entitled to
claim the refund of taxes withheld in excess of the rate of an applicable tax treaty from the
relevant Japanese tax authority.
Gains derived from the sale of our shares or ADSs outside Japan, or from the sale of our
shares within Japan by a non-resident shareholder as a portfolio investor, are generally not
subject to Japanese income or corporation taxes.
Japanese inheritance and gift taxes may be assessed against an individual who has acquired our
shares or ADSs as a legatee, heir or donee, even if the individual is not a Japanese resident.
-119-
F. Dividends and Paying Agents.
Not required.
G. Statement by Experts.
Not required.
H. Documents on Display.
We file periodic reports and other information with the Securities and Exchange Commission, or
SEC. The SEC maintains an Internet site at www.sec.gov that contains reports and other information
regarding issuers that file electronically with the SEC. You may read and copy any document that
we file with the SEC at the SECs public reference room at 100 F Street, N.W., Washington, D.C.
20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of its
public reference room. You may also inspect our reports filed with the SEC and other information
at the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005. Some of this
information may also be found on our website at www.nisgroup.jp/english. This information is not
incorporated by reference into this annual report on Form 20-F. Also, as a foreign private issuer,
we are exempt from the rules under the U.S. Securities Exchange Act of 1934 prescribing the
furnishing and content of proxy statements to shareholders.
I. Subsidiary Information.
Not applicable.
-120-
Item 11. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to the market risks of interest rate changes and changes in the market values
of our investments. We do not have any significant exposures to fluctuations in foreign exchange
rates since we conduct substantially all of our business activities in Japanese yen.
Asset-side Risk
Integrated Financial Services
As we lend at fixed rates, interest rates on our currently outstanding balances are not
typically subject to fluctuation other than for regulatory reasons. However, the interest rates we
charge to new customers or existing customers who pay off their outstanding loans and enter into
new contracts with us are subject to any downward pressure caused by competitive, regulatory or
other reasons.
The following table indicates the weighted-average contractual maturity of each of our loan
categories at the end of each of the years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
(Years)
|
|
|
|
|
Secured loans
|
|
|
1.6
|
|
|
|
1.5
|
|
|
|
1.4
|
|
SME loans
(1)
|
|
|
4.0
|
|
|
|
3.9
|
|
|
|
3.7
|
|
Consumer loans
(1)
|
|
|
4.9
|
|
|
|
4.9
|
|
|
|
5.0
|
|
Other loans
|
|
|
3.5
|
|
|
|
4.3
|
|
|
|
4.1
|
|
|
|
|
(1)
|
|
The average maturity of revolving loans included in each of SME loans and consumer loans is
3.0 years based on the three-year term of the loan contract, which is automatically renewable.
|
The following table indicates the average actual interest rate of each of our loan
categories for each of the years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
2005
|
|
2006
|
|
2007
|
Secured loans
|
|
|
9.6
|
%
|
|
|
7.3
|
%
|
|
|
6.8
|
%
|
SME loans
|
|
|
21.0
|
|
|
|
19.5
|
|
|
|
18.8
|
|
Consumer loans
|
|
|
21.5
|
(1)
|
|
|
19.7
|
|
|
|
19.0
|
|
Other loans
|
|
|
12.0
|
|
|
|
10.7
|
|
|
|
12.4
|
|
|
|
|
(1)
|
|
Reflecting the sale of most of the outstanding balance of our consumer loans to NETCARD, Inc.
(formerly known as Orient Credit Co., Ltd.) in June 2004.
|
Our average actual lending rate per year on loans receivable was 20.1% for the year ended
March 31, 2005, 16.4% for the year ended March 31, 2006 and 13.1% for the year ended March 31,
2007. The following table illustrates the after tax impact of a hypothetical decrease in our
average lending rates on our loans receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed average actual interest rate per year
|
|
|
12.5%
|
|
12.0%
|
|
11.5%
|
|
|
(In millions)
|
Net losses as reported
|
|
¥
|
(1,610
|
)
|
|
¥
|
(1,610
|
)
|
|
¥
|
(1,610
|
)
|
Net losses as adjusted for hypothetical decrease in interest rates
|
|
|
(2,474
|
)
|
|
|
(3,235
|
)
|
|
|
(3,996
|
)
|
Based on the average actual lending rate of 13.1% per year for the year ended March 31,
2007 and rate of change in our average actual lending rate on loans receivable in the past few
years, we believe the above range of 12.5% to 11.5% per year reasonably captures the likely changes
in the weighted-average lending rate on loans receivable during the fiscal year ending March 31,
2008.
-121-
We have been focusing our efforts on acquisition of prime customers with low credit risk
responding to diversification of customers need, especially SMEs, by promoting alliance businesses
with various companies. We have been strategically shifting our resources away from our consumer
loan business, and in line with this strategic shift, we sold most of the outstanding balance of
our unguaranteed consumer loans to a third-party in June 2004, and concentrated on extending loans
to SMEs and their owners, centering on real estate financing to property companies. These
movements have caused our lending rates on loans receivable to decrease as our unguaranteed
consumer loans typically carried a higher average lending rate than our SME loans and secured
loans. Since our unguaranteed consumer loans also had a higher charge-off ratio than all of our
other loan products, particularly our secured loans, we expected an improvement in our profit
margin as the decreased provision for loan losses would have been mitigated the negative impact
from our reduced average actual lending rate. However, due to a
recognition of allowance and reserve related to excess interest repayments to provide for the increasing borrowers demand for
refund of excess interest reflecting the recent Supreme Court
decisions concerning gray-zone interest,
our net interest income from lending activities as a percentage of
our gross interest income fell to 18.7% for the year ended
March 31, 2007 compared to 60.2% for the previous
fiscal year. Although we expect our average lending rate on loans receivable to continue declining
in the short to medium term, we believe that our ongoing efforts to shift our resources to our
non-consumer loan businesses and acquisition of high profile receivables will have a positive
effect on our net income growth by offsetting to a certain extent the downward pressure on our net
income created by the reduced lending rate.
Servicing Business
The interest rates we charge on our purchased loans are heavily negotiated and vary
significantly, depending primarily on the quality of the loan. To the extent that the Japanese
economy continues to improve and the amount of non-performing loans in Japan declines, the interest
rates we charge on our purchased loans may decline as a result of improvement in the quality of the
loans we purchase.
Liability-side Risk
Interest Rate Risk
Our exposure to changes in interest rates arises primarily from our long-term borrowings that
bear interest at variable rates and our cash and cash equivalents. As discussed in Liquidity and
Capital Resources Capital Requirements in Item 5.B of this annual report on Form 20-F, we
require a significant amount of borrowings to fund our lending activities.
The following table shows the repayment schedule for our outstanding bonds and other long-term
borrowings and the average interest rates on these borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
Year Ending March 31,
|
|
|
|
|
|
2007
|
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
Thereafter
|
|
Total
|
|
Fair value
|
|
|
(In millions except
percentages)
|
Bonds
|
|
¥
|
8,460
|
|
|
¥
|
28,030
|
|
|
¥
|
5,250
|
|
|
¥
|
|
|
|
¥
|
|
|
|
¥
|
|
|
|
¥
|
41,740
|
|
|
¥
|
41,524
|
|
Average interest rate
|
|
|
1.60
|
%
|
|
|
1.42
|
%
|
|
|
2.63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
(1)
|
|
|
53,336
|
|
|
|
31,125
|
|
|
|
6,826
|
|
|
|
34,902
|
|
|
|
521
|
|
|
|
372
|
|
|
|
127,082
|
|
|
|
127,082
|
|
Average interest rate
|
|
|
1.64
|
%
|
|
|
1.71
|
%
|
|
|
1.71
|
%
|
|
|
0.97
|
%
|
|
|
0.17
|
%
|
|
|
|
|
|
|
1.62
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
|
46,679
|
|
|
|
21,397
|
|
|
|
22,034
|
|
|
|
1,875
|
|
|
|
10
|
|
|
|
|
|
|
|
91,995
|
|
|
|
89,090
|
|
Average interest rate
|
|
|
2.53
|
%
|
|
|
3.32
|
%
|
|
|
3.25
|
%
|
|
|
1.89
|
%
|
|
|
|
|
|
|
|
|
|
|
2.86
|
%
|
|
|
|
|
|
|
|
(1)
|
|
Variable interest rate borrowings include asset-backed securities.
|
-122-
Our debt obligations mature at various times through March 2012 and carry interest rates
ranging between 0.67% and 5.0%. Our borrowings bear either a fixed rate or a variable rate indexed
to the Tokyo Inter-Bank Offered Rate (TIBOR), or the London Inter-Bank Offered Rate (LIBOR), or the
short-term or long-term prime rates in Japan. In order to reduce our exposure to fluctuations in
interest rates on variable rate borrowings, we utilize derivative instruments such as interest rate
swap contracts. As of March 31, 2007, we had one outstanding interest rate swap agreement with
notional principal amount of ¥263 million, which matures in December 2008. Under this agreement,
we receive payments at TIBOR plus 0.95% and make payments at an interest rate of 2.20%.
The weighted-average interest rate on our short-term borrowings was 1.2% at March 31, 2005,
1.0% at March 31, 2006, and 1.9% at March 31, 2007, and our weighted-average long-term borrowing
rate on variable-rate borrowings was 1.9% at March 31, 2005, 1.3% at March 31, 2006 and 2.0% at
March 31, 2007.
The following table illustrates the after tax impact of a hypothetical increase in our average
borrowing rates on our short-term borrowings and variable-rate long-term borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed weighted-average interest rate
|
|
|
2%
|
|
3%
|
|
4%
|
|
|
(In millions)
|
Net losses as reported
|
|
¥
|
(1,610
|
)
|
|
¥
|
(1,610
|
)
|
|
¥
|
(1,610
|
)
|
Net losses as adjusted for hypothetical increase in interest rates
|
|
|
(1,688
|
)
|
|
|
(2,622
|
)
|
|
|
(3,556
|
)
|
We believe that the likelihood of hypothetical increases in our average borrowing rates
is significantly greater than that of hypothetical decreases, as the weighted-average interest rate
on our own borrowings has been extremely low in recent years. In addition, in July 2006, the Bank
of Japan changed the interest rate policy, and the official discount rate offered by the Bank
of Japan, which had remained at 0.1% since September 2001, was increased to 0.4%.
-123-
Investment Price Risk
We invest in marketable and non-marketable equity securities for business and strategic
purposes. The book carrying value of these equity securities, including warrants, was ¥28,143
million as of March 31, 2006, of which ¥4,747 million were non-marketable, and ¥25,002 million as of March 31, 2007, of
which ¥8,064 million were non-marketable. We also had
non-equity investments that amounted to ¥13,928
million as of March 31, 2006, of which ¥13,734 million were investment funds, ¥114 million were
debt securities and ¥80 million were other, and ¥12,381 million as of March 31, 2007, of which
¥12,339 million were investment funds, ¥35 million were debt securities and ¥7 million were other.
We are exposed to changes in the market value of our investments. We have realized gains and
losses from both sales of investments, as well as from impairment as a result of
other-than-temporary declines in market value. With respect to our sales of investments, our gross
realized gains were ¥939 million for the year ended March 31, 2005, ¥4,185 million for the year
ended March 31, 2006 and ¥1,357 million for the year ended March 31, 2007, and our gross realized
losses were ¥5 million for the year ended March 31 2005, ¥2 million for the year ended March 31,
2006 and ¥105 million for the year ended March 31, 2007. We experienced realized losses of ¥1,447
million on impairment of investment securities, for the year ended March 31, 2005, ¥475 million for
the year ended March 31, 2006 and ¥2,420 million for the year ended March 31, 2007.
Item 12. Description of Securities Other than Equity Securities
Not required.
-124-
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
None
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
None
Item 15. Controls and Procedures
Disclosure Controls and Procedures
As of March 31, 2007, our management, with the participation of Kunihiko Sakioka, our
chairman, representative director and co-chief executive officer,
Shinsuke Amiya, our president,
representative director and co-chief executive officer, and Akihiro Nojiri, our executive director
and principal financial officer, performed an evaluation of our disclosure controls and procedures.
Under
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, disclosure
controls and procedures mean controls and other procedures that are designed to ensure that
information required to be disclosed by us in the reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commissions rules and forms. Disclosure controls
and procedures include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in the reports that we file or submit under the
Securities Exchange Act of 1934 is accumulated and communicated to our management, including our
co-chief executive officers and principal financial officer, as appropriate to allow timely
decisions regarding required disclosure.
Based on that evaluation, our co-chief executive officers and principal financial officer
concluded that our disclosure controls and procedures were effective as of the date of the
evaluation.
Managements Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining effective internal control over
financial reporting (as defined in Rule 13a-15(f) or 15d-15(f) under the Securities Exchange Act of
1934). Our internal control system is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the United States.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
Management, with the participation of our co-chief executive officers and principal financial
officer, evaluated the effectiveness of our internal control over financial reporting as of March
31, 2007, based on the criteria in Internal Control Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
Management concluded that, as of March 31, 2007, our internal control over financial reporting
was effective.
Our independent registered public accounting firm, BDO Sanyu & Co., has issued an audit report
on managements assessment of the effectiveness of our internal control over financial reporting,
which is included herein.
Changes in Internal Control Over Financial Reporting
With the participation of our co-chief executive officers and principal financial officer, we
also evaluated any change in our internal control over financial reporting that occurred during the
fiscal year ended March 31, 2007. Based on that evaluation, our co-chief executive officers and
principal financial officer concluded that no change was made in our internal control over
financial reporting that occurred during the fiscal year ended March 31, 2007 that has materially
affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
-125-
Item 16A. Audit Committee Financial Expert
Our Board of Statutory Auditors has determined that we do not have an audit committee
financial expert as defined in Item 16A of Form 20-F, serving on the Board of Statutory Auditors.
We believe that the combined knowledge, skills and experience of our Statutory Auditors enable
them, as a group, to act effectively in the fulfillment of their tasks and responsibilities,
including those under the Sarbanes-Oxley Act of 2002, as amended. In addition, our Statutory
Auditors have the power and authority to engage outside experts as they deem appropriate to provide
them with advice on matters related to their responsibilities.
Item 16B. Code of Ethics
We have adopted a code of ethics that applies to all of our officers including our principal
executive officer, principal financial officer, principal accounting officer or controller, and all
of our employees. A copy of our code of ethics is included herein as an exhibit.
Item 16C. Principal Accountant Fees and Services
The following table shows information about fees paid by us to BDO Sanyu & Co., our principal
accountants. All services performed by BDO Sanyu & Co were approved by our Board of Statutory
Auditors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
(In millions)
|
Audit
Fees
(1)
|
|
¥
|
45
|
|
|
¥
|
54
|
|
|
¥
|
92
|
|
Audit-Related Fees
(2)
|
|
|
17
|
|
|
|
6
|
|
|
|
3
|
|
Tax Fees
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other Fees
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
These are the aggregate fees billed for each of the fiscal years for professional services
rendered by our principal accountants for the audit of our annual financial statements and
services that are normally provided in connection with statutory and regulatory filings or
engagements for those fiscal years.
|
|
(2)
|
|
These are the aggregate fees billed for each of the fiscal years for assurance and related
services by our principal accountants that are reasonably related to the performance of the
audit of our financial statements other than those reported under Audit Fees above. These
services include due diligence and preparation of comfort letters in connection with bond
offerings.
|
|
(3)
|
|
These are the aggregate fees billed for each of the fiscal years for professional services
rendered by our principle accountants for tax compliance, tax advice and tax planning.
|
|
(4)
|
|
These are the aggregate fees billed for the fiscal year for products and services provided
by our principle accountants other than those included above.
|
Our Board of Statutory Auditors currently approves every engagement by us of BDO Sanyu &
Co. or any of its affiliates for audit or non-audit services prior to the provision of these
services. We are considering whether or not to establish pre-approval policies and procedures to
facilitate the responsibility of our Board of Statutory Auditors to monitor the independence of BDO
Sanyu & Co.
-126-
Item 16D. Exemptions from the Listing Standards for Audit Committees
With respect to the requirements of Rule 10A-3 under the Securities Exchange Act of 1934
relating to listed company audit committees, which apply to us through Section 303A.06 of the New
York Stock Exchanges Listed Company Manual, we rely on an exemption provided by paragraph (c) (3)
of that Rule available to foreign private issuers with boards of
auditors (or similar bodies), or
statutory auditors meeting certain requirements. For a New York Stock Exchange-listed Japanese
company with a board of statutory auditors, the requirements for relying on paragraph (c) (3) of
Rule 10A-3 are as follows:
|
|
|
The board of statutory auditors must be established, and its members must be
selected, pursuant to Japanese law expressly requiring such a board for Japanese
companies that elect to have a corporate governance system with corporate auditors;
|
|
|
|
|
Japanese law must and does require the board of statutory auditors to be separate
from the board of directors;
|
|
|
|
|
None of the members of the board of statutory auditors may be elected by management,
and none of the listed companys executive officers may be a member of the board of
statutory auditors;
|
|
|
|
|
Japanese law must and does set forth standards for the independence of the members
of the board of statutory auditors from the listed company or its management;
|
|
|
|
|
The board of statutory auditors, in accordance with Japanese law or the registrants
governing documents, must be responsible, to the extent permitted by Japanese law, for
the appointment, retention and oversight of the work of any registered public
accounting firm engaged (including, to the extent permitted by Japanese law, the
resolution of disagreements between management and the auditor regarding financial
reporting) for the purpose of preparing or issuing an audit report or performing other
audit, review or attest services for the listed company, including its principal
accountant which audits its consolidated financial statements included in its annual
reports on Form 20-F; and
|
|
|
|
|
To the extent permitted by Japanese law:
|
|
|
|
the board of statutory auditors must establish procedures for (i) the
receipt, retention and treatment of complaints received by the listed company
regarding accounting, internal accounting controls, or auditing matters, and
(ii) the confidential, anonymous submission by the listed companys employees of concerns regarding questionable
accounting or auditing matters;
|
|
|
|
|
the board of statutory auditors must have the authority to engage
independent counsel and other advisers, as it determines necessary to carry
out its duties; and
|
|
|
|
|
the listed company must provide for appropriate funding, as determined by
its board of statutory auditors, for payment of (i) compensation to any
registered public accounting firm engaged for the purpose of preparing or
issuing an audit report or performing other audit, review or attest services
for the listed company, (ii) compensation to any advisers employed by the
board of statutory auditors, and (iii) ordinary administrative expenses of
the board of statutory auditors that are necessary or appropriate in carrying
out its duties.
|
In our assessment, our Board of Statutory Auditors, which meets the requirements for reliance
on the exemption in paragraph (c) (3) of Rule 10A-3 described above, is not materially less
effective than an audit committee meeting all the requirements of paragraph (b) of Rule 10A-3
(without relying on any exemption provided by that Rule) at acting independently of management and
performing the functions of an audit committee as contemplated therein.
-127-
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table shows the purchases made by us of our shares during the year ended March
31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Maximum Number
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased as
|
|
|
of Shares that May
|
|
|
|
|
|
|
|
|
|
|
|
Part of Publicly
|
|
|
Yet Be Purchased
|
|
|
|
Total Number of
|
|
|
Average Price Paid
|
|
|
Announced Plans or
|
|
|
Under the Plans or
|
|
Calendar Month
|
|
Shares Purchased
|
|
|
per Share
|
|
|
Program
|
|
|
Programs
|
|
April 2006
|
|
|
20
|
|
|
|
¥2,342
|
|
|
|
N/A
|
|
|
|
N/A
|
|
May 2006
|
|
|
4
|
|
|
|
2,468
|
|
|
|
N/A
|
|
|
|
N/A
|
|
June 2006
|
|
|
10
|
|
|
|
1,805
|
|
|
|
N/A
|
|
|
|
N/A
|
|
July 2006
|
|
|
10
|
|
|
|
1,233
|
|
|
|
N/A
|
|
|
|
N/A
|
|
August 2006
|
|
|
18
|
|
|
|
1,593
|
|
|
|
N/A
|
|
|
|
N/A
|
|
September 2006
|
|
|
83
|
|
|
|
1,558
|
|
|
|
N/A
|
|
|
|
N/A
|
|
October 2006
|
|
|
21
|
|
|
|
1,491
|
|
|
|
N/A
|
|
|
|
N/A
|
|
November 2006
|
|
|
14
|
|
|
|
1,202
|
|
|
|
N/A
|
|
|
|
N/A
|
|
December 2006
|
|
|
8
|
|
|
|
1,419
|
|
|
|
N/A
|
|
|
|
N/A
|
|
January 2007
|
|
|
9
|
|
|
|
1,303
|
|
|
|
N/A
|
|
|
|
N/A
|
|
February 2007
|
|
|
3
|
|
|
|
1,400
|
|
|
|
N/A
|
|
|
|
N/A
|
|
March 2007
|
|
|
3
|
|
|
|
1,293
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
203
|
|
|
|
¥1,598
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under the Corporate Law of Japan, a holder of shares constituting less than one full unit
may require us to purchase such shares at their market value. (See
Rights of Our Shareholders
Rights with Respect to Distribution of Surplus, Stock
Repurchases and Stock Splits
in Item 10.B
of this annual report on Form 20-F.) During the year ended March 31, 2007, we purchased 203 shares
for a total purchase price of ¥0 million upon such requests from holders of shares constituting
less than one full unit.
-128-
PART III
Item 17. Financial Statements
Not applicable.
Item 18. Financial Statements
The information required by this item begins on page F-1 of this annual report on Form 20-F.
Item 19. Exhibits
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
1.1
|
|
|
Our Articles of Incorporation (English Translation)
|
|
|
|
|
|
|
1.2
|
|
|
Our Share Handling Regulations (English Translation)
|
|
|
|
|
|
|
1.3
|
|
|
Our Regulations of the Board of Directors (English Translation)
|
|
|
|
|
|
|
1.4
|
|
|
Our Regulations of the Board of Statutory Auditors (English Translation)
|
|
|
|
|
|
|
2.1
|
|
|
Our Specimen of Common Stock Certificates (English Translation)
|
|
|
|
|
|
|
2.2
|
|
|
Form of Deposit Agreement Among NIS Group Co., Ltd., The Bank of New York as
Depositary and All Owners and Holders from Time to Time of American Depositary
Receipts, Including the Form of American Depositary Receipt (incorporated by reference
to the Registration Statement on Form F-6 (File No. 333-97133) filed on July 24, 2002)
|
|
|
|
|
|
|
8.1
|
|
|
List of Our Subsidiaries
|
|
|
|
|
|
|
11.1
|
|
|
Our Code of Ethics
|
|
|
|
|
|
|
12.1
|
|
|
Certification of the principal executive officer required by 17 C.F.R. 240. 13a-14(a)
|
|
|
|
|
|
|
12.2
|
|
|
Certification of the principal executive officer required by 17 C.F.R. 240. 13a-14(a)
|
|
|
|
|
|
|
12.3
|
|
|
Certification of the principal financial officer required by 17 C.F.R. 240. 13a-14(a)
|
|
|
|
|
|
|
13.1
|
|
|
Certification of the chief executive officer required by 18 U.S.C. Section 1350
|
|
|
|
|
|
|
13.2
|
|
|
Certification of the chief executive officer required by 18 U.S.C. Section 1350
|
|
|
|
|
|
|
13.3
|
|
|
Certification of the chief financial officer required by 18 U.S.C. Section 1350
|
We have not included as exhibits certain instruments with respect to our long-term debt,
the amount of debt authorized under each of which does not exceed 10% of our total assets, and we
agree to furnish a copy of any such instrument to the Commission upon request.
-129-
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F
and that it has duly caused and authorized the undersigned to sign this annual report on its
behalf.
|
|
|
|
|
|
NIS GROUP CO., LTD.
|
|
|
By
|
/s/ Shinsuke Amiya
|
|
|
|
Name:
|
Shinsuke Amiya
|
|
|
|
Title:
|
President,
Representative Director of the Board and
Co-Chief Executive Officer
|
|
|
September 28, 2007
S-1
NIS GROUP CO., LTD.
INDEX TO FINANCIAL STATEMENTS
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders,
NIS Group Co., Ltd.
Tokyo, Japan
We have audited the accompanying consolidated balance sheets of NIS Group Co., Ltd and
its subsidiaries (collectively, the Group) as of March 31, 2006 and 2007 and the related
consolidated statements of operations, stockholders equity, and cash flows for each of the three
years in the period ended March 31, 2007. These financial statements are the responsibility of the
Groups management. Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). 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, 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 consolidated financial statements referred to above present fairly,
in all material respects, the financial position of NIS Group Co., Ltd. and its subsidiaries as of March 31, 2006 and
2007, and the results of their operations and their cash flows for each of the three years in the
period ended March 31, 2007, in conformity with accounting principles generally accepted in the
United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Groups internal control over financial
reporting as of March 31, 2007, based on criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and
our report dated September 27, 2007 expressed an unqualified opinion on managements assessment of
the effectiveness of internal control over financial reporting and an unqualified opinion on the
effectiveness of internal control over financial reporting.
As
more fully described in Notes 2(t) and 22 to the consolidated
financial statements, on
April 1, 2006, the Group adopted Statement of Financial Accounting Standards No. 123 (revised
2004),
Share-Based Payment.
Also, in our opinion, the U.S. dollar amounts in the accompanying consolidated financial
statements have been translated from Japanese yen on the basis set forth in Note 1 to the
consolidated financial statements.
BDO Sanyu & Co.
Osaka, Japan
September 27, 2007
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Board of Directors and Stockholders of NIS Group Co., Ltd.
