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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended March 31, 2003
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number 0-25175-01
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TOYOTA MOTOR CREDIT CORPORATION
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(Exact name of registrant as specified in its charter)
California 95-3775816
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
19001 S. Western Avenue
Torrance, California 90509
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 468-1310
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Securities registered pursuant to section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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n/a n/a
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Securities registered pursuant to Section 12(g) of the Act:
2.80% Fixed Rate
Notes due 2006
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes No X
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As of April 30, 2003, the number of outstanding shares of capital stock,
par value $10,000 per share, of the registrant was 91,500, all of which
shares were held by Toyota Financial Services Americas Corporation.
-1-
PART I
ITEM 1. BUSINESS.
GENERAL
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Toyota Motor Credit Corporation ("TMCC") was incorporated in California in 1982
as a wholly-owned subsidiary of Toyota Motor Sales, USA, Inc. ("TMS") and
commenced operations in 1983. TMS is an indirect wholly-owned subsidiary of
Toyota Motor Corporation ("TMC"). On October 1, 2000, ownership of TMCC was
transferred from TMS to Toyota Financial Services Americas Corporation
("TFSA"), a holding company wholly-owned by Toyota Financial Services
Corporation ("TFSC"). TFSC, in turn, is a wholly-owned subsidiary of TMC.
TFSC was incorporated in July 2000 and is headquartered in Nagoya, Japan. The
purpose of TFSC is to manage TMC's finance operations worldwide. TMCC is
marketed under the brands of Toyota Financial Services and Lexus Financial
Services.
References herein to "TMCC" denote Toyota Motor Credit Corporation and
references herein to "the Company" denote Toyota Motor Credit Corporation and
its consolidated subsidiaries.
The Company provides retail financing, wholesale financing, and certain other
financial products and services to authorized Toyota and Lexus vehicle dealers
and, to a lesser extent, other domestic and import franchised dealers and their
customers in the United States ("U.S.") (excluding Hawaii), the Commonwealth of
Puerto Rico, Mexico, and Venezuela. Contracts purchased in Mexico and
Venezuela are originated in each country's respective functional currency.
Foreign currency risk related to the Company's international operations is
considered insignificant given the small size of such foreign operations.
TMCC offers retail leasing to authorized Toyota and Lexus vehicle dealers and
certain other domestic and import franchised dealers and their customers in the
U.S. (excluding Hawaii). The Company also provides retail, lease and
wholesale financing to industrial and other equipment dealers throughout the
U.S. (excluding Hawaii). Financing is offered for various industrial and
commercial products such as forklifts, light and medium-duty trucks, and
electric vehicles. Assets, liabilities and results of operations related to
transactions with industrial and other equipment dealers are combined with the
vehicle related assets, liabilities and results of operations.
TMCC has eight wholly-owned subsidiaries; two of which provide retail and
wholesale financing in Mexico and Venezuela, one of which is engaged in the
insurance business, and three limited purpose subsidiaries formed primarily to
acquire and securitize receivables. Additionally, one subsidiary acts as a
holding company for a corporation providing retail and wholesale financing in
the Commonwealth of Puerto Rico, and one subsidiary is an employee services
company in Mexico.
In March 2003, the Company reorganized its Puerto Rican operations by
incorporating a new subsidiary in the Commonwealth of Puerto Rico. The new
corporation, Toyota Credit de Puerto Rico Corp. ("TCPR Corp."), is a wholly-
owned subsidiary of TCPR Holdings, Inc. TCPR Holdings, Inc., a California
corporation, was formerly known as Toyota Credit de Puerto Rico Corp. TCPR
Corp. has taken over the operations formerly conducted by TCPR Holdings, Inc.
TCPR Corp. provides retail and wholesale financing and certain other financial
products and services to authorized Toyota and Lexus dealers and their
customers in the Commonwealth of Puerto Rico.
-2-
The Company also holds minority interests in Banco Toyota Do Brasil ("BTB")
and Toyota Credit Argentina S.A. ("TCA"). BTB provides retail, lease and
wholesale financing to authorized Toyota vehicle dealers and their customers in
Brazil. TMCC's 15% investment in BTB is accounted for using the cost method.
The remaining interest in BTB is owned by TFSC. TMCC owns a 33% interest in
TCA with the remaining interest owned by TFSA. Through January 2002 TCA
provided retail and wholesale financing to authorized Toyota vehicle dealers
and their customers in Argentina. Due to adverse economic conditions
experienced during and subsequent to January 2002, TCA ceased financing new
business and is currently collecting on outstanding receivables. TMCC
accounted for TCA using the equity method.
In fiscal 2002, TMCC wrote-off its investment in TCA due to adverse Argentine
economic conditions. During fiscal 2003, TMCC performed under a guarantee of
TCA's debt repaying $35 million of outstanding balances and accrued interest.
TCA repaid the remaining principal and accrued interest in March 2003. As of
March 31, 2003, TMCC's guarantees of TCA debt have been fully satisfied and
the guarantees were terminated.
The Company completed the physical restructuring of its field operations in
the U.S. during fiscal 2003. The branch offices of TMCC have been converted
to serve primarily dealer financing needs including purchasing finance
contracts from dealers, financing inventories, financing other dealer
activities such as business acquisitions, facilities refurbishment, real
estate purchases and working capital requirements, and providing information
and support for TMCC finance and insurance products. Functions such as
customer service, collections, lease termination, and administration of retail
and lease contracts, have been transferred to three regional customer service
centers which opened, or were expanded, during fiscal 2002 and 2003. Refer to
the "Operating and Administrative Expenses" and "Provision for Credit Losses"
sections of Item 7, "Management Discussion and Analysis of Financial Condition
and Results of Operations" ("MD&A") for further discussion of related
restructuring charges and the impact of the restructuring on operations and
credit losses, respectively.
In June 2000, the Executive Committee of the Board of Directors of the Company
approved a change in the Company's fiscal year-end from September 30 to March
31. This change resulted in a six-month transition period from October 1, 2000
through March 31, 2001 (the "transition period"). Results related to the
transition period are included in this Form 10-K Report.
The Company's filings with the Securities Exchange Commission ("SEC") can be
found on the SEC website (http://www.sec.gov). The SEC website contains
reports, registration statements, proxy and information statements and other
information regarding issuers that file electronically with the SEC. The
Company will make available, without charge, electronic or paper copies of its
filings upon request.
Certain prior period amounts in this Form 10-K have been reclassified to
conform to the current period presentation.
TOYOTA MOTOR SALES
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TMS is the primary distributor of Toyota and Lexus vehicles in the U.S.
(excluding Hawaii). Automobiles and light trucks sold by TMS during fiscal
2003 totaled 1.8 million units. For fiscal 2003, 2002, the six months ended
March 31, 2001, and fiscal 2000, Toyota and Lexus vehicles accounted for
approximately 10.4%, 9.8%, 9.8%, and 9.1%, respectively, of all retail
automobile and light truck unit sales volume in the U.S.
-3-
The Company's business is substantially dependent upon the sale or lease of
Toyota and Lexus vehicles and its ability to offer competitive financing in the
U.S. Changes in the volume of sales of such vehicles resulting from
governmental action, changes in consumer demand, changes in the level of TMS
sponsored financing programs, increased competition, changes in pricing of
imported units due to currency fluctuations or other events, could impact the
level of finance and insurance operations of the Company. To date, the level
of the Company's operations has not been restricted by the level of sales of
Toyota and Lexus vehicles.
SPONSORED FINANCING PROGRAMS
- ----------------------------
Certain lease and retail financing programs offered by the Company on vehicles
and industrial equipment are subsidized by affiliates of the Company. TMS
sponsors special lease and retail programs on certain new and used Toyota and
Lexus vehicles that result in reduced monthly payments to qualified lease and
retail customers. Toyota Material Handling, U.S.A., Inc. ("TMHU") subsidizes
reduced monthly payments on certain Toyota industrial equipment to qualified
lease and retail customers.
Support amounts received from TMS and TMHU in connection with these programs
approximate the amounts required by TMCC to maintain yields at a level
consistent with standard program levels. The level of sponsored program
activity varies based on TMS' and TMHU's marketing strategies, economic
conditions and level of vehicle sales. Support amounts received are earned
over expected lease and retail installment contract terms. Revenues earned
vary based on the mix of Toyota and Lexus vehicles, timing of programs and the
level of support provided. Amounts earned on support received from TMS and
TMHU totaled $144 million, $130 million, $57 million, and $112 million for
fiscal 2003, 2002, the six months ended March 2001 and fiscal 2000,
respectively. The Company also receives support for retail programs from
Toyota and Lexus dealers or dealer associations. Amounts earned on such
support totaled $20 million, $15 million, $7 million, and $13 million for
fiscal 2003, 2002, the six months ended March 2001, and fiscal 2000,
respectively.
SHARED SERVICES AGREEMENT
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On October 1, 2000, following the transfer of TMCC ownership to TFSA, TMS and
TMCC entered into a shared services agreement ("Shared Services Agreement").
The Shared Services Agreement covers certain technological and administrative
services provided by each entity to the other, such as information systems
support, leasing of facilities, and general corporate services.
EARNING ASSETS
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The Company's earning assets are comprised primarily of finance receivables and
investments in operating leases. Substantially all of the Company's retail
and lease assets are originated in the U.S. (excluding Hawaii) and are
principally sourced through Toyota and Lexus vehicle dealers. At March 31,
2003, approximately 25% of managed retail and lease assets were located in
California and 8% in Texas. The concentration of the remaining retail and
lease assets is relatively balanced throughout the other 47 serviced states.
Any material adverse changes to California's or Texas' economy could have an
adverse effect on the Company's financial condition and results of operations.
At March 31, 2003, approximately 2% of the Company's total earning assets was
located in the Commonwealth of Puerto Rico, Mexico, and Venezuela.
-4-
Wholesale and other dealer financing receivables totaled $5.6 billion or 16%
of total earning assets at March 31, 2003. Wholesale and other dealer
financing receivables include vehicle inventory financing, other vehicle and
industrial equipment financing, revolving lines of credit, real estate loans,
and working capital loans. The Company also provides financing to various
large publicly-held dealer organizations, referred to as dealer groups, often
as part of a lending consortium, for wholesale inventory, working capital, real
estate, and business acquisitions. At March 31, 2003, the 25 largest aggregate
outstanding dealer receivables, totaling $2.3 billion, represented 45% of total
dealer receivables and 7% of total earning assets. Additionally, at March 31,
2003, the Company was committed to another $2.1 billion of which $1.3 billion
was outstanding in funding under lines of credit to these 25 largest dealers or
dealer groups. All of these receivables were current as of March 31, 2003.
Summary of Retail and Lease Earning Asset Activity
- --------------------------------------------------
A summary of vehicle retail leasing and financing activity follows:
Years Six Months Year
Ended Ended Ended
March 31, March 31, September 30,
------------------------ ---------- -------------
2003 2002 2001 2000
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Contract volume:
Retail .................... 690,000 643,000 209,000 412,000
Lease ..................... 167,000 192,000 102,000 240,000
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Total .................. 857,000 835,000 311,000 652,000
======= ======= ======= =======
Average amount financed:
Retail .................... $19,400 $19,000 $18,000 $17,600
Lease ..................... $30,500 $30,000 $28,500 $25,500
Outstanding owned portfolio at
period end ($Millions):
Retail .................. $15,873 $13,409 $9,030 $10,229
Lease ................... $12,675 $13,553 $13,426 $13,084
Number of accounts....... 1,533,000 1,512,000 1,344,000 1,426,000
RETAIL FINANCING
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The Company primarily purchases new and used vehicle and industrial equipment
installment contracts from Toyota, Lexus and, to a lesser extent, other
domestic and import franchised dealers. Installment contracts purchased are
reviewed against the Company's credit standards. Thereafter, the Company has
responsibility for contract collection and administration. The Company
acquires security interests in the vehicles financed and generally can
repossess vehicles if customers fail to meet contractual obligations.
Substantially all of the Company's retail financings are non-recourse, which
relieves the dealers from financial responsibility in the event of
repossession. The terms of the Company's retail financing programs require
customers to maintain physical damage insurance covering loss or damage to the
financed vehicle or industrial equipment in an amount not less than the actual
cash value of the vehicle or equipment. The Company is named as a loss payee.
TMCC currently does not monitor ongoing insurance compliance as part of its
customary servicing procedures for retail accounts. The Company may
experience a higher risk of loss if customers fail to maintain the required
insurance coverage.
