H4-H1 ÆON CREDIT SER VICE CO., L TD. Annual Report 2010 Annual Report 2010 S.B 2

Transcription

1 Annual Report 2010

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. CONTENTS 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 34 Major Group Companies 35 Corporate Data, Shareholder Information and Board of Directors and Auditors 36 Forward-Looking Statements Statements contained in this report with respect to the ÆON CREDIT SERVICE Group s plans, strategies and beliefs that are not historical facts are forward-looking statements about the future performance of the ÆON CREDIT SERVICE 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 SERVICE Group s actual results, performance or achievements 1 ÆON to differ Credit materially Service Co., from Ltd. the expectations expressed herein. ÆON Credit Service Co., Ltd. 2

3 To Our Stakeholders (Millions) (Billions of yen) 2,300 2,050 1,800 1,550 0 Number of Cardmembers /2 08/2 09/2 10/2 Credit Card Purchase Volume 1, , , , /2 08/2 09/2 10/2 Fiscal 2009 Performance In fiscal 2009, the Company expanded the cardmember base through alliances with business partners and use of the Internet, while strengthening the promotion of AEON CARD SELECT, which combines credit-card, ATM-card and e-money functions in one card. Our efforts were rewarded with substantial growth, an increase of 1.29 million cardmembers from the previous term, to million, on a consolidated basis. In our domestic credit card business, we have enhanced marketing efforts to increase cardmemberships and expanded our new businesses, including electronic money (e-money), bank agency and credit guarantee businesses, as an effort to convert our business structure via these new revenue sources. In overseas operations, we have successfully expanded into new regions: we achieved a monthly profit at our local subsidiary in Indonesia, set up local representative offices in India (Mumbai) and Cambodia (Phnom Penh). As a result of these efforts, non-consolidated operating revenue began to increase in the third quarter, and the transformation of our business structure proceeded smoothly. Although credit card purchase transaction volume recovered rapidly in the fourth quarter, the impact of both the appreciation of Japanese yen and the drop in demand for financing led to resulted in a 3.9% increase in total transaction volume year on year, to 2,993,335 million and total operating revenue fell 2.0% year on year, to 172,430 million, and operating income fell 22.7%, to 20,560 million. Furthermore, as a result of an non-operating loss of 16,053 million, for allowances, net income declined 98.7% to 198 million. Fiscal 2010 Plans The business environment is expected to continue to be harsh in the non-bank finance sector, due to factors such as the newly enforced Money Lending Business Control and Regulation Law and revision of the Installment Sales Act. Meanwhile, the Company sees bright outlook in the cashless-payment market, and expects its growth as settlement methods diversify from cash-payment to cashless-payment, such as credit card and e-money. Therefore, we remain fully committed to the credit card business and will develop services which are fine-tuned to local demands, making the most of customers sense of familiarity with retail businesses. In an effort to realign our business structure, as a priority task, we will fortify our settlement businesses such as credit card and e-money businesses, expand our fee businesses including bank agency, credit guarantee and Internet businesses and work to expand our overseas business by promoting credit-related businesses in overseas operations while working to turn the businsses to profit in Indonesia and Vietnam. As a response to the increasing cocern of corporate social responsibility from consumers and the public, we remain actively engaged in environmental protection and social contribution, which includes measures to reduce carbon dioxide emissions, and through enhanced corporate governance. Such efforts will help promoting the image and value of the Company. 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. Number of Cardmembers (Domestic) Expanding the Cardmember Base To respond to the diverse needs of our customers, we began to issue AEON CARD SELECT, number of cards issued expanded to 13.4 million as of the end of February Furthermore, in addition to AEON Group companies, the Company has expanded the card acquiring businesses (Millions) which combines credit-card, ATM-card and e-money benefits and functions in one card. As a outside the Group. We also managed to be the first company in the industry to obtain bank result, the Company posted a non-consolidated net increase of 1,110,000 cardmembers from the previous year, bringing the total number of cardmembers to million. agency license, and started recruitment of new customers for AEON Bank savings accounts, which started in October Improving Credit Card Usage Ratio In addition to sales campaigns with business partners, the Company encouraged more affiliated merchants from public utilities secrtors and medical institutions. The company also issued AEON Reinforcing Our Financial Position To hedge against the risk