AIFUL Corporation

AIFUL Corporation
Annual Report 1998

Annual Report 1998

Profile

With balance of loans outstanding of ¥702,446 million (US$5,321,561 thousand) (as of March 31, 1998), AIFUL
Corporation is one of Japan’s big four consumer finance companies. On July 30, 1997, 30 years after its
establishment, AIFUL floated its shares on the OTC market.
AIFUL’s involvement in consumer finance dates from its establishment in 1967 as Marutaka Co., Ltd. It took its
present name in 1982 after merging with three associated companies. One of AIFUL’s founding principles has been
to improve the image of the consumer finance industry. It has worked consistently to gain public support for theindustry, which has not always enjoyed a good reputation in Japan.
Today AIFUL provides services to 1.7 million customers through its 807 branches and a network of 10,167 cash
dispensers and ATMs, of which 9,263 are tie-up CDs.
As a public company, AIFUL will work even harder to fulfill its corporate mission to earn the respect of society. Inline with its “customer-first” philosophy, it is committed to the continuing enhancement of its customer services as it
strives to evolve and grow.

Corporate Headquarters
31 Higashikaigawa-cho, Saiin
Ukyo-ku, Kyoto 615-0057, Japan
Phone 075-321-1701
For further information and additional copiesof this Annual Report, please contact:
Investor Relations Section
Tokyo Office
Tokyoekimae Bldg. / 5th Floor
1-5, 2-Chome Yaesu , Chuo-ku
Tokyo 104-0028, Japan

Contents
Internet Address
1

Non-Consolidated Financial Highlights

2

Message from the President

4

Growth of AIFUL

6

Competitiveness in the Industry

Production

8

Strategy for the Future

10

Shareholder and Investor Value

Ashley Associates
Tokyo, Japan

12

Review of Operations

17

Financial Section

38

History

40

Board of Directors | Investor Information

http://www.aiful.co.jp
e-mail: IR@aiful.co.jp

DesignAshley Associates
Tokyo, Japan
Photography
f-64 Photo Office
Tokyo, Japan

Copyright © 1998 AIFUL Corporation

Non-Consolidated Financial Highlights
AIFUL Corporation
Years Ended March 31
Millions of Yen

For the Financial Year
Total income
Income before income taxes
Net income
At Year-end
Balance of loans outstanding
Total assets
Long-term debt, including current portion thereof
Total shareholders’ equity
Number of shares outstanding

Thousandsof U.S. Dollars

1998

1997

1998/971998¥ 180,181
63,101
25,004¥ 150,176
55,90022,805

20.0
12.9
9.6

$ 1,365,008
478,038
189,424

702,446876,727
600,505

591,630
724,314557,963

18.7
21.0
7.6

5,321,561
6,641,871
4,549,280

146,255
42,752,500

93,055
15,621,000

57.2
273.7

1,107,993% Change

U.S. Dollars

Yen

Per Share Data
Net income
Cash dividends% Change¥ 601.98
60.00¥

619.31
10.00

-2.8
600.0

$

4.56
0.45

Notes
1. The U.S. Dollar amounts have been translated for convenience only at ¥132 = $1, the rate of exchange at March 31, 1998.
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

Shareholders’ Equity(Millions of Yen)

(Millions of Yen)

(Millions of Yen)

200,000

150,000

25,000125,000
20,000150,000
100,000
15,000100,000

75,00010,00050,00050,0005,000
25,000

0

0

0

94

95 96 97 98

94

95 96 97 98

94

95 96 97 98

AI FUL Annual Report1works and diverse financing opportunities, and therest of the industry lacking these key strengths. Our
key management priority in FY98 was the reinforce-

Outlook
We predict that the consumer finance industry willremain on its present expansionary trend until 2003.

Message fr om the
President
ment of our business base through expansion andrestructuring.

On October 6, 1997, we commenced full-scale

marketing of small business loans. These will rank,

alongside unsecured loans and real-estate securedloans, as our third major area of business. In addition to our efforts to expand our balance of loans

outstanding through the introduction of this new

The financial year 1998 (the year ended March 31,

activity, we also focused on the improvement of1998) was a very important year for AIFUL Corp. On

business structures. One such improvement was theJuly 30, 1997 we registered our shares for trading on

start-up of our “fourth-generation on-line system” to

the OTC market, marking our transformation into a

provide capacity for improved operating efficiency

public company. As if to celebrate this achievement,

and future business expansion.

we recorded our fourth consecutive year of growthin excess of 20%.

Yoshitaka Fukuda – President

In our finance business, we continued to expand

and enhance our networks. During FY98, we

I would like to express my sincere appreciation

installed 154 unmanned loan-contracting machines.

to our customers, shareholders, employees and all

To improve our customer service capability, we also

connected with the Company for their continuing

opened 19 staffed branches and 134 unstaffedsupport.

branches. Our total network as of March 31, 1998
consisted of 807 branches, 800 unmanned loan-con-

Overview of Operations

tracting machines, 904 AIFUL-owned ATMs, andJapan’s economic performance continued to mark9,263 tie-up CDs. This powerful business network

time in FY98. This situation was attributable to risingenabled us to achieve significant growth, and our

unemployment and a slump in consumer spendingbalance of loans outstanding at the end of FY98 wasdue to a rise in the consumption tax rate and the

18.7% higher than the previous year’s figure atsuspension of special tax cuts.

¥702,446 million (US$5,321,561 thousand). Total

Despite problems that included a rise in person-

Thereafter, it will gradually shift to a stable growthphase. This transition will be accompanied by achange in market characteristics. During the expansionary phase, the industry has been able to growby focusing on a standardized product range. In astable growth environment, however, it will need toswitch to small-lot production of a wider productrange. In a period of rapidly expanding demand, it ispossible to maintain sales growth by offering cus-

tomers identical products. In the future, survival inthis industry will depend on the ability to develop
and market products to meet varied customer
needs.

Over the next eight pages, I would like to offer apersonal account of what drives AIFUL’s growth,competitiveness and future strategies. The
increased freedom provided by the “Big Bang” will
create fierce competition in the financial sector.
AIFUL is determined to achieve further growth in
this environment. I hope this report will help shareholders and investors to understand why we are so
confident in our ability to achieve this goal.

income increased by 20.0% to ¥180,181 million

al bankruptcies and a trend toward plural indebted-(US$1,365,008 thousand), income before income

ness, FY98 was a time of continuing expansion fortaxes by 12.9% to ¥63,101 million (US$478,038 thou-

the consumer finance industry. However, increasedsand), and net income by 9.6% to ¥25,004 million

market competition has led to further polarization(US$189,424 thousand).

March 31, 1998

between big, high profile firms with extensive net-

2

AI FUL Annual Report

AI FUL Annual Report

3

33.7

Growth in Balanceof Loans Outstanding
Year-on-Year (%)
28.7

What Drives AIFUL’s Growth

27.1

Achieved 30% Annual Average Growth in Balanceof Loans Outstanding for Past Decade
Last year the failure of several financial institutions
18.7

triggered shock waves of uncertainty about theJapanese financial system in Japan and overseas. As
14.8

a result, the Japanese economy remains unable to

13.8

emerge from a suffocating recession.

14.5

12.9

Despite this economic downturn, the consumer

10.3

finance industry in general, and the major consumer
finance firms in particular, have shown robust per6.0

formance trends. In FY98, AIFUL far exceeded theGrowth of AIFUL
94

95

96

97

Average of 4 top consumer
finance companies

98
AIFUL Corporation

Source: Computed by AIFUL based on each company‘s Annual Securities Reportindustry average with a growth rate of 18.7% in its

nificantly higher than the average for the top fivenent of the mechanism that drives our rapid growth.

loan balance. At the same time, there was accelerat-companies.

We have continuously enhanced our systems anding polarization between the major firms and theThis rapid growth would not have been possibleorganization in this area, including the introduction

rest of the industry. Despite the healthy growth,without a corporate culture based on creativity andof a credit scoring system, and the establishment of

there was also continuing intensification of compe-

a willingness to meet new challenges supported byrisk management teams consisting of professional

tition among the major firms.

sophisticated risk management systems. Evidence

in-house and external analysts. That is why we haveof our creativity and willingness to meet new chal-

been able to maintain a doubtful loans charge-offgrown into one of the leading companies in thelenges can be found in our diversification into new

ratio comparable to industry average levels while

consumer finance industry. Over the past 10 years, it

areas, including real-estate secured loans since 1985

achieving a growth rate significantly higher than thehas achieved an average growth rate of 30%, com-and small business loans since 1997, as well as facili-

industry average.

pared with an industry average of about 10%.

tating computer-based applications via the Internet

Another indication of AIFUL’s huge growth potential

and other PC communications systems since 1995.

is the fact that its growth rate has also remained sig-

We regard risk management as a vital compo-

In the 30 years since its establishment, AIFUL has

4

AI FUL Annual Report

AI FUL Annual Report5action records. It is like a corporate

Competitivenessin the Industry

rating system for individuals. To
maintain the soundness of our loan
portfolio, we apply the scoring system not only when a new transaction

AIFUL’s Competitiveness is Based on its Dedication to Customer Needs

Responding to the needs of every customer is abasic requirement for general business corpora-tions, but this approach is extremely difficult in theis initiated, but also to additional
credit provided at regular intervals. Consequently,
AIFUL has maintained a high growth rate while still
keeping loan losses charged off at the same low level as our competitors.

finance industry because of the long periodrequired to complete transactions, which start withAcceptance Ratio
Thousands0

the provision of a loan and end with final repayment. This is because what was initially a credit

100

200

300

400

500

600

700

transaction may, during the term of the transaction,
turn into a bad debt.