Retail financing revenues contributed 30%, 26%, 22% and 23% to total financing
revenues for fiscal 2003, 2002, the six months ended March 2001 and fiscal
2000, respectively. The Company's retail finance portfolio includes contracts
with original terms ranging from 24 months to 72 months. The average original
contract term in TMCC's retail finance portfolio was 57 months, 57 months,
56 months, 56 months at March 31, 2003, 2002, 2001 and 2000, respectively.
-5-
RETAIL LEASING
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The Company primarily purchases new vehicle, industrial and other equipment
lease contracts originated through Toyota, Lexus, and to a lesser extent, other
domestic and import dealers. Lease contracts purchased are reviewed against
the Company's credit standards after which the Company assumes ownership of the
leased vehicles or industrial equipment and is generally permitted to take
possession of such vehicles or industrial equipment upon lessee default. The
Company is responsible for contract collection and administration during the
lease period. The Company is also responsible for the unguaranteed residual
value of the vehicle or equipment if the vehicle or equipment is not purchased
by the lessee or dealer at lease maturity. Returned vehicles are sold to
dealers through a network of auction sites located throughout the U.S. as well
as through the internet. Industrial or other equipment returned by the lessee
or dealer is sold through authorized Toyota industrial equipment dealers using
a bidding process. The Company's lease contracts require lessees to maintain
physical damage insurance covering loss or damage to the leased vehicle and
equipment in an amount not less than the actual cash value of the vehicle or
equipment. The Company is named as a loss payee. TMCC monitors ongoing
insurance compliance only in vicarious liability states. The Company may
experience a higher risk of loss if customers fail to maintain the required
insurance coverage.
Leasing revenues contributed 66%, 69%, 71% and 72% to total financing revenues
for fiscal 2003, 2002, the six months ended March 2001 and fiscal 2000,
respectively. The Company's vehicle lease portfolio includes contracts with
original terms ranging from 24 to 60 months. The average original contract
term in TMCC's lease portfolio was 47 months, 45 months, 43 months, 41 months
at March 31, 2003, 2002, 2001 and 2000, respectively.
In October 1996, TMCC created Toyota Lease Trust, a Delaware business trust
(the "Titling Trust"), to act as lessor and to hold title to leased vehicles
in specified states in connection with a lease securitization program. Lease
contracts purchased by the Titling Trust from Toyota and Lexus dealers are
serviced by TMCC in the same manner as contracts owned directly by the
Company. The Company holds an undivided trust interest in lease contracts
owned by the Titling Trust, and these lease contracts are included in the
Company's lease assets unless and until such time as the beneficial interests
in the contracts are transferred in a securitization transaction.
NATIONAL TIERED/RISK BASED PRICING PROGRAM
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The Company completed the roll-out of a national tiered/risk based pricing
program for both retail and lease vehicle contracts as of March 31, 2001. The
objective of this program is to better match credit risk with contract rates
charged to allow the Company to purchase contracts with a wider range of risk
levels. Implementation of this program has contributed to increased average
contract yields and increased credit losses in connection with purchases of
certain higher risk contracts.
WHOLESALE FINANCING
- -------------------
The Company provides wholesale financing for inventories of new and used
Toyota, Lexus and other vehicles; and industrial equipment. Wholesale
financing is provided to qualified Toyota and Lexus vehicle dealers and, to a
lesser extent, other domestic and import franchised dealers. The Company
acquires security interests in vehicles financed at wholesale, and such
financings are generally backed by corporate or individual guarantees from, or
on behalf of, participating dealers or dealer groups. In the event of dealer
default, the Company has the right to liquidate any assets acquired and seek
legal remedies pursuant to the guarantees.
-6-
TMCC and TMS entered into an Amended and Restated Repurchase Agreement. This
agreement states that TMS will arrange for the repurchase of new Toyota and
Lexus vehicles financed at wholesale by TMCC at the aggregate cost financed in
the event of dealer default. The Company also entered into similar agreements
with TMHU and other domestic and import manufacturers.
A summary of vehicle wholesale financing activity follows:
Years Six Months Year
Ended Ended Ended
March 31, March 31, September 30,
--------------------- ---------- -------------
2003 2002 2001 2000
-------- -------- ---------- -------------
Dealer financing volume
($Millions)................. $23,653 $18,898 $8,608 $13,950
Outstanding portfolio at
period end ($Millions).. $3,791 $2,199 $2,490 $1,362
Average amount financed
per vehicle................. $23,600 $23,700 $23,700 $22,500
- ------------------
Outstanding portfolio figures previously included revolving lines of credit provided to
dealers, which are now reported under other dealer financing below.
OTHER DEALER FINANCING
- ----------------------
The Company extends term loans and revolving lines of credit to dealers for
business acquisitions, facilities refurbishment, real estate purchases, and
working capital requirements. These loans are typically secured with liens on
real estate, vehicle inventory, and/or other dealership assets, as appropriate,
and usually are secured by the personal or corporate guarantees of the dealers
or dealerships. The Company also provides financing to various large publicly-
held dealer organizations, referred to as dealer groups, often as part of a
lending consortium, for wholesale, working capital, real estate, and business
acquisitions. While the majority of these loans are secured, approximately 25%
is unsecured. Adverse changes in the business or financial condition of a
dealer or dealer group to whom the Company has extended a substantial amount of
financing or commitments, in particular when the financing is unsecured or not
secured by realizable assets, could result in a material adverse effect on the
Company's financial condition and results of operations.
Wholesale and other dealer financing revenues contributed 4%, 5%, 7%, and 5% to
total financing revenues for fiscal 2003, 2002, the six months ended March 2001
and fiscal 2000, respectively.
FUNDING
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The Company supports growth in earning assets through funding obtained in the
capital markets as well as funds provided by operating activities. Capital
market funding has generally been in the form of commercial paper, domestic and
euro medium-term notes and bonds, and transactions through the Company's
securitization programs ("funding programs").
The Company uses a variety of derivative instruments to manage interest rate
and foreign exchange exposures arising from the relationship between the
Company's funding programs and earning asset portfolio. These derivative
instruments include interest rate swaps, cross currency interest rate swaps,
and option-based products such as interest rate caps. The Company does not use
derivative instruments for trading purposes.
-7-
CREDIT SUPPORT AGREEMENTS
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To support funding efforts, credit support agreements were established between
the Company and its parent(s). Under the terms of a credit support agreement
between TMC and TFSC ("TMC Credit Support Agreement"), TMC agreed to:
1) maintain 100% ownership of TFSC; 2) cause TFSC and its subsidiaries to have
a net worth of at least Japanese yen 10 million, equivalent to $84,681 U.S.
dollars at March 31, 2003; and 3) make sufficient funds available to TFSC so
that TFSC will be able to (i) service the obligations arising out of its own
bonds, debentures, notes and other investment securities and commercial paper
and (ii) honor its obligations incurred as a result of guarantees or credit
support agreements that it has extended. The agreement is not a guarantee by
TMC of any securities or obligations of TFSC.
Under the terms of a similar credit support agreement between TFSC and TMCC
("TFSC Credit Support Agreement"), TFSC agreed to: 1) maintain 100% ownership
of TMCC; 2) cause TMCC and its subsidiaries to have a net worth of at least
U.S. $100,000; and 3) make sufficient funds available to TMCC so that TMCC
will be able to service the obligations arising out of its own bonds,
debentures, notes and other investment securities and commercial paper
(collectively, "TMCC Securities"). The agreement is not a guarantee by TFSC
of any TMCC Securities or other obligations of TMCC. The TMC Credit Support
Agreement and the TFSC Credit Support Agreement are governed by, and construed
in accordance with, the laws of Japan. TMCC Securities do not include the
securities issued by securitization trusts in connection with TMCC's
securitization programs.
Holders of TMCC Securities have the right to claim directly against TFSC and
TMC to perform their respective obligations under the credit support
agreements by making a written claim together with a declaration to the effect
that the holder will have recourse to the rights given under the credit
support agreement. If TFSC and/or TMC receives such a claim from any holder
of TMCC Securities, TFSC and/or TMC shall indemnify, without any further
action or formality, the holder against any loss or damage resulting from the
failure of TFSC and/or TMC to perform any of their respective obligations
under the credit support agreements. The holder of TMCC Securities who made
the claim may then enforce the indemnity directly against TFSC and/or TMC.
During fiscal 2001, TMCC and TFSC entered into a credit support fee agreement
("Credit Support Fee Agreement"). The Credit Support Fee Agreement requires
TMCC to pay to TFSC a semi-annual fee equal to 0.05% per annum of the weighted
average outstanding amount of TMCC's Securities entitled to credit support.
TMC files periodic reports and other information with SEC, which can be read
and copied at the public reference facilities maintained by the SEC at 450
Fifth Street, N.W., Washington, D.C. 20549. Copies of such material may also
be obtained by mail from the Public Reference Section of the SEC, at 450 Fifth
Street, N.W., Room 1200, Washington, D.C. 20549 at prescribed rates. You may
obtain information about the Public Reference Room by calling the SEC at 1-
800-SEC-0330.
INSURANCE
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Toyota Motor Insurance Services, Inc. ("TMIS"), a wholly-owned subsidiary of
TMCC, conducts an insurance agency brokerage business in the U.S. The
principal activities of TMIS and its wholly-owned insurance company
subsidiaries include marketing, underwriting, and claims administration
related to covering certain risks of Toyota, Lexus, and affiliated vehicle
dealers and their customers. TMIS also provides coverage and related
administrative services to certain affiliates.
-8-
The primary business of TMIS consists of issuing vehicle service agreements
("VSA") and guaranteed auto protection agreements sold to customers by or
through Toyota and Lexus vehicle dealers, and certain other domestic or import
vehicle dealers. Substantially all of the business conducted by TMIS is tied
to the sale of vehicles by related Toyota and Lexus vehicle dealers and
certain other domestic or import vehicle dealers. In addition, TMIS obtains a
significant amount of VSA business through providing limited warranty coverage
to TMS on pre-owned vehicles. Changes in the volume of vehicle sales, changes
in vehicle dealers' utilization of programs offered by TMIS, or changes in the
level of coverage purchased by TMS, could materially impact the level of TMIS
operations. Pretax income from insurance operations contributed 21%, 16%, 41%
and 22% to total income before income taxes and cumulative effect of change in
accounting principle for fiscal 2003, 2002, the six months ended March 2001,
and fiscal 2002, respectively.
COMPETITION
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The Company's primary competitors for retail leasing and financing are
commercial banks, savings and loan associations, credit unions, finance
companies and other captive automobile finance companies. Commercial banks
and other captive automobile finance companies are the Company's primary
competitors for wholesale financing and other dealer financing. Competition
for the principal products and services provided through the insurance
operations is primarily from national and regional independent service
contract providers.
REGULATORY ENVIRONMENT
- ----------------------
The finance and insurance operations of the Company are regulated under both
federal and state law. A majority of states have enacted legislation
establishing licensing requirements to conduct retail and other finance and
insurance activities. Most states also impose limits on the maximum rate of
finance charges. In certain states, the margin between the present statutory
maximum interest rates and borrowing costs is sufficiently narrow that, in
periods of rapidly increasing or high interest rates, there could be an
adverse effect on the Company's operations in these states if the Company were
unable to pass on increased interest costs to its customers. In addition,
state laws differ as to whether anyone suffering injury to person or property
involving a leased vehicle may bring an action against the owner of the
vehicle merely by virtue of that ownership. To the extent that applicable
state law permits such an action, the Company may be subject to liability to
such an injured party. However, the laws of most states either do not permit
such suits or limit the lessor's liability to the amount of any liability
insurance that the lessee was required under applicable law to maintain (or,
in some states, the lessor was permitted to maintain), but failed to maintain.
The Company's lease contracts contain provisions requiring the lessees to
maintain levels of insurance satisfying applicable state law, and the Company
maintains certain levels of contingent liability insurance for protection from
catastrophic claims. TMCC monitors ongoing insurance compliance only in
certain vicarious liability states and not all states. The Company encounters
higher risk of loss if the customers fail to maintain the required insurance
coverage.
The Company's operations are also subject to regulation under federal and state
consumer protection and privacy statutes. The Company continually reviews its
operations for compliance with applicable laws. Future administrative rulings,
judicial decisions and legislation may require modification of the Company's
business practices and documentation.
-9-
EMPLOYEE RELATIONS
- ------------------
At April 30, 2003, the Company had approximately 2,700 full-time employees. The
Company considers its employee relations to be satisfactory.
SEGMENT INFORMATION
- -------------------
Financial information regarding industry segments is set forth in Note 17 -
Segment Information of the Notes to Consolidated Financial Statements.
ITEM 2. PROPERTIES.
The Company's finance and insurance operations are headquartered in Torrance,
California. The Company plans to relocate to a new headquarters location in
the TMS headquarters complex, also in Torrance, California, in fiscal year
2004.