of higher interest rates in the future, the Company has worked to procure long-term fixed funding on a continuous basis, and the composition of long-term fixed- E-money WAON GOLD CARD, with the annual fee waived for premium customers whose annual card usage rate borrowings rose 10.3 points to 78.0%. Despite the stagnant economy and the extremely exceeds 1 million. Through these efforts, the Company has recorded a net increase of harsh business environment, the Company s expanding business and strong financial position approximately 920,000 active cardmembers year on year, for a total of million, meanwhile have been highly appraised by credit rating companies. The Company has obtained an A+ rating 0 07/2 08/2 09/2 10/2 the domestic volume of credit card purchase transactions increased 7.7% year on year, to 2,186,723 million. from Japan Credit Rating Agency Ltd., and an A rating from Rating & Investment Information Inc. AEON Insurance service counter (Billions) 2,200 1,850 1,500 1,150 Credit Card Purchase Volume (Domestic) 1, , , ,186.7 Boosting Profitability In response to the enforcement of the new Money Lending Business Control and Regulation Law the Company has lowered the ceiling of the effective annual interest rate on cash lending services to 18.0%. To cover the resulting drop in income, the Company has focused on improving the income from credit card purchase by promoting revolving payments through joint programs with business partners. The balance of revolving payments on credit card purchase was 116,378 million, a 13.6% increase over fiscal Expanding New Sources of Revenue To archive new sources of revenue the Company entered the e-money business in April The e-money card WAON has become more convenient for customers to use, as the number of merchants accepting WAON has grown to approximately 56,000 nationwide. The cumulative Less than 2 years 22.6% Long-Term Debt Duration As of February 20, 2010 Less than 1 years 15.9% Less than 3 years 24.3% More than 4 years 19.9% Less than 4 years 17.3% 0 07/2 08/2 09/2 10/2 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 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. Hong Kong China Hong Kong-based AEON CREDIT SERVI CE (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 boosted a local cardmember base of 1.04 million, as of February In addition to working with affiliated merchants to promote card usage, in addition to direct sales, the company has built an insurance website for the isurance agency business as an effort to increase the number of insurance policies. As a result, Company secured operating revenues of HK$1,244 million, decreased by 0.8% from the previous year. In China the company has extended its loan collection service to mainly local banks, in the meantime it has launched the insurance agency business. the first non-bank-operated automated teller machines (ATM) in the country. As a result of issuing cards which combined the rewards point program offered by alliance partners and improving cardmember benefits, the cardmember base totaled 110,000 as of February 2010, and operating revenues increased significantly to MYR259 million, increased by 14.0% year on year. To enhance customer service and cost effectiveness, four administration centers have been established. Furthermore, the subsidiary has continued to expand its cardmember base by issuing AEON GOLD CARD to its prime customers and has introduced Touch n Go Card, a co-branded card issued in association with transportation campanies that can be used to pay for highway tolls and train and bus fares. Malaysia Taiwan In the hire purchase business, AEON CREDIT SERVICE (TAIWAN) CO., LTD., has steadily expanded its business to motorcycles, in addition to electric home appliances and furniture. The subsidiary acquired a local credit card issuing license in 2002, making it the first Japanese non-bank to do so. 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 February 2009 was approximately 120,000. To enhance the features of the credit cards, the subsidiary has initiated card settlement service for public utility bills. As a result, the transaction volume has grown steadily. China Thailand AEON THANA SINSAP (THAILAND) PLC. was established in 1992 and progressively expanded its business activities as the second overseas subsidiary after Hong Kong, listing on the Stock Exchange of Thailand since 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 card members to 1.84 million as of February Operating revenues of alliance partners totaled THB10,323 million, decreased by 2.2% from the previous year. In new business areas, the subsidiary is expanding its credit-related business activities. In addition to its non-life insurance agency business, which utilizes the branch network and cardmember base of the credit card business, the subsidiary is implementing a full scale development of the life insurance agency business that will also benefit from the rapidly growing insurance needs in Thailand. The expansion of the collection service business to companies outside the Group, and the leasing business, which focuses on corporate automobile leasing, will also continue to contribute to the Group s