301,780

Our corporate mission and the basis of all our

225,426

94

strategies is to be responsive to our customer’s

74.7%

needs. This stance is reflected in our high accep360,480

tance ratio. In FY98 we achieved an acceptance ratio

291,91595

AIFUL has the highest interest rate ceilingamong the leading consumer finance firms. This isbecause we believe that a higher ceiling does notdiscourage us from offering a wider range of products to meet the requirements of our customers.
What attracts customers most is not interest rates,
but loan availability. Our portfolio philosophy is tolend high-risk customers smaller amounts at higher
interest rates, and to lend low-risk customers larger
amounts at lower interest rates.

of 78%, compared with ratios of 50~70% for other81.0%

major consumer finance companies.
531,359

The key to our ability to compete and address

437,38996

the needs of every customer is our unique credit

82.3%

Ratio of Loan Losses Charged Off

scoring system. Our scoring system is a statistical
636,908
530,804

97
83.3%

94

basis of a database of three million historical trans-

95
96

560,379
437,092

98

method for determining creditworthiness on the

97

78.0%

2.68%
2.18%
2.26%
2.40%

98
70%

80%

90%

2.61%

100%
Note: Each figure is computed by dividing loan losses charged off for the yearby the balance of loans outstanding at year-end.

Number ofCustomer Applications(Top Scale)

Number of
New Accounts Gained(Top Scale)Acceptance Ratio (%)(Bottom Scale)Acceptance Ratio = Number of New Accounts Gained / Number of Applications X 100.

6

AI FUL Annual Report

AI FUL Annual Report7Multiple Hedging to Create a Diversified
Product Range

Strategy
for the Future

We have carried out market simulations taking into
account demographic trends and the age distribu-

tion of the population. The results indicate that theconsumer finance market will continue to grow byaround 8% annually until 2003. Our goal is to maintain our present growth, and to build a loan portfolio of ¥1,300,000 million (US$9,848,484 thousand)risk. At present banks

before the market shifts to a stable growth phase in

and other types ofthat year. Moreover, we also aim to maintain highlenders do not provide

growth even after that time by aggressively pene-loans on this basis. We

trating the areas of real-estate secured loans andwould be able to dis-small business loans, which have joined unsecured

cover product value inloans as our second and third core activities.

such a transaction by

We envisage a future product mix made up of(Millions of Yen)

94

270,62295

348,20996

465,655

means of multiple hedging. The farmland would be

70% unsecured loans, 20% real-estate secured

used to secure part of the loan, and the remaining

loans, and 10% small business loans.

70% would be provided at a relatively high interest

At present we are working to diversify our prod-

Balance of Loans Outstanding by Product Line97

591,630

98

702,446

rate based on the customer’s scoring rank. We will

uct range in readiness for the advent of a stable

continue to use this multiple hedging approach to

growth phase by using multiple hedging to cover

diversify our product range.

credit risk. Multiple hedging is a sophisticated risk

Even among major consumer finance compa-

management system involving the use of hedging

nies, there is already considerable variation in prod-

methods based on scoring, interest rates and collat-

uct strategies. In particular, there is a sharp distinc-eral. To take a specific example, a person may wish

tion between specialist firms that handle only unse-to obtain a loan using as collateral farmland that

cured loans, and comprehensive credit providers,provides a sufficient hedge for about 30% of the

including AIFUL, offering a wide range of products.
We believe that our path to survival is to function as a comprehensive credit provider with a full

Small Business Loans

Secured Loans

Unsecured Loans

Number of Customer Accounts by Product Line94

787,14695

940,92496

1,217,649

line of products to meet a wide range of customer
needs. That is why our strategy emphasizes productdiversification.

97

1,530,094

98

1,706,030

Small Business Loans

8

AI FUL Annual Report

Secured Loans

Unsecured Loans

AI FUL Annual Report9Shareholder andInvestor Value
Key Management Indices Compared with Competitors (1998 actual)

EPS (Yen)
376.3
602

PER (Times)
16.7
14

Why AIFUL’s Future is Brighttion likely to be affected adversely

When our growth processes, competitiveness withinby the growth rate of our loan

the industry, and future strategies are taken into

portfolio, which increased by 18%

account, it should be clear why we have such confi-

in FY98.

dence in our future growth potential. I would like toconsider the market appraisal of our shares baseda variety of other indicators to

on a variety of indicators. I hope that it will assist

compare our share price withshareholders and investors to fairly decide theirthose of other companies. I am,

value.

however, confident that investors who understandAs of March 31, 1998, our stock was valued at

ROE (%)¥8,400 in OTC trading. At a time when few stocks
15.2
20.9

Growth in Balance of Loans Outstanding (%)

Obviously investors will need

our future strategy will share my confidence in
AIFUL’s future potential.

rise above their offering prices, our stock traded

The purpose of this discussion was to express

almost 8% above its offering price of ¥7,800. Our

my firm confidence in AIFUL’s future growth poten-

PER (Price-Earnings Ratio) is 14.0, compared with thetial. I hope this information has been of use to you.

16.7 average for the major four consumer finance

10.3
18.7

companies (excluding AIFUL).
Among existing investment indicators, investors

Average of 4 top consumer finance companies
Source: Computed by AIFUL based on each company‘s Annual Securities Report

AIFUL Corporation

tend to place greatest weight on ROE. Here again
we have outperformed our competitors with an ROEof 20.9%, compared with the big four average of
15.2%. Though our figure needs to be discounted
somewhat to reflect the fact that our shareholders’equity ratio is the lowest among the big five (including AIFUL), it is nevertheless clear that our position
is still the best among the big five. Nor is our posi-

10

AI FUL Annual Report

AI FUL Annual Report11Review of Operations

Loan Business

1,674,173, an increase of 10.9% compared with the

The loan business is our core activity. In recent

total at the end of FY97. AIFUL provides unsecured

years, we have continued to achieve sustainedloans through a nationwide network that includes

growth in excess of industry average growth rates.

451 staffed branches, 352 unstaffed branches

In FY98, the total balance of loans outstanding

equipped with “Ojidosan” unmanned loan-contract-

reached ¥702,446 million (US$5,321,561 thousand),ing machines, and a network of 10,167 cash dis-

while interest on loans to customers amounted topensers and ATMs, of which 9,263 are tie up CDs.

¥171,479 million (US$1,299,083 thousand). These
results represent increases of 18.7% and 20.2%

Secured Loans

respectively over the previous year. The number ofSecured loans are products secured with real estate.

customer accounts rose by 11.5% to a year-end total

In FY98, the balance of secured loans outstandingof 1,706,030.

increased by 48.0% over the previous year’s level to¥95,128 million (US$720,667 thousand), or 13.5% of
Unsecured Loansthe total balance of loans outstanding. This growth

The balance of unsecured

was accompanied by a rise in interest received onloans outstanding

secured loans, which was 52.3% above the previous

increased by 14.5% overyear’s level at ¥13,677 million (US$103,614 thou-

the previous year’s level tosand), equivalent to 7.6% of total operating income.

¥603,662 million

Real-estate secured loans are AIFUL’s second(US$4,573,197 thousand),major source of income, and this area of business isor 85.9% of total balance ofseen as offering the greatest growth potential forloans outstanding. Interest

the future. Our average loan is small at about ¥3 mil-on unsecured loans waslion (US$23 thousand). AIFUL offers a wide range of

17.9% above the 1997

products, from first mortgage loans, in which thefinancial year level atrisk is hedged by the collateral value of real estate,¥157,568 million (US$1,193,697 thousand), or 87.8%

to second mortgage loans, whereby loans are pro-of total operating income. The number of unse-

vided at higher interest rates to customers with highcured loan accounts at the end of FY98 wasscoring ranks, despite a lower collateral value. AIFUL
faces almost no competition from other domestic

12

AI FUL Annual Reportlenders in this field and is achieving dramatichas 250,000 customer

growth in its loan portfolio.

accounts in this category. A

When an application for a secured loan isborrower with a guarantor

received from a general customer who owns real

can obtain a credit line ofestate, AIFUL’s Assessment Department decides

up to ¥2 million (US$15

whether or not the loan will be approved and sets

thousand). By the end of

the loan terms, including the credit limit and theFY98, the balance of small business loans outstand-interest rate. The branch then prepares a loan con-ing had reached ¥3,655 million (US$27,689 thou-tract based on those terms and establishes collateralsand), or 0.5% of the total balance of loans out-

rights over the real estate offered by the customer.

standing. Operating income from this source

Thereafter the customer can obtain any amount ofamounted to ¥233 million (US$1,765 thousand), or

finance up to the credit limit. As with unsecured

0.2% of total operating income. In the context of ourloans, the customer’s creditworthiness is rated

product diversification strategy, our goal is tounder AIFUL’s scoring system. The present rise inincrease our small business loan portfolio to 10% of

the balance of secured loans outstanding is evi-the total balance of loans outstanding.

dence of the success of AIFUL’s product diversification strategy.