During fiscal 2003, the Company completed the physical restructuring of its
field operations in the U.S. Field operations for both finance and insurance
are now located in three regional customer service centers ("CSC"), three
regional management offices and 30 dealer sales and service offices ("DSSO") in
cities throughout the U. S. Two of the DSSOs share premises with the regional
customer services centers. Two of the regional management offices share
premises with DSSO offices. The Central region CSC is located in Cedar
Rapids, Iowa. The Western region CSC is located in Chandler, Arizona. The
Eastern region CSC is located in Owings Mills, Maryland. The Company also has
offices in the Commonwealth of Puerto Rico, Venezuela and Mexico. The office in
Mexico is shared with a TMS subsidiary. All premises are occupied under lease.
ITEM 3. LEGAL PROCEEDINGS.
Various legal actions, governmental proceedings and other claims are pending or
may be instituted or asserted in the future against the Company and its
subsidiaries with respect to matters arising from the ordinary course of
business. Certain of these actions are or purport to be class action suits,
seeking sizeable damages and/or changes in the Company's business operations,
policies and practices. Certain of these actions are similar to suits which
have been filed against other financial institutions and captive finance
companies. Management and internal and external counsel perform periodic
reviews of pending claims and actions to determine the probability of adverse
verdicts and resulting amounts of liability. The amounts of liability on
pending claims and actions as of March 31, 2003 were not determinable; however,
in the opinion of management, the ultimate liability resulting therefrom should
not have a material adverse effect on the Company's consolidated financial
position or results of operations. The foregoing is a forward looking
statement within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Act of 1934, as amended, which
represents the Company's expectations and beliefs concerning future events.
The Company cautions that its discussion of legal proceedings is further
qualified by important factors that could cause actual results to differ
materially from those in the forward looking statement, including but not
limited to the discovery of facts not presently known to the Company or
determinations by judges, juries or other finders of fact which do not accord
with the Company's evaluation of the possible liability from existing
litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
-10-
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
TMCC is a wholly-owned subsidiary of TFSA and, accordingly, all shares of the
Company's stock are owned by TFSA. There is no market for TMCC's stock.
Dividends are declared and paid by the Company as determined by its Board of
Directors. During fiscal 2003, no dividends were declared or paid. During
fiscal 2002, the Company's Board of Directors declared and paid a cash
dividend of $4 million. No dividends had previously been declared or paid.
-11-
ITEM 6. SELECTED FINANCIAL DATA.
Years Six Months Years
Ended Ended Ended
March 31, March 31, September 30,
----------------- --------- ----------------------------
2003 2002 2001 2000 1999 1998
------ ------ --------- ------ ------ ------
(Dollars in Millions)
INCOME STATEMENT DATA
Financing Revenues:
Leasing.........................$ 2,522 $ 2,479 $ 1,246 $ 2,402 $ 2,397 $ 2,595
Retail financing................ 1,136 917 390 768 645 531
Wholesale and other
dealer financing............. 172 186 124 182 123 114
------ ------ ------ ------ ------ ------
Total financing revenues........ 3,830 3,582 1,760 3,352 3,165 3,240
Depreciation on leases.......... 1,626 1,580 753 1,440 1,664 1,681
Interest expense................ 832 1,030 726 1,289 940 994
Derivative fair value
adjustments.................. 335 (38) 23 - - -
------ ------ ------ ------ ------ ------
Net financing revenues.......... 1,037 1,010 258 623 561 565
Insurance premiums earned and
contract revenues............ 168 155 68 138 122 112
Investment and other income..... 212 136 105 25 69 79
------ ------ ------ ------ ------ ------
Net financing revenues
and other revenues........... 1,417 1,301 431 786 752 756
------ ------ ------ ------ ------ ------
Expenses:
Operating and administrative.... 540 529 236 400 376 323
Losses related to Argentine
Investment................... 9 31 - - - -
Provision for credit losses..... 604 263 89 135 83 127
Insurance losses and loss
adjustment expenses.......... 87 76 35 81 63 55
------ ------ ------ ------ ------ ------
Total expenses.................. 1,240 899 360 616 522 505
------ ------ ------ ------ ------ ------
Income before equity in net
loss of subsidiary, provision
for income taxes and
cumulative effect of change
in accounting principle...... 177 402 71 170 230 251
Equity in net loss of
subsidiary................... - - - 1 - -
Provision for income taxes...... 67 159 27 65 98 107
------ ------ ------ ------ ------ ------
Income before cumulative effect
of change in accounting
principle..................... 110 243 44 104 132 144
Cumulative effect of change in
accounting principle, net of
tax benefits.................. - - (2) - - -
------ ------ ------ ------ ------ ------
Net Income......................$ 110 $ 243 $ 42 $ 104 $ 132 $ 144
====== ====== ====== ====== ====== ======
-12-
March 31, September 30,
---------------------------- ----------------------------
2003 2002 2001 2000 1999 1998
-------- -------- -------- -------- -------- --------
(Dollars in Millions)
BALANCE SHEET DATA
Finance receivables, net.. $ 26,477 $ 23,477 $ 19,216 $ 18,168 $ 13,856 $ 11,521
Investments in operating
leases, net............. $ 8,017 $ 7,631 $ 7,409 $ 7,964 $ 8,605 $ 9,765
Total assets.............. $ 39,233 $ 34,260 $ 29,214 $ 28,036 $ 24,578 $ 23,225
Notes and loans payable... $ 32,099 $ 27,026 $ 22,194 $ 21,098 $ 18,565 $ 17,597
Capital stock............. $ 915 $ 915 $ 915 $ 915 $ 915 $ 915
Retained earnings......... $ 1,930 $ 1,820 $ 1,581 $ 1,539 $ 1,435 $ 1,303
As of/for the
--------------------------------------------------------------
Years Six Months Years
Ended Ended Ended
March 31, March 31, September 30,
------------------ ---------- ---------------------------
2003 2002 2001 2000 1999 1998
------ ------ ---------- ------ ------ ------
(Dollars in Millions)
KEY FINANCIAL DATA
Ratio of earnings to
fixed charges........... 1.21 1.39 1.10 1.13 1.24 1.25
Debt to Equity............. 11.21 9.82 8.83 8.53 7.85 7.89
Return on Assets........... .30% .77% .15% .40% .55% .67%
Return on Equity........... 3.92% 9.23% 1.68% 4.30% 5.74% 6.68%
Allowance for credit
losses as a percent
of gross earning
assets ............. 1.50% .90% .85% .87% .90% 1.02%
Net credit losses as a
percent of average
earning assets .99% .59% .44% .39% .40% .51%
Over-60 day delinquencies..
as a percentage of gross
earning assets ..... .56% .71% .26% .25% .17% .15%
- ---------------------------
Delinquency and charge-off ratios typically fluctuate over time as a portfolio matures. The
information in the preceding table has not been adjusted to eliminate the effect of the growth of
the Company's portfolio.
For purposes of this table, "earning assets" include earning assets and repossessed
collateral.
-13-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
The Company has identified the policies below as critical to the Company's
business operations and the understanding of the Company's results of
operations. The impact and any associated risks related to these policies on
the Company's business operations are discussed throughout Management's
Discussion and Analysis of Financial Condition and Results of Operations
("MD&A") where such policies affect reported and expected financial results.
The evaluation of the factors used in determining each of the Company's
critical accounting policies involves significant assumptions, complex
analysis, and management judgment. Changes in the evaluation of these factors
may significantly impact the consolidated financial statements. Different
assumptions or changes in economic circumstances could result in additional
changes to the determination of the allowance for credit losses, the
determination of impairment of residual values, the valuation of the Company's
retained interests in securitizations and derivatives, and its results of
operations and financial condition.
Determination of the Allowance for Credit Losses
- ------------------------------------------------
The Company maintains an allowance for credit losses to cover probable losses
on its owned portfolio resulting from the failure of customers to make
required payments. The Company's owned portfolio includes securitized
receivables that do not qualify for sale treatment under Statement of
Financial Accounting Standards ("SFAS") No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities" ("SFAS 140").
The allowance is evaluated at least quarterly, considering a variety of
factors and assumptions to determine whether reserves are considered adequate
to cover probable losses.
Evaluation of the appropriateness of the allowance is based on several factors
and assumptions. These factors and assumptions include: (1) segmentation of
loan pools based on common loan and/or risk characteristics;
(2) identification and interpretation of various portfolio and economic
indicators such as unemployment and personal bankruptcy rates that management
believes are key to estimating expected credit losses; and (3) consideration
of historical delinquency and loss analysis and trends. Additionally,
management modifies its evaluation as the assumptions in the underlying
analyses and the credit environment change. The estimate of expected credit
losses is based upon information available at the reporting date.
In analyzing the allowance for credit losses, management also reviews trends
it considers systemic in nature. These systemic trends include, but are not
limited to, changes in economic conditions, used vehicle prices, and consumer
behavior. In addition, management reviews certain trends specific to the
Company such as asset growth, the Company's field restructuring, tiered/risk
based pricing, and longer term financing. Management monitors changes in
these factors and takes them into consideration in the evaluation of the
allowance for credit losses.
For evaluation purposes, exposures to credit losses are first segmented into
the two primary categories of "consumer" and "dealer". The Company's consumer
portfolio consists of smaller balance homogeneous financing contracts. The
consumer portfolio is evaluated using statistical and other forecasting
methodologies, such as net flow rate analysis, credit risk grade/tier
segmentation analysis, time series regression analysis, and vintage analysis.
-14-
Loans related to wholesale and other dealer financing are subdivided into
loan-risk pools, which are determined based on the risk characteristics of the
loans (i.e. secured, unsecured, syndicated, etc.) and/or a proprietary
internal risk rating process, or by reference to third party risk rating
sources. Estimated loss percentages are applied to these loan-risk pools to
arrive at estimated losses. In addition, field operations management is
consulted each quarter to determine if there are any specific loans that are
considered impaired. If any such loans are identified, specific reserves are
established, as appropriate, and the loan is removed from the loan-risk pool
and monitored separately.
Analyzing the exposure to credit losses involves a high degree of judgment.
As a result, actual losses could be significantly different than expected
losses. The allowance established for expected credit losses at March 31,
2003 is considered by management to be appropriate to cover probable losses.
Collection activity on delinquent accounts is terminated when it has been
determined that payments due will not be received and the related collateral
is either repossessed and sold or cannot be recovered. Any shortfalls between
proceeds received and the amounts due from customers are charged against the
allowance. Any recoveries are credited to the allowance. The allowance
related to the Company's earning assets is included in finance receivables,
net and investment in operating leases, net in the Consolidated Balance Sheet.
The related provision expense is included in the provision for credit losses
in the Consolidated Statement of Income.
Determination of Impairment of Residual Values
- ----------------------------------------------
The Company has a substantial vehicle lease portfolio. The Company is exposed
to risk of loss on the disposition of vehicles at lease maturity to the extent
that net disposition proceeds are not sufficient to cover the carrying value
of leased assets. At origination, the contractual residual values associated
with leased vehicles represent the estimated market value of the assets at
lease maturity. Generally accepted accounting principles ("GAAP") require
that if the value of the residual declines and such decline is considered
other than temporary, the residual is written down to its estimated net
realizable value through an impairment charge in the year such determination
is made.
The Company performs periodic evaluations of the carrying value of leased
assets to determine if impairment of residual values has occurred. Factors
considered in this evaluation include projected vehicle return rates,
historical trends, market information on new and used vehicle sales, and
general economic conditions. In accordance with GAAP, adjustments are made to
the carrying value of leased assets when management concludes that the decline
in residual value is other than temporary. Impairment charges are included in
depreciation expense in the Consolidated Statement of Income.
Analyzing the carrying value of leased assets involves a high degree of
judgment. As a result, actual losses related to residual value impairment
could be significantly different than expected losses. Management believes
that the net carrying values of leased assets at March 31, 2003 are
reasonable.
-15-
Sale of Receivables and Valuation of Retained Interests
- -------------------------------------------------------
TMCC's securitization transactions are completed using qualified special
purpose entities ("QSPE") with the exception of one transaction in fiscal 2002
discussed below. As such, the Company achieves sale accounting treatment
under the provisions of SFAS 140. The securitization transaction executed in
September 2001, while similar in all material respects to those securitization
transactions described above, was structured and accounted for as a
collateralized borrowing. For accounting purposes, the finance receivables
and debt issued by the related trust remain in the Company's Consolidated
Balance Sheet although the assets of the related trust are not available to
TMCC's creditors.
