ANNUAL REPORT 2005 ANNUAL REPORT 2005 ASSEMBLING THE VISION CONTENTS CORPORATE PHILOSOPHY ○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ Page “WIN THE GOOD FAVOR OF SOCIETY” 1. Consolidated Financial Highlights BE THE COMPANY OF CHOICE FOR 2. To Our Shareholders INDIVIDUALS AND SOCIETY Customers come first. We work hard to understand their needs and satisfy their 6. Growth Potential Remains in expectations. This is why people choose Japan’s Consumer Credit AIFUL, and why they come back to us Market again and again. 7. Outlook for the Core Markets of AIFUL Group 7. The Specialist Consumer Loan Company Market SUCCESSFUL SYNERGIES FOR CUSTOMERS, 8. The Consumer Credit and THE COMPANY, AND EMPLOYEES Credit Card Market 9. The SME Loan Market REWARD INVESTORS WITH CON- OFFER EMPLOYEES A STABLE TINUED CORPORATE GROWTH LIVELIHOOD AND OPTIMUM JOB 10. The Comprehensive Finan- AIFUL pursues steady growth in profit CONDITIONS cial Services Strategy and value for shareholders. We commit AIFUL strives to provide a work environ- ourselves to fair and impartial disclo- ment that is fulfilling for employees and en- 12. Diversification in Risk and sure of information, and to maintaining courages them to realize the ideals of the excellent relations with shareholders company. Employees enjoy performance- Business Domains and other investors. based rewards and optimum job conditions 14. AIFUL CORPORATION which improve their quality of life. 17. LIFE Co., Ltd. Our corporate philosophy is “Win the good favor of society.” By this, we mean coex- 20. BUSINEXT CORPORATION isting harmoniously with and maintaining a good relationship with society at large, as 22. City’s Corporation an innovative, comprehensive finance group that customers can rely on. 24. TRYTO CORPORATION / Wide Corporation “Successful synergies for customers, the Company and employees” With this philosophy we believe we can achieve successful synergies for all of our 26. Market Data stakeholders, namely, our customers, shareholders and employees. 28. Corporate Social The history of the consumer finance industry is a mixed one. In the late 1970s to the Responsibility early 1980s, consumer finance companies were not widely known and were the sub- 30. Board of Directors ject of much public criticism. Our corporate philosophy to “Win the good favor of society” reflects our sincere 31. Management’s Discussion intentions to improve the way we, and the rest of the industry, are viewed by the pub- and Analysis lic, attract a broader base of customers and contribute to society. 61. Financial Section 100. Group Network Forward-Looking Statements 101. Investor Information 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 beliefs in light of the information currently available to it and involve risks and uncertainties and actual results that may differ from those in the forward-looking statements as a result of various factors. 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 ○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ Percentage of Thousands of AIFUL Corporation and Consolidated Subsidiaries Millions of Yen Change U.S. Dollars Years Ended March 31, 2005, 2004 and 2003 2005 2004 2003 05/04 2005 For the Year: Total income ¥ 520,737 ¥ 479,473 ¥ 451,168 8.6 $ 4,866,700 Total expenses 391,295 375,659 343,715 4.2 3,656,962 Credit costs 155,466 157,349 138,479 -1.2 1,452,953 Income before income taxes and minority interests 129,442 103,814 107,453 24.7 1,209,738 Net income 75,723 62,548 59,911 21.1 707,692 At Year-End: Loans 1,995,622 1,786,940 1,670,782 11.7 18,650,673 Installment accounts receivable 192,402 154,285 147,857 24.7 1,798,150 Bad debts 175,136 149,826 120,399 16.9 1,636,785 Total assets 2,574,286 2,332,761 2,282,113 10.4 24,058,748 Allowance for bad debts 159,483 145,757 132,130 9.4 1,490,495 Long-term debt, including current portion thereof 1,601,763 1,451,777 1,436,104 10.3 14,969,748 Total shareholders’ equity 617,353 547,504 485,991 12.8 5,769,654 Number of shares issued 142,035,000 94,690,000 94,690,000 50.0 Percentage of YenChange U.S. Dollars Per Share Data: Net income ¥ 533.57 ¥ 440.65 ¥ 425.06 21.1 $ 4.99 Net income—diluted 533.53 –– – 4.99 Total shareholders’ equity 4,358.69 3,863.06 3,428.97 12.8 40.74 Cash dividends 60.00 60.00 60.00 0 0.56 Notes: 1. The U.S. dollar amounts have been translated, for convenience only, at ¥107=$1, the approximate rate of exchange at March 31, 2005. 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. 3. Figures in the financial section are based on audited English-language statements. Figures in the feature section and review of operations are based on Japanese financial statements. Due to certain reclassifications, some figures and items do not match. 