Small Business Loans
AIFUL launched its new range of small businessloans in October 1997. Small business loans areguaranteed loans to self-employed individuals.
AIFUL has offered loans to self-employed people on
the same terms
as those applying to unsecuredloans since 1980,
and it currently

AI FUL Annual Report13Review of Operations“Customer First” Service

out Japan. Another focus of AIFUL’s efforts toStrategyenhance customer service relates to its hours of

In line with its “customer

business. Business hours are being progressively

first” philosophy, AIFUL

extended, primarily through the installation of

offers a variety of services

unmanned loan-contracting machines.

designed to provide
prompt solutions to its cus-Competitiveness not Determined by Interest Rates

tomer’s funding needs.

AIFUL charges the highest interest rates among the

When a loan application ismajor consumer finance companies. Some may

received through one ofregard this as a disadvantage in terms of competi-

AIFUL’s loan branches, thetiveness. In fact we do not see interest rates as a key

customer’s lending information is retrieved from thedeterminant of competitiveness. Last year AIFUL

Lenders Exchange Federation in Japan and the cred-

was the second in terms of number of new accounts

it is checked using a scoring system which take into

gained among the top four companies in Japan,

account the customer’s attributes, following whicheven though AIFUL’s interest rate was the highest.

the loan limit and the interest rate are determined.

This shows that interest rates are not a key factor

Finally funds are lent to the customer within theinfluencing the choice of lender. Company A, which

specified credit line. Both staffed and unstaffed

gained the largest number of new accounts, alsobranches carry out credit checks as quickly as possi-

has the biggest branch network in the consumer

ble, and with special precautions to protect cus-finance industry, while AIFUL’s success can be attrib-

tomers’ privacy. Once the initial application has

uted to its policy of providing loans to meet every

been made, customers can make subsequent appli-

customer’s needs.

cations through AIFUL’s network of 9,263 tie-up

The most important concern for a customer at

ATMs and CDs. AIFUL has further enhanced its sys-

the time of application is whether or not the lendertems to allow deposits to be made through bankwill provide a loan. A low interest rate is meaning-transfers or postal money orders, or through one ofless if no loan is available. From the customer’s view-

AIFUL’s own ATMs, of which there are 904 through-point, a declined loan is a defective product. Only

14

AI FUL Annual Reportwhen approved can a loan be regarded as a quality

Other Activities

product. In our view, the first criterion determining

Though lending will continue to be the main focus

the customer’s choice of a lender is approval or non-of AIFUL’s business development, we are preparing

approval of the loan, the second is the location of

for the stable growth phase of the consumer financebranches, the third is protection of privacy, and themarket by diversifying into other areas. In the ser-fourth is interest rates.

vice sector, we operate the “Arishan” chain ofrestaurants specializing in popular Taiwanese dish-“Ojidosan” Unmanned Loan-Contracting

es. We are also involved in the amusement industry

Machines Responsible for Majority of New

through our “Mogura no Uta” karaoke parlors.

Customers

Another area of activity is our real estate business. In

At the end of FY98, AIFUL had 800 “Ojidosan”

FY98 total income from these other activities

unmanned loan-contracting machines, an increase

increased by 15.8% to ¥8,702 million (US$65,924

of 153 over the total at the end of FY97. Of these,

thousand), or 4.8% of total income.

446 were located inside staffed branches, while 354
were located at unstaffed branches.
“Ojidosan” machines, which are connected tostaffed branches via two-way video links, enable
customers to establish new unsecured credit
accounts. The majority of the 437,092 new accounts
established during FY98 were created through thesemachines. Since each worker in a staffed branch canprocess loan applications from several unmanned
loan-contracting machines, this method leads toimproved cost
efficiency.

AI FUL Annual Report15Review of Operations

Corporate Citizenshiptournament

AIFUL supports a variety of sporting events andvenue was Sap-

community activities in Japan, both as a way of con-poro. Dodgeballtributing to society, and also to enhance its corpo-

tournaments arerate image. Last year it sponsored the AIFUL Cup

popular events

Kyushu Sports Festa in Kamitsue ‘97, and the 7th

throughout

Fukuchiyama Marathon, which is an officially recog-

Japan, but this isnized athletic event in Japan. It also sponsored thethe first time1997 AIFUL Cup Inter-Company Dodgeball Tourna-that an inter-ment.

company tour-

The Sports Festa was held in Kamitsue, a city in

nament has

Oita Prefecture as a fund-raising measure for conser-

been held. AIFUL also entered its own company

vation efforts designed to protect the source of theteam.

Chikugo River, which flows through the city. AIFUL

AIFUL will continue to play an active role in com-

supports the aims of the program and has been amunity activities such as these. In the current finan-sponsor ever since the event was inaugurated.

cial year it plans to host the AIFUL Cup Golf Tourna-

The Fukuchiyama Marathon is a community
event open to the general public. As in FY97, AIFULsupported the event as a special corporate sponsor.
The Inter-Company
Dodgeball Tournament
was the first communitybased event of its kind that
AIFUL has supported. The

16

AI FUL Annual Reportment 1998 at the Aomori Country Club as part of
the PGA Tour of Japan.

Financial Section
AIFUL Corporation

Non-Consolidated Financial Statements for theYears Ended March 31, 1998 and 1997, andIndependent Auditors’ Report

18
20
24
26
27
28
29
37

6-Year Summary
Non-Consolidated Financial Review
Non-Consolidated Balance Sheets
Non-Consolidated Statements of Income
Non-Consolidated Statements of Shareholders’ Equity
Non-Consolidated Statements of Cash Flows
Notes to Non-Consolidated Financial Statements
Independent Auditors’ ReportNon-Consolidated 6-Year Summary
AIFUL Corporation
Years Ended March 31
Millions of Yen

1998

1997

1996

Result for the Financial Year
Total income
Total expenses
Income before income taxes
Income taxes
Net income¥ 180,181
117,080
63,101
38,09725,004¥ 150,176
94,27655,90033,09522,805¥ 122,695
97,411
25,284
15,197
10,087

At Year-end
Balance of loans outstanding¥ 702,446¥ 591,630¥ 465,656

876,727
98,000600,505
146,255

724,31439,548557,963
93,055589,539
31,758473,62165,447

Total assets
Short-term borrowings
Long-term debt, including current portion thereof
Total shareholders’ equity
Per Share Data (Yen)
Net income
Adjusted for stock splits
Shareholders’ equity
Adjusted for stock splits
Cash dividends
Adjusted for stock splits
Other Data
Number of shares outstanding at year-end
Weighted average number of shares outstanding
Number of customer accounts at year-end
Number of branches at year-end
Number of employees at year-end

18

AI FUL Annual Report

¥

602
602
3,421
3,421
60
60

42,752,500
41,536,061
1,706,030
807
2,731

¥

1,548
619
5,957
2,383
10
4

15,621,000
14,729,432
1,530,094
654
2,521

¥

7,308
292
47,4141,897
100
41,380,300
1,380,300
1,217,649
458
2,411

Millions of Yen

1995¥

94,02475,794
18,23010,2188,012¥ 348,209
472,791
38,200365,449
55,524

1994¥

77,767
66,058
11,7096,550
5,159¥ 270,629
396,558
59,058289,983
36,685

1993¥

71,78766,434
5,353
2,886
2,467

¥ 237,749
343,832
46,719260,083
31,665

Notes
1.

Net income per share has been computed based on the weighted
average number of shares outstanding during each period and

¥

6,472
259
40,226
1,609
100
4

¥

4,169
167
29,645
1,186
100
4

¥

1,994
80
25,5891,024
100
4

shareholders’ equity per share is based on the number of shares
outstanding at the end of each period.
2.

Merged with Toshi Finance Co., Ltd., a wholly-owned subsidiary,on August 1, 1992.

3.

Merged with Marutoh Jisho Co., Ltd., a wholly-owned subsidiary,on March 1,1994.

4.

Capital increased through issuance of shares to third parties on
March 31, 1995 (142,800 shares, ¥76,900).

1,380,300
1,237,891
940,924360
1,951

1,237,500
1,237,500
787,146268
1,688

1,237,500
1,237,500
693,737
233
1,650

5.

Stock split (10 for 1) on August 1,1996.

6.

Warrant exercised on September 27, 1996 (1,818,000 shares, ¥2,750).

7.

Stock split (2.5 for 1) on May 20, 1997.

8.

Capital increased through issuance of shares by public offering on
July 30, 1997 (3,700,000 shares, ¥56,832).

AI FUL Annual Report19Non-Consolidated Financial Review

In this review, each year is taken to mean the financial year ending March 31. Accordingly, financial year 1998 indicates the financial year starting April 1, 1997 and ending March 31, 1998.