Gains or losses on finance receivables sold are recognized in the period in
which the sale occurs and are accounted for in accordance with SFAS 140. The
recorded gains or losses on assets sold depend on the carrying amount and the
fair value of the assets at the sale date. The carrying amount is allocated
between the assets sold and the subordinated retained interests based on their
relative fair values at the sale date. Gains or losses on assets sold are
included in investment and other income in the Consolidated Statement of
Income.
The Company retains interests in the securitizations in the form of senior and
subordinated interests, which are included in investments in marketable
securities and other assets in the Consolidated Balance Sheet. Senior
interests in the securitizations represent purchased senior securities.
Subordinated interests include interest only strips, subordinated securities,
and reserve funds which provide credit enhancement to the senior securities in
the Company's securitization transactions.
The subordinated retained interests are not considered to have a readily
available market value. Therefore, the fair value of the retained interests
is calculated by discounting expected cash flows using management's estimates
and other key economic assumptions and is accounted for in accordance with the
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115").
The key economic assumptions used in the calculation of the initial gain or
loss on assets sold and the subsequent valuations of the retained interests
include the market interest rate environment, severity and rate of credit
losses, and the prepayment speed of the receivables. Discount rates applied
to the retained interests at the sale date are based on current market rates
for an investment with a similar term and risk. Management estimates the
credit loss rate based on a number of factors including vehicle contract mix,
loan credit scoring, and age of contracts sold. To determine the prepayment
assumption used, management considers historical prepayment speeds of
outstanding securitization transactions and the owned portfolio, the current
interest rate environment, and economic conditions. All key assumptions used
in the valuation of the retained interests are reviewed quarterly and are
revised as deemed appropriate.
The Company recognizes income from the retained interests over the life of the
underlying retained interests using the effective yield method. The yield
represents the excess of all forecasted cash flows over the initial amount
recorded as the retained interests at the sale date. As adjustments to
forecasted cash flows are made based upon market conditions, the Company
adjusts the rate at which income is earned prospectively. If forecasted
future cash flows result in an other-than temporary decline in the fair value
below the carrying amount, an impairment is recognized and is included in
investment and other income in the Consolidated Statement of Income.
Otherwise, any difference in the carrying amount and the fair value of the
retained interests is recognized as an unrealized gain or loss, net of income
taxes, and is included in accumulated other comprehensive income in the
Consolidated Balance Sheet.
-16-
Derivatives and Hedging Activities
- ----------------------------------
The Company manages its exposure to market risks such as interest rate and
foreign exchange risks using derivative instruments. These instruments include
interest rate swaps, cross currency interest rate swaps, and option-based
products such as interest rate caps. Derivative instruments, while useful in
managing interest rate and foreign currency risks, involve an element of
counterparty credit risk which is the possibility that a counterparty may
default. Market, interest rate, foreign exchange and counterparty credit risks
are discussed further in Item 7A, "Quantitative and Qualitative Disclosures
about Market Risk".
Fair-Value Hedges
- -----------------
The Company enters into interest rate swap and cross currency interest rate
swap agreements to convert its fixed-rate debt to variable-rate U.S. dollar
debt. The currency exposure for all foreign currency debt is hedged at
issuance, using cross currency interest rate swaps that convert fixed-rate
non-U.S. dollar debt to variable-rate U.S. dollar denominated payments. Such
derivatives are linked to specific liabilities at inception and initially
qualify for hedge accounting treatment under Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (adopted in fiscal 2001) and Statement of Financial Accounting
Standards No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities - an amendment of FASB Statement No. 133" ("SFAS 133/138").
Non-designated Derivatives
- --------------------------
The Company's primary market risk exposure is interest rate risk, in
particular U.S dollar London Interbank Offered Rate ("LIBOR"). Interest rate
risk results from differences in the re-pricing characteristics of the
Company's assets and liabilities. Interest rate risk exposure is managed on a
portfolio basis using derivatives such as interest rate swaps and option-based
products such as interest rate caps ("non-designated derivatives"). Since
these derivatives are not linked to specific assets or liabilities, they do
not qualify for hedge accounting treatment under SFAS 133/138.
Accounting Treatment
- --------------------
In accordance with SFAS 133/138 the Company records derivative instruments as
assets or liabilities on the Consolidated Balance Sheet, measured at fair
value. Changes in the fair value of derivative instruments and the
ineffective portion of designated and effective fair value hedge relationships
are recognized and reported as derivative fair value adjustments in the
Consolidated Statement of Income. When the Company elects not to designate a
derivative instrument and hedged item as a fair value hedge at inception, or
the relationship does not qualify for fair value hedge accounting treatment
under SFAS 133/138, the full amount of changes in the fair value of the
derivative instrument will be recognized in the consolidated financial
statements. In addition, the Company reviews the effectiveness of its hedging
relationships quarterly to determine whether the relationships have been, and
will continue to be, effective in offsetting changes in the fair value of
designated hedged items. If hedge accounting is discontinued due to
ineffectiveness, the Company will continue to carry the derivative instrument
on the Consolidated Balance Sheet at its fair value. In addition, the Company
will cease to adjust the hedged item for changes in fair value and amortize
the cumulative fair value adjustments recognized in prior periods over the
remaining hedged items' term.
-17-
BASIS OF PRESENTATION
- ---------------------
In view of the change in the Company's fiscal year from September 30 to March
31 initially effective March 31, 2001, MD&A will:
- compare the audited results of operations for fiscal 2003 to the audited
results of operations for fiscal 2002; and
- compare the audited results of operations for fiscal 2002 to the
proforma results of operations for the twelve months ended March 2001.
The use of proforma results of operations provides meaningful comparative
analysis. Such proforma results of operations are appropriately noted.
EARNING ASSETS AND CONTRACT VOLUME
- ----------------------------------
Net Earning Assets
- ------------------
The composition of the Company's net earning assets as of the balance sheet
dates reported is summarized below:
March 31,
----------------------------
2003 2002 2001
-------- -------- --------
(Dollars in Millions)
Vehicle lease earning assets,
Investment in operating leases, net.... $ 7,679 $ 7,215 $ 6,994
Finance leases, net .................... 4,997 6,328 6,424
-------- -------- --------
Total vehicle lease earning assets....... 12,676 13,543 13,418
Vehicle retail finance receivables, net.. 15,873 13,409 9,030
Vehicle wholesale and other financing 6,407 4,429 4,392
Allowance for credit losses related to...
earning assets...................... (462) (273) (215)
-------- -------- --------
Total net earning assets ................ $ 34,494 $ 31,108 $ 26,625
======== ======== ========
- ----------------------
For purposes of this table, vehicle wholesale and other financing includes wholesale financing,
real estate loans, working capital loans, revolving credit lines, and industrial equipment
financing.
Consists of allowance to cover probable losses on the Company's owned portfolio.
-18-
March 31, 2003 Compared to March 31, 2002
- -----------------------------------------
Net earning assets increased $3.4 billion or 11% due to higher levels of both
retail and wholesale earning assets partially offset by a decrease in lease
earning assets.
Vehicle retail finance receivables, net increased $2.5 billion or 18% due to
higher volume reflecting the increased use of marketing incentives and
increased sales of Toyota and Lexus vehicles and increased TMCC market share.
Wholesale and other financing increased $2.0 billion or 45% due to both an
increase in the number of dealers receiving wholesale financing and an
increase in total units financed.
Vehicle lease earning assets decreased $868 million or 6% primarily due to a
general shift in programs sponsored by TMS from lease to retail as well as an
industry-wide shift away from leasing.
In addition to the overall decrease in vehicle lease earning assets, the
composition of the vehicle lease portfolio has shifted toward an increasing
mix of operating leases relative to finance lease receivables. Operating
leases comprised 61%, 53% and 52% of the total lease portfolio at March 31,
2003, 2002, and 2001, respectively. Through June 2001 the Company insured
residual values for all leases purchased by the Titling Trust, enabling leases
acquired by the Titling Trust to be classified as finance lease receivables
rather than operating lease assets and, thus, qualify for securitization. The
Company discontinued purchasing residual value insurance effective July 2001.
The allowance for credit losses increased $189 million or 69% due to a
significant increase in delinquency and charge-off rates. Refer to the
"Provision for Credit Losses" section of the MD&A for further discussion
regarding the Company's delinquency and charge-off experience.
March 31, 2002 Compared to March 31, 2001
- -----------------------------------------
The overall increase in earning assets can be attributed to a significant
increase in retail finance receivables.
Vehicle retail finance receivables, net increased $4.4 billion or 48% due to
increased levels of marketing incentives and TMS sponsored programs on new
vehicles and increased sales of Toyota and Lexus vehicles.
Wholesale and other financing increased $37 million or 1% due to increases in
the numbers of dealers receiving wholesale financing and in total units
financed.
Vehicle lease earning assets remained essentially level as a result of the
shift from leasing to retail financing.
The Company's allowance for credit losses increased $58 million or 27% due to
a significant increase in delinquency and charge-off rates. Refer to the
"Provision for Credit Losses" section of the MD&A for further discussion
regarding the Company's delinquency and charge-off experience.
-19-
Contract Volume
- ---------------
The composition of the Company's contract volume and market share for fiscal
2003, 2002, and the twelve months ended March 2001 is summarized below:
Years/Twelve months Ended
March 31,
------------------------------------
2003 2002 2001
-------- -------- --------
Total new contract volume:
Vehicle retail.................... 690,000 643,000 432,000
Vehicle lease..................... 167,000 192,000 216,000
-------- -------- --------
Total................................ 857,000 835,000 648,000
======== ======== ========
TMS sponsored contract volume:
Vehicle retail.................... 204,000 149,000 59,000
Vehicle lease..................... 43,000 33,000 58,000
-------- -------- --------
Total................................ 247,000 182,000 117,000
======== ======== ========
Used contract volume:
Vehicle retail.................... 214,000 224,000 160,000
Vehicle lease..................... 3,000 5,000 6,000
-------- -------- --------
Total................................ 217,000 229,000 166,000
======== ======== ========
Market share :
Vehicle retail.................... 33.3% 29.9% 20.8%
Vehicle lease..................... 11.7% 13.4% 16.3%
-------- -------- --------
Total................................ 45.0% 43.3% 37.1%
======== ======== ========
- ----------------------
Pro Forma
Market share represents penetration of Toyota and Lexus new vehicle financed sales to
consumers, excluding fleet sales and sales by a private Toyota distributor.
Fiscal 2003 Compared to Fiscal 2002
- -----------------------------------
Total new contract volume increased a modest 2% however, the mix of retail and
lease contract volume changed significantly. Retail contract volume increased
7% reflecting the continued use of incentives on new vehicles, and increases
in retail financing programs sponsored by TMS.
Vehicle lease contract volume decreased 13% reflecting a general shift in
programs sponsored by TMS from lease to retail as well as an industry-wide
shift away from leasing.
Total used contract volume also decreased 5% as the increased use of
incentives on new vehicles reduced the demand for financing related to used
vehicles.
Total market share increased 4% during fiscal 2003 as the increased retail
volume resulting from the continued use of incentives on new vehicles more
than offset the overall decline in new vehicle lease contract volume.
-20-
Fiscal 2002 Compared to the Twelve Months Ended March 2001
- ----------------------------------------------------------
Vehicle retail contract volume increased 49% while vehicle lease contract
volume decreased 11%. The significant growth in retail contract volume was
attributable in part to an industry wide emphasis on retail incentive programs
following the events of September 11, 2001, which had the effect of increasing
overall vehicle sales activity. Additionally during fiscal 2002, TMS' program
sponsorship emphasis shifted toward retail contracts and away from lease
contracts. Industry wide emphasis on retail financing along with the TMS
shift toward retail contract sponsorship are considered the primary reasons
for both the significant increase in retail contract volume and the decline in
lease contract volume.
Total used vehicle contract volume increased 38% due to an increased supply of
used cars returned to dealers in the form of trade-ins due to recent new model
incentives, a large supply of used vehicles due to the volume of vehicles
coming off-lease and a shift from leasing to retail financing.
Total market share increased 17% due to significantly higher retail volume
resulting from the increased use of incentives on new vehicles as discussed
above.
NET INCOME
- ----------
The Company's earnings are primarily impacted by the level of average earning
assets, earning asset yields, outstanding borrowings and the related borrowing
cost and the impact of credit losses and impairment of residual values. The
following table summarizes the Company's net income by business segment for
fiscal 2003, 2002, and the twelve months ended March 2001:
Years Ended
March 31,
-----------------------------------
2003 2002 2001
------ ------ --------
(Dollars in Millions)
Net income:
Financing operations............. $ 85 $ 199 $ 51
Insurance operations............. 25 44 38
------ ------ ------
Total net income.............. 110 $ 243 $ 89
====== ====== ======
- ----------------------
Pro Forma
Fiscal 2003 Compared to Fiscal 2002
- -----------------------------------
Net income from financing operations decreased $114 million, or 57% primarily
due to a $201 million (net of income tax) unfavorable derivative fair value
adjustment calculated in accordance with SFAS 133/138 resulting from a
significant reduction in market interest rates during fiscal 2003 ("Derivative
Adjustment"). Also contributing to the lower level of net income were
increases in the provision for credit losses and depreciation expense on
operating leases. These factors were partially offset by the combined effect
of lower interest expense, higher investment and other income, and higher
retail and lease finance revenue.
