H4-H1 ÆON CREDIT SER Planting Seeds of Growth We are ÆON VICE CO., L TD. Annual Report 2011 Annual Report 2011 S.B 2

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1 Annual Report 2011

2 Supporting cardmembers lifestyles and maximizing future opportunities through effective use of credit The unchanging corporate mission of ÆON CREDIT SERVICE CO., LTD., is to constantly benefit its cardmembers through quality financial services. As a reflection of this, we have included ÆON the Latin word for eternity in our corporate name. In Japan and the rest of Asia, our management philosophy is to support cardmembers lifestyles and enable each individual to maximize future opportunities through effective use of credit. To this end, we provide carefully tailored financial services by paying special attention to cardmembers needs. We also seek to earn cardmember trust by striving hard to raise standards of corporate behavior in the financial services industry, adhering to a strict code of corporate ethics and engaging in activities that conserve the environment and contribute to society. C O N T E N T S To Our Stakeholders 2 Domestic Operations 4 Overseas Operations 6 Five-Year Summary 8 Financial Review 9 Consolidated Balance Sheets 13 Consolidated Statements of Income 14 Consolidated Statements of Changes in Equity 15 Consolidated Statements of Cash Flows 16 Notes to Consolidated Financial Statements 17 Independent Auditors Report 37 Major AEON Group Companies 38 Corporate Data, Shareholder Information and Board of Directors and Auditors 39 Forward-Looking Statements Statements contained in this report with respect to the ÆON CREDIT SERVI CE Group s plans, strategies and beliefs that are not historical facts are forward-looking statements about the future performance of the ÆON CREDIT SERVI CE Group, which are based on management s assumptions and beliefs in light of the information currently available. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the ÆON CREDIT SERVI CE Group s actual results, performance or achievements to differ materially from the expectations expressed herein. ÆON CREDIT SERVICE CO., LTD. 1

3 To Our Stakeholders website, and the acceptance of contributions via AEON insurance agency services and servicer operations. We also tasks to strengthen the mainstay businesses and expand new BANK, LTD. s ATMs. Furthermore, the Company has successfully expanded business in new regions, such as revenue sources by fortifying the mainstay businesses and contributed a portion of procured funds financed by the Indonesia, the Philippines and Vietnam. accelerating the transformation of the Company s business issuance of unsecured corporate bonds as a public donation. As a result of these efforts, total transaction volume structure. We at AEON Credit Service wish for the recovery of each increased 6.7% year on year, to 3,194,657 million, on a and every victim of the disaster without further delay. consolidated basis. Although total operating revenues fell Reinforcement of the Credit Card Business 1.9%, to 169,191 million, partly due to a review of the posting Enhance customer privileges and promote member Fiscal 2010 Performance method for operating revenues from the e-money settlement solicitations for the AEON CARD SELECT. In fiscal 2010, the year ended February 20, 2011, the Company service, operating income increased 0.8%, to 20,717 million, Explore new customer segments by strengthening promoted the e-money business and our fee businesses, through enhanced low-cost operations, and ordinary income membership solicitations for co-branded cards. Kazuhide Kamitani President and CEO including the bank agency and Internet businesses, and expanded overseas business in new countries, in addition to enhancing our credit card business. In the credit card increased 2.0%, to 20,823 million. The Company recorded extraordinary income of 4,632 million from the transfer of all shares of AEON INSURANCE Promotion of Fee Businesses In the e-money business, we will promote the issuing of the WAON integrated card and increase the number of affiliated We extend our heartfelt sympathy to the victims of the Great business, as a result of efforts to attract new cardmembers SERVICE CO., LTD. it held to AEON BANK. On the other merchants accepting WAON. East Japan Earthquake that struck on March 11, inside and outside Japan, our cardmember base increased by hand, the Company recorded an extraordinary loss of Regarding bank agency services, we will promote the AEON Credit Service Co., Ltd. (the Company ) has 1.54 million, to million, on a consolidated basis. 4,620 million from the increases in the Allowance for point opening of in-store branches, the handling and soliciting of installed several Temporary Credit Consulting Counters in In the e-money business, the Company continued to work program, for the change in the Tokimeki Point redemption account applications for home mortgage loans, and the new the earthquake/tsunami-devastated areas so that the victims on increasing the number of cards issued and expanding deadline, and from the disposal cost for existing software installation of ATMs. can consult the Company about their lost credit cards, the transaction volume by promoting the issuance of the for improvements in efficiency and for the allowance for an In the Internet business, we will work on increasing the payments and other relevant issues. In addition, the Company e-money card WAON, which has both cash and credit card increase in future trasaction volume. As a result, consolidated number of registered Web Details Statement cardmembers, is committed to rendering useful services with such measures functions, and by developing an e-money program whereby net income amounted to 9,540 million, increasing 9,342 to whom card usage details are sent via rather as the provision of dedicated toll-free call lines for the victims cardmembers can use e-money as if it were a true currency million from the previous fiscal year. than by printed statements, and promote various Internet of the Great East Japan Earthquake and the offering of in available local areas. As for bank agency services, the services. special emergency loans to AEON cardmembers whose Company reinforced the handling and soliciting of account Fiscal 2011 Plans Expansion of Overseas Businesses residences are registered in the devastated areas. applications for home mortgage loans via increased new As for the current economic situation, the Company Centering on listed companies in Hong Kong, Thailand Moreover, the Company has been active in a variety