When the game changes, so does the rule. AIFUL CORPORATIONCORPORATION · ·ANNUAL ANNUAL REPORT REPORT 2003 2003 PROFILE >> The AIFUL Group is an innovative, comprehensive retail financial services group that customers can rely on. Its corporate philosophy is to “Win the good favor of society,” and its utmost priority is to provide convenience to customers by meeting all of their borrowing needs. Since its founding in 1967, AIFUL has grown by diversifying its product offerings and customer acquisition channels, and by merging with or acquiring other firms. We now rank first in the domestic consumer finance industry in terms of consolidated amount of total receivables and loans outstanding, as well as operating revenue, and third in terms of ordinary income. With this philosophy, and by further expanding our share in the consumer credit market, we believe we can achieve successful synergies for all of our stakeholders, namely our customers, shareholders, and employees. CONTENTS >> Consolidated Financial Highlights 1 To Our Shareholders 2 Special Edition Japan’s Consumer Credit Market 6 Advances in the Scoring System 9 Changes in the Business Environment 10 AIFUL’s Management Strategy 13 Management Policies for Fiscal 2004 19 Corporate Philosophy 21 Management’s Discussion and Analysis 23 Financial Section 37 Six-year Summary 78 Board of Directors 80 Investor Information 81 Forward-Looking Statements >> The figures contained in this Annual Report with respect to AIFUL’s plans and strategies and other statements that are not historical facts are forward-looking statements about the future performance of AIFUL which are based on management’s assumptions and belief in light of the information currently available to it and involve risks and uncertainties and actual results may differ from those in the forward- looking statements as a result of various facts. Potential risks and uncertainties include, without limitation, general economic conditions in AIFUL’s market and changes in the size of the overall market for consumer loans, the rate of default by customers, and the level of interest rates charged by AIFUL. CONSOLIDATED FINANCIAL HIGHLIGHTS CONSOLIDATED FINANCIAL HIGHLIGHTS >> Millions of Yen Percentage Thousands of AIFUL Corporation and Consolidated Subsidiaries of Change U.S. Dollars Years Ended March 31, 2003 and 2002 2003 2002 03/02 2003 For the Year: Total income ¥ 451,168 ¥ 400,014 12.8% $ 3,759,733 Total expenses 343,715 338,166 1.6 2,864,292 Income before income taxes and minority interests 107,453 61,848 73.7 895,441 Net income 59,911 35,064 70.9 499,258 At Year-End: Balance of loans outstanding 1,670,782 1,482,796 12.7 13,923,183 Installment accounts receivable 147,857 120,756 22.4 1,232,142 Total assets 2,282,113 2,029,634 12.4 19,017,608 Long-term debt, including current portion thereof 1,436,104 1,291,781 11.2 11,967,533 Total shareholders’ equity 485,991 421,343 15.3 4,049,925 Number of shares issued 94,690,000 93,376,000 1.4 Yen Percentage U.S. Dollars of Change Per Share Data: Net income ¥ 637.59 ¥ 388.85 64.0 $ 5.31 Cash dividends 60.00 50.00 20.0 0.50 Notes: 1. The U.S. dollar amounts have been translated, for convenience only, at ¥120=$1, the approximate rate of exchange at March 31, 2003. 2. Net income per share has been computed based on the weighted average number of shares outstanding during each period, after retroactive adjustment for stock splits. Total Income Net Income (Millions of Yen) (Millions of Yen) 500,000 60,000 400,000 48,000 300,000 36,000 200,000 24,000 100,000 12,000 0 0 9900 01 02 03 9900 01 02 03 Total Assets/ROA Total Shareholders' Equity/ROE (Millions of Yen) （%） (Millions of Yen) （%） 2,500,000 5.0 500,000 25.0 2,000,000 4.0 400,000 20.0 1,500,000 3.0 300,000 15.0 1,000,000 2.0 200,000 10.0 500,000 1.0 100,000 5.0 0 0 0 0 9900 01 02 03 9900 01 02 03 Total Assets Total Shareholders' Equity ROA ROE 1 AIFUL CORPORATION · ANNUAL REPORT 2003 TO OUR SHAREHOLDERS TO OUR SHAREHOLDERS >> As a comprehensive retail financial services group, we will continue to nurture steady profit growth into the future. Yoshitaka Fukuda President and CEO The fiscal year ended March 2003 was a very good Operating Environment and Our Performance picture of the vision we at AIFUL have held of The business environment for the fiscal year ended becoming a comprehensive retail financial services March 2003 was a challenging one in many ways group. The AIFUL Group, including LIFE, became the for this industry. The prolonged economic downturn industry leader in terms of total receivables and has led to a rise in corporate as well as personal loans outstanding. Our operating revenues were the bankruptcies, sluggish income growth and highest in the industry, and our operating and diminished willingness to spend. Competition within ordinary income rose to third place. Moreover, we the industry intensified as banks began to offer were the only one of the four leading