We have audited managements assessment, included in the accompanying Item 15, Controls
and Procedures, that NIS Group Co., Ltd. and its subsidiaries (collectively, the Group) maintained effective internal control over financial
reporting as of March 31, 2007, based on criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). The Groups management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an opinion on managements assessment
and an opinion on the effectiveness of the Groups internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that NIS Group Co., Ltd. and its subsidiaries maintained effective
internal control over financial reporting as of March 31, 2007, is fairly stated, in all material
respects, based on the COSO criteria. Also in our opinion, NIS Group Co., Ltd. and its subsidiaries maintained, in all
material respects, effective internal control over financial reporting as of March 31, 2007, based
on the COSO criteria.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of NIS Group Co., Ltd. and its subsidiaries as of March
31, 2006 and 2007, and the related consolidated statements of operations, stockholders equity, and
cash flows for each of the three years in the period ended March 31, 2007 and our report dated
September 27, 2007 expressed an unqualified opinion thereon.
BDO Sanyu & Co.
Osaka, Japan
September 27, 2007
F-3
CONSOLIDATED BALANCE SHEETS
NIS GROUP CO., LTD. AND ITS SUBSIDIARIES
March 31, 2006 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
Millions of Yen
|
|
|
U.S. Dollars (Note 1)
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
¥
|
22,860
|
|
|
¥
|
28,344
|
|
|
|
$ 240,102
|
|
Restricted cash
|
|
|
3,417
|
|
|
|
10,331
|
|
|
|
87,514
|
|
Loans receivable, net
|
|
|
225,947
|
|
|
|
250,780
|
|
|
|
2,124,354
|
|
Purchased loans receivable, net
|
|
|
24,155
|
|
|
|
28,910
|
|
|
|
244,896
|
|
Interest receivable
|
|
|
1,021
|
|
|
|
1,117
|
|
|
|
9,462
|
|
Investment securities
|
|
|
42,071
|
|
|
|
38,384
|
|
|
|
325,150
|
|
Real estate for sale
|
|
|
20,792
|
|
|
|
67,327
|
|
|
|
570,326
|
|
Property and equipment, net
|
|
|
11,169
|
|
|
|
8,448
|
|
|
|
71,563
|
|
Investment in affiliates
|
|
|
617
|
|
|
|
2,833
|
|
|
|
23,998
|
|
Deferred income taxes
|
|
|
721
|
|
|
|
6,488
|
|
|
|
54,960
|
|
Other assets
|
|
|
7,173
|
|
|
|
11,115
|
|
|
|
94,156
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
¥
|
359,943
|
|
|
¥
|
454,077
|
|
|
|
$3,846,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
¥
|
60,411
|
|
|
¥
|
84,258
|
|
|
|
$ 713,748
|
|
Accrued income taxes
|
|
|
6,089
|
|
|
|
3,714
|
|
|
|
31,461
|
|
Accrued expenses
|
|
|
702
|
|
|
|
915
|
|
|
|
7,751
|
|
Long-term borrowings
|
|
|
198,924
|
|
|
|
260,817
|
|
|
|
2,209,377
|
|
Capital lease obligations
|
|
|
1,337
|
|
|
|
859
|
|
|
|
7,277
|
|
Accrued retirement benefits
|
|
|
647
|
|
|
|
380
|
|
|
|
3,219
|
|
Deferred income taxes
|
|
|
1,382
|
|
|
|
256
|
|
|
|
2,169
|
|
Other liabilities
|
|
|
7,514
|
|
|
|
16,123
|
|
|
|
136,578
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
277,006
|
|
|
|
367,322
|
|
|
|
3,111,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests
|
|
|
2,433
|
|
|
|
4,192
|
|
|
|
35,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Notes 12, 13 and 16)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity (Note 17):
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock designated value
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized 384,000,000 shares as of
March 31, 2006 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued 140,647,064 and 145,894,350 shares as of
March 31, 2006 and 2007, respectively
|
|
|
11,849
|
|
|
|
16,289
|
|
|
|
137,984
|
|
Additional paid-in capital
|
|
|
14,808
|
|
|
|
19,490
|
|
|
|
165,100
|
|
Retained earnings
|
|
|
50,197
|
|
|
|
46,629
|
|
|
|
394,994
|
|
Cumulative other comprehensive income
|
|
|
5,485
|
|
|
|
1,721
|
|
|
|
14,579
|
|
Less treasury stock, at cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
4,005,104 shares and 3,417,449 shares at March 31, 2006
and 2007, respectively
|
|
|
(1,835
|
)
|
|
|
(1,566
|
)
|
|
|
(13,266
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
80,504
|
|
|
|
82,563
|
|
|
|
699,391
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
¥
|
359,943
|
|
|
¥
|
454,077
|
|
|
|
$3,846,481
|
|
|
|
|
|
|
|
|
|
|
See accompanying summary of significant accounting policies and other notes to consolidated
financial statements.
F-4
CONSOLIDATED STATEMENTS OF OPERATIONS
NIS GROUP CO., LTD. AND ITS SUBSIDIARIES
For the Years Ended March 31, 2005, 2006 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
Millions of Yen
|
|
|
U.S. Dollars (Note 1)
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
Interest income
|
|
|
¥29,488
|
|
|
|
¥29,826
|
|
|
|
¥33,706
|
|
|
$
|
285,523
|
|
Provision for losses on excess interest repayments
|
|
|
2,132
|
|
|
|
3,331
|
|
|
|
12,664
|
|
|
|
107,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
27,356
|
|
|
|
26,495
|
|
|
|
21,042
|
|
|
|
178,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
2,971
|
|
|
|
2,602
|
|
|
|
3,870
|
|
|
|
32,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income before provision for loan losses
|
|
|
24,385
|
|
|
|
23,893
|
|
|
|
17,172
|
|
|
|
145,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
5,817
|
|
|
|
5,923
|
|
|
|
10,853
|
|
|
|
91,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income from lending activities
|
|
|
18,568
|
|
|
|
17,970
|
|
|
|
6,319
|
|
|
|
53,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income from purchased loans
|
|
|
3,255
|
|
|
|
4,960
|
|
|
|
5,989
|
|
|
|
50,733
|
|
Gain on sales of real estate, net
|
|
|
477
|
|
|
|
1,584
|
|
|
|
5,379
|
|
|
|
45,565
|
|
Guarantee fees received, net
|
|
|
317
|
|
|
|
508
|
|
|
|
588
|
|
|
|
4,981
|
|
Rents, dividends and other
|
|
|
954
|
|
|
|
4,393
|
|
|
|
5,629
|
|
|
|
47,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other revenue
|
|
|
5,003
|
|
|
|
11,445
|
|
|
|
17,585
|
|
|
|
148,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
188
|
|
|
|
503
|
|
|
|
1,037
|
|
|
|
8,784
|
|
Salaries and employee benefits
|
|
|
6,521
|
|
|
|
7,181
|
|
|
|
8,534
|
|
|
|
72,291
|
|
Occupancy, furniture and equipment
|
|
|
2,395
|
|
|
|
2,654
|
|
|
|
3,196
|
|
|
|
27,073
|
|
Advertising
|
|
|
333
|
|
|
|
629
|
|
|
|
264
|
|
|
|
2,236
|
|
Other general and administrative expenses
|
|
|
6,001
|
|
|
|
6,765
|
|
|
|
9,552
|
|
|
|
80,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
15,438
|
|
|
|
17,732
|
|
|
|
22,583
|
|
|
|
191,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
8,133
|
|
|
|
11,683
|
|
|
|
1,321
|
|
|
|
11,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains on sale of loans receivable
|
|
|
3,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Losses) gains on sales and impairment of investment
securities, net
|
|
|
(513
|
)
|
|
|
3,708
|
|
|
|
(1,168
|
)
|
|
|
(9,894
|
)
|
Gains (losses) on sales of subsidiaries and affiliates, net
|
|
|
1,339
|
|
|
|
(43
|
)
|
|
|
295
|
|
|
|
2,499
|
|
Equity losses in affiliates, net
|
|
|
(92
|
)
|
|
|
(61
|
)
|
|
|
(8
|
)
|
|
|
(68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (losses)
|
|
|
4,061
|
|
|
|
3,604
|
|
|
|
(881
|
)
|
|
|
(7,463
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses on sale, disposal and impairment of long-lived
assets, net
|
|
|
94
|
|
|
|
16
|
|
|
|
189
|
|
|
|
1,601
|
|
Minority interests
|
|
|
192
|
|
|
|
602
|
|
|
|
264
|
|
|
|
2,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
286
|
|
|
|
618
|
|
|
|
453
|
|
|
|
3,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (losses) before income taxes
|
|
|
11,908
|
|
|
|
14,669
|
|
|
|
(13
|
)
|
|
|
(110
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
4,646
|
|
|
|
6,214
|
|
|
|
1,597
|
|
|
|
13,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (losses)
|
|
|
¥ 7,262
|
|
|
|
¥ 8,455
|
|
|
|
¥(1,610
|
)
|
|
|
$ (13,638
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Dollars
|
Per share data
|
|
Yen
|
|
|
(Note 1)
|
Net income (losses) basic
|
|
|
¥59.60
|
|
|
|
¥65.40
|
|
|
|
¥(11.42
|
)
|
|
|
$(0.097
|
)
|
diluted
|
|
|
54.00
|
|
|
|
61.60
|
|
|
|
(11.42
|
)
|
|
|
(0.097
|
)
|
|
Weighted-average
shares outstanding
|
|
Thousands of Shares
|
|
|
|
|
Basic
|
|
|
122,083
|
|
|
|
129,247
|
|
|
|
140,924
|
|
|
|
|
Diluted
|
|
|
135,193
|
|
|
|
137,942
|
|
|
|
140,924
|
|
|
|
|
See accompanying summary of significant accounting policies and other notes to consolidated
financial statements.
F-5
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
NIS GROUP CO., LTD. AND ITS SUBSIDIARIES
For the Years Ended March 31, 2005, 2006 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
Millions of Yen
|
|
|
|
of Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Other
|
|
|
|
|
|
|
Total
|
|
|
|
Issued
|
|
|
Common
|
|
|
Additional
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury Stock,
|
|
|
Shareholders
|
|
|
|
(Thousands)
|
|
|
Stock
|
|
|
Paid-in Capital
|
|
|
Earnings
|
|
|
Income
|
|
|
at Cost
|
|
|
Equity
|
|
Balance as of March 31, 2004
|
|
|
129,337
|
|
|
¥
|
7,218
|
|
|
¥
|
9,092
|
|
|
¥
|
38,351
|
|
|
¥
|
3,371
|
|
|
¥
|
(3,735
|
)
|
|
¥
|
54,297
|
|
Exercise of stock warrants and
convertible bonds
|
|
|
1,383
|
|
|
|
561
|
|
|
|
551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,112
|
|
Stock issuance costs
|
|
|
|
|
|
|
|
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,262
|
|
|
|
|
|
|
|
|
|
|
|
7,262
|
|
Other comprehensive income,
net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized
gains on investment
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,725
|
|
|
|
|
|
|
|
4,725
|
|
Change in net unrealized
losses on derivative
instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
Change in foreign
currency adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,977
|
|
|
Cash dividends paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,300
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,300
|
)
|
Purchases of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Sales of treasury stock
|
|
|
|
|
|
|
|
|
|
|
216
|
|
|
|
|
|
|
|
|
|
|
|
693
|
|
|
|
909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2005
|
|
|
130,720
|
|
|
|
7,779
|
|
|
|
9,836
|
|
|
|
44,313
|
|
|
|
8,086
|
|
|
|
(3,043
|
)
|
|
|
66,971
|
|
Conversion of convertible bonds
|
|
|
9,927
|
|
|
|
4,070
|
|
|
|
4,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,120
|
|
Stock issuance costs
|
|
|
|
|
|
|
|
|
|
|
(77
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(77
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,455
|
|
|
|
|
|
|
|
|
|
|
|
8,455
|
|
Other comprehensive income,
net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized
gains on investment
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,765
|
)
|
|
|
|
|
|
|
(2,765
|
)
|
Change in net unrealized
losses on derivative
instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
4
|
|
Change in foreign
currency adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160
|
|
|
|
|
|
|
|
160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,854
|
|
|
Cash dividends paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,571
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,571
|
)
|
Purchases of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Sales of treasury stock
|
|
|
|
|
|
|
|
|
|
|
999
|
|
|
|
|
|
|
|
|
|
|
|
1,210
|
|
|
|
2,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2006
|
|
|
140,647
|
|
|
¥
|
11,849
|
|
|
¥
|
14,808
|
|
|
¥
|
50,197
|
|
|
¥
|
5,485
|
|
|
¥
|
(1,835
|
)
|
|
¥
|
80,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Continued)
F-6
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
NIS GROUP CO., LTD. AND ITS SUBSIDIARIES
For the Years Ended March 31, 2005, 2006 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
Millions of Yen
|
|
|
|
of Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Other
|
|
|
|
|
|
|
Total
|
|
|
|
Issued
|
|
|
Common
|
|
|
Additional
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury Stock,
|
|
|
Shareholders
|
|
|
|
(Thousands)
|
|
|
Stock
|
|
|
Paid-in Capital
|
|
|
Earnings
|
|
|
Income
|
|
|
at Cost
|
|
|
Equity
|
|
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2006
|
|
|
140,647
|
|
|
|
11,849
|
|
|
|
14,808
|
|
|
|
50,197
|
|
|
|
5,485
|
|
|
|
(1,835
|
)
|
|
|
80,504
|
|
Conversion of convertible bonds
|
|
|
946
|
|
|
|
397
|
|
|
|
377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
774
|
|
Sale of new
shares to a third-party
|
|
|
4,301
|
|
|
|
4,043
|
|
|
|
3,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,000
|
|
Stock compensation costs
|
|
|
|
|
|
|
|
|
|
|
220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
220
|
|
Stock issuance costs
|
|
|
|
|
|
|
|
|
|
|
(99
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(99
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,610
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,610
|
)
|
Other
comprehensive income,
net
of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized
gains on investment
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,974
|
)
|
|
|
|
|
|
|
(3,974
|
)
|
Change in
foreign currency
adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
210
|
|
|
|
|
|
|
|
210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,374
|
)
|
|
Cash dividends paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,958
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,958
|
)
|
Purchases of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of treasury stock
|
|
|
|
|
|
|
|
|
|
|
227
|
|
|
|
|
|
|
|
|
|
|
|
269
|
|
|
|
496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2007
|
|
|
145,894
|
|
|
|
¥16,289
|
|
|
|
¥19,490
|
|
|
|
¥46,629
|
|
|
|
¥1,721
|
|
|
|
¥(1,566
|
)
|
|
|
¥82,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
Thousands of U.S. Dollars (Note 1)
|
|
|
|
of Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Other
|
|
|
|
|
|
|
Total
|
|
|
|
Issued
|
|
|
Common
|
|
|
Additional
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury Stock,
|
|
|
Shareholders
|
|
|
|
(Thousands)
|
|
|
Stock
|
|
|
Paid-in Capital
|
|
|
Earnings
|
|
|
Income
|
|
|
at Cost
|
|
|
Equity
|
|
Balance as of March 31, 2006
|
|
|
140,647
|
|
|
|
$100,373
|
|
|
|
$125,438
|
|
|
|
$425,218
|
|
|
|
$ 46,463
|
|
|
|
$(15,544
|
)
|
|
|
$681,948
|
|
Conversion of convertible bonds
|
|
|
946
|
|
|
|
3,363
|
|
|
|
3,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,557
|
|
Sale of new
shares to a third-party
|
|
|
4,301
|
|
|
|
34,248
|
|
|
|
33,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,768
|
|
Stock compensation costs
|
|
|
|
|
|
|
|
|
|
|
1,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,864
|
|
Stock issuance costs
|
|
|
|
|
|
|
|
|
|
|
(839
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(839
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,638
|
)
|
|
|
|
|
|
|
|
|
|
|
(13,638
|
)
|
Other
comprehensive income,
net
of tax
|
Change in net unrealized
gains on investment
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33,664
|
)
|
|
|
|
|
|
|
(33,664
|
)
|
Change in
foreign currency
adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,780
|
|
|
|
|
|
|
|
1,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(45,522
|
)
|
|
Cash dividends paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,586
|
)
|
|
|
|
|
|
|
|
|
|
|
(16,586
|
)
|
Purchases of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of treasury stock
|
|
|
|
|
|
|
|
|
|
|
1,923
|
|
|
|
|
|
|
|
|
|
|
|
2,278
|
|
|
|
4,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2007
|
|
|
145,894
|
|
|
|
$137,984
|
|
|
|
$165,100
|
|
|
|
$394,994
|
|
|
|
$ 14,579
|
|
|
|
$(13,266
|
)
|
|
|
$699,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying summary of significant accounting policies and other notes to consolidated
financial statements.
F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS
NIS GROUP CO., LTD. AND SUBSIDIARIES
For the Years Ended March 31, 2005, 2006 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Millions of Yen
|
|
|
U.S. Dollars (Note 1)
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (losses)
|
|
¥
|
7,262
|
|
|
¥
|
8,455
|
|
|
¥
|
(1,610
|
)
|
|
$
|
(13,638
|
)
|
Adjustments
to reconcile net income (losses) to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for losses on excess interest repayments
|
|
|
2,132
|
|
|
|
3,331
|
|
|
|
12,664
|
|
|
|
107,276
|
|
Provision for loan losses
|
|
|
5,817
|
|
|
|
5,923
|
|
|
|
10,853
|
|
|
|
91,936
|
|
Depreciation and amortization
|
|
|
1,175
|
|
|
|
1,333
|
|
|
|
1,678
|
|
|
|
14,214
|
|
Amortization of debt issuance costs
|
|
|
239
|
|
|
|
184
|
|
|
|
193
|
|
|
|
1,635
|
|
Amortization of loan origination costs (income)
|
|
|
540
|
|
|
|
431
|
|
|
|
(280
|
)
|
|
|
(2,372
|
)
|
Stock compensation costs
|
|
|
|
|
|
|
|
|
|
|
383
|
|
|
|
3,244
|
|
Gain on sale of loans receivable
|
|
|
(3,327
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses (gains) on sale and impairment of investment
securities, net
|
|
|
513
|
|
|
|
(3,708
|
)
|
|
|
1,168
|
|
|
|
9,894
|
|
Losses on sale, disposal and impairment of long-lived
assets, net
|
|
|
94
|
|
|
|
16
|
|
|
|
189
|
|
|
|
1,601
|
|
(Gains) losses on sale of subsidiaries and affiliates, net
|
|
|
(1,339
|
)
|
|
|
43
|
|
|
|
(295
|
)
|
|
|
(2,499
|
)
|
Equity losses in affiliates, net
|
|
|
92
|
|
|
|
61
|
|
|
|
8
|
|
|
|
68
|
|
Deferred income taxes
|
|
|
1,427
|
|
|
|
(1,460
|
)
|
|
|
(4,180
|
)
|
|
|
(35,409
|
)
|
Minority interests
|
|
|
192
|
|
|
|
602
|
|
|
|
264
|
|
|
|
2,236
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest receivable
|
|
|
229
|
|
|
|
(166
|
)
|
|
|
(95
|
)
|
|
|
(805
|
)
|
Accrued income taxes and expenses
|
|
|
(2,181
|
)
|
|
|
5,521
|
|
|
|
(2,161
|
)
|
|
|
(18,306
|
)
|
Other liabilities
|
|
|
1,821
|
|
|
|
3,704
|
|
|
|
4,897
|
|
|
|
41,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
14,686
|
|
|
|
24,270
|
|
|
|
23,676
|
|
|
|
200,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of loans receivable
|
|
|
32,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, net of principal collections
|
|
|
(17,615
|
)
|
|
|
(82,347
|
)
|
|
|
(40,581
|
)
|
|
|
(343,761
|
)
|
Purchases of distressed loans
|
|
|
(16,896
|
)
|
|
|
(19,779
|
)
|
|
|
(19,579
|
)
|
|
|
(165,853
|
)
|
Proceeds from principal collections of distressed loans
|
|
|
6,840
|
|
|
|
6,956
|
|
|
|
12,872
|
|
|
|
109,039
|
|
Proceeds from sales of distressed loans
|
|
|
|
|
|
|
711
|
|
|
|
|
|
|
|
|
|
Purchases of investment securities
|
|
|
(16,508
|
)
|
|
|
(26,794
|
)
|
|
|
(12,207
|
)
|
|
|
(103,405
|
)
|
Proceeds from sales of investment securities
|
|
|
5,125
|
|
|
|
12,707
|
|
|
|
10,323
|
|
|
|
87,446
|
|
Purchases of real estate for sale
|
|
|
(1,958
|
)
|
|
|
(24,699
|
)
|
|
|
(55,209
|
)
|
|
|
(467,675
|
)
|
Proceeds from sales of real estate
|
|
|
974
|
|
|
|
5,395
|
|
|
|
13,411
|
|
|
|
113,604
|
|
Purchases of property and equipment
|
|
|
(1,754
|
)
|
|
|
(6,368
|
)
|
|
|
(5,270
|
)
|
|
|
(44,642
|
)
|
Proceeds from sales of property and equipment
|
|
|
16
|
|
|
|
3
|
|
|
|
13
|
|
|
|
110
|
|
Investment in affiliates
|
|
|
(160
|
)
|
|
|
(46
|
)
|
|
|
(3,732
|
)
|
|
|
(31,614
|
)
|
Acquisition of a new subsidiary, net of cash acquired
|
|
|
(764
|
)
|
|
|
(554
|
)
|
|
|
|
|
|
|
|
|
Other changes in other assets
|
|
|
(2,543
|
)
|
|
|
(1,161
|
)
|
|
|
116
|
|
|
|
983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(12,546
|
)
|
|
|
(135,976
|
)
|
|
|
(99,843
|
)
|
|
|
(845,768
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Continued)
|
F-8
CONSOLIDATED STATEMENTS OF CASH FLOWS
NIS GROUP CO., LTD. AND SUBSIDIARIES
For the Years Ended March 31, 2005, 2006 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Millions of Yen
|
|
|
U.S. Dollars (Note 1)
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit of restricted cash
|
|
|
(411
|
)
|
|
|
(2,571
|
)
|
|
|
(6,914
|
)
|
|
|
(58,568
|
)
|
Issuance of commercial paper
|
|
|
15,100
|
|
|
|
65,900
|
|
|
|
123,600
|
|
|
|
1,047,014
|
|
Repayments of commercial paper
|
|
|
(14,800
|
)
|
|
|
(39,400
|
)
|
|
|
(126,500
|
)
|
|
|
(1,071,580
|
)
|
Proceeds from short-term borrowings
|
|
|
20,851
|
|
|
|
107,472
|
|
|
|
278,600
|
|
|
|
2,360,017
|
|
Repayments of short-term borrowings
|
|
|
(13,483
|
)
|
|
|
(87,144
|
)
|
|
|
(251,860
|
)
|
|
|
(2,133,503
|
)
|
Proceeds from long-term borrowings
|
|
|
83,685
|
|
|
|
141,918
|
|
|
|
130,888
|
|
|
|
1,108,751
|
|
Repayments of long-term borrowings
|
|
|
(88,555
|
)
|
|
|
(76,425
|
)
|
|
|
(73,508
|
)
|
|
|
(622,685
|
)
|
Payments of capital lease obligations
|
|
|
(823
|
)
|
|
|
(614
|
)
|
|
|
(641
|
)
|
|
|
(5,430
|
)
|
Proceeds from sale of stock
|
|
|
54
|
|
|
|
|
|
|
|
8,000
|
|
|
|
67,768
|
|
Stock issuance costs
|
|
|
(23
|
)
|
|
|
(77
|
)
|
|
|
(99
|
)
|
|
|
(839
|
)
|
Purchases of treasury stock
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
Proceeds from sales of treasury stock
|
|
|
909
|
|
|
|
2,209
|
|
|
|
496
|
|
|
|
4,201
|
|
Dividends paid
|
|
|
(1,300
|
)
|
|
|
(2,571
|
)
|
|
|
(1,958
|
)
|
|
|
(16,586
|
)
|
Dividends paid to minority interests
|
|
|
|
|
|
|
(99
|
)
|
|
|
(214
|
)
|
|
|
(1,813
|
)
|
Proceeds from issuance of new shares by subsidiaries
|
|
|
2,132
|
|
|
|
79
|
|
|
|
1,548
|
|
|
|
13,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
3,335
|
|
|
|
108,675
|
|
|
|
81,438
|
|
|
|
689,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash
equivalents
|
|
|
(9
|
)
|
|
|
182
|
|
|
|
213
|
|
|
|
1,804
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
5,466
|
|
|
|
(2,849
|
)
|
|
|
5,484
|
|
|
|
46,455
|
|
Cash and cash equivalents at beginning of year
|
|
|
20,243
|
|
|
|
25,709
|
|
|
|
22,860
|
|
|
|
193,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
¥
|
25,709
|
|
|
¥
|
22,860
|
|
|
¥
|
28,344
|
|
|
$
|
240,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying summary of significant accounting policies and other notes to consolidated
financial statements.
F-9
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Business Organization and Basis of Presentation
(a) Description of Business
NIS GROUP CO., LTD. (the Company), formerly NISSIN CO., LTD., was incorporated in May 1960 in
Ehime Prefecture in western Japan and has expanded nationwide. The Company and its subsidiaries
(collectively, the Group) operate mainly in Japan. The Company currently maintains head offices
in Tokyo and in the City of Matsuyama, Ehime Prefecture, Japan. Because of its concentration in
financial activities in Japan, the Company is exposed to negative changes in the Japanese economy
and in the stability of its borrowing base in Japan.