REVIEW OF OPERATIONS
IncomeOver the past three years, AIFUL has achieved growth intotal income in excess of 20% annually. For FY98, total
income was ¥180,181 million (US$1,365,008 thousand),20.0% higher than the previous year. The major contribution to growth was an increase in the balance of loans outstanding.
The balance of unsecured loans outstanding, AIFUL’s
primary source of income, increased ¥76,356 million, or
14.5% from the preceding year, to reach ¥603,662 million.
This represents average growth of 25.4% over the past
three years. Over and above the strong growth seen in the
consumer finance industry in general, the effects of opening 153 new branches and further expansion of the “Ojidosan” unmanned loan-contracting machine network
through the introduction of 170 new machines were major
contributors to the increase in FY98.
The balance of secured loans outstanding also showedstrong growth and amounted to ¥95,128 million for FY98,
representing an increase of ¥30,842 million or 48.0% from
FY97.
The balance of small business loans outstanding,where we started full-scale operations in October 1997,
soared during FY98 to ¥3,654 million compared to ¥37 million in FY97.
Of total income for FY98, interest income on loans was¥171,479 million (US$1,299,083 thousand), which represents an increase of 20.2% from the previous year; interest
income on deposits, securities and other was ¥211 million(US$1,599 thousand), a decrease of 29.0%; income fromsales of property for sale was ¥1,574 million (US$11,924
thousand), an increase of 13.6%; and other income was¥6,917 million (US$52,402 thousand), an increase of 18.6%.
In FY98, income before income taxes increased by
12.9% to ¥63,101 million (US$478,038 thousand). Net
income also increased by 9.6% to ¥25,004 million

20

AI FUL Annual Report(US$189,424 thousand). As a result of these increases, net
income per share amounted to ¥601.98 (US$4.56), thehighest figure among our peer group of public companies.
Expenses
Total expenses for FY98 increased by 24.2% comparedwith FY97 totaling ¥117,080 million (US$886,970 thousand). This raised the ratio of total expenses to total
income by 2.2% from the previous year's figure of 62.8% to65.0%.
Of the increase in total expenses in FY98, an increasein charge-offs and provision for doubtful loans was themost significant factor, showing an increase of 93.3% fromthe preceding year and reaching ¥22,783 million(US$172,598 thousand), as AIFUL raised the level of provision for doubtful loans given the higher level of doubtful
loans already seen in the 1999/3 financial year.
Other expenses in FY98 amounted to ¥22,194 million(US$168,136 thousand), representing an increase of 41.3%
compared with the preceding year. This increase wasattributable to higher computer lease fees and expenses
for software and systems development due to the modernization of our fourth-generation on-line system.
Interest on borrowings for FY98 were ¥19,729 million(US$149,462 thousand), only 1.5% higher than the preceding period. The ratio of interest on borrowings to total
income declined by 2.0% from FY97 to 10.9%. This represents the second consecutive decrease in 2-years (the previous period showed a 2.8% decline), and reflects the continuing low interest rate environment.

Balance of Loans
Outstanding

Income before
Income Taxes

Number ofCustomer Accounts(Millions of Yen)

(Millions of Yen)

700,000

1,800,000

70,00070 %60,00060

50,00050

40,00040

30,00030

20,00020

10,000101,600,000
600,000
1,400,000
500,000
1,200,000
400,000

1,000,000

800,000

300,000

600,000
200,000
400,000
100,000
200,000

0

95 96 97 98

0

0

0

94

94

Secured Loans
Unsecured Loans
Small Business Loans

95 96 97 98

94

Secured Loans
Unsecured Loans
Small Business Loans

95 96 97 98

Income before Income
Taxes (Left Scale)
Ratio of Income before
Income Taxes to Total
Income (%)(Right Scale)

Net Income

Net Income per ShareTotal Expenses(Millions of Yen)

(Yen)

(Millions of Yen)

25,00025%

20,000

20

800

8,000

120,000

100%

100,000
80
600

6,000

80,00015,000

60

15
400

4,000
10,00060,00040

1040,000
200

2,000
5,000

20

5
20,0000

094

95 96 97 98

Net Income (Left Scale)
Ratio of Net Income toTotal Income (%)(Right Scale)

0

0

94

95 96 97 98

Net Income per Share(Left Scale)
Adjusted Net Income
per Share (Right Scale)

0

0

94

95 96 97 98

Total Expenses (Left Scale)
Ratio of Total Expenses toTotal Income (%)(Right Scale)

AI FUL Annual Report21

Total Assets

Balance of Borrowings

Total Shareholders’ Equity(Millions of Yen)

(Millions of Yen)

(Millions of Yen)

900,000

750,000

100%

600,00080

150,000

18

800,000
125,000
700,000

15
100,000

600,000
450,000

60

500,000
75,00012

400,000
300,000

40
50,000300,000

9200,000

150,000

20
25,000100,000

00

94

95 96 97 98

0

94

0

95 96 97 98

6

94

Balance of Borrowings(Left Scale)
Ratio of Long-term Debt
to Total Borrowings (%)(Right Scale)

95 96 97 98

Shareholders’ Equity(Left Scale)
Shareholders’ Equity Ratio(Right Scale)

ROE / ROANet Income per Employee

Number of Branches /Balance of Loans
Outstanding per Branch(%)(Thousands of Yen)

(Millions of Yen)

40%

4%

1,200

900

10,000

800
1,000
8,000
30

3

700
800
600

6,000
20

2

600

500
4,000

400
400

10

1

300
2,000
200
200

0

0

94

95 96 97 98

Return on Assets (Right Scale)
Return on Equity (Left Scale)22

AI FUL Annual Report

0

100

0

94

95 96 97 98

94

95 96 97 98

Number of Branches(Left Scale)
Balance of Loans Outstanding
per Branch (Right Scale)Non-Consolidated Financial Review

FINANCIAL CONDITION
AssetsCurrent assets for FY98 showed an increase of 22.3% from
FY97 and was ¥781,578 million (US$5,921,045 thousand),mainly due to growth in the balance of loans outstandingof ¥110,816 million (US$ 839,515 thousand) or 18.7%.
Property, plant and equipment was ¥65,579 million(US$496,811 thousand) as of March 31, 1998, remaining at
almost the same level as FY97, with an increase of 7.3%.
Investments and other assets also increased by ¥5,195 million (US$39,356 thousand) or 21.3% from the preceding
period.
As a result, total assets as of March 31, 1998 reached¥876,727 million (US$6,641,871 thousand), representing
an increase of 21.0% from 1997.
Liabilities
Current liabilities for FY98 amounted to ¥398,647 million(US$3,020,053 thousand), 39.3% higher than the previous
year. The increase was mainly due to the increase in shortterm borrowings and current portion of long-term debt forloans by 45.0%, or ¥114,210 million (US$865,227 thousand)over the amount for the preceding period. AIFUL continues its efforts to diversify its financing resources for loans
to secure stable business funds. During FY98, the Company issued commercial paper in the amount of ¥30 billion(US$227,272 thousand) as part of its active financing program. Long-term liabilities decreased during FY98 by 3.8%
to ¥331,825 million (US$2,513,825 thousand), due to adecrease in long-term debt of ¥13,216 million (US$100,121
thousand), or 3.8% during the period.
The main financing resource of the Company consistsof long-term debt from financial institutions. Long-term
debt (including the current portion of such long-termdebt) represent 86.0% of AIFUL’s total borrowings (including CPs), of which 55.8% is subject to fixed interest rates
due to the use of fixed-rate loans, interest rate caps andswap transactions.
As a result, our current ratio improved by 12.3% during
FY98 from FY97 and reached 235.5% at year-end.

Shareholders’ Equity
AIFUL’s total shareholders’ equity significantly increased
during FY98 by 57.2% or ¥53,200 million (US$403,030
thousand) to ¥146,255 million (US$1,107,993 thousand),resulting from the capital increase due to the successful
registration on the over-the-counter market during theyear.
AIFUL continues to be committed to further improving
its shareholders’ equity to realize a stronger and more stable corporate structure. As a result of its capital increaseduring FY98, the shareholders’ equity ratio improved by
3.9% compared with the previous year to 16.7%. However,return on shareholders’ equity (ROE) declined by 7.9% to20.9% during FY98 due to the significant increase in shareholders’ equity, which is the denominator in the computation of ROE. Return on total assets also decreased by 0.2%
to 2.9%. Despite these declines, however, each index still
remains at a high level.
Efficiency
For the past several years, AIFUL has dedicated its efforts
for more improved business efficiency through introduction of our fourth-generation on-line system, expansion of
unmanned loan-contracting machine and an increase in
the number of unstaffed branches.
During FY98, AIFUL achieved total income per
employee of ¥65,976 thousand (US$499.8 thousand),
which was 10.8% higher than FY97. Net income per
employee was ¥9,156 thousand (US$69.4 thousand), 1.2%
higher than FY97, and balance of loans outstanding per
employee was ¥257,212 thousand (US$1,948.6 thousand),9.6% higher than FY97.
These figures point to improved efficiency at theCompany.