-21-
Net income from insurance operations decreased $19 million, or 43% primarily
due to the recognition of $25 million in impairment losses resulting from an
other-than-temporary decline in the fair value of certain investments. The
decrease is also partially attributable to higher claims expense resulting from
increased loss experience and a larger customer base. These factors were
partially offset by increased insurance premiums and contract revenues.
Fiscal 2002 Compared to the Twelve Months Ended March 2001
- ----------------------------------------------------------
Net income from financing operations increased $148 million, or 290% primarily
due to an increase in finance margin resulting from lower market interest
rates, higher average earning assets, and a favorable Derivative Adjustment.
This increase was partially offset by higher depreciation expense, higher net
credit losses, and increased operating and administrative expenses resulting
from the Company's field restructuring.
Net income from insurance operations increased $6 million, or 16%, for fiscal
2002 as compared to the twelve months ended March 2001 primarily due to
increased premium and contract revenue, partially offset by lower investment
income.
Net Income Excluding Derivative Adjustments
- -------------------------------------------
In accordance with SFAS 133/138, the effect of market interest rate movements
on portfolio-based derivative instruments and the ineffective portion of the
Company's fair value hedge relationships must be included in the Company's
financial results. Under Generally Accepted Accounting Principles, the effect
of market interest rate movements on the Company's related earning assets is
not included in the Company's financial results. Management believes that
including in the Company's financial results the effect of market interest
rate movements on its portfolio-based derivative instruments and the
ineffective portion of the Company's fair value hedges in accordance with SFAS
133/138, while not including any corresponding valuation adjustment related to
earning assets, does not provide a complete picture of the economics of the
Company's business and its operating performance. Therefore, the Company
reports financial results on a basis that includes, as well as excludes, the
Derivative Adjustment.
Management believes that providing a summary of net income excluding the
effects of the Derivative Adjustment provides useful information to investors
for the reasons explained above, and a more balanced representation of the
Company's operating results. Management uses this measure when analyzing its
core operating results.
Net income excluding the Derivative Adjustment is calculated as follows:
Years Ended
March 31,
----------------------------------
2003 2002 2001
------ ------ --------
(Dollars in Millions)
Net Income.......................... $ 110 $ 243 $ 89
Derivative Adjustment (net of
income tax)....................... 201 (25) 18
----- ----- -----
Net Income excluding Derivative
Adjustment (net of income tax).... $ 311 $ 218 $ 107
===== ===== =====
- ----------------------
Pro Forma
-22-
Fiscal 2003 Compared to Fiscal 2002
- -----------------------------------
Net income excluding the Derivative Adjustment (net of income tax) increased
$93 million or 43%. The increase is primarily due to the combined effect of
higher retail and lease finance revenue related to growth in earning assets,
lower interest expense, and higher investment and other income. These factors
were partially offset by increases in both the provision for credit losses and
depreciation expense on operating leases.
Fiscal 2002 Compared to the Twelve Months Ended March 2001
- ----------------------------------------------------------
Net income excluding the Derivative Adjustment (net of income tax) increased
$111 million or 104% primarily due to increased finance margin resulting from
lower market interest rates and higher financing revenues resulting from an
increased level of average earning assets. These factors were partially offset
by increases in depreciation expense, provision for credit losses, and
operating and administrative expenses.
TOTAL FINANCING REVENUES
- ------------------------
Years Ended
March 31,
-----------------------------------
2003 2002 2001
------ ------ --------
(Dollars in Millions)
Financing Revenues:
Leasing.......................... $2,522 $2,479 $2,466
Retail........................... 1,136 917 792
Wholesale and other dealer
Financing...................... 172 186 227
------ ------ ------
Total financing revenues........... $3,830 $3,582 $3,485
====== ====== ======
- ----------------------
Pro Forma
Fiscal 2003 Compared to Fiscal 2002
- -----------------------------------
Total financing revenues increased $248 million, or 7% due to the combined
effect of higher leasing and retail revenues slightly offset by lower
wholesale and other dealer financing revenues.
Leasing revenues increased $43 million or 2% due to increases in operating
lease assets, coupled with an increase in the average capitalized cost of
leased vehicles, partially offset by lower contract yields.
Retail financing revenues increased $219 million or 24% primarily due to
increases in vehicle retail finance receivables partially offset by a
reduction in overall portfolio yields.
Wholesale and other dealer financing revenues decreased $14 million or 8% as
the incremental revenue from growth in related receivables was more than
offset by lower overall portfolio yields.
-23-
Fiscal 2002 Compared to the Twelve Months Ended March 2001
- ----------------------------------------------------------
Total financing revenues increased $97 million, or 3%, as increases in leasing
and retail revenues more than offset the decline in wholesale and other dealer
financing revenues.
Leasing revenues remained essentially level consistent with the insignificant
change in the vehicle lease earning assets.
Retail revenues increased $125 million or 16% primarily due to an increase in
vehicle retail finance receivables and contract volume slightly offset by a
reduction in overall portfolio yields.
Wholesale and other dealer financing revenues decreased $41 million or 18%
primarily due to a reduction in overall portfolio yields significantly offset
by an increase in wholesale and other dealer financing receivables.
DEPRECIATION ON LEASES
- ----------------------
The following table sets forth the items included in the Company's
depreciation on leases for fiscal 2003, 2002, and the twelve months ended
March 2001:
Years Ended
March 31,
--------------------------------
2003 2002 2001
------ ------ --------
(Dollars in Millions)
Straight-line depreciation
on operating leases........... $1,319 $1,199 $1,241
Impairment charges to the
carrying value of leased
assets........................ 307 381 237
TMS support for certain
impairment charges............ - - (35)
------ ------ ------
Total depreciation on leases..... $1,626 $1,580 $1,443
====== ====== ======
- ----------------------
Pro Forma
Fiscal 2003 Compared to Fiscal 2002
- -----------------------------------
Total depreciation expense increased $46 million, or 3% due to higher
straight-line depreciation on operating leases partially offset by decreases
in impairment adjustments on leased assets. Straight-line depreciation
expense increased due to an increase in the average capitalized cost of leased
vehicles combined with decreases in the average contractual residual values at
origination. Depreciation on operating leases is based upon the difference
between capitalized cost and contractual residual value. Hence lower
contractual residual values at origination result in higher depreciation
expense.
-24-
The reduction in impairment charges was primarily due to a decline in the
number of outstanding lease vehicles in the Company's portfolio, partially
offset by an increase in projected average impairment per vehicle. The
increased impairment reflects the downward pressure on used vehicle prices
resulting from continued high levels of incentives on new vehicles, coupled
with continued economic weakness. The current level of incentives in the new
car market and resulting decline in used car prices is expected to continue
into fiscal 2004.
The Company has taken action to reduce the risk of residual value impairment
by developing strategies to increase dealer purchases of off-lease vehicles
and by expanding the marketing of off-lease vehicles through internet auctions
to maximize proceeds on vehicles sold.
Fiscal 2002 Compared to the Twelve Months Ended March 2001
- ----------------------------------------------------------
Total depreciation expense on operating leases increased $137 million or 10%
for fiscal 2002 compared to the twelve months ended March 2001. The increase
resulted from the combined effects of higher impairment charges offset by
lower straight-line depreciation.
Straight-line depreciation decreased as a result of a decline in average
outstanding operating lease assets. Purchasing residual value insurance for
leases acquired by the Titling Trust before July 2001 reduced the number of
outstanding operating lease assets in the portfolio.
Impairment charges increased $144 million or 61% due to an increased supply of
off-lease vehicles, increased return rates and higher impairment per unit. The
increased impairment reflects the downward pressure on used vehicle prices, a
weakened economy, competitive new vehicle pricing, and industry-wide record
levels of incentives on new vehicles.
Under an arrangement with TMS, the Company received $35 million in support for
impairment charges in June 2000.
Unguaranteed Residuals
- ----------------------
Total unguaranteed residual values subject to residual value risk included in
the Company's vehicle lease portfolio as of March 31, 2003, 2002 and 2001 were
approximately $7.2 billion, $7.1 billion and $6.9 billion, respectively. The
increases in total unguaranteed residual values over the last two fiscal
periods primarily resulted from the discontinuation of purchasing residual
value insurance for operating leases acquired by the Titling Trust beginning
in July 2001.
Vehicle Lease Return Rate
- -------------------------
Under circumstances where the market value of a leased vehicle at contract
maturity is less than its contractual residual value, there is a higher
probability that the vehicle will be returned to the Company. A higher rate
of vehicle returns exposes the Company to a higher risk of residual value
impairment.
The number of leased vehicles returned at contract maturity and sold by the
Company during a specified period as a percentage of the number of lease
contracts that as of their origination dates were scheduled to mature in the
same period ("return rate") was 50%, 55% and 51% for fiscal 2003, 2002 and the
twelve months ended March 2001, respectively.
-25-
INTEREST EXPENSE
- ----------------
Interest expense decreased $198 million, or 19% and $391 million, or 28% during
fiscal 2003 and 2002 as compared to the immediately preceding years due to a
general decrease in market interest rates, partially offset by increased
average outstanding debt used to fund growth in assets. Average outstanding
debt was $29 billion, $25 billion, and $22 billion at March 31, 2003, March 31,
2002, and March 31, 2001, respectively. The weighted average interest rates on
the Company's debt portfolio, including the effect of interest rate and cross
currency swap agreements, was 3.07%, 4.38%, and 6.66% for fiscal 2003, 2002,
and the twelve months ended March 2001, respectively.
DERIVATIVE FAIR VALUE ADJUSTMENT
- --------------------------------
Fiscal 2003 results
- -------------------
The $335 million unfavorable Derivative Adjustment recognized by the Company
in fiscal 2003 reflected a $331 million unfavorable adjustment to the fair
market value of the Company's non-designated derivatives. In accordance with
SFAS 133/138, these derivative transactions are not designated as hedges for
accounting purposes. As such, the full amount of changes in fair value are
recognized in the consolidated financial statements. The decrease in the fair
market value of the Company's non-designated derivatives was primarily due to
a significant reduction in market interest rates during fiscal 2003. The
remaining $4 million unfavorable adjustment related to the ineffective portion
of the Company's fair value hedges.
Fiscal 2002 results
- -------------------
The Company recognized a $38 million favorable Derivative Adjustment during
fiscal 2002. The favorable Derivative Adjustment reflected a $43 million
favorable adjustment to the fair market value of the Company's non-designated
derivatives. The increase in the fair market value of non-designated
derivatives was primarily due to higher market interest rates. The remaining
$5 million unfavorable adjustment related to the ineffective portion of the
Company's fair value hedges.
INSURANCE PREMIUMS EARNED AND CONTRACT REVENUES
- -----------------------------------------------
Insurance premiums earned and contract revenues recognized from insurance
operations increased $13 million, or 8% from $155 million for fiscal 2002 to
$168 million for fiscal 2003 primarily due to increased contract volume and an
increase in total agreements in force. Insurance premiums earned and contract
revenues recognized from insurance operations increased $17 million, or 12%,
from $138 million for the twelve months ended March 2001 to $155 million for
fiscal 2002 primarily due to increased contract volume and a higher level of
agreements in force.
-26-
INVESTMENT AND OTHER INCOME
- ---------------------------
The following table summarizes the Company's investment and other income for
fiscal 2003, 2002, and the twelve months ended March 2001:
Years Ended
March 31,
-------------------------------------
2003 2002 2001
-------- -------- ---------
(Dollars in Millions)
Investment and servicing fee income. $ 95 $ 94 $ 111
Gains on assets sold................ 130 81 52
Loss on impairment of
retained interests.............. (20) (70) (85)
------ ------ ------
Investment income-securitizations 205 105 78
Investment income-marketable
securities...................... $ 6 $ 28 $ 38
Other income........................ 1 3 2
------ ------ ------
Investment and other income...... $ 212 $ 136 $ 118
====== ====== ======
- ----------------------
Pro Forma
Investment Income-Securitizations
- ---------------------------------
Investment and Servicing Fee Income
- -----------------------------------
Investment and servicing fee income consists of investment income earned on
retained interests and servicing fee income related to the securitizations that
qualified as sales for accounting purposes. TMCC services its securitized
receivables and earns a contractual servicing fee of 1% per annum on the total
monthly outstanding principal balance of the related securitized receivables.