The Company is a non-bank financial institution providing integrated financial services to owners
of small to medium-sized enterprises (SMEs), sole proprietors, and consumers as its main
business, centering on providing loan products. The Group provides various loan products. These
are categorized into secured loans, SME loans, consumer loans or other loans, as follows:
Secured loans
are secured by real property and are primarily designed for property companies
for use as working capital for the development of small to medium commercial or residential
buildings. These loans have a high degree of liquidity and typically mature within two
years.
SME loans
are mainly unsecured loans designed for SME owners which require one or more
guarantees from third-party individuals and unsecured revolving loans not requiring a
guarantor.
Consumer loans
are debt-consolidation loans for consumers who already have a high level of
outstanding debt with several consumer finance lenders, which require one or more
guarantors, and unsecured revolving loans to consumers at fixed interest rates.
Other loans
consist of direct financing leases, installment credits, note discounting, and
other lending services.
The Group also provides other financial services such as credit enhancement through guarantee and
operating leases.
In addition, the Group is seeking to achieve further growth and profit performance by devoting
management efforts to our four businesses; namely, investment banking, servicing, real estate and
China-related businesses.
Nissin
Servicer Co., Ltd. (Nissin Servicer), a 73.8%-owned subsidiary, engages in the loan
servicing business mainly by purchasing distressed loans from financial institutions and servicing
these loans for its own account. Nissin Servicer also seeks to acquire distressed real estate
assets in connection with disposal by financial institutions of non-performing loans for
restructuring and reselling.
NIS Property Co., Ltd. (NIS Property), a wholly-owned subsidiary, was established in June 2000.
Its business consists of real estate transactions, brokerage, appraisal and other real estate-related businesses. NIS Property mainly invests in real estate properties, particularly commercial
and residential rental properties, with a view to resale following renovations. Recently, the
operating results and financial condition of the real estate business have become significant to
the consolidated financial statements and, accordingly, this business has been recognized as a
separate business segment from the fiscal year ended March 31, 2007.
F-10
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(b) Basis of Presentation
The Company and its domestic subsidiaries maintain their books and records in accordance with
accounting principles generally accepted in Japan (Japanese GAAP), and its foreign subsidiaries
in conformity with those of the country of their domicile. Certain adjustments and
reclassifications have been made in the accompanying consolidated financial statements to conform
with accounting principles generally accepted in the United States of America (U.S. GAAP). These
adjustments were not recorded in the statutory Japanese GAAP books of account.
(c) Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its majority-owned
subsidiaries and those variable interest entities in which the Company and its majority-owned
subsidiaries are deemed to be the primary beneficiary in accordance with the Financial Accounting
Standards Board (FASB) Interpretation (FIN) No. 46(R), Consolidation of Variable Interest
Entities. All significant inter-company accounts, transactions and profits and losses have been
eliminated in the consolidated financial statements. In addition, for the consolidated
subsidiaries with different balance sheet dates, the consolidated financial statements are prepared
by using their provisional settlement of accounts within three months from the consolidated balance
sheet date, and adjustments are made to reflect significant transactions that occurred between the dates of provisional settlement
and the consolidated balance sheet date.
(d) Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period.
Significant estimates are made regarding the Groups allowance for loan losses, reserves for losses
on guarantees and excess interest repayments, and valuation of collateral assets. Actual results
could differ from those estimates, resulting in material changes to income.
(e) Reclassification
Certain reclassifications have been made to conform to the current fiscal year presentation. These
reclassifications have no effects on previously reported net income and shareholders equity.
Principal reclassifications include interest income from purchased loans, real estate for sale and
cash flow changes of real estate for sale.
The Group focused mainly on the moneylending business in the past. However, the Group recently has
been diversifying its finance businesses. In order to reflect the strategic business changes in
the consolidated financial results and financial position, the Group changed the format of
its consolidated financial statements of operations. The previous consolidated financial
statements were modified to conform to the current presentation. These modifications have no
effect on previously reported net income and shareholders equity.
(f) Financial Statement Presentation in U.S. Dollars
The consolidated financial statements are stated in Japanese yen. The translations of the Japanese
yen amounts into U.S. dollars are included solely for the convenience of the readers, using the
prevailing exchange rate on March 31, 2007, which was ¥118.05 to $1.00. The convenience
translations should not be construed as representations that the Japanese yen amounts have been,
could have been, or could in the future be, converted into U.S. dollars at this or any other rate
of exchange.
F-11
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies
(a) Cash and Cash Equivalents
The Group considers all highly liquid investments, including time deposits, with an original
maturity of three months or less at the time of purchase to be cash equivalents. These investments
are recorded at cost, which approximates market value. In addition, cash which cannot be utilized
for operation is classified as restricted cash.
(b) Foreign Currencies Translation
The Group operates principally in Japan but also has subsidiaries in China. The Group maintains
its accounting records in its functional currency. Foreign currency transactions are translated
into the functional currency using the prevailing exchange rates at the dates of the transactions.
Assets and liabilities of foreign subsidiaries with functional currencies other than Japanese yen
are translated into Japanese yen at exchange rates in effect at the balance sheet date. Income and
expense items are translated at average rates for the period. Resulting exchange differences are
accumulated as a component of Cumulative other comprehensive income on the accompanying
consolidated balance sheets.
(c) Interest Income from Loans Receivable
Interest income from loans, except for certain amounts exceeding a statutory interest rate, is
recognized on an accrual basis based on the principal amount outstanding. In Japan, the maximum
interest rates applied to moneylending companies are set by the Moneylending Business Law at two
general levels: an absolute maximum rate subject to the Contributions Law (the legal limit) and a
lower interest rate subject to the Interest Rate Restriction Law based on the principal amount of
the loan (the restricted rate).
The Groups contractual loan interest rates of certain loan products do not exceed the legal limit
but may exceed the restricted rate. However, the Group does not accrue unpaid interest in excess
of the restricted rate, even though an interest payment by a borrower in excess of the restricted
rate may be deemed to be valid. The borrower may make a claim for repayment of excess interest paid to the Group. The Group continues to recognize interest income on excess interest as
received, because the Group believes it is able to estimate amounts
potentially refunded on excess interest previously collected. (See
Reserve and Provision for Losses on Excess Interest
Repayments
below.)
The Group recognizes accrued interest income on loans receivable outstanding as of the balance
sheet date at the lower of the restricted rate or the contractual interest rate. Contractual
interest in excess of the restricted rate is recognized as interest income when collected. Accrual
of interest income is ceased when loan principal is charged-off or is wholly or partially reserved.
The accrued interest portion of a charged-off loan balance is deducted from the current period
interest income and the principal amount is charged-off against the allowance for loan losses.
F-12
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(d) Reserve and Provision for Losses on Excess Interest Repayments
The Interest Rate Restriction Law provides that the portion of interest on a loan with an interest
rate exceeding the restricted rate under the Interest Rate Restriction Law (excess interest) is
invalid but that a borrower cannot demand repayment of excess interest as long as it is paid
voluntarily. The Moneylending Business Law provides that a payment by a
borrower or guarantor of excess interest to a registered moneylender is valid within the legal
limit of the maximum interest rate under the Contributions Law, so long as the excess interest is
paid voluntarily and certain documentation requirements are satisfied (deemed valid payments),
despite the provisions of the Interest Rate Restriction Law.
However,
the Supreme Court of Japan has recently decided several cases that have negatively affected
the application by moneylenders of deemed valid payments of excess interest and have resulted in
increased claims for repayments of excess interest. In particular, in
January 2006, the court ruled that the voluntary payment requirement for deemed valid payments under the Moneylending
Business Law should be interpreted strictly, that an
acceleration clause in a loan agreement
is invalid with respect to a delay in the payment of excess interest
and that, unless there is some particular situation such that the
borrower is not misled into believing that such a clause is valid,
the voluntary nature of excess interest payments, which is
the requirement for deemed valid payments, will not be recognized.
Following
these court decisions, the prospects for resolutions of disputes over claims for repayments of excess interest have been
altered in favor of borrowers, and borrowers claims for repayments of excess interest have
substantially increased for the year ended March 31, 2007. Consequently, the Group
increased its reserve for losses on excess interest repayments and the
portion of allowance for loan losses provided for loan principal charged-off by excess
interest
repayments. The statute of limitations on claims for repayments of excess interest is
10 years from
the date of the relevant excess interest payment by the borrower.
Determining the amount of
reserve for losses on excess interest repayments and the portion of allowance for loan losses provided for loan principal charged-off by excess interest
repayments is a significant estimate and subject to substantial judgment by the Group. The Group sets
the reserve and allowance related to excess interest repayments based on managements best
estimation taking into account past experience and current conditions for refunding of excess interest.
However,
taking into consideration the current business environment, the Group modified its
allowance to
cover all estimated future repayments of excess interest derived from current loans
receivable and
loans previously paid-off or charged-off. This reserve methodology is consistent with the
Audit
Treatment of Reserve for Losses on Excess Interest Repayment Claims in Consumer Finance
Companies
issued by the Japanese Institute of Certified Public Accountants on
October 13, 2006. In particular, the Group analyzes the trends in claims for repayments of excess interest, typical
life of lending by loan product, timing of claims on loans previously
paid-off or charged-off and other factors.
The Group has not historically
tracked amounts of interest income specifically related to excess
interest. Interest income on excess interest approximated 30% of total interest income in
the past
several years including approximately ¥11,776 million and
¥9,858 million ($83,507
thousand), respectively, for the years ended March 31, 2006 and 2007. While claims
for repayments
of excess interest are substantially less than the amount of excess interest collected,
the Group's total gross
exposure may theoretically be up to the amount of excess interest received by the Group over the past
10 years. While the Group may not be obligated to refund
historical collection of excess interest, it refunds excess interest
for business purposes. The
Group continues to recognize revenue as collected, because it believes it is reasonably able to estimate repayments of excess interest.
F-13
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
When excess interest is refunded to borrowers, the excess amount is first applied to the
outstanding loan principal balance and charged-off from the
principal. The Group has the legal right to offset such excess amount
against the outstanding loan principal. If the excess amount is
greater than the outstanding balance of loan principal or there is no loan principal, which is the
case for loans previously paid-off or charged-off, then the Group refunds the deficit amount to the
borrower in cash. In the Groups balance sheet, of the amount refunded upon demands for repayment
of excess interest, (i) the portion applied to the outstanding loan principal is offset by
allowance for loan losses and (ii) the portion refunded in cash is offset by the reserve for losses
on excess interest repayments. In addition, provision for the portion applied to the
outstanding loan principal balance upon demands for repayment of excess interest and provision for the portion refunded in cash are recorded as
provision for losses on excess interest repayments in the accompanying consolidated statements of
operations. The reserve for losses on
excess interest repayments is included in Other liabilities in the
accompanying consolidated balance sheet. This amount was ¥590 million as of
March 31, 2006 and ¥4,952 million ($41,948 thousand) as of March 31,
2007. The portion of allowance for loan losses
provided for loan principal charged-off by excess interest repayments was
¥2,141 million and ¥5,213 million ($44,159
thousand), respectively, as of March 31, 2006 and 2007.
The Group previously deducted the excess interest repayment-related costs, which comprised excess
interest repayments in cash and provision for the portion refunded in
cash, directly from
interest income. However, taking into consideration the significant increase in excess interest
repayments in cash, the Group decided to disclose the excess interest
repayment-related costs plus provision for the portion applied to the
outstanding loan principal charged-off by excess interest repayments which was previously included in provision for loan losses, as a
separate item in the consolidated statements of operations as provision for losses on excess
interest repayments.
Following the abovementioned Supreme Courts decisions, amendments to the Moneylending Business
Law, the Contributions Law and the Interest Rate Restriction Law were promulgated on December 20,
2006 and are scheduled to become effective gradually over the next three years. When in force,
these amendments will (i) abolish the concept of deemed valid payments under the Moneylending
Business Law in approximately three years after the promulgation; (ii) reduce the legal limit on
the maximum interest rate under the Contributions Law from 29.2% per year to 20% per year in
approximately three years after the promulgation; and (iii) introduce further documentation
requirements within one year after the promulgation, among other things.
Because of
the above, effective June 2006, the Group removed the acceleration clause with respect to a delay in the payment of excess interest in all lending contracts. Further, the Group reduced interest rates charged
to borrowers to the restricted rate under the Interest Rate Restriction Law for most moneylending
products for new contracts made on and after October 1, 2006. Accordingly, management expects the
risk of borrowers requesting refunds for excess interest to decrease in respect of loans
originated on and after October 1, 2006.
The
following is a summary of changes in the reserve for losses on excess interest repayments included in Other liabilities and the portion of allowance for loan losses provided for loan principal charged-off by excess interest repayments for the years ended March 31, 2005, 2006, and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Millions of Yen
|
|
|
U.S. Dollars
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
Balance at beginning of year
|
|
¥
|
1,254
|
|
|
¥
|
1,932
|
|
|
¥
|
2,731
|
|
|
|
$ 23,134
|
|
Provision
for losses on excess interest repayments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount related to charge-offs
|
|
|
1,942
|
|
|
|
2,354
|
|
|
|
6,528
|
|
|
|
55,299
|
|
Amount related to cash refunds
|
|
|
190
|
|
|
|
977
|
|
|
|
6,136
|
|
|
|
51,978
|
|
Charge-offs against loan principal
|
|
|
(1,264
|
)
|
|
|
(2,145
|
)
|
|
|
(3,456
|
)
|
|
|
(29,276
|
)
|
Cash refunds
|
|
|
(190
|
)
|
|
|
(387
|
)
|
|
|
(1,774
|
)
|
|
|
(15,028
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
¥
|
1,932
|
|
|
¥
|
2,731
|
|
|
¥
|
10,165
|
|
|
|
$ 86,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-14
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(e) Loans Receivable and Allowance for Loan Losses
Loans
receivable are reported at the principal amount including deferred
origination costs, net of an allowance for loan losses, which includes
an allowance provided for loan principal charged-off by excess
interest repayments. The allowance for loan losses requires substantial
judgment by management and is a significant estimate.
The
allowance for loan losses is maintained at a level that, in managements judgment, is adequate to
provide for estimated probable uncollectible loan losses from known and inherent risks in the
Groups loan portfolios. Increases in the allowance are made by charges to the provision for loan
losses. Allowances are reviewed both on an individual loan and portfolio basis. In evaluating the
adequacy of the allowance, management considers various factors, including current economic
conditions, such as unemployment rates, corporate insolvencies and personal bankruptcy cases, and
historical loss experience. Restructured loans include any loans for which interest, principal or
term is restructured. Allowances for restructured loans are based on the collection history or
legal classification of the borrowers.
The
Groups policy is generally to charge-off loan balances and cease accrual of interest as
follows, in accordance with reasonably estimated collectability and delinquency period based on the
past experience for each product of loans receivable:
Secured
loans:
Loan balances are charged-off when the Group believes the likelihood of any
future collection is minimal. The Group considers the availability and value of collateral in
determining the level of charge-off. Interest accrual is terminated at the earlier of the date
when contractual payments are 97 days delinquent or the date when all or a part of loan
principal is deemed uncollectible.
Unsecured
Loans on Deeds:
Loan balances are charged-off when we believe the likelihood of any
future collection from the borrower as well as the guarantor is minimal. Events triggering
charge-offs include bankruptcy of both the borrower and guarantor. Interest accrual is
terminated at the earlier of the date when contractual interest payments are 97 days delinquent
or the date when all or a part of loan principal is deemed uncollectible.
Revolving
Loans:
Loan balances are charged-off and interest accrual is terminated when a
loans contractual interest payment becomes 67 days delinquent or upon the occurrence of other
events such as the bankruptcy of the borrower.
Other
than above, in the case that loans are restructured, we charge-off the amount of the recorded
loan balance less the restructured loan balance.
(f) Loan Origination Costs
The Group capitalizes direct origination costs and defers fees on successful loan originations.
Loan origination costs, net of loan origination fees, are deferred and amortized over the
contractual life of loans, which averaged approximately 48 months as of March 31, 2007.
(g) Investment in Leases and Revenue Recognition
Investment in direct financing leases consists of leases for various equipment types, including
office equipment, industrial machinery and transportation equipment (aircraft, vessels and
automobiles). The net investment in the leases, included in Loans receivable, net on the
consolidated balance sheets, is the gross investment in the leases plus any unamortized initial
direct costs less unearned lease income. Gross investment in the leases is the sum of lease
payments and estimated unguaranteed residual values. The estimated residual values represent
estimated proceeds from the disposition of equipment at the time the lease is terminated. Initial
direct costs are certain direct lease origination costs, which are being deferred and amortized
over the lease term as a yield adjustment. Unearned lease income is the difference between gross
investment in the leases and cost or carrying amount of the leased equipment. These are being
deferred and taken into income over the lease term. Amortization of unearned lease income is
computed using the interest method. For the years ended March 31, 2006 and 2007, the amount of
initial direct costs was insignificant. As of March 31, 2006 and 2007, the Group recorded ¥2,979
million and ¥3,498 million ($29,632 thousand), respectively, in book value for its investment in
direct financing leases.
Investment in operating leases represent the underlying tangible and intangible assets and are
carried at cost and depreciated over their estimated useful lives on a straight-line basis.
Revenues from operating leases are recognized over the lease term as it becomes receivable
according to the provisions of the lease. Revenues from re-leases are recognized when received.
As of March 31, 2006 and 2007, the Group had ¥1,552 million and ¥2,352 million ($19,923 thousand),
respectively, in net investment in operating leases, which were recorded in Property and
equipment, net on the accompanying consolidated balance sheets.
F-15
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(h) Purchased Loans Receivable and Revenue Recognition
Purchased
loans represent loans purchased from third-party originators and are reported at
purchased cost less an allowance for loan losses. The Group establishes an allowance for estimated
loan losses on reduced credit quality subsequent to acquisition. Due to the non-performing status
of loans that the Group typically purchases in its servicing business and the lack of history with the
borrowers, subsequent to the acquisition, the Group initially recognizes revenue from these loans
using the cost recovery method. Under this method, payments from a borrower are first applied to
loan principal. Once the purchased cost is fully recovered, subsequent receipts are recognized as
interest income. If the Group determines that it cannot recover its cost, an allowance for the
expected uncollectible portion is established. The loan is written off once the Group deems the
loan uncollectible. As of March 31, 2006 and 2007, ¥23,228 million and ¥27,626 million ($234,019
thousand), respectively, in carrying value of loans was accounted for under the cost recovery
method.
For those purchased loans for which the Group can reasonably estimate the expected timing and
amount of cash flows, the Group uses those expected future cash flows to record the loans
receivable and amortize the implied interest into revenue using the level yield method. The
Groups determination to use the level yield method, rather than the cost recovery method, to
account for a purchased loan depends on our judgment regarding the borrowers ability to meet the
restructured payments following our negotiation with the borrower. The Group will adjust the
future yield rate for expected changes in interest rates or collections. However, if the carrying
amounts of those loans are greater than the discounted value of expected future cash flows from
those loans due to delinquency in payment or use of legal means by the borrower, the difference is
recorded as an allowance for the uncollectible portion. As of March 31, 2006 and 2007, ¥927
million and ¥1,284 million ($10,877 thousand), respectively, in carrying value of loans was
accounted for under the level yield method.
(i) Investment Securities
The Groups investment securities consist of marketable securities and other investments. The
Group invests mainly in enterprises that have the potential to strategically complement its
business and whose values are expected to appreciate.
All marketable securities are classified as available-for-sale in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and
Equity Securities, and consist of marketable equity securities and debt securities.
Marketable equity securities are carried at fair value with unrealized gains and losses, net of
tax, reported as cumulative other comprehensive income in the shareholders equity. Fair value is
determined by the market price at the balance sheet date. In accordance with SFAS No. 115, an
other-than-temporary decline in fair value below the amortized cost basis is recorded as a loss
in the statement of operations in the period the decline was determined to be other than temporary.
The Group reviews investment securities that have declined in market value by approximately 10% or
more from their cost bases each period to determine whether an impairment has occurred. For these
securities, an other-than-temporary decline in market value is presumed to have occurred if the
decline has continued for six months unless there is sufficient evidence indicating that the
decline is temporary. Such evidence is considered only when there has been a subsequent recovery
in market value and the evidence includes a recent improvement in financial condition, a positive
prevailing business and industry outlook, and other factors that are deemed to be relevant
indicators.
Debt securities are accounted for on an amortized cost basis and adjusted for
other-than-temporary declines in fair value resulting from company-specific events, industry
developments, general economic conditions or other reasons.
Non-marketable equity securities, which is included in other investments, consist of investments in
which the Group has a less than 20% interest and for which the Group does not have the ability to
exercise significant influence, are accounted for on a cost basis and adjusted for
other-than-temporary declines in fair value resulting from company-specific events, industry
developments, general economic conditions or other reasons.
Costs of securities sold are determined using the weighted-average cost method.
F-16
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(j) Real Estate for Sale
Real estate for sale includes residential and commercial property throughout Japan. The
following is a summary of real estate for sale as of March 31, 2006 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Million of Yen
|
|
|
U.S. Dollars
|
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
Balance at beginning of year
|
|
¥
|
1,136
|
|
|
|
¥ 20,792
|
|
|
|
$ 176,129
|
|
Purchases and foreclosures
|
|
|
24,771
|
|
|
|
55,347
|
|
|
|
468,844
|
|
Sales
|
|
|
(5,458
|
)
|
|
|
(13,308
|
)
|
|
|
(112,732
|
)
|
Impairments and other, net
|
|
343
|
|
|
|
4,496
|
|
|
|
38,085
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
¥
|
20,792
|
|
|
|
¥ 67,327
|
|
|
|
$ 570,326
|
|
|
|
|
|
|
|
|
|
|
|
Real estate for sale, including real estate acquired upon foreclosure, is carried at the lower of
cost or fair value less estimated costs to sell.
If an assets fair value less cost to sell, based on discounted cash flows or market comparisons,
is less than its carrying amount, an impairment is recorded against the asset. Determining an
assets fair value and the related impairment to record requires the Group to utilize judgment and
estimates.
When acquiring real estate assets, the Group capitalizes costs in accordance with SFAS No. 67,
Accounting for Costs and the Initial Rental Operations of Real Estate Properties. Costs
capitalized under SFAS No. 67 include pursuit costs, or pre-acquisition costs, taxes and insurance,
and development and construction costs.
As of March 31, 2007, real estate for sale amounted to ¥67,327 million ($570,326 thousand), of
which ¥32,050 million ($271,495 thousand) was acquired in the general market, ¥1,048 million
($8,878 thousand) was acquired through foreclosure due to borrowers delinquency and ¥34,229
million ($289,953 thousand) was acquired through entities which are consolidated by the Group in
accordance with the
FIN No. 46(R).
(k) Long-lived Assets
Property and equipment, including investment in operating leases, are stated at cost and, except
for land, are depreciated on a straight-line basis over their estimated useful lives, approximately
22 to 50 years (weighted-average life of 41 years) for buildings, 3 to 18 years (weighted-average
life of 14 years) for building improvements, 10 to 30 years (weighted-average life of 12 years) for
structures and 2 to 20 years (weighted-average life of 4 years) for equipment. Software is
amortized on a straight-line basis over 5 years.
Leased property and equipment under capital leases as lessee including software is amortized over
the period of the lease or the life of the property and equipment, whichever is shorter. Repairs
and maintenance are charged to expense when incurred.
The Group applies SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
to recognize and measure impairment of property and equipment owned or under capital lease. The
Group reviews its long-lived assets for impairment whenever events or circumstances indicate that
the carrying amount of an asset group may not be recoverable. Long-lived assets are reported at
the carrying value less amount of impairment, if any. Assets to be disposed are recorded at the
lower of carrying amount or fair value less costs to sell. During the year ended March 31, 2007,
the Group wrote off investments in operational assets and real property to their fair value,
recording ¥141 million ($1,194 thousand) in losses for the year. The fair value of these assets
was measured at net realizable value, using appraised value for real property and zero value for
other fixed assets. These losses are included in Losses on sale, disposal and impairment of
long-lived assets, net in the accompanying consolidated statements of operations. The Group did
not recognize any impairment of long-lived assets during the years ended March 31, 2005 and 2006.
F-17
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(l) Investments in Affiliates
Investments
in 20% to 50%-owned affiliates in which the Group has the ability to exercise
significant influence over operating and financial policies are accounted for under the equity
method. Under the equity method, the Group will recognize its annual share of income or losses in
the current period statement of operations and as an adjustment to investment.
(m) Goodwill and Other Intangible Assets
Goodwill reflects an excess of purchase price and related costs over the fair value of specifically
identified net assets purchased. In accordance with SFAS No. 142, Goodwill and Other Intangible
Assets, goodwill and other intangible assets deemed to have indefinite lives are not amortized but
are subject to impairment tests annually, on March 31, or whenever events or changes in business
circumstances indicate the carrying value of the assets may not be recoverable. These impairment
tests are based on the comparison of the fair value of each of the Groups reporting units to the
carrying value of such unit. If the fair value of the reporting unit falls below its carrying
value, goodwill and other intangible assets are deemed to be impaired and a write-off of goodwill
is recognized. During the years ended March 31, 2006 and 2007, the Group performed the required
impairment tests under SFAS No. 142 to determine the recoverability of its goodwill and other
intangible assets, and concluded that there were no impairments in the carrying value of its
goodwill and other intangible assets recognized in business combination.
See Note 11 for details of goodwill and other intangible assets.
(n) Derivative Financial Instruments
The Group accounts for derivative instruments in accordance with SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities an amendment of FASB Statement No. 133 and SFAS No.