AI FUL Annual Report23Non-Consolidated Balance Sheets
March 31, 1998 and 1997
Thousandsof U.S. Dollars(Note 3)

Millions of Yen

Assets1998

Current Assets:
Cash and cash equivalents:
Cash
Time deposits (Note 6)

12,480$ 202,273

37,69450,174

404,659
606,932

Loans (Notes 4 and 6)
Allowance for doubtful loans
Net loans

702,446(22,115)680,331591,630(17,419)574,2115,321,561(167,538)
5,154,023

Property for sale (Note 6)

3,545
5,000
5,626
6,961
781,578

4,457
4,189
5,811
638,842

26,85637,87942,621
52,734
5,921,045

42,28825,591
9,637
90
77,60637,76623,2269,303
69
70,364

320,364
193,871
73,008682
587,925(12,027)
65,579(9,267)61,097(91,114)496,811

3,477
3,475
18,2182,124
3,475
19,041

26,341
26,326
138,015(19,213)
3,228
7,476
5,831
7,078
29,570¥ 876,727(19,500)
60
6,614
5,910
6,651
24,375¥ 724,314(145,553)
24,45556,63644,17453,621
224,015$ 6,641,871

Investment in trust
Prepaid expenses
Other current assets
Total current assets
Property, Plant and Equipment (Note 6):Land
Buildings and structures
Machinery and equipment
Construction in progress
Total
Accumulated depreciation
Net property, plant and equipment
Investments and Other Assets:
Investment securities (Notes 5 and 6)
Investments in and advances to subsidiaries
Claims in bankruptcy
Allowance for advances to subsidiaries
and claims in bankruptcy
Long-term loans (less current portion)
Lease deposits
Long-term prepayments
Other assets (Note 6)
Total investments and other assets
Total

See notes to non-consolidated financial statements.

24

AI FUL Annual Report

¥

1998

53,415
80,115

Total¥ 26,700

1997

Thousandsof U.S. Dollars(Note 3)

Millions of Yen

Liabilities and Shareholders’ Equity
Current Liabilities:
Short-term borrowings (Note 6)
Current portion of long-term debt (Note 6)
Trade notes payable
Trade accounts payable
Income taxes payable
Accrued expenses
Other current liabilities
Total current liabilities
Long-Term Liabilities:
Long-term debt (Note 6)
Retirement benefits
Other long-term liabilities
Total long-term liabilities
Shareholders’ Equity (Note 8):
Common stock,¥50 par value, authorized, 150,000,000 shares at March 31,
1998 and 55,000,000 shares at March 31, 1997, issued andoutstanding, 42,752,500 shares at March 31, 1998 and
15,621,000 shares at March 31, 1997
Additional paid-in capital
Legal reserve
Retained earnings
Total shareholders’ equity
Total

1998

1997

1998

39,548214,432
3,339
2,555
24,0261,794
521
286,215$ 742,424
2,046,894
26,47021,924160,045
18,6973,599
3,020,053

330,3151,060
450
331,825

343,5311,048
465
345,0442,502,386
8,030
3,409
2,513,825

23,20825,373232
97,442
146,255¥ 876,727

10,3339,832
210
72,68093,055¥ 724,314

175,818
192,220
1,758
738,197
1,107,993$ 6,641,871¥ 98,000
270,1903,494
2,894
21,1262,468
475
398,647¥

See notes to non-consolidated financial statements.

AI FUL Annual Report25Non-Consolidated Statements of Income
Years Ended March 31, 1998 and 1997
Thousandsof U.S. Dollars(Note 3)

Millions of Yen

Income:Interest on loans
Interest on deposits, securities and other
Sales of property for sale
Other income
Total income
Expenses:
Interest on borrowings
Cost of sales of property for sale
Charge-offs and provision for doubtful loans,advances to subsidiaries and claims in bankruptcy
Salaries and other employee benefits
Advertising expenses
Rental expenses
Supplies
Depreciation
Provision for retirement benefits to directors
and corporate auditors
Write-down of property for sale
Stock issue costs
Other expenses
Total expenses
Income before Income Taxes
Income Taxes (Note 7)
Net income

1998

1997

1998

¥ 171,479
211
1,574
6,917
180,181¥ 142,663
297
1,386
5,830
150,176$ 1,299,083
1,599
11,92452,402
1,365,008

19,7291,449

19,435
1,417

149,462
10,97722,783
20,173
13,144
11,837
1,373
3,081

11,78819,218
11,505
9,018
2,257
3,066

172,598
152,826
99,57689,674
10,402
23,341

61
263
993
22,194
117,080
63,101

94775
15,703
94,27655,900

462
1,992
7,523
168,137
886,970478,038

33,09522,805

288,614$ 189,424

38,097¥ 25,004¥

Yen

Amounts per Common Share (Note 2.l)
Net income
Cash dividends applicable to the year

See notes to non-consolidated financial statements.

26

AI FUL Annual Report¥ 601.98
60.00

U.S. Dollars¥

619.31
10.00

$

4.56
0.45

Non-Consolidated Statements of Shareholders’ Equity
Years Ended March 31, 1998 and 1997
Thousands
Number of
Shares of Common Stock
Issued andCommonOutstanding
Stock

Balance at April 1, 1996
Net income
Cash dividends paid, ¥100 per share
Transfer to legal reserve
Bonuses to directors and corporate auditors
Stock split (Note 8)
Exercise of warrants
Balance at March 31, 1997
Net income
Cash dividends paid, ¥10 per share
Transfer to legal reserve
Bonuses to directors and corporate auditors
Stock split (Note 8)
Public offering (Note 8)
Balance at March 31, 1998

1,380

¥ 7,833

Additional
Paid-in
Capital¥ 7,333

Legal
Reserve¥ 190

20
12,423
1,818
15,621

2,500
10,333

2,499
9,832

210

22
23,4323,700
42,753

12,875¥ 23,208

CommonStock

Balance at March 31, 1997
Net income
Cash dividends paid, $0.08 per share
Transfer to legal reserve
Bonuses to directors and corporate auditors
Stock split (Note 8)
Public offering (Note 8)
Balance at March 31, 1998

Millions of Yen$ 78,280

15,541¥ 25,373¥ 232

Thousands of U.S. Dollars (Note 3)
Additional
Paid-in
Legal
CapitalReserve$ 74,485$ 1,591

167

97,538$ 175,818

117,735$ 192,220$ 1,758

Retained
Earnings¥ 50,091
22,805
(138)
(20)
(58)

72,68025,004
(138)
(22)
(82)

¥ 97,442

Retained
Earnings$ 550,606
189,424(1,045)
(167)
(621)

$ 738,197

See notes to non-consolidated financial statements.

AIFUL Annual Report27Non-Consolidated Statements of Cash Flows
Years Ended March 31, 1998 and 1997
Thousandsof U.S. Dollars(Note 3)

Millions of Yen

1998
Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided byoperating activities:
Charge-offs and provision for doubtful loans,advances to subsidiaries and claims in bankruptcy
Depreciation and amortization
Stock issue costs
Provision for retirement benefits to directors
and corporate auditors
Write-down of property for sale
Changes in assets and liabilities:
Decrease in property for sale
Increase in investment in trust
Increase in prepaid expenses
Increase in other current assets
Increase in trade notes payable
Increase in trade accounts payable
Increase (decrease) in income taxes payable
Increase in accrued expenses
Increase (decrease) in other current liabilities
Other - net
Total adjustments
Net cash provided by operating activities

See notes to non-consolidated financial statements.

28

AI FUL Annual Report

1998

22,805$ 189,424

22,783
5,702
993

11,788
4,792

172,598
43,197
7,523

61
263

94
775

462
1,992

649
(5,000)(1,437)(1,150)155
339(2,900)
674
(53)
655
21,73446,738478

4,917(37,879)(10,886)(8,712)
1,174
2,568(21,969)
5,106
(401)
4,962
164,652
354,076¥ 25,004

Investing Activities:
Increase in loans
Collection of long-term loans
Decrease in investments in and advances to subsidiaries
Increase in long-term loans
Purchases of investment securities
Capital expenditures
Increase in long-term prepayments
Other - net
Net cash used in investing activities
Financing Activities:
Net increase (decrease) in short-term borrowings
Proceeds from long-term debt
Proceeds from exercise of warrants
Repayments of long-term debt
Proceeds from public offering (Net of stock issue costs)
Cash dividends paid
Net cash provided by financing activities
Net Increase (Decrease) in Cash and Cash Equivalents
Cash and Cash Equivalents, Beginning of Year
Cash and Cash Equivalents, End of Year
Additional Cash Flow Information:
Interest paid
Income taxes paid
Non-Cash Investing Activities—
Capital expenditures by incurring liabilities

1997¥(1,150)(1,038)865
420
14,33132
57
866
32,31055,115(128,433)
116(139,164)
51
21
(39)
(794)
(6,021)(5,421)(3,871)(155,238)(3,262)(2,010)(7,679)(2,542)(1,266)(145,076)

58,452285,819(243,277)
27,423(138)
128,279¥ 29,941
50,174¥ 80,115

7,790
288,997
4,999(204,655)¥¥(24,712)(15,227)(58,174)(19,258)(9,591)(1,099,060)

442,818
2,165,295(138)
96,993(3,130)53,30450,174(1,843,008)
207,750(1,045)
971,810$ 226,826
380,106$ 606,932$ 149,992
310,583¥ 19,799
40,997¥

19,56318,764

¥

¥

63

70

(972,977)
879

$

530

Notes to Non-Consolidated Financial Statements
Years Ended March 31, 1998 and 1997

1. Basis of Presenting Non-Consolidated FinanicalStatements
The non-consolidated financial statements of Aiful
Corporation (the “Company”) have been prepared inconformity with the Japanese Securities and Exchange
Law and in accordance with accounting principles
generally accepted in Japan, which are different in certain respects as to application and disclosure requirements of International Accounting Standards. In
preparing the non-consolidated financial statements,
certain reclassifications and rearrangements havebeen made to the non-consolidated financial statements issued domestically in Japan in order to present
these statements in a form which is more familiar toreaders outside Japan. The non-consolidated statements of cash flows have also been presented herein,
although such statements are not required in Japan.
Consolidation of the Company’s subsidiaries would
not significantly change the total assets, retained earnings, total income, or net income reported in theaccompanying non-consolidated financial statements.
Certain reclassifications have been made to the prior years’ non-consolidated financial statements toconform to the classifications used in 1998.