credit-related business. Furthermore, to cope with the business expansion and business contingency, four administration centers were established in the country. Taiwan Indonesia PT. AEON CREDIT SERVICE INDONESIA was established in By using expertise accumulated in the consumer finance industry in Japan and other Asian countries, the subsidiary is providing a hire-purchase service for electrical appliances and furniture in the country. Through energetic marketing activities, the subsidiary has built a network of 1,600 affiliated merchants. Seeking to complement this network with a solid client base to support the future promotion of credit card operations, the subsidiary has issued membership cards. Thailand Malaysia AEON CREDIT SERVI CE (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 Vietnam ACS Trading Vietnam Co., Ltd., was established in Ho Chi Minh City in June The subsidiary is the first Japanese company in Vietnam to provide installment payment plans and is working to expand its business. Indonesia 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 For the Year: Total operating revenues 172, , , , ,751 $1,877,301 Total operating expenses 151, , , , ,520 1,653,456 Income before income taxes and minority interests 4,698 30,365 34,327 38,265 38,655 51,152 Net income ,789 17,653 20,592 21,262 2,154 Yen 1 Per Share Data 2 : Net assets , , $ Basic net income Diluted net income At Year-End: Finance receivables net of allowance for possible credit losses 671, , , , ,873 $7,310,758 Net property and equipment 9,929 9,470 9,843 8,037 6, ,102 Total assets 866, , , , ,357 9,432,390 Total liabilities 689, , , , ,472 7,508,407 Equity 3 176, , , , ,691 1,923,983 Percentage Ratios: Equity ratio 18.0% 19.0% 18.9% 18.6% 20.1% 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. On February 21, 2006, the Company made a stock split by way of a free share distribution at the rate of three shares for each outstanding share. Each figure included in Per Share Data was retroactively adjusted for the stock split. 3. According to a new accounting standard for presentation of equity, which is effective for fiscal years ending on or after May 1, 2006, stock acquisition rights, minority interests and any deferred gain or loss on derivatives under hedge accounting are now presented as components of equity. Accordingly, the amount of equity as of February 20, 2006 is not directly comparable to shareholders equity of following years, stated above. 4. Diluted EPS for the years ended February 20, 2008, 2007 and 2006 are not disclosed as there is no potential dilution existing. Financial Review ÆON Credit Service Co., Ltd. and Subsidiaries Years Ended February 20, 2010 and 2009 RESULTS OF OPERATIONS Amount Percentage Change Change Operating revenues: Credit card purchase contracts 055, ,697 (03, % Hire purchase contracts 8,051 9,304 (1,253) (13.5) Loan contracts 80,598 96,041 (15,443) (16.1) Processing service fees 13,013 6,150 6, Other operating revenues 14,802 11,815 2, Total operating revenues 172, ,007 0(3,577) (2.0)% Operating expenses: Financial costs 014, ,035 00,(536) (3.6)% Provision for possible credit losses and write-off of bad debts 36,388 32,767 3, Other operating expenses 100, ,594 (611) (0.6) Total operating expenses 151, ,396 2, Operating income 020, ,611 0(6,051) (22.7)% Fiscal Summary In the fiscal year under review, the operating environment was particularly challenging due to a prolonged downturn in consumer spending caused by the deteriorating employment situation and reductions in payrolls, while the credit industry was affected by factors such as claims for repayment of interest and responses to the revision of the Money Lending Business Control and Regulation Law and the Installment Sales Act. Faced with these economic conditions, AEON Credit Service Co., Ltd. (the Company ) has been actively engaged in the enhancement of competitiveness in the credit card business, the establishment of new revenue sources and the expansion of overseas business in order to accelerate the transformation of the Company s business structure. As a result of efforts to attract new cardmembers inside and outside Japan, our cardmember base increased by 1.29 million to million on a consolidated basis. To establish new sources of revenue, the Company worked on the expansion of its e-money business resulting from the development of its WAON member stores, the enhancement of bank agency services including the promotion of AEON CARD SELECT, which is a bank card with credit card and e-money functions embedded, and increased handling of home mortgage loans. In its overseas business, centering on listed companies in Hong Kong, Thailand and Malaysia, the overseas subsidiaries built up their primary credit card business and their credit-peripheral business, which includes insurance agency services and servicer operations. We also successfully expanded business in new regions, such as turning profitable on a monthly basis in an Indonesian subsidiary. Through such efforts, new sources of revenue such as e-money business and bank agency services have grown, and by strengthening our sales plans with member stores inside and outside Japan, we are seeing a rapid recovery in credit card purchase sales during the fourth quarter and steadily transforming our business structure. However, total operating revenues fell 2.0% to 172,430 million, and operating income fell 22.7% to 20,560 million due to the tightening of credit standards, the increased expenses required for doubtful accounts in preparation for the implementation of the restriction on the total amount of individual debt by the revised Money Lending Business Control and Regulation Law and continued investment in new business. Furthermore, as a result of recording non-operating expenses of 15,862 million, consolidated net income declined 98.7% to 198 million. 8 9