149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities which require
that all derivative instruments be recorded on the balance sheet at fair value. Changes in the
fair value of derivatives are recorded each period either in current results of operations or
cumulative other comprehensive income (losses), depending on whether a derivative is designated as
a fair value hedge or a cash flow hedge. For a derivative not designated as a hedging instrument,
the gains or losses are recognized currently in results of operations.
The Group uses both variable and fixed rate debt to finance its operations. The variable rate debt
obligations expose the Group to variability in interest payments due to changes in interest rates.
The Group continuously monitors changes in interest rate exposures and evaluates hedging
opportunities to limit the impact of interest rate changes on earnings and cash flows.
See Note 15 for details of derivative instruments.
(o) Guarantees
The Group
accounts for guarantees in accordance with the FIN No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.
The Group provides guarantees to affiliated and non-affiliated companies for a fee, which
are recognized on an accrual basis based on the amount of underlying loans outstanding. The Group
maintains reserves for estimated losses from these guarantee transactions at a level that, in
managements judgment, is adequate to provide for estimated probable losses from known and inherent
risks in these transactions. Provision to the reserve are deducted from guarantee fees received.
In evaluating the adequacy of the reserve, management considers various factors, including current
economic conditions and historical loss experience for similar products.
Moreover, in the event of borrowers delinquency, the Group is required to pay out on its
guarantees for the outstanding balance of the specified loans. Upon payment of any guarantees, the
Group records a corresponding receivable from the counterparty, offset by an allowance for deemed
uncollectible amounts which generally approximates 100% of the amount outstanding. The Group
protects against risk for guarantees through its underwriting and monthly evaluation process. The
Group is able to agree to take or decline the guarantee at the time of the loan underwriting
process.
Additionally, in the normal course of its business, the Group may guarantee or indemnify directors
and service providers against litigation or claims. These claims are expected to be fully covered
by insurance policies held by the Group.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(p) Treasury Stock
Treasury stock is recorded at the Groups cost basis. Pursuant to its Articles of Incorporation,
the Group may purchase treasury stock with the Board of Directors approval and can retire treasury
stock by reducing retained earnings or additional paid-in capital.
(q) Advertising Costs
Advertising costs are expensed as incurred, except for costs for advertising requiring upfront
payment for a series of advertisements, which are deferred and expensed as the individual
communications occur. Advertising expenses recognized for the years ended March 31, 2005, 2006 and
2007 were ¥332 million, ¥629 million and ¥264 million ($2,236 thousand), respectively.
(r) Income Taxes
The Group uses the asset and liability method to account for income taxes. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax
bases and operating losses and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to be applied to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities from a change in tax rates is recognized in income in the period the change
is enacted. A valuation allowance is established when it is determined that deferred tax assets
are no longer more likely than not to be realized.
(s) Net Income Per Share (EPS)
Basic EPS is computed based on the average number of shares of common stock outstanding during each
period. Diluted EPS further includes the dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or resulted in the
issuance of common stock.
The Company completed a 2-for-1 stock split on each of May 20, 2004, November 19, 2004, November
18, 2005, and April 1, 2006, respectively, and completed a 1.2-for-1 stock split on May 20, 2005.
In addition, the Company completed a 1-for-20 reverse stock split on August 31, 2007. All share
information disclosed has been retroactively adjusted to reflect such stock splits and reverse
stock split.
(t) Stock-based Compensation
In
December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No.
123R), a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123R
requires a public entity to measure the cost of employee services received in exchange for an award
of equity instruments based on the grant-date fair value of the award.
The Group adopted SFAS No. 123R from the annual reporting period beginning from April 1, 2006 using
the modified prospective method. The Group previously accounted for its stock-based compensation
arrangements in accordance with Accounting Principles Board Opinion (APB) No. 25, Accounting for
Stock Issued to Employees as permitted by SFAS No. 123. Under APB No. 25, the excess, if any, of
the quoted market price of the stock at the grant date of the award or other measurement date over
the stated exercise price of the award had been recognized as deferred stock-based compensation
cost and amortized over the period in which the employee performs the required service.
F-19
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following table reflects pro forma information of the Groups net income and net
income per common share with and without dilution for the years ended March 31, 2005 and 2006 in
conformity with SFAS No. 123R:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Millions of Yen
|
|
|
U.S. Dollars
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
Net income (losses), as reported
|
|
¥
|
7,262
|
|
|
¥
|
8,455
|
|
|
¥
|
(1,610
|
)
|
|
$
|
(13,638
|
)
|
Add back: Stock-based compensation
expense determined under intrinsic
value method, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deduct: Pro forma stock-based
compensation expense determined
under fair value method, net of tax
|
|
|
129
|
|
|
|
346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
¥
|
7,133
|
|
|
¥
|
8,109
|
|
|
¥
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yen
|
|
U.S. Dollars
|
|
|
2005
|
|
2006
|
|
2007
|
|
2007
|
Net income (losses) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported basic
|
|
¥
|
59.60
|
|
|
¥
|
65.40
|
|
|
¥
|
(11.42
|
)
|
|
$
|
(0.097
|
)
|
As reported diluted
|
|
|
54.00
|
|
|
|
61.60
|
|
|
|
(11.42
|
)
|
|
|
(0.097
|
)
|
|
|
|
Yen
|
|
U.S. Dollars
|
|
|
2005
|
|
2006
|
|
2007
|
|
2007
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma basic
|
|
¥
|
58.40
|
|
|
¥
|
62.80
|
|
|
¥
|
|
|
|
$
|
|
|
Pro forma diluted
|
|
|
52.80
|
|
|
|
58.80
|
|
|
|
|
|
|
|
|
|
The Group recognized stock-based compensation costs of ¥383 million ($3,244 thousand) using
the Black-Scholes option-pricing model for the year ended March 31, 2007 under SFAS No. 123R, while
the Group recognized no compensation costs under APB No. 25 for the years ended March 31, 2005 and
2006. Basic and diluted net losses per share for the year ended March 31, 2007 would have been ¥8.66 ($0.073) and ¥8.68 ($0.074), if the Group had not adopted SFAS No. 123R and had continued to
account for stock-based compensation costs under APB No. 25.
(p) Treasury Stock
Treasury stock is recorded at the Groups cost basis. Pursuant to its Articles of Incorporation,
the Group may purchase treasury stock with the Board of Directors approval and can retire treasury
stock by reducing retained earnings or additional paid-in capital.
(q) Advertising Costs
Advertising costs are expensed as incurred, except for costs for advertising requiring upfront
payment for a series of advertisements, which are deferred and expensed as the individual
communications occur. Advertising expenses recognized for the years ended March 31, 2005, 2006 and
2007 were ¥332 million, ¥629 million and ¥264 million ($2,236 thousand), respectively.
(r) Income Taxes
The Group uses the asset and liability method to account for income taxes. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax
bases and operating losses and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to be applied to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities from a change in tax rates is recognized in income in the period the change
is enacted. A valuation allowance is established when it is determined that deferred tax assets
are no longer more likely than not to be realized.
(u) Issuance of Stock by Subsidiaries or Affiliates
The change in the Groups proportionate interest in a subsidiary or an affiliate resulting from
issuance of stock by the subsidiary or affiliate is recognized as earnings.
(v) Comprehensive Income
The Group accounts for comprehensive income in accordance with SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for the reporting and presentation of
comprehensive income and its components (revenues, expenses, gains, and losses) in the financial
statements. The Group presents comprehensive income in its consolidated statement of shareholders
equity, net of related income taxes.
F-20
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. Recently Issued Accounting Pronouncements
In
June 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109 which clarifies the accounting for uncertainty in income
taxes recognized in the financial statements in accordance with SFAS No. 109, Accounting for
Income Taxes. FIN No. 48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or expected to be taken in
a tax return. FIN No. 48 also provides guidance on derecognition, classification, interest and
penalties, disclosure and transitional measures. FIN No. 48 will be effective for the Group from the
fiscal year beginning April 1, 2007. The Group is currently evaluating the impact of adoption of
FIN No. 48 on its financial statements. At March 31, 2007, the Company has taken positions on its tax
returns related to the reporting of reserve for excess interest repayments. The Company does not
expect reporting of this tax contingency to have a material impact on the statements of
operations.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157
establishes a framework for measuring fair value, clarifies the definition of fair value, and
expands disclosures about the use of fair value measurements. SFAS No. 157 applies under other
accounting pronouncements that require or permit fair value measurements and does not require any
new fair value measurements. SFAS No. 157 will be effective for the Group from the fiscal year
beginning April 1, 2008. The Group is currently assessing the potential effect of SFAS No. 157 on
its financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities. SFAS No. 159 permits companies to choose to measure, on an
instrument-by-instrument basis, financial instruments and certain other items at fair value that
are not currently required to be measured at fair value. The Group is currently evaluating whether
to elect the option provided for in this statement. If elected, SFAS No. 159 would be effective
for the Group from the fiscal year beginning April 1, 2008.
F-21
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4. Loans Receivable and Allowance for Loan Losses
The following is a summary of loans outstanding as of March 31, 2006 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Millions of Yen
|
|
|
U.S. Dollars
|
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
Secured loans
|
|
¥
|
91,610
|
|
|
¥
|
139,691
|
|
|
$
|
1,183,321
|
|
SME loans
|
|
|
90,729
|
|
|
|
81,688
|
|
|
|
691,978
|
|
Consumer loans
|
|
|
44,158
|
|
|
|
34,959
|
|
|
|
296,137
|
|
Other loans
|
|
|
10,681
|
|
|
|
14,605
|
|
|
|
123,719
|
|
|
|
|
|
|
|
|
|
|
|
Total loans outstanding
|
|
|
237,178
|
|
|
|
270,943
|
|
|
|
2,295,155
|
|
Allowance for loan losses
|
|
|
(11,003
|
)
|
|
|
(18,537
|
)
|
|
|
(157,027
|
)
|
Deferred origination costs (fee income)
|
|
|
(228
|
)
|
|
|
(1,626
|
)
|
|
|
(13,774
|
)
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, net
|
|
¥
|
225,947
|
|
|
¥
|
250,780
|
|
|
$
|
2,124,354
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of changes in the allowance for loan losses for the years ended
March 31, 2005, 2006 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Millions of Yen
|
|
|
U.S. Dollars
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
Balance at beginning of year
|
|
¥
|
13,528
|
|
|
¥
|
10,034
|
|
|
¥
|
11,003
|
|
|
$
|
93,206
|
|
Provision for loans
receivable on sold loans
|
|
|
(3,327
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
5,817
|
|
|
|
5,923
|
|
|
|
10,853
|
|
|
|
91,936
|
|
Provision
for charge-offs by excess interest repayments
|
|
|
1,942
|
|
|
|
2,354
|
|
|
|
6,528
|
|
|
|
55,298
|
|
Charge-offs, net of recoveries
|
|
|
(7,926
|
)
|
|
|
(7,308
|
)
|
|
|
(9,847
|
)
|
|
|
(83,413
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
¥
|
10,034
|
|
|
¥
|
11,003
|
|
|
¥
|
18,537
|
|
|
$
|
157,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the above allowance for loan losses, the amount included as the allowance provided for charge-offs by repayments
of excess interest is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Millions of Yen
|
|
|
U.S. Dollars
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
Amount related to loan losses
|
|
¥
|
8,102
|
|
|
¥
|
8,862
|
|
|
¥
|
13,324
|
|
|
|
$112,868
|
|
Amount related to charge-offs by excess interest repayments
|
|
|
1,932
|
|
|
|
2,141
|
|
|
|
5,213
|
|
|
|
44,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance for loan losses
|
|
¥
|
10,034
|
|
|
¥
|
11,003
|
|
|
¥
|
18,537
|
|
|
|
$157,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-22
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The components of the allowance for loan losses as of March 31, 2006 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions of Yen
|
|
|
|
2006
|
|
|
|
Secured Loans
|
|
|
SME Loans
|
|
|
Consumer Loans
|
|
|
Other Loans
|
|
|
Total
|
|
Historical Loss Components
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
¥90,905
|
|
|
|
¥80,107
|
|
|
|
¥37,151
|
|
|
|
¥10,375
|
|
|
|
¥218,538
|
|
Restructured
|
|
|
665
|
|
|
|
7,696
|
|
|
|
6,037
|
|
|
|
12
|
|
|
|
14,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding
|
|
|
91,570
|
|
|
|
87,803
|
|
|
|
43,188
|
|
|
|
10,387
|
|
|
|
232,948
|
|
Allowance
|
|
|
532
|
|
|
|
4,743
|
|
|
|
1,694
|
|
|
|
197
|
|
|
|
7,166
|
|
- 67 to 96 days
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding
|
|
|
2
|
|
|
|
339
|
|
|
|
83
|
|
|
|
87
|
|
|
|
511
|
|
Allowance
|
|
|
2
|
|
|
|
238
|
|
|
|
58
|
|
|
|
61
|
|
|
|
359
|
|
- 97 to 120 days
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding
|
|
|
|
|
|
|
73
|
|
|
|
32
|
|
|
|
141
|
|
|
|
246
|
|
Allowance
|
|
|
|
|
|
|
73
|
|
|
|
32
|
|
|
|
141
|
|
|
|
246
|
|
- Over 120 days
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding
|
|
|
15
|
|
|
|
1,452
|
|
|
|
499
|
|
|
|
16
|
|
|
|
1,982
|
|
Allowance
|
|
|
15
|
|
|
|
1,452
|
|
|
|
499
|
|
|
|
16
|
|
|
|
1,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding
|
|
|
91,587
|
|
|
|
89,667
|
|
|
|
43,802
|
|
|
|
10,631
|
|
|
|
235,687
|
|
Allowance
|
|
|
549
|
|
|
|
6,506
|
|
|
|
2,283
|
|
|
|
415
|
|
|
|
9,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Bankrupt loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding
|
|
|
19
|
|
|
|
833
|
|
|
|
264
|
|
|
|
40
|
|
|
|
1,156
|
|
Allowance
|
|
|
7
|
|
|
|
785
|
|
|
|
256
|
|
|
|
36
|
|
|
|
1,084
|
|
- Loans under legal process
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding
|
|
|
4
|
|
|
|
229
|
|
|
|
92
|
|
|
|
10
|
|
|
|
335
|
|
Allowance
|
|
|
2
|
|
|
|
114
|
|
|
|
46
|
|
|
|
4
|
|
|
|
166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding
|
|
|
23
|
|
|
|
1,062
|
|
|
|
356
|
|
|
|
50
|
|
|
|
1,491
|
|
Allowance
|
|
|
9
|
|
|
|
899
|
|
|
|
302
|
|
|
|
40
|
|
|
|
1,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans outstanding
|
|
|
¥91,610
|
|
|
|
¥90,729
|
|
|
|
¥44,158
|
|
|
|
¥10,681
|
|
|
|
¥237,178
|
|
Total allowance
|
|
|
558
|
|
|
|
7,405
|
|
|
|
2,585
|
|
|
|
455
|
|
|
|
11,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-23
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions of Yen
|
|
|
|
2007
|
|
|
|
Secured Loans
|
|
|
SME Loans
|
|
|
Consumer Loans
|
|
|
Other Loans
|
|
|
Total
|
|
Historical Loss Components
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
¥133,939
|
|
|
|
¥67,556
|
|
|
|
¥28,533
|
|
|
|
¥13,958
|
|
|
|
¥243,986
|
|
Restructured
|
|
|
5,108
|
|
|
|
8,528
|
|
|
|
5,138
|
|
|
|
12
|
|
|
|
18,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding
|
|
|
139,047
|
|
|
|
76,084
|
|
|
|
33,671
|
|
|
|
13,970
|
|
|
|
262,772
|
|
Allowance
|
|
|
78
|
|
|
|
8,072
|
|
|
|
2,558
|
|
|
|
326
|
|
|
|
11,034
|
|
- 67 to 96 days
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding
|
|
|
|
|
|
|
447
|
|
|
|
114
|
|
|
|
44
|
|
|
|
605
|
|
Allowance
|
|
|
|
|
|
|
313
|
|
|
|
80
|
|
|
|
26
|
|
|
|
419
|
|
- 97 to 120 days
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding
|
|
|
|
|
|
|
164
|
|
|
|
84
|
|
|
|
474
|
|
|
|
722
|
|
Allowance
|
|
|
|
|
|
|
164
|
|
|
|
84
|
|
|
|
474
|
|
|
|
722
|
|
- Over 120 days
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding
|
|
|
541
|
|
|
|
2,578
|
|
|
|
686
|
|
|
|
7
|
|
|
|
3,812
|
|
Allowance
|
|
|
518
|
|
|
|
2,568
|
|
|
|
686
|
|
|
|
5
|
|
|
|
3,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding
|
|
|
139,588
|
|
|
|
79,273
|
|
|
|
34,555
|
|
|
|
14,495
|
|
|
|
267,911
|
|
Allowance
|
|
|
596
|
|
|
|
11,117
|
|
|
|
3,408
|
|
|
|
831
|
|
|
|
15,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Bankrupt loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding
|
|
|
7
|
|
|
|
1,824
|
|
|
|
293
|
|
|
|
51
|
|
|
|
2,175
|
|
Allowance
|
|
|
7
|
|
|
|
1,783
|
|
|
|
287
|
|
|
|
50
|
|
|
|
2,127
|
|
- Loans under legal process
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding
|
|
|
96
|
|
|
|
591
|
|
|
|
111
|
|
|
|
59
|
|
|
|
857
|
|
Allowance
|
|
|
21
|
|
|
|
350
|
|
|
|
55
|
|
|
|
32
|
|
|
|
458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding
|
|
|
103
|
|
|
|
2,415
|
|
|
|
404
|
|
|
|
110
|
|
|
|
3,032
|
|
Allowance
|
|
|
28
|
|
|
|
2,133
|
|
|
|
342
|
|
|
|
82
|
|
|
|
2,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans outstanding
|
|
|
¥139,691
|
|
|
|
¥81,688
|
|
|
|
¥34,959
|
|
|
|
¥14,605
|
|
|
|
¥270,943
|
|
Total allowance
|
|
|
624
|
|
|
|
13,250
|
|
|
|
3,750
|
|
|
|
913
|
|
|
|
18,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-24
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of U.S. Dollars
|
|
|
|
2007
|
|
|
|
Secured Loans
|
|
|
SME Loans
|
|
|
Consumer Loans
|
|
|
Other Loans
|
|
|
Total
|
|
Historical Loss Components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
$1,134,595
|
|
|
|
$572,266
|
|
|
|
$241,703
|
|
|
|
$118,238
|
|
|
|
$2,066,802
|
|
Restructured
|
|
|
43,270
|
|
|
|
72,241
|
|
|
|
43,524
|
|
|
|
102
|
|
|
|
159,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding
|
|
|
1,177,865
|
|
|
|
644,507
|
|
|
|
285,227
|
|
|
|
118,340
|
|
|
|
2,225,939
|
|
Allowance
|
|
|
661
|
|
|
|
68,378
|
|
|
|
21,668
|
|
|
|
2,762
|
|
|
|
93,469
|
|
- 67 to 96 days
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding
|
|
|
|
|
|
|
3,787
|
|
|
|
965
|
|
|
|
373
|
|
|
|
5,125
|
|
Allowance
|
|
|
|
|
|
|
2,651
|
|
|
|
678
|
|
|
|
220
|
|
|
|
3,549
|
|
- 97 to 120 days
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding
|
|
|
|
|
|
|
1,389
|
|
|
|
712
|
|
|
|
4,015
|
|
|
|
6,116
|
|
Allowance
|
|
|
|
|
|
|
1,389
|
|
|
|
712
|
|
|
|
4,015
|
|
|
|
6,116
|
|
- Over 120 days
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding
|
|
|
4,583
|
|
|
|
21,838
|
|
|
|
5,811
|
|
|
|
59
|
|
|
|
32,291
|
|
Allowance
|
|
|
4,388
|
|
|
|
21,754
|
|
|
|
5,811
|
|
|
|
42
|
|
|
|
31,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding
|
|
|
1,182,448
|
|
|
|
671,521
|
|
|
|
292,715
|
|
|
|
122,787
|
|
|
|
2,269,471
|
|
Allowance
|
|
|
5,049
|
|
|
|
94,172
|
|
|
|
28,869
|
|
|
|
7,039
|
|
|
|
135,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Bankrupt loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding
|
|
|
59
|
|
|
|
15,451
|
|
|
|
2,482
|
|
|
|
432
|
|
|
|
18,424
|
|
Allowance
|
|
|
59
|
|
|
|
15,104
|
|
|
|
2,431
|
|
|
|
424
|
|
|
|
18,018
|
|
- Loans under legal process
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding
|
|
|
814
|
|
|
|
5,006
|
|
|
|
940
|
|
|
|
500
|
|
|
|
7,260
|
|
Allowance
|
|
|
178
|
|
|
|
2,965
|
|
|
|
466
|
|
|
|
271
|
|
|
|
3,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding
|
|
|
873
|
|
|
|
20,457
|
|
|
|
3,422
|
|
|
|
932
|
|
|
|
25,684
|
|
Allowance
|
|
|
237
|
|
|
|
18,069
|
|
|
|
2,897
|
|
|
|
695
|
|
|
|
21,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans outstanding
|
|
|
$1,183,321
|
|
|
|
$691,978
|
|
|
|
$296,137
|
|
|
|
$123,719
|
|
|
|
$2,295,155
|
|
Total allowance
|
|
|
5,286
|
|
|
|
112,241
|
|
|
|
31,766
|
|
|
|
7,734
|
|
|
|
157,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Groups allowance for loan losses is the sum of specific reserves under SFAS No. 114, Accounting by Creditors for Impairment of a Loan, and a general reserve of groups of loans with
similar risk characteristics under SFAS No. 5, Accounting for Contingencies. The components used
in determining the allowance level include:
|
(1)
|
|
a component estimated based on historical loss by payment status;
|
|
(2)
|
|
components based on legal status including bankruptcy or death; and
|
|
(3)
|
|
other components based on loan attributes.
|
Historical loss experience is adjusted for observable data on bankruptcies and unemployment.
F-25
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The aggregate loans outstanding due in each of the next five fiscal years and thereafter are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Millions of Yen
|
|
|
U.S. Dollars
|
|
Year ending March 31,
|
|
|
|
|
|
|
|
|
2008
|
|
¥
|
176,181
|
|
|
$
|
1,492,427
|
|
2009
|
|
|
39,223
|
|
|
|
332,258
|
|
2010
|
|
|
33,502
|
|
|
|
283,795
|
|
2011
|
|
|
13,688
|
|
|
|
115,951
|
|
2012 and thereafter
|
|
|
8,349
|
|
|
|
70,724
|
|
|
|
|
|
|
|
|
Total loans outstanding
|
|
¥
|
270,943
|
|
|
$
|
2,295,155
|
|
|
|
|
|
|
|
|
In
addition, NIS Lease Co., Ltd. (NIS Lease), a wholly-owned subsidiary, was incorporated on
November 10, 2003, and started its business on February 1, 2004. NIS Lease acquires equipment and
related assets for lease and provides leasing services in Japan, including direct financing leases.
Investment in direct financing leases, included in Other
loans of Loans receivable, net, at
March 31, 2006 and 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Millions of Yen
|
|
|
U.S. Dollars
|
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
Aggregate lease payments receivable
|
|
¥
|
4,002
|
|
|
¥
|
4,700
|
|
|
$
|
39,814
|
|
Initial direct costs
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned lease income
|
|
|
(901
|
)
|
|
|
(945
|
)
|
|
|
(8,005
|
)
|
|
|
|
|
|
|
|
|
|
|
Investment in direct financing leases
|
|
|
3,101
|
|
|
|
3,755
|
|
|
|
31,809
|
|
Allowance for loan and lease losses
|
|
|
(122
|
)
|
|
|
(257
|
)
|
|
|
(2,177
|
)
|
|
|
|
|
|
|
|
|
|
|
Investment in direct financing leases, net
|
|
¥
|
2,979
|
|
|
¥
|
3,498
|
|
|
$
|
29,632
|
|
|
|
|
|
|
|
|
|
|
|
The presentation of initial direct costs associated with investment in direct financing leases
for the years ended March 31, 2006 and 2007 are omitted as their respective figures are
insignificant.
Aggregate lease payments receivable are due in periodic installments through March 2012. At March
31, 2007, the amounts, which are included in the schedule above, due in each of the next five
fiscal years and thereafter are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Millions of Yen
|
|
|
U.S. Dollars
|
|
Year ending March 31,
|
|
|
|
|
|
|
|
|
2008
|
|
¥
|
1,490
|
|
|
$
|
12,622
|
|
2009
|
|
|
1,417
|
|
|
|
12,003
|
|
2010
|
|
|
1,053
|
|
|
|
8,920
|
|
2011
|
|
|
562
|
|
|
|
4,761
|
|
2012
|
|
|
178
|
|
|
|
1,508
|
|
|
|
|
|
|
|
|
Aggregate lease payments receivable
|
|
¥
|
4,700
|
|
|
$
|
39,814
|
|
|
|
|
|
|
|
|
F-26
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5. Purchased Loans Receivable
The Group mainly purchases distressed loans from financial institutions and services these loans
for its own portfolio. The total contracted amounts outstanding for these distressed loans were
¥1,643,039 million and ¥2,227,668 million ($18,870,546 thousand) as of March 31, 2006 and 2007,
respectively.