openings of in-store branches. believes that the Great East Japan Earthquake has had and Malaysia, we will build up our mainstay credit card of fund-raising activities, including the Emergency In the overseas business, centering on listed companies in such an enormous impact on the domestic economy that business and extend the credit-peripheral business in Asian Restoration Assistance Donation campaign, the solicitation Hong Kong, Thailand and Malaysia, the overseas subsidiaries reconstruction will require a considerable period of time. countries. of contributions using our credit cards or the Tokimeki Point continued to build up their mainstay credit card business and Given a business environment that is expected to remain We will strive to launch our credit card business in the Program through storefronts, offices and the Company s extended their credit-peripheral business, which includes harsh, the Company intends to address the following priority Philippines, India and Cambodia. Number of Cardmembers Credit Card Purchase Volume Net Income Return on Equity (Millions) (Billions of yen) 3,000 2,000 1, , , ,587.5 (Billions of yen) (%) /08 2/09 2/10 2/11 1, /08 2/09 2/10 2/ /08 2/09 2/10 2/ /08 2/09 2/10 2/11 2 ÆON CREDIT SERVICE CO., LTD. ÆON CREDIT SERVICE CO., LTD. 3

4 Domestic Operations To achieve customer satisfaction, we always respond swiftly to customer needs. We strive to offer even more attractive financial services to cardmembers in our credit card business and other operations. Credit Card Business endeavored to increase the number of affiliated merchants the previous fiscal year. The cumulative number of cards transactions. Furthermore, in the credit guarantee Expanding the Cardmember Base throughout these areas. Through these efforts, the issued expanded 5.10 million, to million, during the business, the Company has successfully increased the During the year under review, we focused on soliciting Company recorded a net increase of approximately 7.8 year, and total transaction volume increased 57.8%, to relevant balances of bank-offered card loan and home applications for the AEON CARD SELECT and expanded million cardmembers year on year, and the domestic 894,373 million, as of the fiscal year ended February 20, renovation loan products. the number of new customers by issuing co-branded cards volume of credit card purchase transactions increased with Benesse Corporation and Metropolitan Expressway 14.4%, to 2,501,943 million. Reinforcing Our Financial Position Service Company Limited. As a result, the Company Bank Agency Services To ensure stable financing, the Company has set a posted a non-consolidated net increase of 950,000 Fee Businesses The Company newly opened comprehensive financial commitment line of 200 billion and implemented Japan s cardmembers from the previous fiscal year, bringing the E-Money Business shops, at which banking, credit and insurance products first self-trust- and master-trust-based securitization of total number of cardmembers to over 20 million. In the e-money business, the Company strove to increase are swiftly offered as one-stop services. At these shops, receivables as a securitization project for which an external the number of affiliated merchants by enabling settlements enhanced banking services such as account opening and rating score is obtained, for the purpose of ensuring and Improving Credit Card Usage Ratio at commercial facilities, such as airports and automatic the handling of agency operations for time deposits and diversifying stable and flexible fund-raising means and In addition to the aggressive implementation of usage vending machines, and improve customer convenience by home mortgage loans are always available, in addition to furthering cost reductions. promotion plans such as Rewards Point Up campaigns incorporating the Mobile WAON functions on smartphones. recruiting cardmembers for the AEON CARD SELECT. The Company has obtained an A+ rating from Japan with business partners to raise the credit card usage As a result of these efforts, the e-money card WAON Also, jointly with AEON BANK, the Company promoted Credit Rating Agency Ltd. and an A rating from Rating and ratio, the Company entered into a business alliance with has become more convenient for customers to use, as the installation of new ATMs and encouraged the use of Investment Information, Inc. based on their assessments of China UnionPay in Japan and Asian countries where the number of merchants accepting WAON has grown ATMs by customers with such measures as promotion our diversified sources of revenue via business expansion the Company conducts its business operations, and to approximately 102,500 nationwide, up 51,900 from campaigns and the handling of China UnionPay card and our sound financial position. Number of Cardmembers (Domestic) Credit Card Purchase Volume (Domestic) E-Money Purchase Volume Long-Term Debt Duration (Millions) (Billions of yen) 2,700 1, ,800 2, , ,501.9 (Billions of yen) Less than 1 year 26.4% More than 3 years 23.3% Less than 2 years 26.0% Less than 3 years 24.3% 0 2/08 2/09 2/10 2/11 0 2/08 2/09 2/10 2/ /08 2/09 2/10 2/11 4 ÆON CREDIT SERVICE CO., LTD. ÆON CREDIT SERVICE CO., LTD. 5

5 Overseas Operations Our business has been extended to China, Thailand, Malaysia, Taiwan, Indonesia, the Philippines and Vietnam. We have earned a solid reputation overseas as a company that takes a global perspective with the services offered, taking care to tailor them to cardmembers lifestyles. China and Hong Kong Hong Kong based AEON CREDIT SERVICE (ASIA) CO., LTD., the Company s first overseas subsidiary, was established in 1987 and listed on the Hong Kong Stock Exchange in The subsidiary maintains a 16-branch network and actively develops co-branded cards, pursues promotional activities with alliance partners and boasted a local cardmember base of 1.30 million as of the fiscal year ended February 20, In addition to collaborating with affiliated merchants to promote card usage, apart from direct sales, the subsidiary has built a website for the insurance agency business in an effort to increase the number of new insurance policies. In China, the subsidiary has extended its loan collection service to mainly local banks and has launched the insurance agency business. Thailand AEON THANA SINSAP (THAILAND) PLC. was established in 1992 and has progressively expanded its business activities as the second overseas subsidiary after Hong Kong, listing on the Stock Exchange of Thailand in AEON THANA SINSAP has expanded to an 80-branch network, and its ongoing