7 Transaction volume Processing services, which used to include the volume of e-money settlement service related to the cards issued by both the Company and other companies, includes only the Finance receivables volume of e-money settlement service related to the Company s card. Amount Percentage Change Change Installment sales receivables: Credit card purchase contracts 262, ,117 (51, % Hire purchase contracts 37,971 34,261 3, Subtotal 300, ,378 55, Operating loan receivables 423, ,528 (60,204) (12.5) Allowance for possible credit losses (52,614) (50,758) (1,856) 3.7 Total finance receivables 671, ,148 0(6,655) (1.0)% Installment sales receivables increased by 55,405 million, due to the increase in the transaction volume of credit card purchase and the redemption of securitized credit card receivables. Operating loan receivables declined by 60,204 million, due to a decline in cash advance service and the securitization of cash advance receivables. Amount Percentage Change Change Credit card purchase contracts 2,261,616 2,109, , % Hire purchase contracts 44,119 49,051 (4,932) (10.1) Loan contracts 586, ,488 (69,363) (10.6) Processing services 66,831 31,732 35, Other transaction volume 34,644 33, Total transaction volume 2,993,335 2,879, , % Operating revenues Operating expenses Total operating expenses climbed 2,474 million (1.7%) from the previous fiscal year. This was primarily because the commission payment rose by 5,215 million (36.7%) and the provision for possible credit losses and write-off of bad Amount Percentage Change Change Credit card purchase contracts 055, ,697 (03, % Hire purchase contracts 8,051 9,304 (1,253) (13.5) Loan contracts 80,598 96,041 (15,443) (16.1) Processing service fees 13,013 6,150 6, Other operating revenues 14,802 11,815 2, Total operating revenues 172, ,007 0(3,577) (2.0)% Total operating revenues decreased 3,577 million compared with the previous fiscal year, resulting from a 6.2%, or 3,269 million, increase in credit card purchase contracts, a 111.6%, or 6,863 million increase in processing service fees, and a 16.1%, or 15,443 million decrease in loan contracts. The main reason for the increase in credit card purchase contracts and processing service fees was a steady increase in credit card purchase and e-money transaction volume. The principal cause of the decrease in loan contracts was a decline in cash advance service. Amount Percentage Change Change Financial costs 014, ,035 0(536) (3.6)% Provision for possible credit losses and write-off of bad debts 36,388 32,767 3, Other operating expenses 100, ,594 (611) (0.6) Total operating expenses 151, ,396 2, % debts rose by 3,621 million (11.1%), while the provision for loss on refund of interest received decreased by 5,120 million (52.4%). CASH FLOWS Net cash provided by operating activities decreased 29,322 million over the previous fiscal year, to 16,387 million, due to an increase in installment sales receivables resulting from an expansion of the credit card business inside and outside Japan and the redemption of securitized receivables. Net cash used in investing activities increased 16,721 million, to 17,420 million, due to 10,360 million being used to purchase investment securities. Net cash used in (provided by) financing activities turned into a cash outflow of 36,376 million due to the repayment of short-term borrowings in order to reduce interest rate risk exposures. Consequently, cash and cash equivalents at the end of the fiscal year under review amounted to 23,013 million, down 37,189 million from a year earlier

8 Consolidated Balance Sheets ÆON Credit Service Co., Ltd. and Subsidiaries February 20, 2010 and 2009 BUSINESS PERFORMANCE BY GEOGRAPHIC AREA Total assets and total operating revenues by geographic area Amount Percentage Change Change Total assets: Domestic 665, ,789 00, % Overseas 211, ,946 11, Elimination/Corporate (10,552) (10,541) Total assets 866, ,194 12, % Operating revenues: Domestic 122, ,070 (0, % Overseas 50,426 54,937 (4,511) (8.2) Total operating revenues 172, ,007 (3,577) (2.0)% (Note 1) ASSETS Current assets: Cash and cash equivalents 023, ,202 $0,250,545 Finance receivables net of allowance for possible credit losses (Notes 4 and 5) 671, ,148 7,310,758 Deferred tax assets (Note 11) 18,765 16, ,301 Prepaid expenses and other current assets 56,257 42, ,486 Total current assets 769, ,954 8,378,090 Property and equipment: Structures 3,124 2,629 34,007 Vehicles 4,170 3,726 45,399 Equipment 17,377 15, ,193 Total 24,671 22, ,599 Accumulated