Investment and servicing fee income remained fairly consistent for fiscal 2003
as compared to fiscal 2002. The decrease in investment and servicing fee
income for fiscal 2002, as compared to the twelve months ended March 2001, is
primarily due to lower investment income earned on funds held in reserve
accounts related to lease securitization transactions that matured in fiscal
2002.
Gains on Assets Sold
- --------------------
The securitization and sale of assets generally accelerates the recognition of
income on retail contracts, net of servicing fees and other related deferrals,
into the period the assets are sold. Numerous factors can affect the timing
and amounts of gain recognition, such as the type and amount of assets sold,
market interest rates at the time of the sale, the structure of the sale, and
key economic assumptions used.
-27-
The Company recognized gains on assets sold totaling $130 million for fiscal
2003, an increase of $49 million as compared to fiscal 2002. The increase in
recognized gains reflects decreases in market interest rates which increased
the value of the interest-only strips retained by the Company and resulted in
higher gains, and an increased use of securitization transactions that
qualified as sales under SFAS 140. The Company entered into three
securitization transactions totaling approximately $4.6 billion that qualified
as sales under SFAS 140 during fiscal 2003 as compared with two such
transactions totaling approximately $3.1 billion during fiscal 2002.
The Company recognized gains on assets sold totaling $81 million for fiscal
2002, an increase of $29 million as compared to the twelve months ended March
2001. The increase reflects decreases in market interest rates which increased
the value of the interest-only strips retained by the Company.
Loss on Impairment of Retained Interests
- ----------------------------------------
The Company recognized $20 million in impairment losses related to the
retained interests in the securitized retail finance receivables during fiscal
2003 as compared with $70 million and $85 million in impairment losses
recognized in fiscal 2002 and the twelve months ended March 2001, respectively,
related to retained interests in securitized retail and lease finance
receivables. The impairment charges recognized in fiscal 2003 resulted from
increased credit losses on securitized receivables. Increased credit losses
were attributable to factors similar to those affecting the Company's owned
portfolio, as discussed in the "Provision for Credit Losses" section of MD&A.
The impairment charges recognized in fiscal 2002 and the twelve months ended
March 2001 resulted from increased credit and residual value impairment on
securitized retail and lease receivables attributable to factors similar to
those affecting the Company's owned portfolio.
Investment Income-Marketable Securities
- ---------------------------------------
The decrease in investment income-marketable securities for fiscal 2003, as
compared to fiscal 2002, is primarily due to a $25 million impairment loss
related to the Company's investment portfolio, resulting from an other-than-
temporary decline in the fair value of investments below cost in accordance
with SFAS 115 and Staff Accounting Bulletins No. 59, "Accounting for
Noncurrent Marketable Equity Securities". Of the total, $22 million was
recognized in the fourth quarter of fiscal 2003 related to investments in
certain equity indexed mutual funds. The impairment loss is included in
investment and other income in the Consolidated Statement of Income. The
Company did not recognize similar losses during fiscal 2002 or the twelve
months ended March 2001.
Investment income-marketable securities decreased during fiscal 2002 as
compared to the twelve months ended March 2001 as a result of decreased net
realized capital gains on sales of available-for-sale securities coupled with
decreased overall rates of return.
-28-
OPERATING AND ADMINISTRATIVE EXPENSES
- -------------------------------------
Operating and administrative expenses increased $11 million or 2% during fiscal
2003 as compared to fiscal 2002. The increase during fiscal 2003 reflects
additional costs incurred to support growth in the Company's business and its
international operations, partially offset by a decrease in restructuring
costs.
Operating and administrative expenses increased $86 million or 19% during
fiscal 2002 as compared to the twelve months ended March 2001. The increase
during fiscal 2002 reflects costs incurred primarily as a result of the
restructuring of the Company's field operations, technology-related projects,
and costs incurred to support the Company's growing customer base.
Included in operating and administrative expenses are charges allocated by TMS
for certain technological and administrative services provided to TMCC.
During fiscal 2003, 2002, and the twelve months ended March 2001, TMCC was
charged $63 million, $51 million, and $39 million, respectively, for services
provided in those periods.
Restructuring and Related Activities
- ------------------------------------
Operating and administrative expenses include costs incurred in connection with
the restructuring of the Company's field operations. The Company completed the
physical migration of resources related to the restructuring of its field
operations during fiscal 2003. Restructuring charges and costs recognized
during fiscal 2003, 2002, and the twelve months ended March 2001 were $10
million, $19 million, and $5 million, respectively. Fiscal 2003 charges
included $4 million for asset and facility costs and $6 million for other exit
costs. Fiscal 2002 charges included $9 million related to employee
separations, $3 million related to asset and facility costs, and $7 million
for other exit costs. Costs incurred during the twelve months ended March
2001 included primarily employee separation costs. The Company does not
expect to incur any additional restructuring costs.
During the field restructuring, the Company experienced an increase in
contractual delinquencies and frequency and severity of charge-offs. Refer to
the "Provision for Credit Losses" section of the MD&A for further discussion
regarding the Company's delinquency and charge-off experience.
-29-
LOSSES RELATED TO ARGENTINE INVESTMENT
- --------------------------------------
TMCC guaranteed TCA's offshore U.S. dollar bank loans in a principal amount
not to exceed $65 million. In 2001, the Argentine government imposed foreign
exchange controls restricting TCA's ability to send payments out of Argentina
to service its offshore debt. In 2002, the Argentine government established
re-denomination policies that adversely affected TCA's financial condition and
further limited its ability to fully satisfy its offshore U.S. dollar loans.
As a result, in fiscal 2002, TMCC established a $26 million reserve pursuant
to its guaranty of TCA's offshore outstanding debt. The reserve was increased
to $37 million at September 30, 2002.
During fiscal 2003, TMCC performed under its guarantees and repaid $35 million
of the then $37 million outstanding balance and accrued interest. TCA repaid
the remaining outstanding balance and accrued interest. As of March 31, 2003,
all of TMCC's guarantees of TCA's debt have been satisfied and the guarantees
are terminated.
TMCC has entered into a separate indemnity agreement with TCA. The indemnity
agreement and a subsequent letter agreement executed between TMCC and TCA
includes reimbursement provisions whereby TMCC is entitled to reimbursement
from TCA for the principal amount paid by TMCC to TCA's banks under the
guarantees, while the interest portion was forgiven. Though TMCC is entitled
to reimbursement of amounts paid under the guarantees, receipt of such
reimbursement is not certain as to amount or timing.
-30-
PROVISION FOR CREDIT LOSSES
- ---------------------------
The Company is exposed to credit risk on its owned portfolio which includes
securitized receivables that do not qualify for sale treatment under SFAS 140.
Credit risk is the risk that customers will not make required payments in
accordance with their contractual obligation to the Company. The Company's
level of credit losses is influenced primarily by two factors: the total
number of contracts that default ("frequency of occurrence") and loss per
occurrence ("loss severity"). The Company maintains an allowance for credit
losses to cover probable losses.
The following tables provide information related to the Company's credit loss
experience:
Years Ended
March 31,
----------------------------------
2003 2002 2001
------ ------ --------
(Dollars in Millions)
Allowance for credit losses
at beginning of period............... $ 283 $ 227 $ 214
Provision for credit losses............. 604 263 164
Charge-offs............................. (365) (190) (134)
Recoveries.............................. 35 20 19
Other adjustments....................... (31) (37) (36)
------- ------- -------
Allowance for credit losses
at end of period..................... $ 526 $ 283 $ 227
======= ======= =======
- --------------------
Pro Forma
March 31,
--------------------------------
2003 2002 2001
------ ------ --------
(Dollars in Millions)
Net credit losses as a percentage
of average earning assets .... 0.99% 0.59% 0.44%
Aggregate balances 60 or more days
past due .............................. $ 198 $ 224 $ 70
Over-60 day delinquencies as a percentage
of gross earning assets ....... 0.56% 0.71% 0.26%
Allowance for credit losses
as a percentage of gross
earning assets ................... 1.50% 0.90% 0.85%
- --------------------
Pro Forma
Delinquency and charge-off ratios typically fluctuate over time as a portfolio matures. The
information in the preceding table has not been adjusted to eliminate the effect of the growth of
the Company's portfolio.
For purposes of this table, "earning assets" include earning assets and repossessed
collateral.
-31-
Net Credit Losses and Delinquency Experience
- --------------------------------------------
The Company experienced a $160 million or 94% and $55 million or 48% increase
in net credit losses during fiscal 2003 and 2002, respectively, over the
immediately preceding periods. The changes reflect increases in both
frequency of occurrence and loss severity over the comparable prior periods.
The increases in credit losses are primarily attributable to the following:
- - The Company's field restructuring
- - Lower used vehicle prices
- - Continued economic weakness
- - Tiered/risk based pricing
- - Longer term financing
The physical restructuring of the Company's field operations began in fiscal
2001 and was completed in fiscal 2003. The restructuring activities during,
and following the completion of the physical restructuring disrupted normal
collection activities during fiscal 2002 and 2003. In an effort to reduce the
disruptive impact from the restructuring, the Company continues to review and
refine current processes and deploy additional resources and technology. The
Company's efforts to reduce the negative impact of the restructuring can be
seen in the reduction in contractual delinquencies from March 2002 to March
2003. The restructuring of field operations is expected to continue to
adversely affect delinquencies and credit losses at least through the first
half of fiscal 2004. Management believes that the continued impact of the
restructuring has been reasonably factored into the allowance for credit
losses.
Lower used vehicle prices also contributed to 29% and 19% increases in credit
loss severity during fiscal 2003 and 2002 over the immediately preceding
periods. The continuation of manufacturer incentives on new vehicles during
fiscal 2003 is considered to be a significant contributor to decreased used
vehicle prices. The decline in used vehicle prices is evidenced by the
decrease in the Manheim used vehicle value index from approximately 115 at
January 2002 to approximately 106 at January 2003. The current pressure on
used vehicle prices is expected to continue well into fiscal year 2004 and to
continue to have an adverse impact on the Company's financial results.
Continued economic weakness as reflected in increased unemployment and
personal bankruptcy filings in the U.S. has also contributed, in part, to the
Company's increased delinquencies and frequency of credit losses.
The increased frequency of delinquencies and credit losses can also be
attributed, in part, to increases in the volume of higher risk contracts in
connection with the tiered/risk based, retail and lease pricing program
launch, which was completed as of March 2001. The objective of this program
is to better match credit risk with contract rates charged to allow the
Company to purchase contracts with a wider range of credit risk levels.
Consistent with industry trends, the Company has experienced a general
increase in the average original contract term of retail and lease vehicle
contracts due to longer term financing. The average lengths of retail and
lease contracts originated during fiscal 2003, 2002, and the twelve months
ended March 2001 were 54.8 months, 54.4 months, and 52.8 months, respectively.
Historically, longer term contracts experience higher credit losses.
Although delinquency experience improved from March 2002 to March 2003,
management expects the factors discussed above to continue to adversely affect
the performance of the Company's retail and lease asset portfolios at least
through the first half of fiscal 2004.
-32-
INSURANCE LOSSES AND LOSS ADJUSTMENT EXPENSES
- ---------------------------------------------
Insurance losses and loss adjustment expenses represent losses incurred by the
Company's insurance operations. Losses incurred are a function of the number
of covered risks ("agreements in force"), the frequency and severity of claims
associated with the agreements in force, and the level of risk retained by the
insurance operations. Insurance losses include amounts accrued for reported
losses, losses incurred but not reported, and any related claim adjustment
expenses. Unpaid losses are included in other liabilities in the Consolidated
Balance Sheet.
An inherent assumption in the projection of future loss payments is that
historical loss patterns can be relied upon to reasonably predict loss
patterns on existing agreements in force. Ultimate loss payments may vary
from such estimates and the variances can be significant. Estimated
liabilities are reviewed regularly, and adjustments to such estimates are
reflected in the results of current operations. Management believes that
given the inherent variability of such estimates, the aggregate reserves are
within an acceptable range of reasonableness.
Insurance losses and loss adjustment expenses increased $11 million, or 15%,
for fiscal 2003 as compared to fiscal 2002. The increase is primarily due to
an increased number of agreements in force. Agreements in force increased
12%, for fiscal 2003 as compared to fiscal 2002. In addition, losses incurred
related to insuring dealer vehicle wholesale inventories also increased, due
to a decline in salvage recoveries in fiscal 2003 and an increase in the level
of risk retained by TMIS.