4. On May 23, 2005, each common, par value share held as of March 31, 2005, was split into 1.5 shares according to the provisions of Article 218 of the Japanese Commercial Code. TOTAL INCOME NET INCOME TOTAL ASSETS / ROA TOTAL SHAREHOLDERS’ (Millions of yen) (Millions of yen) (Millions of yen / %) EQUITY / ROE (Millions of yen / %) 600,000 80,000 3,000,000 5 700,000 16 600,000 500,000 2,500,000 4 60,000 12 500,000 400,000 2,000,000 3 400,000 300,000 40,000 1,500,000 8 300,000 2 200,000 1,000,000 200,000 20,000 4 1 100,000 500,000 100,000 0 0 0 0 0 0 01 02 03 04 05 01 02 03 04 05 01 02 03 04 05 01 02 03 04 05 Total Assets ROA Total Shareholders’ Equity ROE AIFUL CORPORATION Annual Report 2005 001 TO OUR SHAREHOLDERS ○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ Pursuit of our comprehensive financial services strategy in the retail sector has led to an even greater contribution to earnings by group companies. OPERATING ENVIRONMENT Japan’s economy gradually improved during fiscal 2004, the fiscal year ended March 31, 2005. There was a brief period of weakness due to the much higher cost of oil and slowing economic growth in China. However, the Japanese economy was supported by strong corporate sales and earnings as many companies, chiefly large corporations, reported record-setting results. Held back by concerns about the economic outlook, consumer spending remained flat despite an improvement in employment levels and an end to the decline in personal income. In the consumer finance industry, a realignment of consumer finance and credit card companies occurred under the leadership of Japan’s megabanks. There were two equity and business alliances: ACOM Co., Ltd. and Mitsubishi Tokyo Financial Group, Inc.; and Promise Co., Ltd. and Sumitomo Mitsui Financial Group, Inc. Furthermore, Credit Saison Co., Ltd. and Mizuho Financial Group, Inc. announced a business alliance. Another notable trend is the determination among credit card companies affiliated with retailers and manufacturers to expand their operations. We also saw the acquisition of consumer finance companies by companies in the IT field. These events are fueling even more intense competition for market share. On the positive side, the steady growth in Japan’s personal bankruptcies, based on Supreme Court statistics, has come to an end. Due to amendments to the Moneylending Business Restriction Law that mainly targeted predatory lenders, these bankruptcies fell 12.8% in fiscal 2004 to 211 thousand. This was the first year- on-year decline in a decade. All major consumer finance companies saw double-digit declines in their credit costs as a result. Consequently, the volume of charge-offs probably reached its peak in the past fiscal year. Yoshitaka Fukuda President and CEO 002 AIFUL CORPORATION Annual Report 2005 ○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ HIGHLIGHTS OF OPERATING RESULTS 2. The transformation in LIFE’s profitability Credit card issuer LIFE Co., Ltd. is the largest component of growth in 1. Consolidated summary consolidated revenue and earnings. Since joining the AIFUL Group in Consolidated operating revenue increased 9.5% to ¥518.4 billion and March 2001, LIFE has posted consistently strong growth. In the past ordinary income was up 20.3% to ¥135.2 billion. As in the prior fiscal fiscal year, LIFE’s fourth as an AIFUL Group member, ordinary income year, AIFUL Group was again the only major consumer finance improved 36.8% to ¥16.5 billion, ¥2.0 billion more than our initial plan for company in Japan to post increases in revenue and earnings. Most of the year. Since joining the group, this company’s ordinary income has our peers reported higher earnings but lower revenue. Two factors grown from ¥2.4 billion to ¥8.0 billion, ¥12.0 billion and, last year, to were responsible for this accomplishment. The first was the downturn ¥16.5 billion. The last three years were all-time highs. in credit costs because of the double-digit decline in personal LIFE’s credit card business has been achieving remarkable growth. bankruptcies, a trend that benefited all members of the consumer Central to this expansion are affinity card alliances with prominent finance industry. The second factor is unique to AIFUL Group: higher partners such as Aoyama Capital Co., Ltd., an apparel retailer, and earnings from group companies resulting from our comprehensive DEODEO Corporation and EIDEN Co., Ltd., both consumer electronics financial services strategy.