depreciation (14,742) (12,771) (160,497) Net property and equipment 9,929 9, ,102 Investments and other assets: Investment securities (Notes 3 and 4) 53,064 18, ,723 Investments in associated companies ,679 Software 12,566 11, ,814 Deferred tax assets (Note 11) 9,093 4,782 98,996 Guarantee money deposits 1,813 2,360 19,738 Deferred charges ,297 Long-term prepaid expenses 6,879 7,710 74,890 Other assets (Note 6) 2,944 2,160 32,061 Total investments and other assets 86,908 46, ,198 TOTAL 866, ,194 $9,432,390 LIABILITIES AND EQUITY Current liabilities: Accounts payable (Note 17) 116, ,247 $1,270,050 Short-term borrowings (Note 5) 18,672 26, ,284 Current portion of long-term debt (Note 5) 111,048 86,960 1,209,018 Accrued expenses 3,515 4,067 38,267 Allowance for point program 3,717 4,142 40,473 Deferred revenue ,822 Accrued income taxes 3,988 4,773 43,415 Other current liabilities 14,049 6, ,962 Total current liabilities 272, ,796 2,963,291 Long-term liabilities: Long-term debt (Note 5) 392, ,408 4,271,198 Deferred tax liabilities (Note 11) ,401 Allowance for loss on refund of interest received 22,841 11, ,674 Other liabilities (Note 6) 1,914 1,760 20,843 Total long-term liabilities 417, ,497 4,545,116 Commitment and contingent liabilities (Notes 12, 13, 14 and 15) Equity (Note 7): Common stock authorized, 540,000,000 shares; Common stock issued, 156,967,008 shares in 2010 and ,467 15, ,389 Capital surplus 17,047 17, ,595 Stock acquisition rights (Note 8) 25 Retained earnings 129, ,162 1,408,668 Unrealized gain on available-for-sale securities ,385 Deferred loss on derivatives under hedge accounting (1,599) (420) (17,408) Foreign currency translation adjustments (4,905) (5,274) (53,406) Treasury stock at cost, 112,878 shares in 2010 and 131,823 shares in 2009 (187) (220) (2,039) Total 155, ,560 1,698,184 Minority interests 20,740 19, ,799 Total equity 176, ,901 1,923,983 TOTAL 866, ,194 $9,432,390 See notes to consolidated financial statements

9 Consolidated Statements of Income ÆON Credit Service Co., Ltd. and Subsidiaries Years Ended February 20, 2010 and 2009 (Note 1) Operating revenues (Notes 4 and 17): Credit card purchase contracts 0(55,966 0(52,697 $0,(609,323 Hire purchase contracts 8,051 9,304 87,654 Loan contracts 80,598 96, ,501 Processing service fees 13,013 6, ,672 Other operating revenues 14,802 11, ,151 Total operating revenues 172, ,007 1,877,301 Operating expenses (Note 17): Financial costs (14,499) (15,035) (157,859) Provision for possible credit losses and write-off of bad debts (36,388) (32,767) (396,166) Other operating expenses (Note 9) (100,983) (101,594) (1,099,431) Total operating expenses (151,870) (149,396) (1,653,456) Operating income 20,560 26, ,845 Non-operating revenues (expenses) Provision for loss on refund of interest received (Note 2.i.) (14,000) (152,422) Provision of allowance for doubtful accounts (Note 2.d.) (2,053) (6,564) (22,347) Gain on sale of investment securities 9,431 Other non-operating revenues, net (Notes 6 and 10) ,076 Total non-operating revenues (expenses) (15,862) 3,754 (172,693) Income before income taxes and minority interests 4,698 30,365 51,152 Income taxes (Note 11): Current (5,572) (12,658) (60,663) Deferred 4,878 1,474 53,103 Total income taxes (694) (11,184) (7,560) Minority interests in net income (3,806) (4,392) (41,438) Net income 0(00,198 0(14,789 $0,(002,154 Yen (Note 1) PER SHARE OF COMMON STOCK (Note 16): Basic net income $0.01. Diluted net income Cash dividends applicable to the year Consolidated Statements of Changes in Equity ÆON Credit Service Co., Ltd. and Subsidiaries Years Ended February 20, 2010 and 2009 Thousands Deferred Outstanding Unrealized Loss on Foreign Number of Stock Gain (Loss) on Derivatives Currency Shares of Common Capital Acquisition Retained Available-for-Sale under Hedge Translation Treasury Minority Total Common Stock Stock Surplus Rights Earnings Securities Accounting Adjustments Stock Total Interests Equity Balance, February 20, ,837 15,467 17, ,647 4,356 (339) (0,297 (218) 163,263 20, ,337 Net income 14,789 14,789 14,789 Cash dividends, 40 per share (6,274) (6,274) (6,274) Purchase of treasury stock (2) (3) (3) (3) Disposal of treasury stock Net change in the year 25 (3,589) (81) (5,571) (9,216) (733) (9,949) Balance, February 20, ,835 15,467 17, , (420) (5,274) (220) 162,560 19, ,901 Effect of application of ASBJ Practical Task Force No.18 (Note 2.u.) Net income Cash dividends, 40 per share (6,274) (6,274) (6,274) Purchase of treasury stock (1) (1) (1) (1) Disposal of treasury stock 20 (6) (3) Net change in the year (25) 3 (1,179) 369 (832) 1, Balance, February 20, ,854 15,467 17, ,385 0,770 (1,599) (4,905) (187) 155,978 20, ,718 Thousands (Note 1) Deferred Outstanding Unrealized Loss on Foreign Number of Stock Gain on Derivatives Currency Shares of Common Capital Acquisition Retained Available-for-Sale under Hedge Translation Treasury Minority Total Common Stock Stock Surplus Rights Earnings Securities Accounting Adjustments Stock Total Interests Equity Balance, February 20, ,835 $168,389 $185,660 $273 $1,471,553 $8,354 $(4,569) $(57,417) $(2,391)$1,769,852 $210,567 $1,980,419 Effect of application of ASBJ Practical Task Force No.18 (Note 2.u.) 3,289 3,289 3,289 Net income 2,154 2,154 2,154 Cash dividends, $0.44 per share (68,304) (68,304) (68,304) Purchase of treasury stock (1) (12) (12) (12) Disposal of treasury stock 20 (65) (24) Net change in the year (273) 31 (12,839) 4,011 (9,070) 15,232 6,162 Balance, February 20, ,854 $168,389 $185,595 $267 $1,408,668 $8,385 $(17,408) $(53,406) $(2,039)$1,698,184 $225,799 $1,923,983 See notes to consolidated financial statements. See notes to consolidated financial statements