emphasis is to reinforce its cardmember base, primarily by issuing more co-branded cards with airline companies and mobile phone service providers, as well as by issuing the AEON GOLD CARD to cardmembers with particularly good credit histories, bringing the total number of cardmembers to 5.81 million as of the fiscal year ended February 20, In the new business area, the subsidiary is expanding its credit-related business activities. In addition to its nonlife insurance agency business, which utilizes the branch network and cardmember base of the credit card business, the subsidiary is implementing the full-scale development of the life insurance agency business, which will benefit from the rapidly growing insurance needs in Thailand. The recently started collection service business entrusted to companies outside the Group and the leasing business, which focuses on corporate automobile leasing, will continue to contribute to the Group s credit-related business. Furthermore, to cope with business expansion and business contingencies, four operation centers have been established in the country. Malaysia AEON CREDIT SERVICE (M) BERHAD, the Company s third overseas subsidiary, was established in 1997 and listed on the Bursa Malaysia in The subsidiary has steadily expanded its operations, primarily by boosting its cardmember base through alliances with local companies and by installing the first nonbank-related ATMs in the country. As a result of issuing cards, which combine the reward point programs offered by alliance partners, improving cardmember benefits and promoting the issuance of the AEON GOLD CARD to its prime customers, the cardmember base totaled 790,000 as of the fiscal year ended February 20, In addition, the subsidiary reinforced the hire purchase and insurance agency businesses, steadily expanding the credit-related business activities. Meanwhile, to enhance customer services and establish a lower-cost operating system, four administrative centers have been established in the country. Taiwan In the hire purchase business, AEON CREDIT SERVICE (TAIWAN) CO., LTD. has steadily expanded its business to motorcycles, in addition to electrical home appliances and furniture. The subsidiary is the first Japanese non-bank financial institution which acquired a local credit card issuing license, in As a result of the expansion of the cardmember base through the issuance of new co-branded cards, including a co-branded card with a major local retail group, the total number of cardmembers as of the fiscal year ended February 20, 2011 was approximately 140,000. To improve the convenience of credit card usage, the subsidiary has extended the card settlement service for public utility bills and promoted the settlement agency service for affiliated merchants. As a result, the transaction volume has grown steadily. Indonesia PT. AEON CREDIT SERVICE INDONESIA was established in By utilizing expertise and know-how accumulated in the consumer finance industry in Japan and other Asian countries, the subsidiary is providing the hire purchase business for electrical appliances and furniture in the country. Through energetic marketing activities, the subsidiary has extended its network of affiliated merchants and enhanced the recruitment of customers by issuing membership cards to set up a solid client base for the future launch of the credit card business. As a result of these efforts, in fiscal 2010 the subsidiary achieved profits on an annual basis. The Philippines AEON CREDIT TECHNOLOGY SYSTEMS (PHILIPPINES) INC. was established in The subsidiary engages in providing services for the development of information systems. In fiscal 2010, the subsidiary achieved profits on an annual basis. Vietnam ACS Trading Vietnam Co., Ltd. was established in The subsidiary is the first Japanese company in Vietnam to start the installment sales business, and it is now working to expand its operations. As a result of its efforts to increase the number of affiliated merchants, including mass retailers of electrical home appliances, the subsidiary achieved profits on a monthly basis in fiscal Hong Kong China Thailand Malaysia Taiwan Indonesia Philippines Vietnam 6 ÆON CREDIT SERVICE CO., LTD. ÆON CREDIT SERVICE CO., LTD. 7

6 Five-Year Summary ÆON Credit Service Co., Ltd. and Subsidiaries Years Ended February 20 Financial Review ÆON Credit Service Co., Ltd. and Subsidiaries Years Ended February 20, 2011 and 2010 For the Year: Total operating revenues 2 169, , , , ,481 $2,029,405 Total operating expenses 2 148, , , , ,525 1,780,901 Income before income taxes and minority interests 20,936 4,698 30,365 34,327 38, ,117 Net income 9, ,789 17,653 20, ,440 Per Share Data: Yen 1 Net assets 1, , , $12.18 Basic net income Diluted net income At Year-End: Ratios: Finance receivables net of allowance for possible credit losses 1 625, , , , ,551 $ 7,501,044 Net property and equipment 12,849 9,929 9,470 9,843 8, ,115 Total assets 901, , , , ,254 10,814,186 Total liabilities 721, , , , ,643 8,652,739 Equity 180, , , , ,611 2,161,447 Percentage Equity ratio 17.7% 18.0% 19.0% 18.9% 18.6% Return on assets (ROA) Return on equity (ROE) The translation of Japanese yen amounts into U.S. dollar amounts is included solely for the convenience of readers outside Japan and has been made at the rate of to U.S.$1, the approximate rate of exchange on February 20, Such translations should not be construed as representations that the Japanese yen amounts could be converted into U.S. dollars at that or any other rate. 2. Total operating revenues and total operating expenses for the year ended February 20, 2010 and before are retroactively restated. Refer to page 9 RESULTS OF OPERATIONS for more details. 