The following is a summary of the recorded value of purchased loans receivable as of March 31, 2006
and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
|
|
|
|
Millions of Yen
|
|
|
U.S. Dollars
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
Purchased loans outstanding
|
|
|
|
|
|
|
¥25,947
|
|
|
|
¥31,565
|
|
|
|
$267,386
|
|
Allowance for loan losses
|
|
|
|
|
|
|
(1,792
|
)
|
|
|
(2,655
|
)
|
|
|
(22,490
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased loans receivable, net
|
|
|
|
|
|
|
¥24,155
|
|
|
|
¥28,910
|
|
|
|
$244,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of information with respect to purchased loans receivable for the
years ended March 31, 2005, 2006 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Millions of Yen
|
|
|
U.S. Dollars
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
Purchased loans receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
¥ 5,059
|
|
|
|
¥14,863
|
|
|
|
¥25,947
|
|
|
|
$ 219,797
|
|
Purchases
|
|
|
16,896
|
|
|
|
19,779
|
|
|
|
19,565
|
|
|
|
165,735
|
|
Principal collections
(A)
|
|
|
(6,840
|
)
|
|
|
(7,308
|
)
|
|
|
(13,087
|
)
|
|
|
(110,860
|
)
|
Sales
(B)
|
|
|
|
|
|
|
(711
|
)
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
(252
|
)
|
|
|
(676
|
)
|
|
|
(833
|
)
|
|
|
(7,057
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
(27
|
)
|
|
|
(229
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
14,863
|
|
|
|
25,947
|
|
|
|
31,565
|
|
|
|
267,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
717
|
|
|
|
1,282
|
|
|
|
1,792
|
|
|
|
15,180
|
|
Provision for loan losses
|
|
|
817
|
|
|
|
1,186
|
|
|
|
1,696
|
|
|
|
14,367
|
|
Charge-offs
|
|
|
(252
|
)
|
|
|
(676
|
)
|
|
|
(833
|
)
|
|
|
(7,057
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
1,282
|
|
|
|
1,792
|
|
|
|
2,655
|
|
|
|
22,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased loans receivable, net
|
|
|
¥13,581
|
|
|
|
¥24,155
|
|
|
|
¥28,910
|
|
|
|
$244,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
|
Including non-cash payments such as foreclosed property of
¥352 million and ¥218 million ($1,847 thousand) for
the year ended March 31, 2006 and 2007, respectively.
|
|
(B)
|
|
Sold to an affiliate accounted for under equity method at cost which approximated fair value.
The Group did not recognize any gains or losses from this transaction.
|
|
(C)
|
|
Since ¥12,745 million, ¥23,228 million
and ¥27,626 million ($234,019 thousand) of the net purchased loans were accounted for under the cost
recovery method as of March 31, 2005, 2006 and 2007,
respectively, the amounts of accretable yield were not
considered significant.
|
In the event of a borrowers delinquency, the Group may foreclose on the borrowers loan
collateral. Real estate collateral obtained by the Group is held for sale and included in Real
estate for sale on the accompanying consolidated balance sheets.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
6. Investment Securities
The Groups investment securities as of March 31, 2006 and 2007 consist of marketable securities,
all of which are classified as available-for-sale in accordance with SFAS No. 115, and other
investments, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Millions of Yen
|
|
|
U.S. Dollars
|
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
¥
|
23,396
|
|
|
¥
|
16,938
|
|
|
$
|
143,482
|
|
Debt securities
|
|
|
114
|
|
|
|
1,035
|
|
|
|
8,767
|
|
Other investments
|
|
|
18,561
|
|
|
|
20,411
|
|
|
|
172,901
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
¥
|
42,071
|
|
|
¥
|
38,384
|
|
|
$
|
325,150
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate cost and fair value of marketable equity securities as of March 31, 2006 and
2007 are as follows:
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions of Yen
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity
securities
|
|
¥
|
14,424
|
|
|
¥
|
9,121
|
|
|
¥
|
149
|
|
|
¥
|
23,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions of Yen
|
|
|
Thousands of U.S. Dollars
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Marketable equity
securities
|
|
¥
|
14,650
|
|
|
¥
|
2,457
|
|
|
¥
|
169
|
|
|
¥
|
16,938
|
|
|
$
|
124,100
|
|
|
$
|
20,814
|
|
|
$
|
1,432
|
|
|
$
|
143,482
|
|
The number of investment positions and the aggregate fair value of marketable equity
securities which were in an unrealized loss position as of March 31, 2006 and 2007 were 6 positions
and ¥2,781 million, and 12 positions and ¥4,406 million ($37,323 thousand), respectively, and no
marketable equity securities were in an unrealized loss position for 12 months or more.
In addition, the aggregate cost of debt securities approximates fair value. As of March 31, 2006
and 2007, the Group held five and nine debt securities, respectively, with maturity ranging from
August 2006 to March 2010 and August 2007 to August 2011, respectively.
The aggregate cost of other investments which approximates fair value as of March 31, 2006 and 2007
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Millions of Yen
|
|
|
U.S. Dollars
|
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
Non-marketable equity securities
|
|
¥
|
4,594
|
|
|
¥
|
7,981
|
|
|
$
|
67,607
|
|
Investment funds
|
|
|
13,734
|
|
|
|
12,339
|
|
|
|
104,523
|
|
Other
|
|
|
233
|
|
|
|
91
|
|
|
|
771
|
|
|
|
|
|
|
|
|
|
|
|
Total other investments
|
|
¥
|
18,561
|
|
|
¥
|
20,411
|
|
|
$
|
172,901
|
|
|
|
|
|
|
|
|
|
|
|
During the years ended March 31, 2005, 2006 and 2007, the proceeds from sales of investment
securities were ¥5,125 million, ¥12,707 million and ¥10,323 million ($87,446 thousand),
respectively. On those sales, gross realized gains computed on the average cost basis were ¥939
million, ¥4,185 million and ¥1,357 million ($11,495 thousand) and gross realized losses were ¥5
million, ¥2 million and ¥105 million ($889 thousand), respectively.
Management believes that there was a permanent impairment in value of marketable securities and
other investments during the years ended March 31, 2005, 2006 and 2007 of approximately ¥1,447 million, ¥475 million and ¥2,420
million ($20,500 thousand), respectively. These amounts are netted with the gains noted above in
the accompanying consolidated statements of operations.
F-28
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
7. Property and Equipment
Property and equipment as of March 31, 2006 and 2007 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Millions of Yen
|
|
|
U.S. Dollars
|
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
Land
|
|
|
¥ 4,070
|
|
|
|
¥ 1,920
|
|
|
$
|
16,264
|
|
Buildings and structures
|
|
|
4,043
|
|
|
|
4,023
|
|
|
|
34,079
|
|
Equipment and software
|
|
|
6,587
|
|
|
|
7,576
|
|
|
|
64,176
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
14,700
|
|
|
|
13,519
|
|
|
|
114,519
|
|
Less accumulated depreciation and amortization
|
|
|
(3,531
|
)
|
|
|
(5,071
|
)
|
|
|
(42,956
|
)
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
¥ 11,169
|
|
|
|
¥ 8,448
|
|
|
$
|
71,563
|
|
|
|
|
|
|
|
|
|
|
|
As discussed in the summary of significant accounting policies, investment in operating leases
is included in property and equipment presented above. The cost of equipment, building
improvements and related assets leased to customers under operating leases as of March 31, 2006 and
2007 was ¥1,848 million and ¥3,069 million ($25,997 thousand), respectively. Accumulated
depreciation on equipment, building improvements and related assets under operating leases as of
March 31, 2006 and 2007 was ¥296 million and ¥717 million ($6,074 thousand), respectively.
Depreciation during the years ended March 31, 2005, 2006 and 2007 was ¥1,175 million, ¥1,333
million and ¥1,678 million ($14,214 thousand), respectively.
In addition, the amount of property and equipment held by variable interest entities, which are
consolidated by the Group in accordance with FIN No. 46(R) as of March 31, 2006 and 2007 is ¥4,522
million and ¥1,570 million ($13,299 thousand), respectively.
8. Acquisitions
On July 9, 2004, the Company invested $500 thousand to establish Matsuyama Nissin Investment
Consulting (Shanghai) Co., Ltd. (currently Nissin Leasing (China) Co., Ltd.), a wholly-owned
subsidiary which formerly operated as a business consultant, in Shanghai, China to expand the
Groups businesses into the Chinese market. Subsequently, the Company increased its investments in
Nissin Leasing (China) Co., Ltd. to $60 million as of March 31, 2007. On September 14, 2005,
Nissin Leasing (China) Co., Ltd. obtained a leasing license in China. The functional currency of
Nissin Leasing (China) Co., Ltd. is Chinese Yuan Renminbi (CNY).
On December 3, 2004, the Company invested ¥3,811 million in cash to acquire 100% of the issued
shares of Yamagen Securities Co., Ltd., a wholly-owned subsidiary of Japan Asia Holdings (Japan)
Limited. This acquisition was made for the purpose of commencing securities business operations in
Japan to enable the Group to provide a full line of financial services from procurement to
investment, as well as direct and indirect financing, to all clients and businesses related with
the Group. The Group began consolidating the results of operations of Yamagen Securities Co., Ltd.
from December 3, 2004. The Group accounted for the acquisition as a purchase using the accounting
standards established in SFAS No. 141, Business
Combination, and SFAS No. 142. The amount of
consideration paid in excess of the estimated fair value of the net assets acquired was ¥600
million for a brokerage license and was recorded in Other assets on the accompanying consolidated
balance sheets. This license is determined to have an indefinite useful life. On May 1, 2005,
Yamagen Securities Co., Ltd. changed its companys name to NIS Securities Co., Ltd. and the
Companys interest in NIS Securities Co., Ltd. was 99.5% as of March 31, 2007.
F-29
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the purchase price of Yamagen Securities Co., Ltd. was as follows:
|
|
|
|
|
|
|
Millions of Yen
|
|
Fair value of assets acquired:
|
|
|
|
|
Current assets
|
|
¥
|
3,133
|
|
Other tangible assets
|
|
|
9
|
|
Amortizable intangible assets
|
|
|
4
|
|
Unamortizable assets
|
|
|
181
|
|
Brokerage license
|
|
|
600
|
|
|
|
|
|
Total assets acquired
|
|
|
3,927
|
|
Less: liabilities assumed
|
|
|
(116
|
)
|
|
|
|
|
Total purchase price
|
|
¥
|
3,811
|
|
|
|
|
|
Yamagen Securities Co., Ltd. was not an operating business at the time of the acquisition.
Therefore, had the Group purchased Yamagen Securities Co., Ltd. at the beginning of the Groups
fiscal year, there would be no significant difference in revenues or net income of the Group.
On December 2, 2005, the Company invested ¥1,446 million to acquire 69.3% of the outstanding shares
of APREK Co., Ltd. (APREK), a JASDAQ-listed company, through a cash tender offer. APREK provides
business financing primarily to owners of SMEs and sole proprietors in Japans Kyushu region. Both
the Company and APREK target mainly owners of SMEs as customers. The Group began consolidating the
results of operations of APREK from December 2, 2005. The Group accounted for the acquisition as a
purchase, using the accounting standards established in SFAS No. 141 and No. 142. The excess
amount between the consideration paid and the estimated fair value of the acquired tangible and
intangible assets was insignificant.
A reconciliation of the purchase price of APREK was as follows:
|
|
|
|
|
|
|
Millions of Yen
|
|
Fair value of assets acquired:
|
|
|
|
|
Current assets
|
|
¥
|
7,896
|
|
Other tangible assets
|
|
|
619
|
|
Amortizable intangible assets
|
|
|
16
|
|
Unamortizable assets
|
|
|
196
|
|
|
|
|
|
Total assets acquired
|
|
|
8,727
|
|
Less: liabilities assumed
|
|
|
(6,624
|
)
|
Less: minority interests
|
|
|
(657
|
)
|
|
|
|
|
Total purchase price
|
|
¥
|
1,446
|
|
|
|
|
|
In addition, had the Group purchased APREK at the beginning of the Groups fiscal year, there
would be no significant difference in revenues or net income of the Group on either an individual
or an aggregate basis.
F-30
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
9. Variable Interest Entities
A variable interest entity (VIE) is an entity that does not have sufficient equity at risk to
finance its activities without additional subordinated financial support or in which the equity
investors do not have the characteristics of a controlling financial interest. In accordance with
FIN No. 46(R), an enterprise is required to consolidate the VIE if the enterprise will absorb a
majority of the VIEs expected losses, or if there is no such entity, the entity that will receive
a majority of the VIEs expected residual returns. An enterprise that consolidates a VIE is
referred to as the primary beneficiary.
The Group
has financial interests in a number of trusts, partnerships, corporations or other
vehicles that are established for a limited business purpose, and certain entities may be deemed to
be VIEs. The Group consolidates those VIEs if the Group is a primary beneficiary.
The
following provides information about VIEs in which the Group has financial interests.
(a) Securitization conduits of the Groups loan receivables
The Group administers a finance entity that purchases secured loans from the Group. The Group
participates in a majority of these entities expected losses through subordinated interests the
Group retains. As such, the Group consolidates the entity.
Total assets of the finance entity as of March 31, 2007 were ¥40,612 million ($344,024 thousand)
and were mainly included in loans receivable of the consolidated balance sheets. Of the assets
consolidated, ¥40,612 million ($344,024 thousand) were pledged as collateral for the borrowing by
the conduit.
(b) Special purpose entities for acquisition or development of real estate for customers
The Group is involved with special purpose entities formed to acquire real estate and/or develop
real estate projects. In each case, a customer establishes and makes an equity investment in an
entity that is designed to be bankruptcy remote from the customer. The Group provides financing to
the entities to acquire real estate and/or develop real estate projects.
The Group provided non-recourse loans to the entities and held debt securities issued by certain
entities in the aggregate of ¥12,006 million ($101,703 thousand) as of March 31, 2007, and made
investments in these entities, which amounted to ¥1,216 million ($10,301 thousand) as of March 31,
2007. The Groups risk exposure was limited to the amounts of the loans, debt securities and
investments referred to above. Total assets of such entities were ¥44,737 million ($378,967
thousand) as of March 31, 2007. Among those special purpose entities, total assets of consolidated
entities were ¥18,352 million ($155,460 thousand) as of March 31, 2007. Those assets were mainly
included in real estate for sale in the consolidated balance sheets.
Certain of our consolidated investees obtain non-recourse loans from financial institutions, for
which ¥16,703 million ($141,491 thousand) of the investees assets were pledged as collateral for
the non-recourse loans as of March 31, 2007. The creditors to these entities had no recourse to
other assets of the Group.
F-31
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(c) Special purpose entities for acquisition of real estate for the Groups real estate business
The Group acquires real estate, particularly commercial as well as residential rental properties,
through special purpose entities we create with a view to resale.
Total assets of the entities the Group consolidated were ¥8,298 million and ¥9,999 million ($84,701
thousand) and were mainly included in real estate for sale in the consolidated balance sheets as of
March 31, 2006 and 2007, respectively.
Total assets of the non-consolidated entities of which the Group was not considered as the primary
beneficiary were ¥2,514 million ($21,296 thousand) as of March 31, 2007.
(d) Special purpose entities for acquisition of distressed loans
The Group acquires through the special purpose entities distressed loans that are collateralized by
real estate from financial institutions that we believe can be restructured and resold at a higher
price.
The Group consolidated certain of such entities in which the Group had the majority of the
investment share. Total assets of such consolidated entities were ¥347 million ($2,939 thousand) as
of March 31, 2007. Those assets were mainly included in purchased loans receivable in the
consolidated balance sheet as of March 31, 2007.
(e) Special purpose entities for investments in securities
The Group has financial interests in entities that are investment funds and invest in equity
securities. Such entities are managed by fund management companies that are independent of the
Group.
The Group consolidated certain such entities in which the Group had the majority of the investment
share. Total assets of such consolidated entities were ¥19 million ($161 thousand) as of March 31,
2007. Those assets were mainly included in investment securities in the consolidated balance sheet
as of March 31, 2007.
10. Investment in Affiliates
As of
March 31, 2006 and 2007, the aggregate net assets of affiliates
owned by the Group were ¥617
million and ¥2,833 million ($23,998 thousand), respectively. The changes in investment in
affiliates for the years ended March 31, 2006 and 2007 are as follows:
2006:
On January 23, 2006, the Company invested ¥20 million for a 25% interest in Nippon Real Estate
Rating Services Co., Ltd., a private Japanese corporation established as a joint venture with Funai
Zaisan Consultants Co., Ltd. for the purpose of further enhancing the real estate market through
the standardization of real estate ratings.
2007:
On December 26, 2006, the Company invested ¥2,721 million ($23,050 thousand) for a 37.46%
interest in Araigumi Co., Ltd. through a subscription to a third-party allotment of new shares. As
a result, Araigumi became an affiliate accounted for under the equity method. The excess amount of
carrying value over the underlying equity in net assets at the balance sheet date of Araigumis
provisional settlement of accounts was ¥703 million ($5,955 thousand) as of March 31, 2007.
F-32
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
11. Goodwill and Other Intangible Assets
Goodwill and other intangible assets as of March 31, 2006 and 2007 comprised the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
|
|
|
|
Millions of Yen
|
|
|
U.S. Dollars
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
Goodwill
|
|
|
|
|
|
|
¥201
|
|
|
|
¥
|
|
|
|
$
|
|
License
|
|
|
|
|
|
|
600
|
|
|
|
600
|
|
|
|
5,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total goodwill and other intangible assets
|
|
|
|
|
|
|
¥801
|
|
|
|
¥600
|
|
|
|
$5,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
of ¥201 million resulting from the Groups investment
in Webcashing.com Co., Ltd. (Webcasting.com), a
38%-owned affiliate accounted for under the equity method prior to September 5, 2006, was included
in Investment in affiliates on the accompanying consolidated balance sheets as of March 31, 2006.
However, all ownership interest in Webcashing.com owned by the Group was sold to a
third-party investor and, accordingly, no goodwill in respect thereof was recorded on the
accompanying consolidated balance sheets as of March 31, 2007.
The changes in the carrying amount of goodwill and other intangible assets recognized in business
combinations for the years ended March 31, 2005, 2006 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Millions of Yen
|
|
|
U.S. Dollars
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
Balance at beginning of year
|
|
|
¥201
|
|
|
|
¥801
|
|
|
|
¥ 801
|
|
|
|
$ 6,785
|
|
Acquired during the year
|
|
|
600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sold during the year
|
|
|
|
|
|
|
|
|
|
|
(201
|
)
|
|
|
(1,702
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
¥801
|
|
|
|
¥801
|
|
|
|
¥ 600
|
|
|
|
$ 5,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12. Short-Term and Long-Term Borrowings
Borrowings are considered short-term if at the time of borrowing, the maturity is less than 12
months. Short-term borrowings as of March 31, 2006 and 2007 are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Millions of Yen
|
|
|
U.S. Dollars
|
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
Bank loans
|
|
|
¥30,283
|
|
|
|
¥57,037
|
|
|
|
$483,159
|
|
Commercial paper
|
|
|
30,000
|
|
|
|
27,100
|
|
|
|
229,564
|
|
Rediscounted notes
|
|
|
128
|
|
|
|
121
|
|
|
|
1,025
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term borrowings
|
|
|
¥60,411
|
|
|
|
¥84,258
|
|
|
|
$713,748
|
|
|
|
|
|
|
|
|
|
|
|
Interest rates on bank loans as of March 31, 2006 and 2007 under fixed or variable contracts
ranged from 0.993% to 5.022% and from 1.075% to 2.505%, with the weighted-average interest rates of
these bank loans being 1.374% and 1.961%, respectively. Interest rates on commercial paper as of
March 31, 2006 and 2007 ranged from 0.300% to 1.000% and from 1.300% to 2.200%, respectively. The
weighted-average interest rates of the commercial paper as of March 31, 2006 and 2007 were 0.682%
and 1.894%, respectively. The interest rate on all rediscounted notes as of March 31, 2006 was
2.375%, and interest rates on rediscounted notes as of March 31, 2007 ranged from 2.625% to 2.875%,
with the weighted-average interest rates of these rediscounted notes being 2.695%. All short-term
borrowings have terms ranging from approximately 1 month to 12 months and are usually renewed at
maturity subject to renegotiation of interest rates and other factors.
F-33
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Long-term borrowings as of March 31, 2006 and 2007 are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Millions of Yen
|
|
|
U.S. Dollars
|
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
1.90% unsecured bonds, due July 31, 2006
|
|
¥
|
500
|
|
|
¥
|
|
|
|
$
|
|
|
0.45% unsecured bonds, due September 27, 2006
|
|
|
500
|
|
|
|
|
|
|
|
|
|
0.64% unsecured bonds, due March 26, 2007
|
|
|
500
|
|
|
|
|
|
|
|
|
|
0.67% unsecured bonds, due September 27, 2007
|
|
|
500
|
|
|
|
500
|
|
|
|
4,235
|
|
1.18% unsecured bonds, due February 25, 2008
|
|
|
7,500
|
|
|
|
7,500
|
|
|
|
63,532
|
|
1.55% unsecured bonds, due September 19, 2008
|
|
|
150
|
|
|
|
90
|
|
|
|
762
|
|
1.17% unsecured bonds, due June 20, 2008
|
|
|
7,500
|
|
|
|
7,500
|
|
|
|
63,532
|
|
1.08% unsecured bonds, due September 16, 2008
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
84,710
|
|
1.21% unsecured bonds, due September 18, 2009
|
|
|
|
|
|
|
450
|
|
|
|
3,812
|
|
1.45% unsecured bonds, due March 27, 2009
|
|
|
1,000
|
|
|
|
700
|
|
|
|
5,930
|
|
2.73% unsecured bonds, due February 26, 2010
|
|
|
|
|
|
|
5,000
|
|
|
|
42,355
|
|
2.29% unsecured bonds, due March 23, 2009
|
|
|
|
|
|
|
10,000
|
|
|
|
84,710
|
|
1.70%
unsecured convertible bonds, due September 29, 2006
(A)
|
|
|
822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total bonds
|
|
|
28,972
|
|
|
|
41,740
|
|
|
|
353,578
|
|
|
Loans from banks and other financial institutions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured:
|
|
|
|
|
|
|
|
|
|
|
|
|
Due 2006 to 2010 with fixed interest rates ranging from
1.300% to 5.100% per annum, weighted-average
actual rate is 1.994%
|
|
|
14,352
|
|
|
|
|
|
|
|
|
|
Due 2007 to 2010 with fixed interest rates ranging from
1.300 to 5.000% per annum, weighted-average
actual rate is 4.081%
|
|
|
|
|
|
|
25,630
|
|
|
|
217,112
|
|
Due 2006 to 2009 with variable interest rates principally
based on LTPR plus -1.239% to 0.775% per annum,
weighted-average actual rate is 0.922%
(B)
|
|
|
39,382
|
|
|
|
|
|
|
|
|
|
Due 2007 to 2012 with variable interest rates principally
based on LTPR plus -1.126% to 0.300% per annum,
weighted-average actual rate is 1.601%
(B)
|
|
|
|
|
|
|
70,597
|
|
|
|
598,026
|
|
|
Unsecured:
|
|
|
|
|
|
|
|
|
|
|
|
|
Due 2006 to 2011 with fixed interest rates ranging from
1.050 to 2.585% per annum, weighted-average
actual rate is 1.540%
|
|
|
70,806
|
|
|
|
|
|
|
|
|
|
Due 2007 to 2011 with fixed interest rates ranging from
1.150 to 2.620% per annum, weighted-average
actual rate is 1.552%
|
|
|
|
|
|
|
66,365
|
|
|
|
562,177
|
|
Due 2006 to 2011 with variable interest rates based on
LTPR plus -1.114% to 1.472% per annum,
weighted-average actual rate is 1.644%
|
|
|
45,412
|
|
|
|
|
|
|
|
|
|
Due 2007 to 2011 with variable interest rates based on
LTPR plus -1.150% to 1.100% per annum,
weighted-average actual rate is 1.993%
|
|
|
|
|
|
|
56,485
|
|
|
|
478,484
|
|
|
|
|
|
|
|
|
|
|
|
Total loans from banks and other financial institutions
|
|
|
169,952
|
|
|
|
219,077
|
|
|
|
1,855,799
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term borrowings
|
|
¥
|
198,924
|
|
|
¥
|
260,817
|
|
|
$
|
2,209,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
|
On September 13, 2001, the Company issued ¥10 billion of 1.7% unsecured convertible bonds
issued at par and redeemable on September 29, 2006. The conversion price was ¥818.00 ($6.93)
per share of common stock which was the market value plus 30% premium at the time of issuance.
For the years ended March 31, 2006 and 2007, convertible bonds totaling ¥8,120 million and
¥774 million ($6,557 thousand) were converted to 9,927 thousand shares of common stock and 946
thousand shares of common stock, respectively.
|
(B)
|
|
The Company entrusted certain loans outstanding to a trust bank. In order to raise
funds, the Company sold its senior beneficiary interest in these loans outstanding in trust to
a third-party. These transactions constitute a legal sale under Japanese law. Since the
Company reserves an option to repurchase the senior beneficiary interest, the Company does not
recognize the extinguishment of the aforementioned interest in the financial statements
herein, and the funds are recognized as a long-term liability. As of March 31, 2006 and 2007,
entrusted loans outstanding included in loans receivable were ¥30,907 million and ¥36,778
million ($311,546 thousand), respectively. The related long-term liability recorded in loans
from banks and other financial institutions were ¥21,670 million and ¥26,957 million ($228,352
thousand), respectively. In addition, the Company is required to deposit certain amounts with
banks as restricted cash for the purpose of settlement of account. As of March 31, 2006 and
2007, deposits of restricted cash in banks related to the above borrowings were ¥491 million
and ¥493 million ($4,176 thousand), respectively.
|
F-34
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of March 31, 2006 and 2007, the weighted-average rates of loans from banks and other
financial institutions were 1.462% and 1.978%, respectively.