10 Consolidated Statements of Cash Flows ÆON Credit Service Co., Ltd. and Subsidiaries Years Ended February 20, 2010 and 2009 (Note 1) OPERATING ACTIVITIES: Income before income taxes and minority interests (004,698 (030,365 $0,051,152 Adjustments for: Income taxes paid (6,396) (11,001) (69,631) Depreciation and amortization 6,849 6,060 74,566 Provision for possible credit losses 33,077 34, ,124 Loss on changes in interests in consolidated subsidiaries 348 Gain on sale of investment securities (9,431) Gain on redemption of investment securities (2,706) Loss of revaluation of investment securities Loss on disposal of cash dispenser 1,034 Changes in assets and liabilities: Increase in finance receivables (47,341) (13,221) (515,420) Increase in other assets (14,903) (11,361) (162,253) Increase in accounts payable 18,425 9, ,595 Increase in other current liabilities 6,527 2,469 71,057 Increase in allowance for loss on refund of interest received 10,905 3, ,723 Other 4,539 4,551 49,423 Net cash provided by operating activities 16,387 45, ,409 INVESTING ACTIVITIES: (Increase) decrease in time deposits net (52) 760 (570) Purchase of property and equipment (2,747) (5,013) (29,902) Proceeds from sale of property and equipment ,972 Purchase of software (4,634) (6,012) (50,449) Purchase of investment securities (10,360) (532) (112,792) Purchase of investment in subsidiary (14) (156) Proceeds from sale of investment securities 10,874 Proceeds from redemption of investment securities 2,706 Other 206 (3,802) 2,242 Net cash used in investing activities (17,420) (699) (189,655) FINANCING ACTIVITIES: (Repayment) borrowing of short-term bank loans net (8,560) 4,622 (93,201) Decrease in commercial paper net (603) Proceeds from long-term debt 70, , ,383 Repayments of long-term debt (89,923) (95,528) (979,012) Increase in treasury stock net (1) (2) (11) Dividends paid to the Company s shareholders (6,274) (6,273) (68,304) Dividends paid to minority shareholders (1,827) (1,730) (19,896) Proceeds from issuance of subsidiaries stock to minority shareholders 16 Net cash used in (provided by) financing activities (36,376) 1,536 (396,041) FOREIGN CURRENCY TRANSLATION ADJUSTMENTS ON CASH AND CASH EQUIVALENTS 150 (2,184) 1,634 NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (37,259) 44,362 (405,653) ACCRUAL OF CASH AND CASH EQUIVALENTS WITH THE DIVISION ABSORPTION 86 CASH AND CASH EQUIVALENTS OF NEWLY-CONSOLIDATED SUBSIDIARIES, BEGINNING OF YEAR CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 60,202 15, ,441 CASH AND CASH EQUIVALENTS, END OF YEAR (023,013 (060,202 $0,250,545 See notes to consolidated financial statements. Notes to Consolidated Financial Statements Years Ended February 20, 2010 and 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 application and disclosure requirements of International Financial Reporting Standards and accounting principles generally accepted in the United States of America. 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, 2010 include the accounts of the Company and its 23 significant (21 in 2009) subsidiaries and three (one in 2009) companies 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 differences between the cost of an acquisition and the fair value of the net assets of the acquired subsidiary at the date of acquisition are recorded as goodwill and are amortized over a period not exceeding 20 years (estimated effective period) for the Company and consolidated domestic subsidiaries. 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. 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. more familiar to readers outside Japan. In addition, certain reclassifications have been made in the 2009 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 representation that the Japanese yen amounts could be converted into U.S. dollars at that or any other rate. d. Allowance for Possible Credit Losses The allowance for possible credit losses is stated in amounts considered to be appropriate based on the past credit loss experience and an evaluation of potential losses in receivables. The Company revised its credit control management methodology and implemented the new credit control system, considering the recent changes in the business environment, including the revision of the Money Lending Business Control and Regulation Law which regulates lower ceiling rates. At the beginning of the fiscal year 2009, the Company changed its estimation method for the allowance for possible credit losses based on the revised credit control management methodology and the detailed data from its new system. The effect of this change was to record provision of allowance for doubtful accounts of 6,564 million at the beginning of the fiscal year 2009, and this provision is stated as Provision of allowance for doubtful accounts in the consolidated statements of income. 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. Non-marketable available-for-sale securities are stated at cost determined by the moving-average method. For other-than-temporary 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 16 17