3. Diluted EPS for the years ended February 20, 2011, 2008 and 2007 are not disclosed as no potential dilution exists. RESULTS OF OPERATIONS Operating Revenues: Fiscal Summary In the fiscal year ended February 20, 2011, the outlook for the domestic economy remained uncertain as a result of increased financial instability, especially in Europe, and the negative effects of the escalation of crude oil prices despite several rallying trends encouraged by the economic stimulus policies implemented by the government. Meanwhile, companies in the credit card industry have been streamlining their operating systems to strictly comply with laws and regulations in response to revisions to the Money Lending Business Control and Regulation Law and the Installment Sales Act. In these circumstances, AEON Credit Service Co., Ltd. (the Company ) promoted fee businesses, including e-money business, the bank agency business and Internet business, and expanded overseas business in new countries, in addition to enhancing its credit card business. In the credit card business, as a result of efforts to attract new card members inside and outside Japan, the Group s card member base increased by 1.54 million, to million (including housecard members and familycard members). In the e-money business, the Company continued to work on expanding the transaction volume by promoting the issuance of e-money functions embedded in credit cards. As for the bank agency business, the Company reinforced the handling and soliciting of account applications for home mortgage loans via the increase of Amount Change Percentage Change Credit card purchase contracts 63,838 55,966 7, % Hire purchase contracts 8,906 8, Loan contracts 71,570 80,598 (9,028) (11.2) Processing service fees ( * ) 6,626 5,032 1, Other operating revenues 18,251 14,802 3, Total operating revenues 169, ,449 4, % Operating Expenses: Financial costs 15,073 14, % Provision for possible credit losses and write-off of bad debts 35,306 36,388 (1,082) (3.0) Other operating expenses ( * ) 98,094 93,002 5, Total operating expenses 148, ,889 4, % Operating Income 20,718 20, % ( * ) Previously, processing service fees were recorded by the gross amount of service fees collected from merchants. However, effective from the fiscal year ended February 20, 2011, the amount of processing service fees reflects the net amount, after deducting the relevant service fees paid to the e-money issuers through the Company s e-money settlement service. As a result, processing service fees and other operating expenses for the year ended February 20, 2010 are retroactively restated. in-store branches and started ATM business with AEON BANK, LTD. In the Internet business, the Company endeavored to raise the level of convenience for customers with such measures as the launch of a comprehensive financial services portal site, Money Site for Your Life. In the overseas business, centering on listed companies in Hong Kong, Thailand, and Malaysia, the overseas subsidiaries continued to build up their mainstay credit card business and extended their credit-peripheral business, which includes insurance agency services and servicer operations. The Group also successfully expanded its business in new regions, such as turning profitable in Indonesia and the Philippines on an annual basis and in Vietnam on a monthly basis. As a result of these efforts, total operating revenues increased 2.9%, to 169,191 million, and operating income rose 0.8%, to 20,718 million. Meanwhile, the Company transferred all of the AEON INSURANCE SERVICE CO., LTD. s shares it held to AEON BANK, LTD. as of February 18, 2011 and recorded nonoperating revenues of 4,633 million. This was based on management s determination that: 1) the development of comprehensive financial shops (at which banking, credit and insurance products are swiftly offered as one-stop services) and 2) the expansion of the credit guarantee business (with sales promotion of AEON BANK, LTD. s 8 ÆON CREDIT SERVICE CO., LTD. ÆON CREDIT SERVICE CO., LTD. 9

7 unsecured loan products by AEON INSURANCE SERVICE CO., LTD.) will help transform the Company s business structure. In addition, the Company recorded 2,793 million under its provision for point program, which was caused by a change in point program, extending the expiration of Transaction Volume Amount Change Percentage Change Credit card purchase contracts 2,587,516 2,261, , % Hire purchase contracts 48,865 44,119 4, Loan contracts 405, ,125 (180,202) (30.7) Processing services 105,884 66,831 39, Other transaction volume 46,469 34,644 11, Total transaction volume 3,194,657 2,993, , % Finance Receivables Installment sales receivables: Amount Change Percentage Change Credit card purchase contracts 344, ,812 81, % Hire purchase contracts 39,920 37,971 1, Subtotal 384, ,783 83, Operating loan receivables 293, ,324 (129,897) (30.7) Allowance for possible credit losses (52,327) (52,614) 287 (0.5) Total finance receivables 625, ,493 (46,131) (6.9)% Installment sales receivables increased 27.8%, to 384,262 million, due to the increase in the transaction volume of credit card purchase contracts and the redemption of securitized credit card receivables. Meanwhile, operating loan receivables decreased 30.7%, to 293,427 million, due to a decline in the billings the points to increase the appeal and convenience for card customers, and a loss on disposal of software of 1,787 million for improvements in operating efficiency. As a result, consolidated net income amounted to 9,541 million, up 9,343 million from the previous fiscal year. for loans, reflecting the restrictions imposed by the revised Money Lending Business Control and Regulation Law on the total amount of individual debt, and the implementation of the securitization of operating loan receivables. Operating Revenues Amount Change Percentage Change Credit card purchase contracts 63,838 55,966 7, % Hire purchase contracts 8,906 8, Loan contracts 71,570 80,598 (9,028) (11.2) Processing service fees ( * ) 6,626 5,032 1, Other operating revenues 18,251 14,802 3, Total operating revenues 169, ,449 4, % ( ) Processing service fees for the year ended Feburuary 20, 2010 are retroactively restated. Refer to page 9 RESULTS OF OPERATIONS for more details. * Total operating revenues increased 4,742 million, or 2.9%, compared with the previous fiscal year. This increase mainly resulted from a 14.1%, or 7,872 million, increase in credit card purchase contracts; a 23.3%, or 3,449 million, increase in other operating revenues; and an 11.2%, or 9,028 million, decrease in loan contracts. Operating Expenses The principal cause of the decrease in loan contracts was a decline in transaction volume from the cash advance service. The main reason for the increase in credit card purchase contracts was a steady increase in the transaction volume of credit card purchases. The increase in other operating revenues primarily resulted from the ATM business Amount Change Percentage Change Financial costs 15,073 14, % Provision for possible credit losses and write-off of bad debts 35,306 36,388 (1,082) (3.0) Other operating expenses ( * ) 98,094 93,002 5, Total operating expenses 148, ,889 4, % ( *) Other operating expenses for the year ended Feburuary 20, 2010 are retroactively restated. Refer to page 9 RESULTS OF OPERATIONS for more details. Total operating expenses climbed 4,584 million, or 3.2%, from the previous fiscal year. This was primarily attributable