consumer similar products and services. finance companies to manage to increase both During this period, all of our efforts have been revenue and income this fiscal year with our geared toward becoming a comprehensive retail consolidated operating revenues totaling ¥449.5 financial services company targeting the ¥63 trillion billion (up 13.2% year on year), ordinary income overall consumer credit market, and not just the ¥111.7 billion (up 6.4%), and net income ¥59.9 conventional consumer loans. billion (up 70.9%). We have been diversifying our product lineup to We believe that these financial results validate our include, in addition to unsecured loans, home-equity strategy of becoming a comprehensive retail financial loans and small-business loans, which our services company. It also demonstrates the extent to competitors do not offer. The acquisitions of leading which LIFE, our new consolidated subsidiary, credit card company LIFE in March 2001 and contributed to earnings: Operating revenues midsized business lender City’s in October 2002 increased 13% on a consolidated basis, which represent our efforts to develop brands, products, includes LIFE, while increasing only 6% on a non- and customer base unlike those of conventional consolidated basis; ordinary income rose 6% on a consumer finance companies. LIFE has been consolidated basis while slipping a slight 0.4% on a particularly successful in steadily expanding its non-consolidated basis. Clearly, these numbers paint cardholder base, receivables and earnings. The a picture of a growing, more comprehensive, AIFUL. unit’s ordinary income reached an all-time high of 2 TO OUR SHAREHOLDERS To address the phenomenon of a maturing market, we will expand our business into new growth areas. ¥8 billion, which contributed significantly to our consumer finance, we need to broaden our consolidated results and helped AIFUL secure steady operating base and diversify our brand, product profit growth. lineup, and customer acquisition channels, as we have been doing through mergers and acquisitions, Comprehensive Retail Financial Group for example. There are three reasons why we have striven to Third, AIFUL has been significantly transformed on become a comprehensive retail financial services its way to becoming a comprehensive retail company rather than just a mere consumer finance financial services company, by diversifying the company. First, the traditional consumer loan market business portfolio beyond just conventional is projected to mature starting around 2010, as the consumer loans to include credit cards and sales young adult population, the target customer segment finance. By the end of March 2003, we had of the market, shrinks in conjunction with Japan’s developed a diversified base of customers, declining birthrate and aging society. Nor are there operating receivables and income sources other markets likely to grow for very extended completely unlike our competitors’. The parent periods. Thus, we believe it is imperative for us to company’s unsecured loans accounted for 50% of expand into new growth areas while we can still total receivables while home equity loans accounted generate steady income in the core businesses. for 15%, operating receivables acquired from LIFE Second, as evident in the recent developments accounted for 30% and other subsidiaries’ loans among bank-affiliated consumer finance companies, 5%. deregulation and industry realignments have Given that the consumer finance market is likely to gradually blurred the conventional boundaries mature in the near future and the economic outlook separating the consumer finance, business finance, is uncertain, we are confident that this strategy of sales finance and credit card businesses, which has broadening and diversifying our business portfolio led to intensified competition throughout the entire to achieve our goal is absolutely necessary in order consumer credit market. To successfully compete for to minimize the risks and at the same time ensure market share in areas beyond conventional that we continue to steadily grow. 3 AIFUL CORPORATION · ANNUAL REPORT 2003 TO OUR SHAREHOLDERS By joining the AIFUL Group, LIFE has generated numerous synergetic effects in addition to contributing to AIFUL’s profits. Successes with LIFE outstanding fell 14% to ¥117.8 billion. In these As a member of the AIFUL Group for more than two ways, LIFE has been shifting its asset portfolio mix years now, LIFE has been able to steadily increase toward higher-margin receivables as smoothly as its sales and earnings. LIFE expanded its base of planned. cardholders from 8.71 million at the end of March Companies in the sales finance industry are 2002 to 9.83 million at the end of March 2003, for realigning themselves in the wake of instability in the an increase of 1.11 million, thanks mainly to a financial system and a plunge in share prices of successful card deal with a leading retailer.