11 estimated useful lives of the assets. The range of useful lives is principally from two to 15 years. 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 the point program is stated in amounts considered to be appropriate based on the companies past redemption experience. i. Allowances 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 experiences. 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 provision for loss on refund of interest received of 14,000 million ($152,422 thousand) in non-operating expenses in the consolidated statements of income for the year ended February 20, j. 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 reversal of retirement benefit liability of 297 million ($3,237 thousand) into other non-operating revenues in the consolidated statements of income for the year ended February 20, k. Bond Issuance Costs Bond issuance costs as of February 20, 2010, which were included in deferred charges, were 119 million ($1,297 thousand). These costs are amortized by the interest method over the lives of the bonds. l. 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. m. 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, the stock option is presented as a stock acquisition right 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, n. 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. The effect of this change was insignificant. All other lease contracts are accounted for as operating lease transactions. o. 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. p. 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. q. 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. r. 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. s. 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, and gains or losses on derivative transactions are recognized in the consolidated statements of income and (b) for derivatives used for hedging purposes, if derivatives qualify for hedge accounting because of high correlation and effectiveness between the hedging instruments and the hedged items, gains or losses on derivatives are deferred until maturity of the hedged items. Foreign currency-denominated long-term debt for which forward exchange contracts are used as hedging instruments are translated at the forward exchange rate if derivatives qualify for hedge accounting. Interest rate swaps are utilized to hedge interest rate exposures of longterm 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 are recognized and included in interest expense or income. t. Per Share Information Basic net income per share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period, retroactively adjusted for stock splits. Diluted net income per share reflects the potential dilution that could occur if outstanding stock 18 19

12 acquisition rights were exercised. Diluted net income per share of common stock assumes full exercise of outstanding stock acquisition rights. Cash dividends per share presented in the accompanying consolidated statements of income are dividends applicable to the respective years, including dividends to be paid after the end of the year, retroactively adjusted for stock splits. u. Unification of Accounting Policies Applied to Foreign Subsidiaries for the Consolidated Financial Statements In May 2006, the Accounting Standards Board of Japan (the ASBJ ) issued ASBJ Practical Issues Task Force (PITF) No. 18, Practical Solution on Unification of Accounting Policies Applied to Foreign Subsidiaries for the Consolidated Financial Statements. PITF No. 18 prescribes: (1) the accounting policies and procedures applied to a parent company and its subsidiaries for similar transactions and events under similar circumstances should, in principle, be unified for the preparation of the consolidated financial statements, (2) financial statements prepared by foreign subsidiaries in accordance with either International Financial Reporting Standards or generally accepted accounting principles in the United States of America tentatively may be used for the consolidation process, (3) however, the following items should be adjusted in the consolidation process so that net income is accounted for in accordance with Japanese GAAP unless they are not material: 1) amortization of goodwill; 2) scheduled amortization of actuarial gain or loss of pensions that has been directly recorded in equity; 3) expensing capitalized development costs of R&D; 4) cancellation of the fair value model of accounting for property, plant, and equipment and investment properties and incorporation of the cost model of accounting; 5) recording the prior years effects of changes in accounting policies in the income statement where retrospective adjustments to financial statements have been incorporated; and 6) exclusion of