to an increase in human resource expenses of 1,919 million, or 8.9%; an increase in sales promotion expenses of 2,512 million, or 17.1%; an increase in depreciation CASH FLOWS Net cash provided by operating activities increased 12,655 million from the previous fiscal year, to 29,042 million. This was primarily the result of an increase in installment sales receivables due to an expansion of the transaction volume in the credit card business. This was offset by a decline in operating loan receivables owing to a decline in the billings for loans, reflecting the restrictions imposed by the revised Money Lending Business Control and Regulation Law on the total amount of individual debt, and the implementation of the securitization of operating loan receivables of 60,000 million. Net cash used in investing activities decreased 8,559 million, to 8,861 million, mainly due to payments for expenses of 1,008 million, or 14.7%; and an increase in system operating expenses of 2,823 million, or 91.6%; with a decrease in the provision for loss on refund of interest received of 4,646 million. investments in property and equipment and intangible assets for the expansion of business fields, and 3,353 million in cash received in conjunction with the sale of a consolidated subsidiary. Net cash used in financing activities decreased 23,435 million, to 12,941 million, due to such factors as policybased debt selling to prepare for future interest rate hikes and dividend payments. Consequently, cash and cash equivalents at the end of the fiscal year under review amounted to 29,667 million, up 6,654 million from a year earlier. 10 ÆON CREDIT SERVICE CO., LTD. ÆON CREDIT SERVICE CO., LTD. 11

8 BUSINESS PERFORMANCE BY GEOGRAPHIC AREA Total assets and total operating revenues by geographic area Total Assets: Amount Change Percentage Change Domestic 697, ,488 31, % Overseas 215, ,429 3, Elimination/Corporate (10,710) (10,552) Total assets 901, ,365 35, % Operating Revenues: Domestic ( * ) 118, ,023 4, % Overseas 50,896 50, Total operating revenues 169, ,449 4, % ( ) Domestic operating revenue for the year ended February 20, 2010 is retroactively restated. Refer to page 9 RESULTS OF OPERATIONS for more details. * Consolidated Balance Sheets ÆON Credit Service Co., Ltd. and Subsidiaries February 20, 2011 and 2010 (Note 1) ASSETS Current assets: Cash and cash equivalents (Note 14) 29,667 23,013 $ 355,847 Finance receivables net of allowance for possible credit losses (Notes 4, 5 and 14) 625, ,493 7,501,044 Deferred tax assets (Note 11) 19,372 18, ,366 Prepaid expenses and other current assets (Note 5) 76,160 56, ,518 Total current assets 750, ,528 9,002,775 Property and equipment: Structures 3,100 3,124 37,179 Vehicles 4,754 4,170 57,020 Equipment 20,487 17, ,740 Total 28,341 24, ,939 Accumulated depreciation (15,492) (14,742) (185,824) Net property and equipment 12,849 9, ,115 Investments and other assets: Investment securities (Notes 3, 4 and 14) 99,417 53,064 1,192,478 Investments in associated companies (Note 14) ,347 Software 14,919 12, ,950 Deferred tax assets (Note 11) 6,802 9,093 81,591 Guarantee money deposits 1,800 1,813 21,587 Deferred charges Long-term prepaid expenses 6,302 6,879 75,586 Other assets (Note 6) 8,486 2, ,790 Total investments and other assets 138,169 86,908 1,657,296 Total 901, ,365 $10,814,186 LIABILITIES AND EQUITY Current liabilities: Accounts payable (Notes 14 and 19) 146, ,654 $ 1,761,223 Short-term borrowings (Notes 5 and 14) 5,587 18,672 67,013 Commercial paper (Note 5) 411 4,926 Current portion of long-term debt (Notes 5 and 14) 145, ,048 1,743,769 Accrued expenses 4,101 3,515 49,188 Allowance for point program 6,895 3,717 82,711 Deferred revenue ,799 Accrued income taxes 4,332 3,988 51,957 Other current liabilities 22,684 14, ,097 Total current liabilities 336, ,178 4,039,683 Long-term liabilities: Long-term debt (Notes 5 and 14) 367, ,310 4,406,836 Deferred tax liabilities (Note 11) ,932 Allowance for loss on refund of interest received 16,017 22, ,123 Other liabilities (Note 6) 931 1,914 11,165 Total long-term liabilities 384, ,469 4,613,056 Commitment and contingent liabilities (Notes 13, 15, 16 and 17) Equity (Note 7) Common stock authorized, 540,000,000 shares; issued, 156,967,008 shares in 2011 and ,467 15, ,516 Capital surplus 17,047 17, ,472 Retained earnings 132, ,385 1,591,134 Unrealized gain on available-for-sale securities 1, ,898 Deferred loss on derivatives under hedge accounting (608) (1,599) (7,297) Foreign currency translation adjustments (6,296) (4,905) (75,518) Treasury stock at cost, 113,462 shares in 2011 and 112,878 shares in 2010 (188) (187) (2,254) Total 159, ,978 1,909,951 Minority interests 20,967 20, ,496 Total equity 180, ,718 2,161,447 Total 901, ,365 $10,814,186 See notes to consolidated financial statements. 12 ÆON CREDIT SERVICE CO., LTD. ÆON CREDIT SERVICE CO., LTD. 13

9 Consolidated Statements of Income ÆON Credit Service Co., Ltd. and Subsidiaries Years Ended February 20, 2011 and 2010 Consolidated Statements of Changes in Equity ÆON Credit Service Co., Ltd. and Subsidiaries Year Ended February 20, 2011 and 2010 (Note 1) Operating revenues (Notes 4 and 19): Credit card purchase contracts 63,838 55,966 $ 765,725 Hire purchase contracts 8,906 8, ,830 Loan contracts 71,570 80, ,465 Processing service fees 6,626 5,032 79,479 Other operating revenues 18,251 14, ,906 Total operating revenues 169, ,449 2,029,405 Operating expenses: Financial costs (15,073) (14,499) (180,802) Provision for possible credit losses and write-off of bad debts (35,306) (36,388) (423,490) Other operating expenses (Note 9) (98,094) (93,002) (1,176,609) Total operating expenses (148,473) (143,889) (1,780,901) Operating income 20,718 20, ,504 Non-operating revenues (expenses): Gain on sale of investment in consolidated subsidiary 4,633 55,570 Provision for point program (Note 2.h.) (2,793) (33,506) Loss on disposals of software (1,787) (22) (21,433) Provision for loss on refund of interest received (Note 2.j.) (14,000) Provision of allowance for doubtful accounts (2,053) Other non-operating revenues, net (Notes 6 and 10) ,982 Total non-operating revenues (expenses) 218 (15,862) 2,613 Income before income taxes and minority interests 20,936 4, ,117 Income taxes (Note 11): Current (7,117) (5,572) (85,368) Deferred (578) 4,878 (6,934) Total income taxes (7,695) (694) (92,302) Minority interests in net income (3,700) (3,806) (44,375) Net income 9, $ 114,440 PER SHARE OF COMMON STOCK (Note 18): Basic net income $0.73 Diluted net income 1.26 Cash dividends applicable to the year See