method based on the useful lives prescribed under
the tax regulations, principally ranging from 24 to
60 years for buildings, and from 3 to 20 years formachinery, equipment and others.
e. Retirement Benefits - Effective April 1, 1995, theCompany amended previously adopted severance
and retirement plans and established a contributory
funded pension plan, transferring all prior plans’
obligations for employees’ retirement benefits(including all plan assets of the trusteed pensionplan) to the new pension plan. Also, reversals of theexcess portion of employees’ retirement benefits
are added to income equally over seven years
beginning with the fiscal year ended March 31,
1997 pursuant to the applicable tax regulations.
Under the plan, prior service costs are charged toincome over ten years.
The net assets in the fund, including a government pension fund required by Japanese law in theamount of ¥281 million ($2,129 thousand), were
¥1,169 million ($8,856 thousand) at March 31, 1997
(the most recent date of available information).
Retirement benefit balances include those todirectors and corporate auditors as follows:

At March 31:

2. Summary of Significant Accounting Policies
a. Cash and Cash Equivalents - The Company considers
time deposits to be cash equivalents. Time deposits
have original maturities of one year or less and canbe withdrawn on demand with no diminution ofprincipal.
b. Property for Sale - Property for sale is stated at thelower of cost or market, cost being determined by
the specific identification method.
c. Investment Securities - Investment securities listed
on a stock exchange are valued at the lower of costor market, cost being determined by the movingaverage method. All other securities are stated atcost, which is determined by the moving-averagemethod, except that appropriate write-downs arerecorded for securities with values considered to besignificantly impaired.
d. Depreciation - Depreciation of property, plant andequipment is computed by the declining balance

1998
1997

Millions of Yen

¥ 850
¥ 795

Thousands of
U.S. Dollars$ 6,439

f. Allowances for Doubtful Loans, Advances to Subsidiaries and Claims in Bankruptcy - Allowances for
doubtful loans, advances to subsidiaries and claims
in bankruptcy are stated at the higher of either
management’s estimate or the maximum amountwhich is allowed under tax regulations (the actual
rate of past charge-offs).
g. Income Taxes - Income taxes are provided foramounts currently payable for each year. Deferredtaxes arising from “temporary differences” between
tax and financial reporting are not recorded.
h. Interest on Loans - In accordance with the practiceprevailing in the industry, the Company records
accrued interest to the extent that the realization ofsuch income is considered to be certain.

AI FUL Annual Report29Notes to Non-Consolidated Financial Statements
Years Ended March 31, 1998 and 1997

i. Stock Issue Costs - Stock issue costs are charged toincome as incurred.
j. Leases - All leases are accounted for as operatingleases. Under Japanese accounting standards forleases, finance leases that deem to transfer ownership of the leased property to the lessee are to becapitalized, while other finance leases are permitted
to be accounted for as operating lease transactions
if certain “as if capitalized” information is disclosed
in the notes to the lessee’s non-consolidated financial statements.
k. Foreign Currency Transactions - Short-term receivables and payables denominated in foreign currencies are translated into Japanese yen at the current
exchange rates at the balance sheet date. Longterm receivables and payables denominated in foreign currencies are translated into Japanese yen at
historical rates except for those hedged by forward
exchange contracts or currency swap agreement
which are translated at such fixed exchange rates.
In the case where there is a significant fluctuation ofcurrencies resulting in possible exchange losses,
long-term receivables or payables denominated inforeign currencies are translated at the current
exchange rates as of each balance sheet date.
The exchange gains arising from the above contract and agreement are deferred and recognized asincome ratably over the term of the contract period.
Other exchange gains and losses are recognized in
the fiscal periods in which they occur.
l. Per Share Information - The computation of net
income per share is based on the weighted average
number of shares of common stock outstanding,retroactively adjusted for stock splits. The average
number of common shares used in the computation was as follows:

30

AI FUL Annual Report

Year Ended March 31:

1998
1997

Average
Number of
Shares

41,536,061
36,823,580

Cash dividends per share presented in the accompanying non-consolidated statements of income are
dividends applicable to the respective years including
dividends to be paid after the end of the year without
giving retroactive adjustment for subsequent stock
split.
Fully diluted net income per share is not presented
in 1998 and 1997 because common stock of the Company was not listed prior to March 31, 1997 andbecause no dilutive securities were outstanding forthe year ended March 31, 1998.
3. Translation into United States Dollars
The non-consolidated financial statements are statedin Japanese yen, the currency of the country in which
the Company is incorporated and operates. The translations of Japanese yen amounts into U.S. dollar
amounts are included solely for the convenience ofreaders outside Japan and have been made at the rateof ¥132 to $1, the approximate rate of exchange at
March 31, 1998. Such translations should not be construed as representations that Japanese yen amounts
could be converted into U.S. dollars at that or any other rate.

4. Loans
Loans at March 31, 1998 and 1997 consisted of the following (before allowance for doubtful loans):Thousandsof U.S. Dollars

Millions of Yen

Unsecured (1)Secured (2)Guaranteed (3)
Total

1998

1997

1998

¥ 603,662
95,1283,656¥ 702,446¥ 527,306
64,324$ 4,573,197
720,667
27,697$ 5,321,561¥ 591,630(1) Loans to individuals without offering security or providing a third-party guarantee. The credit limit is generally ¥500,000
per customer.
(2) Loans to individuals or corporation with real estate as collateral. Credit limits range up to ¥100 million, subject to an
evaluation of the real estate, creditworthiness of the borrower, and approval of the Credit Department of the Company.
(3) Loans up to ¥2 million to self-employed individuals, small business loans, subject to the provision of a third-party guarantee by an individual with regular occupation and income.

5. Investment Securities
The carrying and market values of publicly traded investment securities at March 31, 1998 and 1997 were as follows:
Thousandsof U.S. Dollars

Millions of Yen

1998

Investment securities

1997

1998

Carrying
Value

Market
Value

Carrying
Value

Market
Value

Carrying
Value

MarketValue¥ 2,912¥ 2,970¥ 2,008¥ 2,018$ 22,061$ 22,500

The difference between the above carrying amounts and the amounts shown in the accompanying non-consolidatedbalance sheets principally consists of non-marketable securities for which there is no readily-available market fromwhich to obtain or calculate the market value thereof.

6. Short-Term Borrowings and Long-Term Debt
Short-term borrowings substantially consisted of commercial paper and notes payable, generally due in one year.
Short-term borrowings at March 31, 1998 and 1997 consisted of the following:Thousandsof U.S. Dollars

Millions of Yen

1998
Commercial paper, 1.6%
Loans from banks, 1.6% to 2.4% (1.4% to 6.1% in 1997)
Other (principally from leasing and factoring
companies), 2.0% to 3.6% (2.7% to 3.6% in 1997)
Total

1997

1998

¥ 30,000
26,100¥26,178$ 227,273
197,727

41,900¥ 98,000¥

13,37039,548317,424$ 742,424

AI FUL Annual Report31Notes to Non-Consolidated Financial Statements
Years Ended March 31, 1998 and 1997

Long-term debt at March 31, 1998 and 1997 consisted of the following:Thousandsof U.S. Dollars

Millions of Yen

1998

1997

1998

Loans from banks, 1.9% to 5.1% (1.3% to 5.5% in 1997),
due serially to 2003

¥ 191,622¥ 192,295$ 1,451,682

Loans from other financial institutions, 2.3% to4.7% (2.5% to 5.4% in 1997), due serially to 2003

245,614

239,750

1,860,712

58,40023,000442,424

104,869

102,918

794,462

600,505(270,190)¥ 330,315

557,963(214,432)¥ 343,531

4,549,280(2,046,894)$ 2,502,386

Syndicated Loans, 2.2%, to 2.6% (1.9% in 1997), due to 2001
Other (principally from leasing and factoring companies),
2.6% to 9.1% (2.5% to 9.1% in 1997), due serially to 2002
Total
Less current portionLong-term debt, less current portion

The aggregate annual maturities of long-term debt at March 31, 1998 were as follows:Year Ending March 31

Millions of Yen

Thousandsof U.S. Dollars

1999
2000
2001
2002
2003
Total

¥ 270,190
177,846
106,165
34,496
11,808¥ 600,505$ 2,046,894
1,347,318
804,280
261,333
89,455$ 4,549,280

At March 31, 1998, the following assets were pledged as collateral for short-term borrowings and long-term debt (including current portion of long-term debt).
Thousandsof U.S. Dollars

Millions of Yen

Time deposits
Loans
Property for sale
Investment securities
Property, plant and equipment, net of accumulated depreciation
Other assets
Total
Related liabilities:
Short-term borrowings
Long-term debt (including current portion of long-term debt)

32

AI FUL Annual Report¥820
312,297641
480
23,750106¥ 338,094$

6,212
2,365,887
4,856
3,636
179,924803$ 2,561,318¥ 46,700¥ 250,668$ 353,788$ 1,899,000