In addition, other than the above, the Group has additional syndicated loans, overdraft facilities,
and loan commitments available from banks totaling
¥5,927 million and ¥1,050 million ($8,895
thousand) as of March 31, 2006 and 2007, respectively.
The aggregate future annual maturities of bonds, long-term loans from banks and other financial
institutions as of March 31, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Millions of Yen
|
|
|
U.S. Dollars
|
|
Year ending March 31,
|
|
|
|
|
|
|
|
|
2008
|
|
|
¥108,475
|
|
|
$
|
918,890
|
|
2009
|
|
|
80,552
|
|
|
|
682,355
|
|
2010
|
|
|
34,110
|
|
|
|
288,945
|
|
2011
|
|
|
36,777
|
|
|
|
311,538
|
|
2012 and thereafter
|
|
|
903
|
|
|
|
7,649
|
|
|
|
|
|
|
|
|
Total long-term borrowings
|
|
|
¥260,817
|
|
|
$
|
2,209,377
|
|
|
|
|
|
|
|
|
Under some of its borrowing arrangements, the Group has pledged certain assets as collateral.
The bank may obtain this collateral in the event of financial default. Financial default includes
missed or delinquent payments as provided for in the loan agreements.
As of March 31, 2007, the following assets were pledged for short and long-term borrowings as
collateral:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Millions of Yen
|
|
|
U.S. Dollars
|
|
Restricted cash
|
|
|
¥ 361
|
|
|
|
$ 3,058
|
|
Loans receivable
|
|
|
50,717
|
|
|
|
429,623
|
|
Purchased loans receivable
|
|
|
8,779
|
|
|
|
74,367
|
|
Real estate for sale
|
|
|
2,913
|
|
|
|
24,676
|
|
Investment securities
|
|
|
2,123
|
|
|
|
17,984
|
|
|
|
|
|
|
|
|
Total assets pledged as collateral
|
|
|
¥64,893
|
|
|
|
$549,708
|
|
|
|
|
|
|
|
|
As of March 31, 2007, the Group loaned investment securities under share lending agreement and
received cash as collateral.
Other than the above, as discussed in Note 9, certain consolidated VIEs obtained non-recourse loans
from financial institutions. For these loans, ¥25,491 million ($215,934 thousand) in the VIEs
assets are pledged as collateral as of March 31, 2007.
In addition, the Group is subject to financial covenants which require the Group to meet various
operating and liquidity measures. The Group is in compliance with these covenants as of March 31,
2007.
F-35
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
13. Lease Obligations
The Group leases office space under operating lease agreements. Generally, these agreements are
all cancelable by the Group with six months advance notice. Total rent expense under operating
lease agreements was approximately ¥911 million, ¥965 million and ¥1,135 million ($9,615 thousand)
for the years ended March 31, 2005, 2006 and 2007, respectively.
The minimum rental assuming no cancellation on operating lease payments that have initial lease
terms in excess of one year as of March 31, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Millions of Yen
|
|
|
U.S. Dollars
|
|
Year ending March 31,
|
|
|
|
|
|
|
|
|
2008
|
|
¥
|
961
|
|
|
$
|
8,141
|
|
2009
|
|
|
379
|
|
|
|
3,210
|
|
2010
|
|
|
21
|
|
|
|
178
|
|
|
|
|
|
|
|
|
Total minimum future rentals
|
|
¥
|
1,361
|
|
|
$
|
11,529
|
|
|
|
|
|
|
|
|
The Group leases certain equipment, software and vehicles under capital leases.
Acquisition costs and accumulated amortization of leased assets as of March 31, 2006 and 2007 are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Millions of Yen
|
|
|
U.S. Dollars
|
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
Acquisition costs
|
|
¥
|
2,875
|
|
|
¥
|
2,954
|
|
|
$
|
25,023
|
|
Accumulated amortization
|
|
|
(1,563
|
)
|
|
|
(2,121
|
)
|
|
|
(17,967
|
)
|
|
|
|
|
|
|
|
|
|
|
Net leased property
|
|
¥
|
1,312
|
|
|
¥
|
833
|
|
|
$
|
7,056
|
|
|
|
|
|
|
|
|
|
|
|
Future minimum lease payments for the above assets under capital leases as of March 31, 2007
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Millions of Yen
|
|
|
U.S. Dollars
|
|
Year ending March 31,
|
|
|
|
|
|
|
|
|
2008
|
|
¥
|
468
|
|
|
$
|
3,964
|
|
2009
|
|
|
250
|
|
|
|
2,118
|
|
2010
|
|
|
104
|
|
|
|
881
|
|
2011
|
|
|
49
|
|
|
|
415
|
|
2012 and thereafter
|
|
|
11
|
|
|
|
93
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
882
|
|
|
|
7,471
|
|
Less: Amount representing interest
|
|
|
(23
|
)
|
|
|
(194
|
)
|
|
|
|
|
|
|
|
Present value of minimum lease payments
|
|
|
859
|
|
|
|
7,277
|
|
Less: Current portion
|
|
|
(455
|
)
|
|
|
(3,855
|
)
|
|
|
|
|
|
|
|
Long-term capital lease obligations
|
|
¥
|
404
|
|
|
$
|
3,422
|
|
|
|
|
|
|
|
|
F-36
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
14. Retirement Plans Employee, Director and Statutory Auditor
In past years, the Group had an employee severance plan, a defined benefit plan for employees of a
subsidiary, and director and statutory auditor retirement plans. These plans have been terminated.
A description of these plans and their termination is as follows:
Directors and Statutory Auditors:
The Companys retirement plan for directors and statutory auditors was terminated effective on
April 1, 1999 and the retirement liability as of March 31, 1999 shall be paid on retirement from
the Company. APREK had also adopted a retirement plan for directors and statutory auditors.
However, the plan was terminated effective on June 1, 2006, and the retirement liability as of May
31, 2006 was paid on retirement from APREK.
Accrued retirement benefits presented on the accompanying consolidated balance sheet as of March
31, 2005 included only the Companys unpaid retirement benefits for directors and statutory
auditors.
Employees:
The Company had no employee retirement plans or liabilities at March 31, 2006 and 2007. APREK had
adopted a defined benefit plan for employees. However, the plan was terminated effective on June
1, 2006 with a lump-sum distribution of retirement benefits upon termination of the plan on June
20, 2006.
The benefit obligations and plan assets, representing 100% of the obligation on the accompanying
balance sheets under SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans, as of March 31, 2006 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Millions of Yen
|
|
|
U.S. Dollars
|
|
Change in benefit obligation
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
Benefit obligation at beginning of year
|
|
|
¥330
|
|
|
|
¥ 647
|
|
|
|
$ 5,481
|
|
Increase in obligation due to
acquisition of a subsidiary
|
|
|
310
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
|
6
|
|
|
|
4
|
|
|
|
34
|
|
Interest cost
|
|
|
1
|
|
|
|
1
|
|
|
|
8
|
|
Benefit paid
|
|
|
|
|
|
|
(272
|
)
|
|
|
(2,304
|
)
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation as of the end of year
|
|
|
¥647
|
|
|
|
¥ 380
|
|
|
|
$ 3,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Millions of Yen
|
|
|
U.S. Dollars
|
|
Total recognized liabilities in the balance sheets
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
Employees
|
|
|
¥265
|
|
|
|
¥
|
|
|
|
$
|
|
Directors and statutory auditors
|
|
|
382
|
|
|
|
380
|
|
|
|
3,219
|
|
|
|
|
|
|
|
|
|
|
|
Obligations in excess of plan assets
|
|
|
¥647
|
|
|
|
¥380
|
|
|
|
$3,219
|
|
|
|
|
|
|
|
|
|
|
|
In addition, the Group participates in the mandatory fully-funded contributory plan under the
Japanese Welfare Pension Insurance Law. Under this plan, contributions are made by both the Group
and its employees. Amounts paid by the Group under this plan totaled ¥358 million, ¥454 million
and ¥522 million ($4,422 thousand) for the years ended March 31, 2005, 2006 and 2007, respectively.
F-37
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
15. Derivative Financial Instruments and Risk Management
In order to reduce its exposure to fluctuations in interest rates on variable rate borrowings, the
Group utilizes derivative financial instruments such as interest rate swap contracts. The
counterparties to these instruments are major international financial institutions with favorable
credit ratings, thereby reducing credit risk exposure for non-performance.
Derivative financial instruments outstanding as of March 31, 2006 and 2007 are summarized as
follows:
Interest rate swap:
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions of Yen
|
|
|
|
|
|
Millions of Yen
|
Number of
|
|
Notional
|
|
Interest Rate
|
|
Ultimate
|
|
Fair
|
Agreements
|
|
Principal
|
|
Pay
|
|
Receive
|
|
Maturity
|
|
Value
|
1
|
|
¥97
|
|
Fixed at 2.190%
|
|
TIBOR+1.250%
|
|
August 2006
|
|
¥()
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions of Yen
|
|
|
|
|
|
Millions of Yen
|
Number of
|
|
Notional
|
|
Interest Rate
|
|
Ultimate
|
|
Fair
|
Agreements
|
|
Principal
|
|
Pay
|
|
Receive
|
|
Maturity
|
|
Value
|
1
|
|
¥263
|
|
Fixed at 2.200%
|
|
TIBOR+0.950%
|
|
December 2008
|
|
¥(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
|
|
|
|
Thousands of
|
|
|
U.S. Dollars
|
|
|
|
|
|
U.S. Dollars
|
Number of
|
|
Notional
|
|
Interest Rate
|
|
Ultimate
|
|
Fair
|
Agreements
|
|
Principal
|
|
Pay
|
|
Receive
|
|
Maturity
|
|
Value
|
1
|
|
$2,228
|
|
Fixed at 2.200%
|
|
TIBOR+0.950%
|
|
December 2008
|
|
$(8)
|
|
|
|
|
|
Applicable interest rate as of March 31, 2006 is as follows:
|
|
|
|
|
¥TIBOR (TIBOR Yen Rate for Three Months)
|
0.128
|
%
|
|
|
|
|
|
|
|
Applicable interest rate as of March 31, 2007 is as follows:
|
|
|
|
|
¥TIBOR
(TIBOR Yen Rate for Three Months)
|
0.664
|
%
|
|
|
The notional amounts above are the underlying principal amounts used in determining the
interest swapped over the period of the swap agreements and, therefore, are not measures of the
Groups exposure to loss through its use of derivatives. The fair value is estimated based on
quotes from market makers of these instruments and represents the estimated amounts that the Group
would expect to receive and pay if the Group terminated the agreements as of March 31, 2006 and
2007.
F-38
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
16. Commitments and Contingencies
As discussed earlier, the contractual interest in excess of the restricted rate is recognized
as interest income as collected. This excess interest may need to be refunded to the borrower,
should the borrower request refund of excess interest amounts previously paid. As a result of the
recent decision made by the Supreme Court of Japan impacting interest rates charged to borrowers
and subsequent changes in business environment, the Group has experienced substantial increases in
claims from borrowers for return of excess interest. Borrowers may request the return of excess
interest for up to 10 years from the date of the relevant excess
interest payment. Due to repayments of
excess interest, the Group refunded ¥387 million and ¥1,774 million ($15,028 thousand) in cash to
borrowers and charged-off ¥2,145 million and
¥3,456 million ($29,276 thousand) applied to the
outstanding loan principal balance during the years ended March 31, 2006 and 2007, respectively.
The Group expects these amounts to substantially increase. As of March 31, 2007, total balance of
reserve for losses on excess interest repayments and the portion of allowance for loan losses
provided for loan principal charged-off by excess interest repayments
was ¥10,165 million ($86,107 thousand).
Under the
terms and conditions of the Companys credit line agreements, the Company may, but is not
committed to, lend funds to certain loan customers. The Company reviews credit lines and related
funding needs based on account usage and customer creditworthiness.
The Companys unfunded credit lines at March 31, 2006 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Millions of Yen
|
|
|
U.S. Dollars
|
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
Unfunded credit lines with loans outstanding
|
|
|
¥ 9,642
|
|
|
|
¥ 7,398
|
|
|
$
|
62,668
|
|
Unfunded credit lines without loans outstanding
|
|
|
48,037
|
|
|
|
46,110
|
|
|
|
390,598
|
|
|
|
|
|
|
|
|
|
|
|
Total unfunded credit lines
|
|
|
¥57,679
|
|
|
|
¥53,508
|
|
|
$
|
453,266
|
|
|
|
|
|
|
|
|
|
|
|
The Group is exposed to risks regarding legal proceedings or claims in the ordinary course of
its business. In the opinion of management, none of these proceedings and claims is expected to
materially impact the Groups financial condition or results of operations.
Pursuant
to an agreement with Sanyo Club Co., Ltd. (Sanyo Club), in exchange for guaranteeing 40% of the
outstanding balance of specified loans to its customers, the Company receives 40% of the interest
received from the specified loans receivable and pays 40% of the related administrative expenses
and other expenses incurred by Sanyo Club. The Company is required to pay out on its guarantees
for 40% of the outstanding balance of specified loans for which contractual payments are overdue by
120 days or more as of the end of each month, and distressed loans due to legal processes. Under a
loan agreement, borrowers are neither required to have a guarantor nor to provide collateral.
The Company guarantees loans to customers of Shinsei Business Finance Co., Ltd. (Shinsei Business
Finance) and corresponding interest receivable, and receives guarantee fees. Shinsei Business
Finance was a 25%-owned affiliate of the Company accounted for under the equity method until April
14, 2006. The Company receives guarantee fees from the following loan products that Shinsei
Business Finance sells:
3S loans
The Company guarantees 100% of loans to customers of 3S loans and corresponding
interest receivable and receives a guarantee fee at the loan contract rate less 4%. The Company
is required to pay out on its guarantees on loans for which contractual payments are overdue by 14
days or more as of the end of each month. 3S loans are unsecured loans that require one or more
guarantees from third-party individuals with an income source separate from the customer, and are
designed for SMEs.
Business loans
The Company guarantees 10% of loans to customers of Business loans and
corresponding interest receivable and receives 10% of the interest received from Business loans.
The Company is required to pay out on its guarantees on loans for which contractual payments are
overdue by 90 days or more as of the end of each month. Business loans are unsecured loans
designed for SMEs.
F-39
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Company guarantees loans to customers of Chuo Mitsui Finance Service Co., Ltd. (Chuo Mitsui
Finance) and corresponding interest receivable and receives guarantee fees. Chuo Mitsui Finance
was a 30%-owned affiliate of the Company accounted for under the equity method until February 22,
2007. The Company receives guarantee fees from the following loan products that Chuo Mitsui
Finance sells:
Business Card loans
The Company guarantees 10% of loans to customers of Business Card loans and
corresponding interest receivable and receives 10% of the interest received from Business Card
loans. The Company is required to pay out on its guarantees on loans for which contractual
payments are overdue by 90 days or more. Business Card loans are unsecured loans designed for
SMEs.
Real Estate Finance loans
The Company guarantees 10% of loans of Real Estate Finance loans and
corresponding interest receivable and receives 10% of the interest received from Real Estate
Finance loans. The Company is required to pay out on its guarantees on loans for which
contractual payments are overdue by 30 days or more.
In addition, NIS Lease guarantees accounts receivable of certain customers for a fee determined
based on their creditworthiness and contract duration. As of March 31, 2006 and 2007, the fee rate
ranged from 0.38% to 21.60% and from 0.15% to 4.00%, with weighted-average fee rates of 2.25% and
1.08%, respectively.
The Group maintains reserves for all estimated guarantee losses and includes the amounts in Other
liabilities on the accompanying consolidated balance sheets.
Upon payment of any guarantee, the Group records corresponding guaranteed loans receivable to
customers, which are offset by allowances for deemed uncollectible amounts. As of March 31, 2006
and 2007, receivables from payment of guarantees were ¥663 million and ¥1,166 million ($9,877
thousand), respectively. These receivables were offset by allowances of ¥588 million and ¥923
million ($7,819 thousand), respectively, and the resulting amounts were recorded in Other assets
on the accompanying consolidated balance sheets.
Also, the Company was liable as a guarantor for bank loans borrowed by Shinsei Business Finance and
Chuo Mitsui Finance, and received guarantee fees. However, during the
years ended March 31, 2006
and 2007, the Company was released from its obligations as a guarantor for bank loans borrowed by
Shinsei Business Finance and Chuo Mitsui Finance, respectively.
As of March 31, 2006 and 2007, the Groups guaranteed borrowings, guaranteed accounts receivable,
guarantees for borrowing of other companies and reserve for guarantee losses are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
Millions of Yen
|
|
U.S. Dollars
|
|
|
2006
|
|
2007
|
|
2007
|
Guaranteed borrowings
|
|
¥
|
11,886
|
|
|
¥
|
17,555
|
|
|
$
|
148,708
|
Guaranteed accounts receivable
|
|
|
964
|
|
|
|
908
|
|
|
|
7,692
|
Guarantees for borrowings of other companies:
|
|
|
|
|
|
|
|
|
|
|
|
Chuo Mitsui
Finance Service Co., Ltd.
|
|
|
1,920
|
|
|
|
|
|
|
|
|
Reserve for guarantee losses
|
|
|
629
|
|
|
|
1,066
|
|
|
|
9,030
|
F-40
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
During the years ended March 31, 2005, 2006 and 2007, the Group paid the related
administrative and other expenses, as discussed above, and received guarantee fees as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Millions of Yen
|
|
|
U.S. Dollars
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
Guarantee fees received from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed loans and accounts receivable
|
|
¥
|
845
|
|
|
¥
|
1,386
|
|
|
¥
|
1,880
|
|
|
|
$ 15,926
|
|
Guarantees for borrowings of other companies
|
|
|
34
|
|
|
|
20
|
|
|
|
45
|
|
|
|
381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total guarantee fees received
|
|
|
879
|
|
|
|
1,406
|
|
|
|
1,925
|
|
|
|
16,307
|
|
Administrative expenses and other expenses paid
|
|
|
(562
|
)
|
|
|
(898
|
)
|
|
|
(1,337
|
)
|
|
|
(11,326
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantee fees received, net
|
|
¥
|
317
|
|
|
¥
|
508
|
|
|
¥
|
588
|
|
|
|
$ 4,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the years ended March 31, 2005, 2006 and 2007, as a result of contractual commitments,
the Group paid ¥270 million, ¥607 million and ¥1,299 million ($11,004 thousand), respectively, as a
guarantor for the borrowings.
In July 2007, the Tokyo Regional Tax Bureau, or TRTB, issued an assessment against one of the
leading consumer finance companies in Japan claiming for additional income taxes. The assessment
was based on a new Japanese tax law interpretation by the TRTB that the amount of losses on excess
interest repayments should be excluded from the calculation of the tax deductible portion of
provision for loan losses, in line with the recent revision of the auditing rules for calculation
of reserves for losses on excess interest repayments promulgated by the Japanese Institution of
Certified Public Accountants. These new auditing rules have been introduced since the semi-annual
period ended September 30, 2006 and reflected Supreme Court decisions relating to excess interest
repayments. (See Note 2 for a summary of significant accounting policies.) The aforementioned
consumer finance company has announced that it is considering filing a petition of objection
against the assessment by the TRTB. Whether the TRTBs interpretation is sustainable under the
Japanese tax law has not been adjudicated.
The Company has not yet received any similar assessment from the TRTB. However, if the Company
calculated its Japanese income taxes in accordance with the interpretation of the TRTB in this
assessment, the Companys deferred tax assets would increase by ¥830 million ($7,031 thousand) on
the accompanying consolidated balance sheet as of March 31, 2007 and other general and
administrative expenses would increase by ¥9 million ($76 thousand) and income taxes would decrease
by ¥3 million ($25 thousand) on the accompanying consolidated statement of operations for the year
ended March 31, 2007. Consequently, net losses for the year ended March 31, 2007 would increase by
¥6 million ($51 thousand).
No accrual was made for the loss contingency in the accompanying consolidated balance sheet as of
March 31, 2007, because the Company believes the outcome is reasonably possible but not probable in
accordance with SFAS No. 5.
F-41
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
17. Shareholders Equity
Under Article 445-2 of the Corporate Law, at least one-half of the value of assets which were paid
or provided at share issuance is required to be designated as common stock, and proceeds in excess
of the amount designated as common stock are to be credited to general additional paid-in capital
in accordance with Article 445-3 of the Corporate Law. The portion to be designated as common
stock is determined by resolution of the Board of Directors in advance of the issue. General
additional paid-in capital may be transferred to common stock pursuant to resolution of the
Shareholders Meeting, in accordance with Article 448-1 of the Corporate Law. In addition, general
additional paid-in capital may be used to reduce a deficit by resolution of the Shareholders
Meeting but is not available for dividends payment.
Article 445-4 of the Corporate Law also provides that an amount equal to at least 10% of dividends
must be appropriated to general additional paid-in capital or legal reserve until the sum of the
general additional paid-in capital and legal reserve equals 25% of common stock. The legal reserve
may be transferred to common stock pursuant to resolution of the Shareholders Meeting, in
accordance with Article 448-1 of the Corporate Law. In addition, the legal reserve may be used to
reduce a deficit through resolution of the Shareholders Meeting but is not available for dividend
payment. As of March 31, 2006 and 2007, legal reserves included in the Companys retained earnings
were ¥401 million ($3,397 thousand). Also, as of March 31, 2006 and 2007, legal reserves included
in Nissin Servicers retained earnings were ¥2 million ($17 thousand).
The Corporate Law provides that common stock, legal reserve, general additional paid-in capital,
other additional paid-in capital, and retained earnings may be transferred among the accounts under
certain conditions upon resolution of the Shareholders Meeting.
According to Article 446 of the Corporate Law, the maximum amount that the Company and each of its
subsidiaries can distribute as dividends at the end of fiscal year is the sum of Other additional
paid-in capital, which is the amount of additional paid-in capital excluding general additional
paid-in capital, and Other retained earnings, which is the amount of retained earnings excluding
legal reserve. As of March 31, 2007, the maximum amount of the Companys distributable dividends
calculated under the Corporate Law based on the non-consolidated financial statement prepared in
conformity with Japanese GAAP was ¥45,170 million ($382,634 thousand).
During the year ended March 31, 2007, convertible bonds totaling ¥774 million ($6,557 thousand)
were converted into 946 thousand shares of common stock and, consequently, common stock and general
additional paid-in capital increased by ¥397 million ($3,363 thousand) and ¥377 million ($3,194
thousand), respectively.
In addition, the Company sold newly issued 86,021,600 shares of common stock to Sumitomo Mitsui
Banking Corporation on June 12, 2006. As a result, total paid-in amount was ¥8,000 million
($67,768 thousand), of which ¥4,043 million ($34,248 thousand) was credited to common stock.
F-42
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
18. Issuance of Stock by Subsidiaries
On November 25, 2003 and February 9, 2004, Nissin Servicer, previously a wholly-owned subsidiary of
the Company, completed a sale of additional shares to third-parties. The number of shares newly
issued was 8,000 shares and 82,400 shares, and the price per share was ¥1,125 and ¥6,250,
respectively. As a result, Nissin Servicer became an 89.8% subsidiary of the Company.
Further, Nissin Servicer listed its stock on the Mothers market of the Tokyo Stock Exchange on
September 16, 2004. The number of shares newly issued due to the initial public offering was
100,000 shares, and the price per share was ¥22,500. During the years ended March 31, 2005, 2006
and 2007, Nissin Servicer issued 63,200 shares, 19,200 shares and 11,520 shares, respectively, to
directors and employees in connection with exercises of stock acquisition rights, with an average
price per share of ¥1,063 and ¥6,250 ($52.94), respectively. As a result, the Companys interest
in Nissin Servicer has been diluted to 75.9%, 74.6% and 73.8% as of March 31, 2005, 2006 and 2007,
respectively. The Group recognized net gains of ¥1,339 million for the year ended March 31, 2005
and net losses of ¥47 million and ¥4 million ($34
thousand) for the years ended March 31, 2006 and
2007, respectively, in respect of its investment in Nissin Servicer, which were recorded as Gains
(losses) on sales of subsidiaries and affiliates, net in the accompanying consolidated statements
of operations. The Group continues to recognize gains or losses from dilution of its interest in
Nissin Servicer.
19. Related Party Transactions
The Group leases office space to Shuho, Ltd., an entity 100% owned by the Companys chairman and
his relatives and which owns 11.5% of the Companys outstanding share capital as of March 31, 2007.
Total rent received from Shuho, Ltd. was ¥1 million ($8 thousand) for each of the years ended
March 31, 2005, 2006 and 2007, respectively.
In addition, the Group leases office and parking space to Nissin Building Co., Ltd., an entity
93.3% owned by the Companys chairman and his relatives and which owns 11.8% of the Companys
outstanding share capital as of March 31, 2007. Total rent received from Nissin Building Co., Ltd.
was ¥2 million, ¥1 million and ¥2 million ($17 thousand) for the years ended March 31, 2005, 2006
and 2007, respectively.
During the years ended March 31, 2005, 2006 and 2007, the Groups transactions with Shinsei
Business Finance, a 25%-owned affiliate prior to April 14, 2006, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
Millions of Yen
|
|
U.S. Dollars
|
|
|
2005
|
|
2006
|
|
2007
|
|
2007
|
Commissions paid
|
|
¥
|
32
|
|
|
¥
|
13
|
|
|
¥
|
1
|
|
|
$
|
8
|
|
Commissions received
|
|
|
13
|
|
|
|
4
|
|
|
|
36
|
|
|
|
305
|
|
Loan guarantee fees received
|
|
|
316
|
|
|
|
467
|
|
|
|
|
|
|
|
|
|
Bank loan guarantee fees received
|
|
|
34
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
Shinsei Business Finance became an unrelated party during the year ended March 31, 2007.