notes to consolidated financial statements. Thousands Outstanding Number of Shares of Common Stock Common Stock Capital Surplus Stock Acquisition Rights Retained Earnings Unrealized Gain on Availablefor-sale Securities Deferred Gain (Loss) on Derivatives under Hedge Accounting Treasury Stock Total Minority Interests Balance, February 20, 156,835 15,467 17, , (420) (5,274) (220) 162,560 19, , Effect of application of ASBJ Practical Task Force No. 18 (Note 2, v) Net income Cash dividends, 40 per share (6,274) (6,274) (6,274) Purchases of treasury stock (1) (1) (1) (1) Disposals of treasury stock 20 (6) (3) Net change in the year (25) 3 (1,179) 369 (832) 1, Balance, February 20, 156,854 15,467 17, , (1,599) (4,905) (187) 155,978 20, , Net income 9,541 9,541 9,541 Cash dividends, 40 per share (6,274) (6,274) (6,274) Purchases of treasury stock (1) (1) (1) Net change in the year (1,391) (11) Balance, February 20, ,854 15,467 17, ,652 1,159 (608) (6,296) (188) 159,233 20, ,200 Thousands (Note 1) Foreign Currency Translation Adjustments Outstanding Number of Shares of Common Stock Common Stock Capital Surplus Stock Acquisition Rights Retained Earnings Unrealized Gain on Availablefor-sale Securities Deferred Gain (Loss) on Derivatives under Hedge Accounting Foreign Currency Translation Adjustments Treasury Stock Total Minority Interests Balance, February 20, ,854 $185,516 $204,472 $1,551,951 $ 9,238 $(19,178) $(58,837) $(2,247) $1,870,915 $248,766 $2,119,681 Net income 114, , ,440 Cash dividends, $0.48 per share (75,257) (75,257) (75,257) Purchases of treasury stock (7) (7) (7) Net change in the year 4,660 11,881 (16,681) (140) 2,730 2,590 Balance, February 20, ,854 $185,516 $204,472 $1,591,134 $13,898 $ (7,297) $(75,518) $(2,254) $1,909,951 $251,496 $2,161,447 Total Equity Total Equity See notes to consolidated financial statements. 14 ÆON CREDIT SERVICE CO., LTD. ÆON CREDIT SERVICE CO., LTD. 15

10 Consolidated Statements of Cash Flows ÆON Credit Service Co., Ltd. and Subsidiaries Years Ended February 20, 2011 and 2010 Notes to Consolidated Financial Statements Years Ended February 20, 2011 and 2010 (Note 1) OPERATING ACTIVITIES: Income before income taxes and minority interests 20,936 4,698 $ 251,117 Adjustments for: Income taxes paid (6,385) (6,396) (76,588) Depreciation and amortization 7,856 6,849 94,236 Provision for possible credit losses 31,424 33, ,921 Gain on sale of investment in consolidated subsidiary (4,633) (55,570) Changes in assets and liabilities: Increase in finance receivables (34,262) (47,341) (410,962) Increase in other assets (25,631) (14,903) (307,432) Increase in accounts payable 29,589 18, ,907 Increase in other current liabilities 9,568 6, ,762 (Decrease) increase in allowance for loss on refund of interest received (6,823) 10,905 (81,845) Other 7,403 4,546 88,808 Net cash provided by operating activities 29,042 16, ,354 INVESTING ACTIVITIES: Increase in time deposits net (451) (52) (5,414) Purchases of property and equipment (3,505) (2,747) (42,044) Proceeds from sale of property and equipment ,487 Purchases of software (6,721) (4,634) (80,614) Purchases of investment securities (10,360) Purchases of investment in subsidiary (13) (14) (151) Cash received in conjunction with the purchase of consolidated subsidiary Cash received in conjunction with the sale of consolidated subsidiary (Note 12) 3,353 40,215 Other (2,082) 206 (24,973) Net cash used in investing activities (8,861) (17,420) (106,289) FINANCING ACTIVITIES: Repayment of short-term bank loans net (12,887) (8,560) (154,573) Increase in commercial paper net 409 4,901 Proceeds from issuance of long-term debt 118,383 70,209 1,419,971 Repayments of long-term debt (110,046) (89,923) (1,319,976) Increase in treasury stock net (1) (1) (7) Dividends paid to the Company s shareholders (6,274) (6,274) (75,257) Dividends paid to minority shareholders (2,525) (1,827) (30,283) Net cash used in financing activities (12,941) (36,376) (155,224) FOREIGN CURRENCY TRANSLATION ADJUSTMENTS ON CASH AND CASH EQUIVALENTS (586) 150 (7,023) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,654 (37,259) 79,818 CASH AND CASH EQUIVALENTS OF NEWLY-CONSOLIDATED SUBSIDIARIES, BEGINNING OF YEAR 70 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 23,013 60, ,029 CASH AND CASH EQUIVALENTS, END OF YEAR 29,667 23,013 $ 355,847 See notes to consolidated financial statements. 1. BASIS OF PRESENTING CONSOLIDATED FINANCIAL STATEMENTS The accompanying consolidated financial statements have been prepared in accordance with the provisions set forth in the Japanese Financial Instruments and Exchange Act and its related accounting regulations, and in conformity with accounting principles generally accepted in Japan ( Japanese GAAP ), which are different in certain respects as to the application and disclosure requirements of International Financial Reporting Standards ( IFRS ) and accounting principles generally accepted in the United States of America ( U.S. GAAP ). In preparing these consolidated financial statements, certain reclassifications and rearrangements have been made to the consolidated financial statements issued domestically in order to present them in a form which is 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Consolidation The consolidated financial statements as of February 20, 2011 include the accounts of the Company and its 24 (23 in 2010) subsidiaries and three (also three in 2010) companies accounted for under the equity method (collectively, the Group ). Under the control or influence concept, those companies in which the Company, directly or indirectly, is able to exercise control over operations are fully consolidated, and those companies over which the Group has the ability to exercise significant influence are accounted for by the equity method. The difference between the cost of an acquisition and the fair value of the net assets of the acquired subsidiary at the date of acquisition is recorded as goodwill and is amortized over a period not exceeding 20 years (estimated effective period) for the Company and consolidated domestic subsidiaries. In December 2008, the Accounting Standards Board of Japan (the ASBJ ) issued a revised accounting standard for business combinations, ASBJ Statement No. 21, Accounting Standard for Business Combinations. Under the revised standard, the acquirer recognizes the bargain purchase gain (negative goodwill) in profit or loss immediately on the acquisition date after reassessing and confirming that all of the assets acquired and all of the liabilities assumed have been identified after