7. Income Taxes
The Company is subject to a number of taxes based on
income which, in the aggregate, resulted in a normal
tax rate of approximately 51% in 1998 and 1997. The
effective tax rate differs from the statutory rate principally due to the special additional tax on undistributed
profit and the recording of certain expenses which aretemporarily nondeductible for tax purposes.
8. Shareholders’ Equity
Under the Japanese Commercial Code (the “Code”), atleast 50% of the issue price of new shares, with a minimum of the par value, is to be designated as statedcapital. The portion which is to be designated as stated capital is determined by resolution of the Board of
Directors. Proceeds in excess of the amounts designated as stated capital are credited to additional paidin capital. The Company may transfer portions ofadditional paid-in capital to stated capital by resolution of the Board of Directors.
Under the Code, the Company is required to appropriate as a legal reserve portions of retained earnings
in the amount equal to at least 10% of cash payments,
including cash dividends and bonuses to directors andcorporate auditors, appropriated in each financial period until the reserve equals 25% of the stated capital.
This reserve is not available for cash dividends but
may be used to reduce a deficit by resolution of theshareholders or transferred to stated capital by resolution of the Board of Directors. The Company may alsotransfer portions of unappropriated retained earnings
to stated capital by resolution of the shareholders.
Under the Code, the Company may issue newshares of its common stock to the existing shareholders without consideration pursuant to resolution of

the Board of Directors as a stock split. The Company
may make such a stock split to the extent that theamount calculated by multiplying the number ofissued shares after the stock split by the par value pershare does not exceed the stated capital and that theamount calculated by dividing the total amount ofshareholders’ equity by the number of issued shares
after the stock split shall not be less than ¥500.
At the Shareholders’ General Meeting held on June27, 1996, the Company reduced par value of common
stock from ¥500 to ¥50 concurrent with a ten-for-one
stock split, resulting in an increase of 12,422,700
shares effective August 1, 1996. The number of common shares the Company is authorized to issue wasalso increased from 4 million to 55 million.
On March 10, 1997, the Board of Directors declareda five-for-two stock split to be distributed on May 20,
1997 to shareholders of record on March 31, 1997. As
a result, the number of shares issued increased by
23,431,500 shares.
On July 30, 1997, the Company completed the saleof 3,700,000 shares of its common stock in a public
offering. Of the proceeds totalling to ¥28,416 million($215,273 thousand), ¥12,875 million ($97,538 thousand) and ¥15,541 million ($117,735 thousand) werecredited to common stock and additional paid-in capital, respectively.
Retained earnings of the Company as of March 31,
1998 included ¥71,622 million ($542,591 thousand)which is designated as a general reserve but is available for future dividends subject to approval by theshareholders and legal reserve requirements. Dividends are approved at the Shareholders’ General
Meeting to be held subsequent to the fiscal year towhich they relate and are reflected in the non-consolidated statements of shareholders’ equity when duly
declared and paid.

AI FUL Annual Report33Notes to Non-Consolidated Financial Statements
Years Ended March 31, 1998 and 1997

9. Leases
The Company leases vehicles, computer equipment, furniture and fixtures, office space and other assets.
Total rental expenses including lease payments under finance leases, for the years ended March 31, 1998 and 1997
were as follows:
Thousandsof U.S. Dollars

Millions of Yen

Year March 31:

1998
1997

Total Rental
Expenses

Lease Payments
Under FinanceLeases¥ 11,837
9,018¥ 4,854
3,641

Total Rental
Expenses

Lease Payments
Under FinanceLeases$ 89,674$ 36,773

Pro forma information of leased property such as acquisition cost, accumulated depreciation, obligations under financeleases, depreciation expense, and interest expense of finance leases that do not transfer ownership of the leased property to the lessee on an “as if capitalized” basis for the years ended March 31, 1998 and 1997 were as follows:
Thousandsof U.S. Dollars
Machinery andEquipment

Millions of Yen
Machinery andEquipment

1998
Acquisition cost
Accumulated depreciation
Net leased property¥ 20,477
11,737¥ 8,740

¥
¥

1997

1998

15,102
7,296
7,806$ 155,129
88,917$ 66,212

Obligations under finance leases:
Thousandsof U.S. Dollars

Millions of Yen

1998
Due within one year
Due after one year
Total

1997

¥

4,629
6,902
¥ 11,531

¥
¥

3,655
6,421
10,076

1998$$

35,06852,28887,356

Depreciation expense and interest expense, which are not reflected in the accompanying non-consolidated statements
of income, computed under a declining method and the interest method, respectively, for the years ended March 31,
1998 and 1997 were as follows:
Thousandsof U.S. Dollars

Millions of Yen

1998
Depreciation expense
Interest expense

34

AI FUL Annual Report

¥

5,329
501

1997
¥

4,051
416

1998
$

40,371
3,795

10. Derivatives
The Company enters into foreign forward currency contracts to hedge foreign exchange risk associated with certain liabilities denominated in foreign currencies. The Company also enters into interest rate swap and interest rate cap contracts as a means of managing its interest rate exposure on certain liabilities.
All derivative transactions are entered into to hedge interest and foreign currency exposures incorporated with theCompany’s business. Accordingly, market risk in these derivatives is theoretically offset by opposite movements in thevalue of hedged liabilities. The Company does not hold or issue derivatives for trading and speculative purposes.
Because the counterparties to these derivatives are limited to major domestic financial institutions, the Company
does not anticipate any losses arising from credit risk.
Derivative transactions entered into by the Company have been made in accordance with internal policies which
regulate the authorization and credit limit amount.
At March 31, 1998 and 1997 the Company had outstanding derivatives contracts as follows:
Thousandsof U.S. Dollars

Millions of Yen

1998
Contract or
Notional Amount

Fair Value

1997
Unrealized
Gain (Loss)

Forward Exchange
Contracts Buying U.S. $1998

Contract or
Notional Amount

Fair Value

Unrealized
Gain (Loss)

¥ 8

¥ 10

¥ 2

Contract or
Notional Amount

Fair Value

Unrealized
Gain (Loss)

Interest Rate Swaps
Fixed rate receipt,
floating rate payment
Fixed rate payment,
floating rate receipt¥ 16,148

¥ 28

¥ 28

2,376

—

—

$ 122,333

$ 212

$ 212

Interest Rate CapsPurchased interest
rate caps

190,000

229(1,535)

190,000——

1,439,394

1,735(11,629)

1,000

Estimated fair values were obtained from banks.
Fees paid on purchased interest rate caps are deferred and amortized over the life of the related contract as adjustments to interest expense on the related liabilities. Unamortized deferred fees at March 31, 1998 were ¥1,764 million($13,364 thousand). The unrealized loss on interest rale caps represents the difference between the fair value andunamortized deferred fees of such instuments.
The contract or notional amounts of derivatives which are shown in the above table do not represent the amounts
exchanged by the parties and do not measure the Company’s exposure to credit or market risk.
Forward exchange contracted amounts which are assigned to associated assets or liabilities and are reflected on the
non-consolidated balance sheet at year end are not subject to the disclosure of market value information.
Disclosure of information regarding fair value and unrealized gains or losses of interest rate swaps and interest rate
caps at March 31, 1997 was not required by the relevant Japanese regulations.

AI FUL Annual Report35Notes to Non-Consolidated Financial Statements
Years Ended March 31, 1998 and 1997

11. Subsequent Events
a. On April 16, 1998, the Company issued 4,000,000 shares of common stock and received gross proceeds totalling to¥33,084 million ($250,636 thousand). The offering was made to certain persons in offshore transactions according toRegulations under the United States Securities Act of 1993 as amended (the ”Securities Act”), and in the United States
to qualified institutional buyers in accordance with Rule 144A under the Securities Act. Of the proceeds from theoffering, ¥16,544 million ($125,333 thousand) and ¥16,540 million ($125,303 thousand) were credited to common
stock and additional paid-in capital, respectively.
b. On May 25, 1998, the Board of Directors resolved to propose the following plan of appropriations of retained earnings for the year ended March 31, 1998 for approval at the Shareholders’ General Meeting to be held on June
26,1998:
Thousandsof U.S. Dollars

Millions of Yen

Cash dividends, ¥60 ($0.45) per share
Transfer to legal reserve
Bonuses to directors and corporate auditors

¥

2,565
264
71

$

19,4322,000
538

c. On June 15, 1998, the Board of Directors resolved to issue the unsecured Euro-yen debentures to institutional buyers
amounting up to ¥11,000 million ($83,333 thousand) with maturity from three up to five years after the date ofissuance. The other terms and conditions have not yet been determined.

36

AI FUL Annual ReportIndependent Auditors’ Report

To the Board of Directors of Aiful Corporation:
We have examined the non-consolidated balance sheets of Aiful Corporation as of March 31, 1998 and 1997, and the related
non-consolidated statements of income, shareholders’ equity, and cash flows for the years then ended, all expressed inJapanese yen. Our examinations were made in accordance with auditing standards generally accepted in Japan and,accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary
in the circumstances.
In our opinion, the non-consolidated financial statements referred to above present fairly the financial position of Aiful
Corporation as of March 31, 1998 and 1997, and the results of its operations and its cash flows for the years then ended inconformity with accounting principles generally accepted in Japan applied on a consistent basis.
Our examinations also comprehended the translation of Japanese yen amounts into U.S. dollar amounts and, in our opinion,such translation has been made in conformity with the basis stated in Note 3. Such U.S. dollar amounts are presented solely
for the convenience of readers outside Japan.