Insurance losses and loss adjustment expenses remained relatively level in
fiscal 2002 compared to the twelve months ending March 2001. Although the
overall number of agreements in force increased in fiscal 2002, the impact
from this growth on insurance losses and loss adjustment expenses was
essentially offset by a decline in losses incurred related to a now
discontinued commercial property and casualty program offering certain
coverages to Toyota and Lexus vehicle dealers.
TMIS anticipates losses to increase commensurate with the expected growth in
agreements in force and the related growth in premiums earned and contract
revenues. Additional losses are also expected on certain products where TMIS
has retained increased levels of risks.
-33-
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The objective of the Company's liquidity strategy is to ensure access to the
capital markets so as to meet obligations and other commitments on a timely and
cost-effective basis to support the growth in earning assets. Significant
reliance is placed on the Company's ability to obtain debt and securitization
funding in the capital markets in addition to funding provided by earning asset
liquidations and cash provided by operating activities. Debt issuances have
generally been in the form of commercial paper, medium-term notes ("MTNs"), and
bonds.
Commercial Paper
- ----------------
The Company issues commercial paper to meet short-term funding needs.
Commercial paper outstanding under the Company's commercial paper programs
ranged from approximately $4.7 billion to $6.8 billion during fiscal 2003, with
an average outstanding balance of $5.8 billion.
Unsecured Term Debt
- -------------------
Long-term funding requirements are met through the issuance of a variety of
debt securities underwritten in both the U.S. and international capital
markets. MTNs and bonds have provided the Company with significant sources of
funding. During fiscal 2003, the Company issued approximately $9.5 billion of
MTNs and bonds all of which had original maturities of one year or more. The
original maturities of all MTNs and bonds outstanding at March 31, 2003 ranged
from one year to ten years. As of March 31, 2003, the Company had total MTNs
and bonds outstanding of $26.7 billion, of which $11.0 billion was denominated
in foreign currencies.
The Company anticipates continued use of MTNs and bonds in both the U.S. and
international capital markets. To provide for the issuance of debt securities
in the U.S. capital market, the Company maintains a shelf registration with the
SEC under which approximately $7 billion was available for issuance at
April 30, 2003. Under the Company's euro MTN program, which provides for the
issuance of debt securities in the international capital market, the maximum
aggregate principal amount authorized to be outstanding at any time is
$16 billion, of which $939 million was available for issuance at April 30,
2003. The U.S. dollar and euro MTN programs may be expanded from time to time
to allow for the continued use of these sources of funding. In addition, the
Company may issue bonds in the U.S. and international capital markets that are
not issued under its MTN programs.
Securitization Funding
- ----------------------
TMCC is an active participant in the securitization market, primarily
securitizing retail finance receivables. TMCC's securitization programs allow
the Company to access an additional source of funding, further diversifying
its investor base to enhance its liquidity position. The outstanding balance
of securitized retail finance receivables which TMCC continues to service
totaled $6.7 billion and $5.7 billion at March 31, 2003 and 2002,
respectively.
For the past three fiscal years, securitization transactions averaged 29% of
the Company's total funding. A reduction or termination of TMCC's
securitization activities would cause the Company to seek funding, currently
obtained through the securitization markets, from debt funding markets.
Management does not anticipate any changes in the Company's ability to access
the securization market in the foreseeable future.
-34-
TMCC's securitization transactions are completed using QSPEs with the
exception of one transaction in fiscal 2002 discussed below. As such, the
Company achieves sale accounting treatment under the provisions of SFAS 140.
The Company continues to service all securitized receivables and earns a
contractual servicing fee of 1% per annum on the total monthly outstanding
principal balance of the related securitized receivables. The securitization
transaction executed in September 2001, while similar in all material respects
to those securitization transactions described above, was structured and
accounted for as a collateralized borrowing. For accounting purposes, the
finance receivables and debt issued by the related trust remain in the
Company's Consolidated Balance Sheet although the assets of the related trust
are not available to TMCC's creditors. Approximately $589 million and $1,087
million of retail finance receivables and approximately $549 million and
$1,036 million of debt included in the Consolidated Balance Sheet were related
to this transaction at March 31, 2003 and 2002, respectively.
The securities issued by the trusts are secured by collections on the sold
finance receivables. These securities are typically structured into senior
and subordinated classes. The Company typically retains interests in the
securitizations in the form of senior and subordinated interests, which are
included in investments in marketable securities and other assets in the
Consolidated Balance Sheet. Senior interests in the securitizations represent
purchased senior securities. Subordinated interests include interest-only
strips, subordinated securities, and reserve funds which provide credit
enhancement to senior securities in the Company's securitization transactions.
In certain structures, revolving liquidity notes are used in lieu of reserve
funds to provide credit enhancement to the senior securities. Under these
revolving liquidity notes, investors may draw upon the notes to cover any
shortfall in interest and principal payments. The draws are funded by TMCC
and repayments of the liquidity notes are subordinated to principal and
interest payments due on the securities, and in certain circumstances, may
require deposits for the reserve funds. TMCC must fund the entire amount
available under the revolving liquidity notes if TMCC's short-term unsecured
debt rating is downgraded below P-1 or A-1 by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Ratings, Group, a division of The McGraw-Hill
Companies, Inc. ("S&P"), respectively. As of March 31, 2003 and 2002, $39
million and $15 million, respectively, were available under the revolving
liquidity notes to investors.
The securities issued by the trusts are rated by independent rating agencies
and sold in registered public offerings or in private transactions exempt from
registration under U.S. securities laws. The Company maintains a shelf
registration statement with the SEC relating to the issuance of securities
secured by retail receivables. During fiscal 2003, the Company sold retail
receivables totaling $4.6 billion in connection with securities issued under
the shelf registration statement. Of the $4.6 billion sold, the Company
invested $1.4 billion in purchased and retained senior class securities,
resulting in $3.2 billion of net cash flows. During fiscal 2003, the Company
registered additional securities of $7.5 billion with the SEC under the shelf
registration statement. Approximately $7.4 billion remained available for
issuance under the registration statement as of April 30, 2003.
Investors in the securitizations have no recourse to the Company beyond the
Company's retained subordinated interests and any amounts available or funded
under the revolving liquidity notes. Additionally, the Company does not
guarantee any securities issued by the securitizations. The Company's
exposure to these retained interests exists until the associated securities
are paid in full. Investors do not have recourse to other assets held by TMCC
for failure of obligors on the receivables to pay when due or otherwise.
Back-up Liquidity
- -----------------
For additional liquidity purposes, the Company maintains syndicated bank credit
facilities with certain banks whose commitments aggregated $4.2 billion and
$3.5 billion at March 31, 2003 and 2002, respectively. The Company has not
drawn down any amount under the syndicated bank credit facilities during fiscal
2003 or 2002.
-35-
The Company maintains uncommitted lines of credit to facilitate and maintain
letters of credit. These lines of credit totaled $60 million and $61 million
as of March 31, 2003 and 2002, respectively. Approximately $0.7 million and
$0.5 million in letters of credit were outstanding as of March 31, 2003 and
2002, respectively.
The Company believes that cash provided by operating, investing, and financing
activities, as well as the issuance of unsecured term debt, the issuance of
commercial paper, and execution of securitization transactions will provide
sufficient liquidity to meet future funding requirements.
Credit Ratings
- --------------
The cost and availability of unsecured financing is influenced by credit
ratings, which are intended to be an indicator of the creditworthiness of a
particular company, security, or obligation. Lower ratings generally result
in higher borrowing costs as well as reduced access to capital markets.
Credit ratings are not recommendations to buy, sell, or hold securities and
are subject to revision or withdrawal at any time by the assigning rating
agency. Each rating agency may have different criteria for evaluating risk,
and therefore ratings should be evaluated independently for each rating
agency. As of March 31, 2003, TMCC's ratings were as follows:
Rating Agency Senior Debt Commercial Paper
--------------- ------------- ------------------
S&P AAA A-1+
Moody's Aa1 P-1
In March 2003, S&P affirmed the ratings of both senior debt and commercial
paper, while maintaining a negative outlook. In July 2000, Moody's affirmed
the ratings of both senior debt and commercial paper, and maintained a stable
outlook.
-36-
CONTRACTUAL OBLIGATIONS AND CREDIT-RELATED COMMITMENTS
- ------------------------------------------------------
The Company has certain obligations to make future payments under contracts and
credit-related financial instruments and commitments. Aggregate contractual
obligations and credit-related commitments in existence at March 31, 2003 are
summarized as follows:
Commitments Expiring During the Fiscal Years Ending
------------------------------------------------------------
2004 2005 2006 2007 2008 Thereafter
-------- -------- -------- -------- -------- ----------
(Dollars in Millions)
Contractual Obligations:
Premises occupied under leases.... $ 18 $ 12 $ 10 $ 6 $ 3 $ 3
Total debt........................ 7,248 5,198 4,861 2,265 4,415 3,293
Manufacturing facilities
guarantees..................... - - - - - 148
International affiliates
guarantees ................ 15 12 1 - - -
Revolving liquidity notes......... 39
------- ------- ------- ------- ------- -------
$ 7,320 $ 5,222 $ 4,872 $ 2,271 $ 4,418 $ 3,444
======= ======= ======= ======= ======= =======
- --------------------
Amounts represent TMCC's guarantees of debt or other contractual commitments entered into by
Toyota Services de Venezuela, C.A. and BTB. Allocation to fiscal years is based on maturity
dates specified in underlying contractual agreements.
The securitization trusts may draw a total of $39 million from TMCC under the revolving
liquidity notes over the life of the securities transactions.
In addition to the commitments described above, TMCC has guaranteed the
obligations of TMIS relating to vehicle service agreements issued in certain
states. These states require a letter of guaranty from TMCC to support the
financial obligations of TMIS as a service contract provider. These
guarantees have been given without regard to any security, but are limited to
the duration of the agreements, which may have original terms that range from
12 months to 84 months. The liability for these agreements is limited to the
original manufacturer's suggested retail price for new vehicles, and fair
market value at the time the agreement was issued for used vehicles. Should
TMIS become unable to satisfy its obligations related to these agreements,
TMCC would be required to perform under the guarantees. At March 31, 2003,
TMIS had approximately 167,000 agreements guaranteed by TMCC. TMCC has not
paid, and does not expect to pay, any amounts under these guarantees.
The Company extends term loans and revolving lines of credit to dealers for
business acquisitions, facilities refurbishment, real estate purchases, and
working capital requirements. These loans are typically secured with liens on
real estate, vehicle inventory, and/or other dealership assets, as appropriate,
and usually are secured by the personal or corporate guarantees of the dealers
or dealerships. The Company also provides financing to various large publicly-
held dealer organizations, referred to as dealer groups, often as part of a
lending consortium, for wholesale, working capital, real estate, and business
acquisitions. While the majority of these loans are secured, approximately 25%
is unsecured. The credit facilities totaled $2.9 billion of which $1.8 billion
was outstanding as of March 31, 2003.
-37-
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
- ------------------------------------------------------------------------
This report contains "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which include estimates,
projections and statements of the Company's beliefs concerning future events,
business plans, objectives, expected operating results, and the assumptions
upon which those statements are based. Forward looking statements include,
without limitation, any statement that may predict, forecast, indicate or
imply future results, performance or achievements, and are typically
identified with words such as "believe," "anticipate," "expect," "estimate,"
"project," "should," "intend," "will," "may" or words or phrases of similar
meaning. The Company cautions that the forward looking statements involve
known and unknown risks, uncertainties and other important factors that may
cause actual results to differ materially from those in the forward looking
statements, including, without limitation, the following: decline in demand
for Toyota and Lexus products; the effect of economic conditions; the effect of
the current political, economic and regulatory risk in Argentina, Mexico,
Venezuela, Brazil and other Latin American and South American countries and the
resulting effect on their economies and monetary and fiscal policies; a decline
in the market acceptability of leasing; the effect of competitive pricing on
interest margins; changes in pricing due to the appreciation of the Japanese
yen against the U.S. dollar; the effect of governmental actions; changes in tax
laws; the effect of competitive pressures on the used car market and residual
values and the continuation of the other factors causing an increase in vehicle
returns and disposition losses; the continuation of, and if continued, the
level and type of special programs offered by TMS; the ability of the Company
to successfully access the U.S. and international capital markets; the effects
of any rating agency actions; increases in market interest rates; the
continuation of factors causing increased delinquencies and credit losses; the
changes in the fiscal policy of any government agency which increases sovereign
risk, monetary policies exercised by the European Central Bank and other
monetary authorities; increased costs associated with the Company's debt
funding or restructuring efforts; the effect of any military action by or
against the U.S., as well as any future terrorist attacks, including any
resulting effects on general economic conditions, consumer confidence and
general market liquidity; with respect to the effects of litigation matters,
the discovery of facts not presently known to the Company or determination by
judges, juries or other finders of fact which do not accord with the Company's
evaluation of the possible liability from existing litigation; increased losses
resulting from default by any dealers to which the Company has a significant
credit exposure; default by any counterparty to a derivative contract; and
performance under any guaranty or comfort letter issued by the Company. The
risks included here are not exhaustive. New risk factors emerge from time to
time and it is not possible for the Company to predict all such risk factors,
nor to assess the impact such risk factors might have on the Company's
business or the extent to which any factor or combination of factors may cause
actual results to differ materially from those contained in any forward
looking statements. Given these risks and uncertainties, investors should not
place undue reliance on forward looking statements as a prediction of actual
results. The Company will not update the forward looking statements to
reflect actual results or changes in the factors affecting the forward looking
statements.