a review of the procedures used in the purchase allocation, whereas the previous accounting standard provided for a bargain purchase gain to be systematically amortized over a period not exceeding 20 years. This standard was applicable to business combinations undertaken on or after April 1, All significant intercompany balances and transactions have been eliminated in consolidation. All material unrealized profit included in assets resulting from transactions within the Group is eliminated. more familiar to readers outside Japan. In addition, certain reclassifications have been made in the 2010 financial statements to conform to the classifications used in The consolidated financial statements are stated in Japanese yen, the currency of the country in which the Company is incorporated and operates. The translation of Japanese yen amounts into U.S. dollar amounts is included solely for the convenience of readers outside Japan and has been made at the rate of to $1, the approximate rate of exchange at February 20, Such translation should not be construed as a representation that the Japanese yen amounts could be converted into U.S. dollars at that or any other rate. b. Cash Equivalents Cash equivalents are short-term investments that are readily convertible into cash and that are exposed to insignificant risk of changes in value. Cash equivalents include time deposits, certificates of deposit, commercial paper and bond funds, all of which mature or become due within three months of the date of acquisition. c. Finance Receivables Finance receivables that the companies have the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances reduced by any write-off or valuation allowance. d. Allowance for Possible Credit Losses The allowance for possible credit losses is stated in amounts considered to be appropriate based on past credit loss experience and an evaluation of potential losses in receivables. e. Investment Securities Investment securities are classified and accounted for, depending on management s intent, as follows: available-for-sale securities are reported at fair value, with unrealized gains and losses, net of applicable taxes, reported in a separate component of equity. Nonmarketable available-for-sale securities are stated at cost determined by the moving-average method. For other-thantemporary declines in fair value, investment securities are reduced to net realizable value by a charge to income. f. Property and Equipment Property and equipment are stated at cost. Depreciation of property and equipment is computed under the straight-line method based on the estimated useful lives of the assets. The range of useful lives is principally from two to 15 years. 16 ÆON CREDIT SERVICE CO., LTD. ÆON CREDIT SERVICE CO., LTD. 17

11 g. Software Software is carried at cost less accumulated amortization. Amortization of software of the Group is calculated by the straight-line method. Software is amortized mainly over five years. h. Allowance for Point Program The allowance for point program is stated in amounts considered to be appropriate based on the companies past redemption experience. The Company changed the expiration date of the points and this change increased the estimated redemption ratio. The Company recorded an additional provision for the point program of 2,793 million ($33,506 thousand) for the year ended February 20, i. Allowance for loss on debt guarantees The allowance for loss on debt guarantees is stated at the amount considered to be appropriate based on the estimated loss on debt guarantees on loan instruments provided by partner financial institutions for individual customers. j. Allowance for Loss on Refund of Interest Received The allowance for loss on refund of interest received (the amount of interest that exceeds the ceiling rate imposed by the Interest Rate Restriction Law) is provided by the Company and is stated in amounts considered to be appropriate based on the Company s past refund experience. In October 2006, Application of auditing for provision of allowance for loss for reclaimed refund of interest in the accounting of consumer finance companies of the industry audit practice committee report No. 37 by the Japanese Institute of Certified Public Accountants was issued and was adopted at the beginning of the fiscal year ended February 20, The Company fundamentally changed the estimation of the provision for the year ended February 20, This change is due to the current tendency of higher refund amounts after the Supreme Court s judgement in January 2009 regarding extinctive prescription for refund claims, and the potential increase in claims corresponding to the full application of the revised Money Lending Business Control and Regulation Law, which restricts the total amount of individual debt. The effect of this change from the previous estimated amount was to record an additional provision for loss on refund of interest received of 14,000 million in non-operating expenses in the consolidated statements of income for the year ended February 20, k. Retirement Benefit and Pension Plans The Company and consolidated domestic subsidiaries have a defined benefit pension plan, advance payment plan and defined contribution pension plan covering substantially all employees. An overseas subsidiary has a severance payment plan for employees. The defined benefit plan was amended on January 15, 2010 and a new cash balance plan was implemented on April 1, Under the cash balance plans, the pension payment is adjusted for fluctuations in market interest rates. The Company and consolidated domestic subsidiaries recognized all prior service costs arising from the amendment of the plan. The effect of the amendment was to record a reversal of retirement benefit liability of 297 million into other non-operating revenues in the consolidated statements of income for the year ended February 20, l. Bond Issuance Costs Bond issuance costs as of February 20, 2011, which were included in deferred charges, were 81 million ($967 thousand). These costs are amortized by the interest method over the lives of the bonds. m. Recognition of Operating Revenues The operations of the Group mainly comprise the following areas, and the recognition of operating revenues is different according to each business. See Note 4 for amounts of transactions and realized operating revenues for each business. (1) Credit card purchase contracts and hire purchase contracts Installment sales receivables are recognized after the Group has accepted the relevant contracts that participating member stores refer to the