Although transactions between the Group and Shinsei Business Finance are continuous in nature, the
transactions with Shinsei Business Finance after it became an unrelated party are not included
above. The terms of these transactions were determined with reference to equivalent transactions
with unrelated parties, and the prices for these transactions were equivalent to those set for
equivalent transactions with unrelated parties.
F-43
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
During the years ended March 31, 2005, 2006 and 2007, the Groups transactions with Webcashing.com, a 38%-owned affiliate prior to September 5, 2006, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
Millions of Yen
|
|
U.S. Dollars
|
|
|
2005
|
|
2006
|
|
2007
|
|
2007
|
Commissions paid
|
|
¥
|
205
|
|
|
¥
|
151
|
|
|
¥
|
|
|
|
$
|
|
|
Advertising expenses and other fees paid
|
|
|
175
|
|
|
|
518
|
|
|
|
1
|
|
|
|
8
|
|
No transactions between the Group and Webcashing.com have taken place subsequent to the sale
of all ownership interest owned by the Group in Webcashing.com to a third-party investor on
September 5, 2006. The terms of these transactions were determined with reference to equivalent
transactions with unrelated parties, and the prices for these transactions were equivalent to those
set for equivalent transactions with unrelated parties.
During the years ended March 2005, 2006 and 2007, the Groups transactions with Chuo Mitsui Finance, a 30%-owned affiliate prior to February 22, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
Millions of Yen
|
|
U.S. Dollars
|
|
|
2005
|
|
2006
|
|
2007
|
|
2007
|
Commissions paid
|
|
¥
|
|
|
|
¥
|
9
|
|
|
¥
|
11
|
|
|
$
|
93
|
|
Loan guarantee fees received
|
|
|
|
|
|
|
26
|
|
|
|
89
|
|
|
|
754
|
|
Bank loan guarantee fees received
|
|
|
|
|
|
|
11
|
|
|
|
41
|
|
|
|
347
|
|
Chuo Mitsui Finance became an unrelated party during the year ended March 31, 2007.
Although transactions between the Group and Chuo Mitsui Finance are continuous in nature,
transactions with Chuo Mitsui Finance after it became an unrelated party are not included above.
The terms of these transactions were determined with reference to equivalent transactions with
unrelated parties, and the prices for these transactions were equivalent to those set for
equivalent transactions with unrelated parties.
20. Income Taxes
The components of income tax expense for the years ended March 31, 2005, 2006 and 2007 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Millions of Yen
|
|
|
U.S. Dollars
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
|
|
|
¥2,132
|
|
|
|
¥ 5,211
|
|
|
|
¥ 3,867
|
|
|
|
$ 32,757
|
|
Local
|
|
|
1,087
|
|
|
|
2,463
|
|
|
|
1,910
|
|
|
|
16,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,219
|
|
|
|
7,674
|
|
|
|
5,777
|
|
|
|
48,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
|
|
|
945
|
|
|
|
(991
|
)
|
|
|
(2,798
|
)
|
|
|
(23,702
|
)
|
Local
|
|
|
482
|
|
|
|
(469
|
)
|
|
|
(1,382
|
)
|
|
|
(11,707
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,427
|
|
|
|
(1,460
|
)
|
|
|
(4,180
|
)
|
|
|
(35,409
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
¥4,646
|
|
|
|
¥ 6,214
|
|
|
|
¥ 1,597
|
|
|
|
$ 13,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-44
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The significant components of deferred tax assets and liabilities as of March 31, 2006 and
2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Millions of Yen
|
|
|
U.S. Dollars
|
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable charge-offs
|
|
¥
|
25
|
|
|
¥
|
37
|
|
|
$
|
313
|
|
Allowance for loan losses
|
|
|
793
|
|
|
|
2,908
|
|
|
|
24,634
|
|
Reserve for guarantee losses
|
|
|
241
|
|
|
|
441
|
|
|
|
3,736
|
|
Reserve for losses on interest repayments
|
|
|
239
|
|
|
|
2,005
|
|
|
|
16,984
|
|
Accrued local taxes
|
|
|
444
|
|
|
|
472
|
|
|
|
3,998
|
|
Accrued retirement benefits
|
|
|
262
|
|
|
|
154
|
|
|
|
1,305
|
|
Accrued salary expenses
|
|
|
460
|
|
|
|
408
|
|
|
|
3,456
|
|
Impairment of long-lived assets
|
|
|
239
|
|
|
|
325
|
|
|
|
2,753
|
|
Loan origination costs
|
|
|
92
|
|
|
|
658
|
|
|
|
5,574
|
|
Other
|
|
|
214
|
|
|
|
710
|
|
|
|
6,014
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
3,009
|
|
|
|
8,118
|
|
|
|
68,767
|
|
Valuation allowance
|
|
|
|
|
|
|
(1,355
|
)
|
|
|
(11,478
|
)
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
3,009
|
|
|
|
6,763
|
|
|
|
57,289
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities difference in basis
|
|
|
3,418
|
|
|
|
80
|
|
|
|
678
|
|
Bond issuance costs
|
|
|
114
|
|
|
|
266
|
|
|
|
2,253
|
|
Accumulated depreciation
|
|
|
85
|
|
|
|
146
|
|
|
|
1,237
|
|
Other
|
|
|
53
|
|
|
|
39
|
|
|
|
330
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
3,670
|
|
|
|
531
|
|
|
|
4,498
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax (liabilities) assets, net
|
|
¥
|
(661
|
)
|
|
¥
|
6,232
|
|
|
$
|
52,791
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets and liabilities as of March 31, 2006 and 2007 are reflected on the
accompanying consolidated balance sheets under the following captions:
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Millions of Yen
|
|
|
U.S. Dollars
|
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
Assets: Deferred income taxes
|
|
¥
|
721
|
|
|
¥
|
6,488
|
|
|
$
|
54,960
|
|
Liabilities: Deferred income taxes
|
|
|
1,382
|
|
|
|
256
|
|
|
|
2,169
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes, net
|
|
¥
|
(661
|
)
|
|
¥
|
6,232
|
|
|
$
|
52,791
|
|
|
|
|
|
|
|
|
|
|
|
The Group is subject to national and local income taxes, which in the aggregate result in a
statutory tax rate of 40.5% for the years ended March 31, 2005, 2006 and 2007.
F-45
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Reconciliation of the differences between the statutory tax rate and the effective income tax
rate for the years ended March 31, 2005, 2006 and 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
Statutory tax rate
|
|
|
40.5
|
%
|
|
|
40.5
|
%
|
|
|
40.5
|
%
|
Increase (reduction) in taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses not deductible for tax purpose
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
37.6
|
|
Per capita levy
|
|
|
0.4
|
|
|
|
0.3
|
|
|
|
22.7
|
|
Special tax credit upon application of
IT Investment Promotion Tax Incentive
|
|
|
(1.9
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
Valuation allowance
|
|
|
|
|
|
|
|
|
|
|
502.0
|
|
Difference in statutory tax rates of
subsidiaries
|
|
|
|
|
|
|
|
|
|
|
31.2
|
|
Other
|
|
|
(0.9
|
)
|
|
|
(0.3
|
)
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
38.4
|
%
|
|
|
40.7
|
%
|
|
|
637.1
|
%
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2007, the Group established a valuation allowance of ¥1,355 million ($11,478
thousand) for deferred tax assets of APREK and other consolidated subsidiaries, because the Group
believes it is more likely than not that part of the deferred tax assets would not be realized,
taking into consideration the Groups projections of future taxable income.
21. Reconciliation of the Differences Between Basic and Diluted Net Income Per Share
Basic and diluted EPS as well as the number of shares in the following table have been
retroactively adjusted to reflect a 1.2-for-1 stock split completed on May 20, 2005, 2-for-1 stock
splits completed on November 18, 2005 and April 1, 2006,
and a 1-for-20 reverse stock split
completed on August 31, 2007. Reconciliation of the differences between basic and diluted EPS for
the years ended March 31, 2005, 2006 and 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
Millions of Yen
|
|
|
U.S. Dollars
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
Net income (losses)
|
|
|
¥7,262
|
|
|
|
¥8,455
|
|
|
|
¥(1,610
|
)
|
|
|
$(13,638
|
)
|
After-tax
equivalent of
interest expense on
1.7% convertible
bond
|
|
|
100
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
Loss on change of
equity interest as
a result of
exercise of stock
acquisition rights
of a subsidiary
|
|
|
(53
|
)
|
|
|
(28
|
)
|
|
|
(6
|
)
|
|
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income for purpose
of computing
diluted net income
per share
|
|
|
¥7,309
|
|
|
|
¥8,484
|
|
|
|
¥(1,616
|
)
|
|
|
$(13,689
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Shares
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
Weighted-average shares outstanding basic
|
|
|
122,083
|
|
|
|
129,247
|
|
|
|
140,924
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
Warrants and options
|
|
|
997
|
|
|
|
1,794
|
|
|
|
|
Convertible bond
|
|
|
12,113
|
|
|
|
6,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding for
diluted EPS computation
|
|
|
135,193
|
|
|
|
137,942
|
|
|
|
140,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yen
|
|
|
U.S. Dollars
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
Basic EPS
|
|
¥
|
59.60
|
|
|
¥
|
65.40
|
|
|
¥
|
(11.42
|
)
|
|
|
$(0.097
|
)
|
Diluted EPS
|
|
|
54.00
|
|
|
|
61.60
|
|
|
|
(11.42
|
)
|
|
|
(0.097
|
)
|
Stock acquisition rights attaching to 79 thousand shares were excluded from the computations
of diluted EPS for the year ended March 31, 2007, as their exercise price was higher than the
Companys average stock price.
F-46
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
22. Stock-based Compensation
The Company has two types of stock-based compensation plans as incentive plans for selected
directors and employees.
Warrant Plan:
Under the Companys incentive warrant plans, on April 20, 2001, the Company issued unsecured bonds
with detachable warrants. These warrants were immediately repurchased at their fair market value
and granted as compensation to directors and selected employees in the Company. The warrants were
exercisable into approximately 2,493 thousand shares of common stock at an exercise price of
¥602.00 per share. The exercise period of the warrant was from July 2, 2001 through April 19,
2004. The warrants were immediately exercisable at the time of grant, but would expire at the time
of termination of employment with the Group. All warrants matured by March 31, 2005.
Stock Option Plan:
Following approval of the Companys Annual Shareholders Meeting on June 22, 2002, the Company
granted stock acquisition rights to the Groups directors, statutory auditors, employees, corporate
advisors and temporary employees with tenure of over one year on September 10, 2002. Under this
stock option plan, rights to purchase common stock of 2,870 thousand shares were granted at the
exercise price of ¥540.00 per share, which was priced at 110% of the closing price of the day
before the approval of grant. These rights were exercisable from October 1, 2002 and expired on
the earlier of September 30, 2005 or termination of employment with the Group.
Following approval of the Companys Annual Shareholders Meeting on June 24, 2003, the Company
granted stock acquisition rights to the Groups directors, statutory auditors, corporate advisors
and employees, including employees seconded to other companies, on July 16, 2003. Under this stock option plan, rights
to purchase common stock of 1,296 thousand shares were granted at the exercise price of ¥560.00
($4.74) per share, which was priced at 110% of the average daily closing price of the month
immediately before the month of the issuance date of such stock acquisition rights. These rights
were exercisable from August 1, 2003 and expired on the earlier of July 31, 2006 or termination of
employment with the Group.
Following approval of the Companys Annual Shareholders Meeting on June 22, 2004, the Company
granted stock acquisition rights to the Groups directors, statutory auditors, corporate advisors,
contract employees and regular employees (including employees of the Group seconded to other
companies and employees of other companies seconded to the Group), and temporary employees with
tenure of over one year of the Group, and a director of a business counterparty of the Company
approved by the Board of Directors, on July 15, 2004. Under this stock option plan, rights to
purchase common stock of 3,197 thousand shares were granted at the exercise price of ¥1,060.00
($8.98) per share, which was priced at 110% of the average daily closing price of the month
immediately before the month of the issuance date of such stock acquisition rights. These rights
were exercisable from August 1, 2004 and expired on the earlier of July 31, 2007 or termination of
employment with the Group.
Following approval of the Companys Annual Shareholders Meeting on June 22, 2004, the Company
granted stock acquisition rights to the Groups contract employees and regular employees (including
employees of the Group seconded to other companies and employees of other companies seconded to the
Group), and temporary employees with tenure of over one year of the Group on January 20, 2005.
Under this stock option plan, rights to purchase common stock of 38 thousand shares were granted at
the exercise price of ¥1,100.00 ($9.32) per share, which was priced at 110% of the average daily
closing price of the month immediately before the month of the issuance date of such stock
acquisition rights. These rights were exercisable from February 1, 2005 and would expire on the
earlier of January 31, 2008 or termination of employment with the Group.
F-47
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Following approval of the Companys Annual Shareholders Meeting on June 22, 2004, the Company
granted stock acquisition rights to the Groups directors, corporate advisor, contract employees
and regular employees (including employees of the Group seconded to other companies and employees
of other companies seconded to the Group), and temporary employees with tenure of over one year of
the Group on April 21, 2005. Under this stock option plan, rights to purchase common stock of 357
thousand shares were granted at the exercise price of ¥1,340.00 ($11.35) per share, which was
priced at 110% of the average daily closing price of the month immediately before the month of the
issuance date of such stock acquisition rights. These rights are exercisable from May 1, 2005 and
expire on the earlier of April 30, 2008 or termination of employment with the Group.
Following approval of the Companys Annual Shareholders Meeting on June 22, 2005, the Company
granted stock acquisition rights to the Groups directors, statutory auditors, corporate advisors,
contract employees and regular employees (including employees of the Group seconded to other
companies and employees of other companies seconded to the Group) of the Group, and a director of a
business counterparty of the Company approved by the Board of Directors on July 15, 2005. Under
this stock option plan, rights to purchase common stock of 720 thousand shares were granted at the
exercise price of ¥1,160.00 ($9.83) per share, which was priced at 110% of the average daily
closing price of the month immediately before the month of the issuance date of such stock
acquisition rights. These rights are exercisable from August 1, 2005 and expire on the earlier of
July 31, 2008 or termination of employment with the Group.
Following approval of the Companys Annual Shareholders Meeting on June 22, 2005, the Company
granted stock acquisition rights to the Groups director, corporate advisors, contract employees
and regular employees (including employees of the Group seconded to other companies and employees
of other companies seconded to the Group) of the Group on March 23, 2006. Under this stock option
plan, rights to purchase common stock of 96 thousand shares were granted at the exercise price of
¥2,620.00 ($22.19) per share, which was priced at 110% of the average daily closing price of the
month immediately before the month of the issuance date of such stock acquisition rights. These
rights are exercisable from April 1, 2006 and expire on the earlier of March 31, 2009 or
termination of employment with the Group.
Each year, the Company is permitted to issue stock acquisition rights to directors the lesser of
¥500 million or 1,500 thousand shares.
A summary of the Companys stock acquisition rights as of March 31, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
|
Number of Shares
|
Exercise Prices
|
|
|
|
Granted
|
|
|
|
Outstanding
|
Yen
|
|
U.S. Dollars
|
|
Date Granted
|
|
(Thousands)
|
|
Exercise Period
|
|
(Thousands)
|
¥1,060.00
|
|
$
|
8.98
|
|
|
July 15, 2004
|
|
|
3,197
|
|
|
From August 1, 2004 to July 31, 2007
|
|
|
1,120
|
|
¥1,100.00
|
|
$
|
9.32
|
|
|
January 20, 2005
|
|
|
38
|
|
|
From February 1, 2005 to January
31, 2008
|
|
|
23
|
|
¥1,340.00
|
|
$
|
11.35
|
|
|
April 21, 2005
|
|
|
357
|
|
|
From May 1, 2005 to April 30, 2008
|
|
|
173
|
|
¥1,160.00
|
|
$
|
9.83
|
|
|
July 15, 2005
|
|
|
720
|
|
|
From August 1, 2005 to July 31, 2008
|
|
|
413
|
|
¥2,620.00
|
|
$
|
22.19
|
|
|
March 23, 2006
|
|
|
96
|
|
|
From April 1, 2006 to March 31, 2009
|
|
|
79
|
|
A summary of changes in the Companys stock acquisition rights for the year ended March 31,
2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Weighted-average
|
|
|
|
Weighted-average Exercise
|
|
|
Aggregate Intrinsic Value
|
|
|
|
Shares
|
|
|
Remaining Life
|
|
|
Price Per Share
|
|
|
|
|
|
|
Thousands of
|
|
|
|
(Thousands)
|
|
|
(Years)
|
|
|
Yen
|
|
|
U.S. Dollars
|
|
|
Millions of Yen
|
|
|
U.S. Dollars
|
|
Outstanding at beginning
of year
|
|
|
2,483
|
|
|
|
|
|
|
|
¥1,108
|
|
|
|
$ 9.39
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
588
|
|
|
|
|
|
|
|
845
|
|
|
|
7.16
|
|
|
|
|
|
|
|
|
|
Expired or forfeited
|
|
|
87
|
|
|
|
|
|
|
|
1,412
|
|
|
|
11.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
1,808
|
|
|
|
0.72
|
|
|
|
1,179
|
|
|
|
9.99
|
|
|
|
¥497
|
|
|
|
$4,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
1,808
|
|
|
|
0.72
|
|
|
|
¥1,179
|
|
|
|
9.99
|
|
|
|
¥497
|
|
|
|
$4,210
|
|
As of March 31, 2007, the Company has 1,500 thousand shares available for grant to directors
F-48
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Instead of an issuance of new shares, the Company sold to the grantee its treasury stock. The
Company received ¥909 million, ¥2,209 million and ¥496 million ($4,201 thousand) in cash from
exercise of stock acquisition rights for the years ended March 31, 2005, 2006 and 2007,
respectively. Consequently, additional paid-in capital increased by ¥216 million, ¥999 million and
¥227 million ($1,923 thousand) for the years ended March 31, 2005, 2006 and 2007, respectively, as
a result of gains from these transactions.
The total intrinsic value of stock acquisition rights exercised were ¥700 million, ¥2,346 million
and ¥488 million ($4,134 thousand) for the years ended March 31, 2005, 2006 and 2007, respectively.
The fair value of stock acquisition rights and warrants granted is estimated using the
Black-Scholes option-pricing model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2006
|
|
2007
(A)
|
Weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
0.3
|
%
|
|
|
1.5
|
%
|
|
|
|
%
|
Expected lives
|
|
|
3.0
|
years
|
|
|
3.0
|
years
|
|
|
|
years
|
Expected volatility
|
|
|
33.3
|
%
|
|
|
28.9
|
%
|
|
|
|
%
|
Dividend yield
|
|
|
1.1
|
%
|
|
|
1.4
|
%
|
|
|
|
%
|
Weighted-average fair value of grant per share
|
|
|
¥124.2
|
|
|
|
¥130.0
|
|
|
|
¥
|
|
(A) No share was granted for the year ended March 31, 2007.
The Company had no unrecognized stock-based compensation costs related to non-vested stock
acquisition rights as of March 31, 2007.
Nissin
Servicer, a 73.8%-owned subsidiary of the Company, also has stock-based compensation plans
as incentive plans for its directors and selected employees.
Following approval of Nissin Servicers Extraordinary Shareholders Meeting on September 9, 2002,
Nissin Servicer granted stock acquisition rights to its directors, statutory auditors and employees
on September 26, 2002. Under this stock option plan, rights to purchase common stock of 80,000
shares were granted at the exercise price of ¥625 ($5.29) per share, which was priced at the
initial cost of Nissin Servicers common stock. These rights are exercisable from October 1, 2004
and expire on the earlier of September 30, 2007 or termination of employment with Nissin Servicer.
Following approval of Nissin Servicers Annual Shareholders Meeting on June 23, 2003, Nissin
Servicer granted stock acquisition rights to its directors, statutory auditors and employees on
September 26, 2002. Under this stock option plan, rights to purchase common stock of 23,600 shares
were granted at the exercise price of ¥1,125 ($9.53) per share, which was priced at estimated
average net assets of Nissin Servicer for the six months ended September 30, 2003. These rights
are exercisable from July 1, 2005 and expire on the earlier of June 30, 2008 or termination of
employment with Nissin Servicer.
Following approval of Nissin Servicers Extraordinary Shareholders Meeting on March 30, 2004,
Nissin Servicer granted stock acquisition rights to its statutory auditor and employees on March
30, 2004. Under this stock option plan, rights to purchase common stock of 14,960 shares were
granted at the exercise price of ¥6,250 ($52.94) per share, which was priced at the fair value of
Nissin Servicer as of September 30, 2003 calculated using the discounted cash flow method. These
rights are exercisable from April 1, 2006 and expire on the earlier of March 31, 2009 or
termination of employment with Nissin Servicer.
Following approval of Nissin Servicers Annual Shareholders Meeting on June 21, 2005, Nissin
Servicer granted stock acquisition rights to directors, corporate advisors and employees of Nissin
Servicer and its affiliated companies on August 9, 2005. Under this stock option plan, rights to
purchase common stock of 2,620 shares were granted at the exercise price of ¥51,549 ($436.67) per
share, which was priced at 110% of the average daily closing price of the month immediately before
the month of the issuance date of such stock acquisition rights. These rights are exercisable from
July 1, 2007 and expire on the earlier of June 30, 2010 or termination of employment with Nissin
Servicer.
F-49
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Following approval of Nissin Servicers Board of Directors Meeting on August 7, 2006, Nissin
Servicer granted stock acquisition rights to its directors and executive officers on August 23,
2006. Under this stock option plan, rights to purchase common stock of 1,400 shares were granted
at the exercise price of ¥67,362 ($570.62) per share, which was priced at 150% of the average daily
closing price of the month immediately before the month of the issuance date of such stock
acquisition rights. These rights are exercisable from September 1, 2006 and expire on the earlier
of August 6, 2011 or termination of employment with Nissin Servicer.
Following approval of Nissin Servicers Board of Directors Meeting on August 7, 2006, Nissin
Servicer granted stock acquisition rights to director, corporate advisors and employees of Nissin
Servicer and its affiliated companies on August 23, 2006. Under this stock option plan, rights to
purchase common stock of 4,530 shares were granted at the exercise price of ¥58,380 ($494.54) per
share, which was priced at 130% of the average daily closing price of the month immediately before
the month of the issuance date of such stock acquisition rights. These rights are exercisable from
September 1, 2006 and expire on the earlier of August 6, 2011 or termination of employment with
Nissin Servicer.
A summary of Nissin Servicers stock acquisition rights as of March 31, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
|
Number of Shares
|
Exercise Prices
|
|
|
|
Granted
|
|
|
|
Outstanding
|
Yen
|
|
U.S. Dollars
|
|
Date Granted
|
|
(Shares)
|
|
Exercise Period
|
|
(Shares)
|
¥ 625.00
|
|
$
|
5.29
|
|
|
September 26, 2002
|
|
|
80,000
|
|
|
From October 1, 2004 to September
30, 2007
|
|
|
1,600
|
|
¥ 6,250.00
|
|
$
|
52.94
|
|
|
March 30, 2004
|
|
|
14,960
|
|
|
From April 1, 2006 to March 31, 2009
|
|
|
2,000
|
|
¥51,549.00
|
|
$
|
436.67
|
|
|
August 9, 2005
|
|
|
2,620
|
|
|
From July 1, 2007 to June 30, 2010
|
|
|
2,340
|
|
¥67,362.00
|
|
$
|
570.62
|
|
|
August 23, 2006
|
|
|
1,400
|
|
|
From September 1, 2006 to August 6,
2011
|
|
|
1,400
|
|
¥58,380.00
|
|
$
|
494.54
|
|
|
August 23, 2006
|
|
|
4,530
|
|
|
From September 1, 2006 to August 6,
2011
|
|
|
4,250
|
|
A summary of changes in Nissin Servicers stock acquisition rights for the year ended March
31, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Weighted-average
|
|
|
Weighted-average Exercise
|
|
|
Aggregate Intrinsic Value
|
|
|
|
Shares
|
|
|
Remaining Life
|
|
|
Price Per Share
|
|
|
|
|
|
|
Thousands of
|
|
|
|
(Shares)
|
|
|
(Years)
|
|
|
Yen
|
|
|
U.S. Dollars
|
|
|
Millions of Yen
|
|
|
U.S. Dollars
|
|
Outstanding at beginning
of year
|
|
|
17,620
|
|
|
|
|
|
|
¥
|
11,961
|
|
|
|
$101.32
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
5,930
|
|
|
|
|
|
|
|
60,501
|
|
|
|
512.50
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
11,520
|
|
|
|
|
|
|
|
6,250
|
|
|
|
52.94
|
|
|
|
|
|
|
|
|
|
Expired or forfeited
|
|
|
440
|
|
|
|
|
|
|
|
47,660
|
|
|
|
403.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
11,590
|
|
|
|
3.20
|
|
|
|
41,118
|
|
|
|
348.31
|
|
|
|
¥135
|
|
|
|
$1,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
9,250
|
|
|
|
3.18
|
|
|
¥
|
38,479
|
|
|
|
$325.96
|
|
|
|
¥135
|
|
|
|
$1,144
|
|
Nissin Servicer received ¥40 million, ¥20 million and ¥72 million ($610 thousand) in cash from
exercise of stock acquisition rights for the years ended March 31, 2005, 2006 and 2007,
respectively.
The total intrinsic value of stock acquisition rights exercised were ¥2,443 million, ¥839 million
and ¥717 million ($6,074 thousand) for the years ended March 31, 2005, 2006 and 2007, respectively.