minority interests from net income, if included. PITF No. 18 was effective for fiscal years beginning on or after April 1, The Company applied this accounting standard effective February 21, The effect of this change was to increase operating income by 38 million ($413 thousand) and income before income taxes and minority interests by 94 million ($1,024 thousand). In addition, the Company adjusted the beginning balance of retained earnings at February 21, 2009, as if this accounting standard had been retrospectively applied. v. New Accounting Pronouncements Asset Retirement Obligations On March 31, 2008, the ASBJ published a new accounting standard for asset retirement obligations, ASBJ Statement No. 18, Accounting Standard for Asset Retirement Obligations, and ASBJ Guidance No. 21, Guidance on Accounting Standard for Asset Retirement Obligations. Under this accounting standard, an asset retirement obligation is defined as a legal obligation imposed either by law or contract that results from the acquisition, construction, development and the normal operation of a tangible fixed asset and is associated with the retirement of such tangible fixed asset. The asset retirement obligation is recognized as the sum of the discounted cash flows required for the future asset retirement and is recorded in the period in which the obligation is incurred if a reasonable estimate can be made. If a reasonable estimate of the asset retirement obligation cannot be made in the period the asset retirement obligation is incurred, the liability should be recognized when a reasonable estimate of the asset retirement obligation can be made. Upon initial recognition of a liability for an asset retirement obligation, an asset retirement cost is capitalized by increasing the carrying amount of the related fixed asset by the amount of the liability. The asset retirement cost is subsequently allocated to expense through depreciation over the remaining useful life of the asset. Over time, the liability is accreted to its present value each period. Any subsequent revisions to the timing or the amount of the original estimate of undiscounted cash flows are reflected as an increase or a decrease in the carrying amount of the liability and the capitalized amount of the related asset retirement cost. This standard will be effective for fiscal years beginning on or after April 1, 2010, with early adoption permitted for fiscal years beginning on or before March 31, Accounting changes and error corrections In December 2009, the ASBJ issued ASBJ Statement No. 24, Accounting Standard for Accounting Changes and Error Corrections, and ASBJ Guidance No. 24, Guidance on Accounting Standard for Accounting Changes and Error Corrections. Accounting treatments under this standard and guidance are as follows; (1) Changes in accounting policies When a new accounting policy is applied with revision of accounting standards, a new policy is applied retrospectively unless the revised accounting standards include specific transitional provisions. When the revised accounting standards include specific transitional provisions, an entity shall comply with the specific transitional provisions. (2) Changes in presentation When the presentation of financial statements is changed, prior period financial statements are reclassified in accordance with the new presentation. (3) Changes in accounting estimates A change in an accounting estimate is accounted for in the period of the change if the change affects that period only, and is accounted for prospectively if the change affects both the period of the change and future periods. (4) Correction of prior period errors 3. INVESTMENT SECURITIES Investment securities as of February 20, 2010 and 2009 consisted of the following: When an error in prior period financial statements is discovered, those statements are restated. This accounting standard and the guidance will be applicable to accounting changes and corrections of prior period errors which are made from the beginning of the fiscal year that begins on or after April 1, Non-current: Marketable equity securities 04,003 03,947 $043,577 Other securities 49,061 14, ,146 Total 53,064 18,042 $577,723 The carrying amounts and aggregate fair values of investment securities as of February 20, 2010 and 2009 were as follows: Unrealized Unrealized Fair Cost Gains Losses Value February 20, 2010 Securities classified as: Available-for-sale: Equity securities 2,683 1,695 (375) 4,003 February 20, 2009 Securities classified as: Available-for-sale: Equity securities 3,258 1,472 (783) 3,947 Unrealized Unrealized Fair Cost Gains Losses Value February 20, 2010 Securities classified as: Available-for-sale: Equity securities $29,205 $18,452 $(4,080) $43,577 Available-for-sale securities whose fair value was not readily determinable as of February 20, 2010 and 2009 were as follows: Carrying Amount Available-for-sale: Beneficiary rights 38,349 13,333 $417,523 Equity securities 10, ,623 Total 49,061 14,095 $534,146 Proceeds from sale of available-for-sale securities and proceeds from redemption of investment securities for the year ended February 20, 2009 were 10,874 million and 2,706 million, respectively