DELOITTE TOUCHE TOHMATSU
Kyoto, JapanSHIMBASHI & CO.
Osaka, Japan

June 29, 1998

AI FUL Annual Report37History

1967

April – Yoshitaka Fukuda, the current president,
founded a consumer finance business.

1978

February – Marutaka Co., Ltd. (the forerunner of
AIFUL Corporation) established.

1979

September – Computers introduced.

1981

June – Host computer introduced.
September – First on-line system started operation.
October – Training center and dormitories opened.
December – Company owned houses opened.

1982

May – Marutaka Co., Ltd. integrated its three affiliates (Daicho Co., Ltd., Yamakatsu Sangyo Co., Ltd.,and Maruto Co., Ltd.) and changed its name to
AIFUL Corporation. Capital increased to ¥500 million
as a result of the merger.
Construction of the present headquarters
completed.
First TV commercials broadcast.

1983

July – Loans to customers outstanding reached¥50 billion.
November – Capital increased to ¥1,012 million.

1984

February – ATMs started operation.
June – Second on-line system started operation.

1985

March – First scoring system (automated creditworthiness evaluation system) introduced.
May – Karuizawa Resort (leisure facility for employees) opened.
August – All branches started handling real-estate
secured loans.

1986

September – Telesit sales started.
November – Operation of ATMs on holidays started.

38

AIFUL Annual Report

1987

March – Second scoring system introduced.
August – Capital increased to ¥1,119 million.
December – Capital increased to ¥2,207 million.

1988

October – Third on-line system started operation.
December – Sales of Full Mail loans started.

1989

June – Loans to customers outstanding reached¥100 billion.

1990

April – AIFUL Heartful Parade participated in International EXPO for Flowers and Plants.
May – Loans to customers outstanding reached¥150 billion.
June – Number of customer accounts reached
500,000.
October – Third scoring system introduced.
December – Swiss franc bond issued (SFr 20
million).

1991

March – Loans to customers outstanding reached¥200 billion.
April – Employee health insurance scheme
introduced.
November – Customer Consulting Center opened.

1992

March – Capital increased to ¥2,342 million.
April – Fourth scoring system introduced.
Editing studio opened in Kyoto for production ofpromotional videos.
July – Automatic brushing system started operation.
First ATM outside a branch installed at
Shijotera-machi, Kyoto.

1993

February – “AI Computing Center” started
operation.
April – Automated remittance processing systemstarted operation.
August – “Arinshan”, restaurant chain offering popular Taiwanese dishes, opened in Kyoto.
October – Mutual aid association established.
Four-regional marketing system (Higashi-Nihon,
Kanto, Naka-Nihon and Nishi-Nihon) started.
Sponsored “Kyushu Sports Festa in Kamitsue ’93”.

1994

September – Loans to customers outstanding
reached ¥300 billion.
Sponsored “Green Kyoto Fair”.
October – Sponsored “Kyushu Sports Festa in
Kamitsue ’94”.
Fifth scoring system introduced.
November – Heartful Center opened.

1995

March – “Ojidosan” unmanned loan-contracting
machines installed at Kanda North Exit Branch andIkebukuro West Exit Branch.
Capital increased to ¥7,832.7 million.
April – Welfare pension fund established.
June – Tie-ups with retailers’ consumer financecompanies for CDs and ATMs started.
Number of customer accounts reached 1 million.
July – Loan application service on PC-VAN network
started.
August – Tie-ups with banks in the Second Association of regional banks for CDs and ATMs started.
September – Loans to customers outstanding
reached ¥400 billion.
October – Sponsored “Kyushu Sports Festa in
Kamitsue ’95”.
November – Internet home page opened.

1996

January – Virtual branch opened on CD-ROM
Curiosity.
April – Six-regional marketing system (Higashi-Nihon,
Kanto, Tokyo-Koshinetsu, Chubu, Kinki and NishiNihon) started.
May – Tie-ups with regional banks for CDs andATMs started.
June – Tie-ups with CD installation companies for
CDs and ATMs started.
Loans to customers outstanding reached ¥500 billion.
Preliminary Single A rating for long-term
unsecured debt obtained.
September – Capital increased to ¥10,332.45 million.
October – Sponsored “Kyushu Sports Festa in
Kamitsue ’96”.
November – Sponsored the 6th Fukuchiyama
Marathon.
December – Raised ¥23 billion through domestic
syndicate loan.

1997

January – Liaison Group of Consumer Finance Companies launched.
March – CP issued (Rating: A1).
April – Female employees’ uniforms renewed.
Donated old uniforms overseas through Japan Cloth
Aid Center.
July – Registered its shares with the over-the-countermarket under Japan Securities Dealers Association.
Capital increased to ¥23,208.45 million.
August – Fourth on-line system started operation.
October – Sales of small business loans to selfemployed individuals started full operation.
Design of cashing cards renewed.
Sponsored “Kyushu Sports Festa in Kamitsue ’97”.
November – Sponsored the 7th Fukuchiyama
Marathon.

1998

January – Obtained “Baa1” corporate rating from
Moodies.
April – 4 million new shares issued overseas.
Capital increased to ¥39,752.45 million.

AI FUL Annual Report39Board of Directors | Investor Information
As of June 26, 1998

As of March 31, 1998

Chairman

Yoshiyuki Watanabe

President | Representative Director

Yoshitaka Fukuda

Senior Managing Director | Representative Director

Taichi Kawakita

Restaurant & Entertainment Department
Real Estate Department

Susumu Yano

Inspection Department

Takashi Noda

General Manager – Finance Division
Public Relations Department

Senior Managing Directors

Managing Directors

Directors

Standing Statutory Auditors

Yuji Kataoka

General Manager – Loan Business Division

Sadatoshi Kobayashi

Information Systems Department
Administration Office

Yasutaka Fukuda

Deputy General Manager – Finance Division
General Manager – Finance Department

Yoshimasa Nishimura

General Manager – Secured Loan Business
Department
Remedial Risk Management Department

Koji Imada

General Manager – General Affairs Department

Shintaro Hashima

General Manager – Personnel Department
Education & Training Department

Takashi Koumoto

General Manager – Accounting Department

Yoshinori Sogabe

Credit Risk Management Department

Masami Munetake

General Manager – Tokyo/Koshin-etsu
Regional Headquarters

Yasuo Yanagibashi

General Manager – Nishi-Nihon Regional
Headquarters

Yasunori Nagai
Tadao Mushiake

Statutory Auditors

Takao Oshima
Terutoshi Tanaka

Corporate NameAIFUL Corporation

Date of Establishment

April 1967

Financial Year

April 1 to March 31

Independent Auditors

Deloitte Touche Tohmatsu | Shimbashi & Co.

Transfer Agent and Registrar

The Sumitomo Trust & Banking Co., Ltd.

Paid-in Capital¥ 23,208 million

Number of Shares of Common Stock

Authorized: 150,000,000 shares
Issued and Outstanding: 42,752,500 shares

Number of Shareholders

3,177

Number of Employees

2,731

40

AI FUL Annual ReportProfile

With balance of loans outstanding of ¥702,446 million (US$5,321,561 thousand) (as of March 31, 1998), AIFUL
Corporation is one of Japan’s big four consumer finance companies. On July 30, 1997, 30 years after its
establishment, AIFUL floated its shares on the OTC market.
AIFUL’s involvement in consumer finance dates from its establishment in 1967 as Marutaka Co., Ltd. It took its
present name in 1982 after merging with three associated companies. One of AIFUL’s founding principles has been
to improve the image of the consumer finance industry. It has worked consistently to gain public support for theindustry, which has not always enjoyed a good reputation in Japan.
Today AIFUL provides services to 1.7 million customers through its 807 branches and a network of 10,167 cash
dispensers and ATMs, of which 9,263 are tie-up CDs.
As a public company, AIFUL will work even harder to fulfill its corporate mission to earn the respect of society. Inline with its “customer-first” philosophy, it is committed to the continuing enhancement of its customer services as it
strives to evolve and grow.

Corporate Headquarters
31 Higashikaigawa-cho, Saiin
Ukyo-ku, Kyoto 615-0057, Japan
Phone 075-321-1701
For further information and additional copiesof this Annual Report, please contact:
Investor Relations Section
Tokyo Office
Tokyoekimae Bldg. / 5th Floor
1-5, 2-Chome Yaesu , Chuo-ku
Tokyo 104-0028, Japan

Contents
Internet Address
1

Non-Consolidated Financial Highlights

2

Message from the President

4

Growth of AIFUL

6

Competitiveness in the Industry

Production

8

Strategy for the Future

10

Shareholder and Investor Value

Ashley Associates
Tokyo, Japan

12

Review of Operations

17

Financial Section

38

History

40

Board of Directors | Investor Information

http://www.aiful.co.jp
e-mail: IR@aiful.co.jp

DesignAshley Associates
Tokyo, Japan
Photography
f-64 Photo Office
Tokyo, Japan

Copyright © 1998 AIFUL Corporation

AIFUL Corporation

AIFUL Corporation
Annual Report 1998

Annual Report 1998