The fair value of stock acquisition rights and warrants granted is estimated using the
Black-Scholes option-pricing model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
(A)
|
|
2006
|
|
2007
|
Weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
|
%
|
|
|
1.6
|
%
|
|
|
0.8
|
%
|
Expected lives
|
|
|
|
years
|
|
|
4.9
|
years
|
|
|
2.5
|
years
|
Expected volatility
|
|
|
|
%
|
|
|
57.5
|
%
|
|
|
74.3
|
%
|
Dividend yield
|
|
|
|
%
|
|
|
0.8
|
%
|
|
|
1.0
|
%
|
Weighted-average fair value of grant per share
|
|
|
¥
|
|
|
|
¥11,522
|
|
|
|
¥20,258
|
|
(A) No share was granted for the year ended March 31, 2005.
F-50
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Nissin Servicer had unrecognized stock-based compensation costs of ¥4 million ($34 thousand)
related to non-vested stock acquisition rights as of March 31, 2007 which is expected to be
amortized for a weighted-average of 0.3 years.
APREK, a
69.3%-owned subsidiary of the Company, also has subsidiary stock-based compensation plans
as incentive plans for its directors and selected employees.
Following approval of APREKs Extraordinary Shareholders Meeting on January 26, 2006, APREK
granted stock acquisition rights to directors, statutory auditor and employees of APREK on April
28, 2006. Under this stock option plan, rights to purchase common stock of 175,000 shares were
granted at the exercise price of ¥740 ($6.27) per share, which was the closing price of APREKs
shares on the JASDAQ Securities Exchange on the issuance date of such stock acquisition rights.
These rights are exercisable from May 1, 2006 and expire on the earlier of April 30, 2009 or
termination of employment with APREK. In case of mandatory retirement, stock acquisition rights
are due to expire in 90 days from that day.
A summary of APREKs stock acquisition rights as of March 31, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
|
Number of Shares
|
Exercise Prices
|
|
|
|
Granted
|
|
|
|
Outstanding
|
Yen
|
|
U.S. Dollars
|
|
Date Granted
|
|
(Shares)
|
|
Exercise Period
|
|
(Shares)
|
¥740.00
|
|
$
|
6.27
|
|
|
April 28, 2006
|
|
|
175,000
|
|
|
From May 1, 2006 to April 30, 2009
|
|
|
166,000
|
|
A summary of changes in APREKs stock acquisition rights for the year ended March 31, 2007 is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Weighted-average
|
|
|
Weighted-average Exercise
|
|
|
Aggregate Intrinsic Value
|
|
|
|
Shares
|
|
|
Remaining Life
|
|
|
Price Per Share
|
|
|
|
|
|
|
Thousands of
|
|
|
|
(Shares)
|
|
|
(Years)
|
|
|
Yen
|
|
|
U.S. Dollars
|
|
|
Millions of Yen
|
|
|
U.S. Dollars
|
|
Outstanding at beginning
of year
|
|
|
|
|
|
|
|
|
|
|
¥
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
175,000
|
|
|
|
|
|
|
|
740
|
|
|
|
6.27
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired or forfeited
|
|
|
9,000
|
|
|
|
|
|
|
|
740
|
|
|
|
6.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
166,000
|
|
|
|
2.00
|
|
|
|
740
|
|
|
|
6.27
|
|
|
|
¥
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
166,000
|
|
|
|
2.00
|
|
|
|
¥740
|
|
|
|
$6.27
|
|
|
|
¥
|
|
|
|
$
|
|
The fair value of stock acquisition rights and warrants granted is estimated using the
Black-Scholes option-pricing model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
(A)
|
|
2006
(A)
|
|
2007
|
Weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
|
%
|
|
|
|
%
|
|
|
2.5
|
%
|
Expected lives
|
|
|
|
years
|
|
|
|
years
|
|
|
3.0
|
years
|
Expected volatility
|
|
|
|
%
|
|
|
|
%
|
|
|
47.2
|
%
|
Dividend yield
|
|
|
|
%
|
|
|
|
%
|
|
|
0.7
|
%
|
Weighted-average fair value of grant per share
|
|
|
¥
|
|
|
|
¥
|
|
|
|
¥196.0
|
|
(A)
|
|
No share was granted for the years ended March 31, 2005 and 2006.
|
APREK had no unrecognized stock-based compensation costs related to non-vested stock
acquisition rights as of March 31, 2007.
F-51
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
23. Cumulative Other Comprehensive Income
Cumulative other comprehensive income and related tax effects for the years ended March 31, 2005,
2006 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions of Yen
|
|
|
|
Other
|
|
|
|
|
|
|
Cumulative
|
|
|
|
Comprehensive
|
|
|
|
|
|
Other
|
|
|
|
Income
|
|
|
Tax (Expense)
|
|
|
Comprehensive
|
|
|
|
Before Tax
|
|
|
or Benefit
|
|
|
Income
|
|
March 31, 2004
|
|
|
¥ 5,657
|
|
|
|
¥ (2,286
|
)
|
|
|
¥ 3,371
|
|
Unrealized gains on investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized changes in fair value during the period
|
|
|
7,428
|
|
|
|
(3,008
|
)
|
|
|
4,420
|
|
Reclassification adjustment for realized gains (losses)
included in net income
|
|
|
513
|
|
|
|
(208
|
)
|
|
|
305
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized holding gains (losses) during the period
|
|
|
7,941
|
|
|
|
(3,216
|
)
|
|
|
4,725
|
|
Unrealized losses on derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized changes in fair value during the period
|
|
|
(2
|
)
|
|
|
1
|
|
|
|
(1
|
)
|
Reclassification adjustment for realized (gains) losses
included in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses arising during the period
|
|
|
(9
|
)
|
|
|
|
|
|
|
(9
|
)
|
Reclassification adjustment for realized (gains) losses
included in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2005
|
|
|
13,587
|
|
|
|
(5,501
|
)
|
|
|
8,086
|
|
Unrealized gains on investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized changes in fair value during the period
|
|
|
(864
|
)
|
|
|
336
|
|
|
|
(528
|
)
|
Reclassification adjustment for realized (gains) losses
included in net income
|
|
|
(3,760
|
)
|
|
|
1,523
|
|
|
|
(2,237
|
)
|
|
|
|
|
|
|
|
|
|
|
Net unrealized holding (gains) losses during the period
|
|
|
(4,624
|
)
|
|
|
1,859
|
|
|
|
(2,765
|
)
|
Unrealized losses on derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized changes in fair value during the period
|
|
|
7
|
|
|
|
(3
|
)
|
|
|
4
|
|
Reclassification adjustment for realized (gains) losses
included in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains arising during the period
|
|
|
160
|
|
|
|
|
|
|
|
160
|
|
Reclassification adjustment for realized (gains) losses
included in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006
|
|
|
9,130
|
|
|
|
(3,645
|
)
|
|
|
5,485
|
|
Unrealized gains on investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized changes in fair value during the period
|
|
|
(6,701
|
)
|
|
|
2,713
|
|
|
|
(3,988
|
)
|
Reclassification adjustment for realized gains (losses)
included in net losses
|
|
|
23
|
|
|
|
(9
|
)
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized holding (gains) losses during the period
|
|
|
(6,678
|
)
|
|
|
2,704
|
|
|
|
(3,974
|
)
|
Unrealized losses on derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized changes in fair value during the period
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
|
|
Reclassification adjustment for realized (gains) losses
included in net losses
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains arising during the period
|
|
|
210
|
|
|
|
|
|
|
|
210
|
|
Reclassification adjustment for realized (gains) losses
included in net losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007
|
|
|
¥ 2,661
|
|
|
|
¥ (940
|
)
|
|
|
¥ 1,721
|
|
|
|
|
|
|
|
|
|
|
|
F-52
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of U.S. Dollars
|
|
|
|
Other
|
|
|
|
|
|
|
Cumulative
|
|
|
|
Comprehensive
|
|
|
|
|
|
|
Other
|
|
|
|
Income
|
|
|
Tax (Expense)
|
|
|
Comprehensive
|
|
|
|
Before Tax
|
|
|
or Benefit
|
|
|
Income
|
|
March 31, 2006
|
|
|
$ 77,340
|
|
|
|
$(30,877
|
)
|
|
|
$ 46,463
|
|
Unrealized gains on investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized changes in fair value during the period
|
|
|
(56,765
|
)
|
|
|
22,982
|
|
|
|
(33,783
|
)
|
Reclassification adjustment for realized gains (losses)
included in net losses
|
|
|
195
|
|
|
|
(76
|
)
|
|
|
119
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized holding (gains) losses during the period
|
|
|
(56,570
|
)
|
|
|
22,906
|
|
|
|
(33,664
|
)
|
Unrealized losses on derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized changes in fair value during the period
|
|
|
(8
|
)
|
|
|
8
|
|
|
|
|
|
Reclassification adjustment for realized (gains) losses
included in net losses
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains arising during the period
|
|
|
1,780
|
|
|
|
|
|
|
|
1,780
|
|
Reclassification adjustment for realized (gains) losses
included in net losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007
|
|
|
$ 22,542
|
|
|
|
$ (7,963
|
)
|
|
|
$ 14,579
|
|
|
|
|
|
|
|
|
|
|
|
24. Cash Flow Information
Cash payments for interest and income taxes for the years ended March 31, 2005, 2006 and 2007 are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Millions of Yen
|
|
|
U.S. Dollars
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
Interest
|
|
¥
|
2,999
|
|
|
¥
|
2,779
|
|
|
¥
|
4,206
|
|
|
$
|
35,629
|
|
Income taxes
|
|
|
5,266
|
|
|
|
2,302
|
|
|
|
8,119
|
|
|
|
68,776
|
|
Non-cash investing and financing activities for the years ended March 31, 2005, 2006 and 2007
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of
|
|
|
|
Millions of Yen
|
|
|
U.S. Dollars
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
Property and
equipment obtained
under capital
leases
|
|
¥
|
792
|
|
|
¥
|
278
|
|
|
¥
|
163
|
|
|
$
|
1,381
|
|
Conversion of
convertible bonds
to common stock
|
|
|
1,058
|
|
|
|
8,120
|
|
|
|
774
|
|
|
|
6,557
|
|
In addition, cash dividends paid to minority interest by Nissin Servicer of ¥99 million and
¥214 million ($1,813 thousand) are included in Dividends paid of cash flows from financing
activities for the years ended March 31, 2006 and 2007, respectively.
F-53
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
25. Disclosures About Fair Value of Financial Instruments
SFAS No. 107, Disclosures about Fair Value of Financial Instruments requires disclosures of the
fair value of financial instruments, including for assets and liabilities recognized and not
recognized in the Groups balance sheet. The estimated fair value amounts have been determined by
the Group using available market information and appropriate valuation methodologies. The use of
different market assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts. Considerable judgment is required in estimating fair values and the
estimates presented are not necessarily indicative of the amounts the Group could realize in a
current market exchange.
The estimated fair values of the Groups financial instruments as of March 31, 2006 and 2007 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions of Yen
|
|
|
Thousands of U.S. Dollars
|
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
|
Carrying
|
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
¥
|
22,860
|
|
|
¥
|
22,860
|
|
|
¥
|
28,344
|
|
|
¥
|
28,344
|
|
|
$
|
240,102
|
|
|
$
|
240,102
|
|
Loans receivable, net
|
|
|
225,947
|
|
|
|
220,502
|
|
|
|
250,780
|
|
|
|
249,700
|
|
|
|
2,124,354
|
|
|
|
2,115,205
|
|
Purchased loans receivable, net
|
|
|
24,155
|
|
|
|
24,155
|
|
|
|
28,910
|
|
|
|
28,910
|
|
|
|
244,896
|
|
|
|
244,896
|
|
Investment securities
|
|
|
42,071
|
|
|
|
42,071
|
|
|
|
38,384
|
|
|
|
38,384
|
|
|
|
325,150
|
|
|
|
325,150
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
60,411
|
|
|
|
60,411
|
|
|
|
84,258
|
|
|
|
84,258
|
|
|
|
713,748
|
|
|
|
713,748
|
|
Long-term borrowings
|
|
|
198,924
|
|
|
|
200,487
|
|
|
|
260,817
|
|
|
|
257,696
|
|
|
|
2,209,377
|
|
|
|
2,182,939
|
|
Interest rate swaps
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
8
|
|
|
|
8
|
|
Guarantee of loans
|
|
|
629
|
|
|
|
629
|
|
|
|
1,066
|
|
|
|
1,066
|
|
|
|
9,030
|
|
|
|
9,030
|
|
The following methods and assumptions were used to estimate the fair value of each class of
financial instruments for which it is practicable to estimate that value:
a)
|
|
Cash and Cash Equivalents:
Cash and cash equivalents are carried at an amount that
approximates fair value.
|
|
b)
|
|
Loans Receivable:
The Group maintains an allowance for loan losses at a level that is
adequate in managements judgment to provide for estimated probable uncollectible loan losses
from known and inherent risks in the Groups loan portfolios. In addition, the Group provides
a reserve for losses on excess interest repayments derived from current loans receivable and
loans previously paid-off or charged-off. (See Note 2 for a summary of significant accounting
policies.) Accordingly, the Group believes the carrying value of its loans receivable, net of
reserve for losses on excess interest repayments derived from the current loans, approximates
fair value.
|
|
c)
|
|
Purchased Loans Receivable:
The carrying value of purchased loans receivable is estimated
based on either the market value or the discounted amounts of future cash flows. The Group
believes the carrying value of its purchased loans receivable approximates fair value.
|
|
d)
|
|
Investment Securities:
The fair value of marketable equity securities is based on quoted
market prices. The Group also holds ¥18,675 million and ¥20,446 million ($173,198 thousand)
in debt securities and other investments, including non-marketable equity securities as of
March 31, 2006 and 2007, respectively. The fair value of these investments is assumed to
estimate cost until such time as new equity or financing or significant changes operations
demonstrate a new fair value.
|
|
e)
|
|
Short-term Borrowings:
Short-term borrowings are carried at an amount that approximates fair
value.
|
|
f)
|
|
Long-term Borrowings:
Long-term borrowings, including current portion, are estimated based
on either the market value or the discounted amounts of future cash flows. The borrowing
interest rates which are currently available to the Group offered by financial institutions
for debt with similar terms and remaining average maturities are used as the discount rates.
The fair value of syndicated bonds is estimated using a discounted cash-flow calculation that
applies interests rates at an assumed marginal market-funding rate.
|
|
g)
|
|
Interest Rate Swaps:
The fair value of interest rate swaps (used for hedging purpose)
reflects the estimated amounts that the Group 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 Groups derivatives.
|
|
h)
|
|
Guarantee of Loans:
The fair value of the Groups guarantees generally reflects the probable
and estimable amounts that the Group would pay for the delinquent payments of borrowings under
guarantees.
|
F-54
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
26. Segment Information
The Group
operates under the following segments: integrated financial services segment, the
servicing business segment, the real estate business segment, and the
other businesses segment. The
integrated financial services segment is comprised of loan businesses, as well as credit guarantee,
leasing and securities businesses. In the servicing business segment, Nissin Servicer mainly
acquires and services non-performing debts from banks and financial institutions in Japan. The
real estate business has been disclosed as a separate segment, because this business has become
significant. The other businesses segment includes insurance agency, consultancy and other businesses. The
Group currently conducts its operating activities mainly in Japan. The Group has recently begun
activities in China, but these are currently insignificant.
In addition, the accounting policies for the segment information are the same as those described in
the summary of significant accounting policies in Note 2, and all inter-company transactions are at
an arms-length.
Selected information for the Groups business segments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions of Yen
|
|
Integrated
|
|
Servicing
|
|
Real Estate
|
|
Other
|
|
|
|
|
|
Financial Services
|
|
Business
|
|
Business
|
|
Businesses
|
|
Eliminations
|
|
Consolidated
|
Year Ended / As of March 31,
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
¥
|
27,356
|
|
|
¥
|
|
|
|
¥
|
|
|
|
¥
|
|
|
|
¥
|
|
|
|
¥
|
27,356
|
Other revenue
|
|
|
1,107
|
|
|
|
3,893
|
|
|
|
18
|
|
|
|
210
|
|
|
|
(225
|
)
|
|
|
5,003
|
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
3,012
|
|
|
|
153
|
|
|
|
90
|
|
|
|
9
|
|
|
|
(105
|
)
|
|
|
3,159
|
Provision for loan losses
|
|
|
5,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,817
|
Other provision
|
|
|
123
|
|
|
|
821
|
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
984
|
Other expense
|
|
|
12,969
|
|
|
|
1,181
|
|
|
|
58
|
|
|
|
180
|
|
|
|
(122
|
)
|
|
|
14,266
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (losses)
|
|
|
6,542
|
|
|
|
1,738
|
|
|
|
(130
|
)
|
|
|
(19
|
)
|
|
|
2
|
|
|
|
8,133
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
208,493
|
|
|
|
21,818
|
|
|
|
2,643
|
|
|
|
572
|
|
|
|
(5,125
|
)
|
|
|
228,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions of Yen
|
|
|
Integrated
|
|
Servicing
|
|
Real Estate
|
|
Other
|
|
|
|
|
|
|
Financial Services
|
|
Business
|
|
Business
|
|
Businesses
|
|
Eliminations
|
|
Consolidated
|
|
Year Ended / As of March 31,
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
income
|
|
¥
|
26,495
|
|
|
¥
|
|
|
|
¥
|
|
|
|
¥
|
|
|
|
¥
|
|
|
|
¥
|
26,495
|
|
Other revenue
|
|
|
3,251
|
|
|
|
7,918
|
|
|
|
901
|
|
|
|
279
|
|
|
|
(904
|
)
|
|
|
11,445
|
|
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
2,656
|
|
|
|
408
|
|
|
|
311
|
|
|
|
11
|
|
|
|
(281
|
)
|
|
|
3,105
|
|
Provision for loan losses
|
|
|
5,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,923
|
|
Other provision
|
|
|
122
|
|
|
|
1,186
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
1,334
|
|
Other expense
|
|
|
13,619
|
|
|
|
1,676
|
|
|
|
340
|
|
|
|
577
|
|
|
|
(317
|
)
|
|
|
15,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (losses)
|
|
|
7,426
|
|
|
|
4,648
|
|
|
|
250
|
|
|
|
(335
|
)
|
|
|
(306
|
)
|
|
|
11,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
313,127
|
|
|
|
43,000
|
|
|
|
25,074
|
|
|
|
244
|
|
|
|
(21,502
|
)
|
|
|
359,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-55
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions of Yen
|
|
Integrated
|
|
Servicing
|
|
Real Estate
|
|
Other
|
|
|
|
|
|
Financial Services
|
|
Business
|
|
Business
|
|
Businesses
|
|
Eliminations
|
|
Consolidated
|
Year Ended / As of March 31,
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
income
|
|
¥
|
21,215
|
|
|
¥
|
|
|
|
¥
|
|
|
|
¥
|
|
|
|
¥
|
(173
|
)
|
|
¥
|
21,042
|
Other revenue
|
|
|
5,610
|
|
|
|
10,375
|
|
|
|
5,307
|
|
|
|
319
|
|
|
|
(4,026
|
)
|
|
|
17,585
|
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
3,892
|
|
|
|
933
|
|
|
|
981
|
|
|
|
116
|
|
|
|
(1,015
|
)
|
|
|
4,907
|
Provision for loan losses
|
|
|
10,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,853
|
Other provision
|
|
|
530
|
|
|
|
1,696
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
2,229
|
Other expense
|
|
|
15,658
|
|
|
|
2,548
|
|
|
|
824
|
|
|
|
626
|
|
|
|
(339
|
)
|
|
|
19,317
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (losses) income
|
|
|
(4,108
|
)
|
|
|
5,198
|
|
|
|
3,499
|
|
|
|
(423
|
)
|
|
|
(2,845
|
)
|
|
|
1,321
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
370,481
|
|
|
|
62,649
|
|
|
|
56,466
|
|
|
|
8,599
|
|
|
|
(44,118
|
)
|
|
|
454,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of U.S. Dollars
|
|
Integrated
|
|
Servicing
|
|
Real Estate
|
|
Other
|
|
|
|
|
|
Financial Services
|
|
Business
|
|
Business
|
|
Businesses
|
|
Eliminations
|
|
Consolidated
|
Year Ended / As of March 31,
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
179,713
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(1,466
|
)
|
|
$
|
178,247
|
Other revenue
|
|
|
47,522
|
|
|
|
87,886
|
|
|
|
44,955
|
|
|
|
2,703
|
|
|
|
(34,104
|
)
|
|
|
148,962
|
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
32,969
|
|
|
|
7,903
|
|
|
|
8,310
|
|
|
|
983
|
|
|
|
(8,598
|
)
|
|
|
41,567
|
Provision for loan losses
|
|
|
91,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,936
|
Other provision
|
|
|
4,490
|
|
|
|
14,367
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
18,882
|
Other expense
|
|
|
132,639
|
|
|
|
21,584
|
|
|
|
6,980
|
|
|
|
5,303
|
|
|
|
(2,872
|
)
|
|
|
163,634
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (losses) income
|
|
|
(34,799
|
)
|
|
|
44,032
|
|
|
|
29,640
|
|
|
|
(3,583
|
)
|
|
|
(24,100
|
)
|
|
|
11,190
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
3,138,340
|
|
|
|
530,699
|
|
|
|
478,323
|
|
|
|
72,842
|
|
|
|
(373,723
|
)
|
|
|
3,846,481
|
|
|
|
|
|
|
|
|
|
|
|
|
We mainly focused on the moneylending business in the past. However, we recently have been
diversifying our financial and other businesses. In order to reflect our strategic business
changes in the presentation of our consolidated financial results, we changed the format of our
consolidated statements of operations. Consolidated financial statements for previous fiscal years
were modified to conform to the current presentation and, consequently, the presentation of segment
information was also modified in conformity with such changes. In
addition, Real Estate Business, which was
previously included in Integrated Financial Services, is disclosed as a separate segment, due to
an increase in its significance, and Other Businesses is also disclosed as a separate segment,
beginning with the year ended March 31, 2007. Segment information for the years ended March 31,
2005 and 2006 are modified in conformity with this new segment classification. These modifications
have no effect on previously reported net income and shareholders equity.
F-56
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
27. Subsequent Events
1)
|
|
On June 23, 2007, the shareholders of the Company authorized the following at the Annual
Shareholders Meeting:
|
|
(1)
|
|
Implementation of a 1-for-20 reverse stock split effective on August 31, 2007. The
effect of this reverse stock split has been retroactively reflected in these consolidated
financial statements.
|
|
|
(2)
|
|
Changes of the annual upper limit on the total number of
stock acquisition rights issuable to the Companys directors as
stock-based compensation and shares allotted to these rights from 300,000
units and 1,500,000 shares to 500,000 units and 2,500,000 shares, respectively.
|
|
|
(3)
|
|
Partial amendments of the Articles of Incorporation
|
|
|
|
Reduction of the total number of authorized shares from 7,680 million shares to 384
million shares. This shall go into effect on the effective date of the reverse stock
split approved at the Annual Shareholders Meeting.
|
|
2)
|
|
On June 23, 2007, the Board of Directors approved the repurchase of shares of the
Companys common stock of up to 3,000,000 shares for an aggregate amount of up to ¥3 billion.
The company completed all stock repurchases to be made under this stock repurchase program
during the period from June 25, 2007 to August 24, 2007.
|
|
3)
|
|
On July 18, 2007, the Board of Directors approved that the number of shares of the
Companys common stock represented by each American Depositary Share (ADS) be changed from
the current ratio of one ADS for 10 shares of common stock to two
ADSs for one share of common
stock. This change became effective on August 31, 2007, in accordance with the 1-for-20
reverse stock split approved at the Annual Shareholders Meeting.
|
F-57
INDEX OF EXHIBITS
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
1.1
|
|
|
Our Articles of Incorporation (English Translation)
|
|
|
|
|
|
|
1.2
|
|
|
Our Share Handling Regulations (English Translation)
|
|
|
|
|
|
|
1.3
|
|
|
Our Regulations of the Board of Directors (English Translation)
|
|
|
|
|
|
|
1.4
|
|
|
Our Regulations of the Board of Statutory Auditors (English Translation)
|
|
|
|
|
|
|
2.1
|
|
|
Our Specimen of Common Stock Certificates (English Translation)
|
|
|
|
|
|
|
2.2
|
|
|
Form of Deposit Agreement Among NIS Group Co., Ltd., The Bank of New York as Depositary and All
Owners and Holders from Time to Time of American Depositary Receipts, Including the Form of
American Depositary Receipt (incorporated by reference to the Registration Statement on Form F-6
(File No. 333-97133) filed on July 24, 2002)
|
|
|
|
|
|
|
8.1
|
|
|
List of Our Subsidiaries
|
|
|
|
|
|
|
11.1
|
|
|
Our Code of Ethics
|
|
|
|
|
|
|
12.1
|
|
|
Certification of the principal executive officer required by 17 C.F.R. 240. 13a-14(a)
|
|
|
|
|
|
|
12.2
|
|
|
Certification of the principal executive officer required by 17 C.F.R. 240. 13a-14(a)
|
|
|
|
|
|
|
12.3
|
|
|
Certification of the principal financial officer required by 17 C.F.R. 240. 13a-14(a)
|
|
|
|
|
|
|
13.1
|
|
|
Certification of the chief executive officer required by 18 U.S.C. Section 1350
|
|
|
|
|
|
|
13.2
|
|
|
Certification of the chief executive officer required by 18 U.S.C. Section 1350
|
|
|
|
|
|
|
13.3
|
|
|
Certification of the chief financial officer required by 18 U.S.C. Section 1350
|
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