Group. The Group receives fees for collection of the installment sales and the related administrative services from the member stores under credit card purchase contracts and hire purchase contracts for shopping. The fees from the member stores are generally recognized at the time when the Group makes payments for the installment sales receivables to the member stores in advance. The Group receives fees from customers under credit card purchase contracts and hire purchase contracts. The fees from customers are recognized principally by the interest method. (2) Loan contracts The Group provides cash advance and personal loan services. Operating loan receivables are recognized when the Group loans cash to customers. The interest income and the customer charge at the start of the contract are recognized principally by the interest method. n. Stock Options ASBJ Statement No. 8, Accounting Standard for Stock Options, and related guidance are applicable to stock options granted on and after May 1, This standard requires companies to recognize compensation expense for employee stock options based on the fair value at the date of the grant and over the vesting period as consideration for receiving goods or services. The standard also requires companies to account for stock options granted to non-employees based on the fair value of either the stock option or the goods or services received. In the consolidated balance sheet, stock options are presented as stock acquisition rights as a separate component of equity until exercised. The Company has applied the accounting standard for stock options to those granted on and after May 1, o. Leases In March 2007, the ASBJ issued ASBJ Statement No. 13, Accounting Standard for Lease Transactions, which revised the previous accounting standard for lease transactions issued in June The revised accounting standard for lease transactions was effective for fiscal years beginning on or after April 1, Under the previous accounting standard, finance lease contracts that were deemed to transfer ownership of the leased property to the lessee were to be capitalized. However, other finance lease contracts were permitted to be accounted for as operating lease transactions if certain as if capitalized information was disclosed in the notes to the lessee s financial statements. The revised accounting standard requires that all finance lease transactions be capitalized to recognize lease assets and lease obligations in the balance sheet. However, the revised accounting standard allows continuing treatment for the finance lease contracts, which existed at the date of transition and which do not transfer ownership to the lessee, to be accounted for as operating lease transactions. The Company and the consolidated domestic subsidiaries applied the revised accounting standard effective February 21, The Company and the consolidated domestic subsidiaries accounted for lease contracts which existed at the transition date and which did not transfer ownership to the lessee as operating lease transactions. All other lease contracts are accounted for as operating lease transactions. p. Income Taxes The provision for income taxes is computed based on the pretax income included in the consolidated statements of income. The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred taxes are measured by applying currently-enacted tax laws to the temporary differences. A valuation allowance is provided for any portion of the deferred tax assets that is not considered to be realizable. q. Appropriations of Retained Earnings Appropriations of retained earnings are reflected in the consolidated financial statements for the following year upon the Board of Directors resolution or shareholders approval. r. Foreign Currency Transactions All short-term and long-term monetary receivables and payables denominated in foreign currencies are translated into Japanese yen at the exchange rates at each balance sheet date. The foreign exchange gains and losses from translation are recognized in the consolidated statements of income to the extent that they are not hedged by forward exchange contracts. s. Foreign Currency Financial Statements The balance sheet accounts of the consolidated foreign subsidiaries are translated into Japanese yen at the current exchange rate as of each balance sheet date except for equity, which is translated at the historical rate. Differences arising from such translation were shown as Foreign currency translation adjustments in a separate component of equity. Revenue and expense accounts of consolidated foreign subsidiaries are translated into yen at the average exchange rate. t. Derivative Financial Instruments The Group uses derivative financial instruments to manage its exposures to market fluctuations in foreign currency exchange and interest rates. The Group enters into forward exchange contracts, currency swap contracts and interest rate swap contracts to reduce its exposures to foreign currency and interest rate risk. The Group does not enter into any derivative contracts for trading or speculative purposes. Derivative financial instruments and foreign currency transactions are classified and accounted for as follows: (a) all derivatives are recognized as either assets or liabilities and measured at fair value with gains or losses on derivative transactions recognized in the consolidated statements of income and (b) for derivatives used for hedging purposes, if the derivatives qualify for hedge accounting because of high correlation and effectiveness between the hedging instruments and the hedged items, gains or losses on the derivatives are deferred until maturity of the hedged items. Foreign currencydenominated long-term debt for which forward exchange contracts are used as hedging instruments are translated at the forward exchange rate if the derivatives qualify for hedge accounting. Interest rate swaps are utilized to hedge interest rate exposures of long-term debt. In principle, these swaps which qualify for hedge accounting are measured at market value at the balance sheet date and the unrealized gains or losses, net of applicable taxes, are deferred until maturity as deferred gain/loss on derivatives under hedge accounting in a separate component of equity. Interest rate swaps which qualify for hedge accounting and meet specific matching criteria are not re-measured at market value, but the differential paid or received under the swap agreements is recognized and included in interest expense or income. 18 ÆON CREDIT SERVICE CO., LTD. ÆON CREDIT SERVICE CO., LTD. 19