-38-
NEW ACCOUNTING STANDARDS
- ------------------------
In June 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS 146"), which addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies EITF Issue No. 94-3
"Liability Recognition for Certain Employee Terminations Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)". SFAS 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability is incurred
as opposed to the date of an entity's commitment to an exit plan as required
under EITF Issue No. 94-3. SFAS 146 also requires that measurement of the
liability associated with exit or disposal activities be at fair value. SFAS
146 is effective for the Company for exit or disposal activities that are
initiated after December 31, 2002. The implementation of SFAS 146 did not
have a material impact on the Company's consolidated financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an interpretation of FASB Statements No.
5, 57, and 107 and Rescission of FASB Interpretation No. 34" ("FIN 45"). FIN
45 elaborates on the disclosures to be made by a guarantor in its financial
statements about its obligations under certain guarantees that it has issued.
FIN 45 also requires a guarantor to recognize, at the inception of a
guarantee, a liability for the fair value of the obligations it has undertaken
in issuing the guarantee. The disclosure provisions of FIN 45 are effective
for financial statements of interim or annual periods that end after December
15, 2002. The provisions for initial recognition and measurement are
effective on a prospective basis for guarantees that are issued or modified
after December 31, 2002, irrespective of a guarantor's year-end. The Company
adopted the disclosure provisions of FIN 45 in the quarter ended December 31,
2002. Adoption of the initial recognition and measurement provisions of FIN
45 did not have a material impact on the Company's consolidated financial
statements.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51" ("FIN 46"). FIN 46 requires existing unconsolidated variable interest
entities to be consolidated by their primary beneficiaries if the entities do
not effectively disperse risks among parties involved. FIN 46 applies
immediately to variable interest entities created after January 31, 2003, and
to variable interest entities in which an enterprise obtains an interest after
that date. It applies in the first fiscal year or interim period beginning
after June 15, 2003, to variable interest entities in which an enterprise
holds a variable interest that it acquired before February 1, 2003. FIN 46
applies to public enterprises as of the beginning of the applicable interim or
annual period. FIN 46 may be applied prospectively with a cumulative-effect
adjustment as of the date on which it is first applied or by restating
previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year restated.
The implementation of FIN 46 did not have a material impact on the Company's
consolidated financial statements because all securitization transactions are
with entities that are qualifying special-purpose entities under SFAS 140
except for one transaction categorized as a collateralized borrowing, which is
already included in the Company's consolidated financial statements.
In March 2003, the Emerging Issues Task Force ("EITF") released Issue No. 02-
9, "Accounting for Changes That Result in a Transferor Regaining Control of
Financial Assets Sold" ("EITF 02-9") for events occurring after April 2, 2003.
EITF 02-9 relates to securitizations that have been accounted for as sales
under SFAS 140. In the event that one or more of the control rules specified
by SFAS 140 are no longer met, the transferor would have to recognize those
assets and the related liabilities on the Consolidated Balance Sheet at fair
value. The implementation of EITF 02-9 is not expected to have a material
impact on the Company's consolidated financial statements because all
securitization transactions treated as a sale for accounting purpose remain in
QSPEs and the control rules of SFAS 140 continue to be met.
-39-
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends
and clarifies accounting for derivative instruments and improves financial
reporting by requiring that contracts with comparable characteristics be
accounted for similarly. The amendments to SFAS 133 fall principally into
three categories: amendments related to SFAS 133 implementation issues that
were previously cleared by the FASB, amendments clarifying the definition of a
derivative, and amendments relating to the definition of expected cash flows
in FASB Concepts Statement No. 7 "Using Cash Flow Information and Present
Value in Accounting Measurements". SFAS 149 is effective for contracts
entered into or modified after June 30, 2003. All of the Company's existing
derivatives have been recognized in the Company's consolidated financial
statements under prior SFAS statements. SFAS 149 does not alter current
valuation or disclosures. As such, the implementation of SFAS 149 is not
expected to have a material impact on the Company's consolidated financial
statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150").
SFAS 150 addresses certain financial instruments that, under previous
guidance, could be accounted for as equity, but now must be classified as
liabilities in statements of financial position. These financial instruments
include 1) mandatorily redeemable financial instruments, 2) obligations to
repurchase the issuer's equity shares by transferring assets, and 3)
obligations to issue a variable number of shares. SFAS 150 is effective for
all financial instruments entered into or modified after May 31, 2003, and
otherwise effective at the beginning of the first interim period beginning
after June 15, 2003. The implementation of SFAS 150 is not expected to have a
material effect on the Company's consolidated financial statements.
-40-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
- -----------
The Company is exposed to various types of market risks as a result of its
normal business activities. Market risk is the sensitivity of the Company's
income and capital to fluctuations in market variables such as foreign
exchange rates, interest rates, and market prices.
Relative to financing operations, the Company has developed a program to
manage its exposure to market risks within an established risk tolerance range
through the use of a variety of derivative instruments. As a matter of
policy, the Company does not use derivatives for trading purposes.
Foreign Exchange Rate Risk
- ---------------------------
The Company issues debt in a variety of currencies, with the primary
denomination being U.S. dollars and euros. As a matter of policy, currency
exposure related to foreign currency debt is hedged at issuance through the
execution of cross currency interest rate swaps that convert fixed-rate non-
U.S. dollar debt to variable-rate U.S. dollar denominated payments.
Interest Rate Risk
- ------------------
The Company's primary market risk exposure is interest rate risk, in
particular U.S dollar LIBOR. Interest rate risk results from differences in
re-pricing characteristics of the Company's assets and liabilities. Interest
rate risk exposure is managed on a portfolio basis using derivatives such as
interest rate swaps and option-based products such as interest rate caps.
These derivatives are not designated to hedge specific assets or liabilities
and, therefore, do not qualify for hedge accounting treatment under SFAS
133/138.
The Company has developed and implemented a comprehensive policy framework to
manage interest rate risk. The policy framework considers a variety of
factors such as management's risk tolerance, the Company's funding objectives,
and market conditions. The policy framework is reviewed at least annually and
as conditions warrant. The Company uses various analytical techniques
including market valuation, sensitivity analysis, simulations, and value at
risk to assess and manage interest rate risk.
Value at Risk
- -------------
The Company uses the value at risk methodology ("VAR") to measure interest
rate risk. The VAR provides an overview of the Company's exposure to changes
in market factors. VAR represents the potential loss in fair value for the
Company's portfolio from adverse changes in market factors for a 30-day
holding period within a 95% confidence interval using the Monte Carlo
simulation technique. The VAR methodology uses historical interest rate data
to assess the potential future loss.
The Company's VAR methodology incorporates the impact from adverse changes in
market interest rates but does not incorporate the impact from other market
changes, such as foreign currency exchange rates, which do not affect the
value of the Company's portfolio. The VAR methodology is applied to more than
90% of the Company's market risk sensitive positions. Management believes the
positions considered in the analysis are representative of the Company's total
portfolio. The VAR methodology currently does not consider changes in fair
values related to investments in marketable securities and equipment financing.
-41-
The VAR and the average VAR of the Company's portfolio as of, and for the
years ended March 31, 2003 and 2002, measured as the potential 30 day loss in
fair value from assumed adverse changes in interest rates are as follows:
Average for the
As of Year Ended
March 31, 2003 March 31, 2003
------------------ -------------------
Mean portfolio value..................... $4.9 billion $4.5 billion
VAR...................................... $39 million $43 million
Percentage of the mean portfolio value... 0.8% 1.0%
Confidence level......................... 95.0% 95.0%
Average for the
As of Year Ended
March 31, 2002 March 31, 2002
------------------ -------------------
Mean portfolio value..................... $4.4 billion $4.9 billion
VAR...................................... $44 million $82 million
Percentage of the mean portfolio value... 1.0% 1.7%
Confidence level......................... 95.0% 95.0%
The Company's calculated VAR exposure represents an estimate of reasonably
possible net losses that would be recognized on its portfolio of financial
instruments assuming hypothetical movements in future market rates and is not
necessarily indicative of actual results which may occur. It does not
represent the maximum possible loss nor any expected loss that may occur,
since actual future gains and losses will differ from those estimated, based
upon actual fluctuations in market rates, operating exposures, and the timing
thereof, and changes in the composition of the Company's portfolio of
financial instruments during the year. The increase in the mean portfolio
value from March 31, 2002 to March 31, 2003 primarily reflects increased
earning assets and decreased interest rates during fiscal 2003. The reduction
in VAR is consistent with portfolio activities during fiscal 2003, which
included an increase in floating-rate wholesale assets funded with floating-
rate debt.
Market Price Risk
- -----------------
The Company is also exposed to market price risk related to equity investments
included in the investment portfolio of its insurance operations, consisting
primarily of equity investments in mutual funds tied to common indicies.
These investments are classified as available for sale in accordance with SFAS
No. 115 "Accounting for Certain Investments in Debt and Equity Securities".
None of the equity investments are considered trading securities within the
meaning of SFAS No. 115.
-42-
A summary of the sensitivity of the fair market value of the Company's equity
investments to an assumed 10% and 20% adverse change in market prices is
presented below.
As of
March 31,
2003
-----------
(Dollars in Millions)
Cost........................... $ 149
Fair Market Value.............. $ 147
Net unrealized loss............ $ (2)
Estimated 10% adverse change
in prices.................. $ (15)
Estimated 20% adverse change
In prices.................. $ (30)
These hypothetical scenarios represent an estimate of reasonably possible net
losses that would be recognized on the Company's equity investments assuming
hypothetical movements in future market rates and is not necessarily
indicative of actual results that may occur. Additionally, the hypothetical
scenarios do not represent the maximum possible loss nor any expected loss
that may occur, since actual future gains and losses will differ from those
estimated, based upon actual fluctuations in market rates.
COUNTERPARTY CREDIT RISK
- ------------------------
Derivative instruments involve counterparty credit risk, which is the risk
that a counterparty may fail to perform on its contractual obligations. This
risk is managed through the use of a comprehensive policy that includes credit
standard guidelines, counterparty diversification, monitoring of counterparty
financial condition, use of master netting agreements with all counterparties
and exposure limits based on counterparty credit, exposure amount and
management risk tolerance. The policy is reviewed at a minimum on an annual
basis and as conditions warrant.
Counterparty credit risk of derivative instruments is represented by the fair
value of contracts with a positive fair value at March 31, 2003, reduced by the
effects of master netting agreements. At March 31, 2003, aggregate
counterparty credit risk as represented by the fair value of the Company's
derivative instruments was $1.4 billion on an aggregate notional amount of
$47.7 billion. Additionally, at March 31, 2003, all of the Company's
derivative instruments were executed with commercial banks and investment
banking firms assigned investment grade ratings of "A" or better by national
rating agencies. The Company does not currently anticipate non-performance by
any of its counterparties and has no reserves related to non-performance as of
March 31, 2003. The Company has not experienced any counterparty default
during the fiscal 2003, 2002, and the twelve months ended March 2001.
-43-
A reconciliation of the activity of the Company's derivative instruments which
totaled $47.7 billion and $43.5 billion for the fiscal 2003 and 2002 is as
follows:
Cross
Currency
Interest Interest
Rate Swap Rate Swap Option-based
Agreements Agreements Products
---------------- ---------------- ----------------
March 31,
--------------------------------------------------------------
2003 2002 2003 2002 2003 2002
---- ---- ---- ---- ---- ----
(Dollars in Billions)
Beginning Notional Amount... $ 8.0 $8.9 $29.4 $16.7 $6.1 $11.5
Add:
New agreements........... 4.2 1.9 8.3 16.9 3.3 5.4
Less:
Terminated agreements.... 0.2 0.1 0.1 0.1 - 8.0
Expired agreements....... 1.5 2.7 7.4 3.8 0.3 2.8
Amortizing notionals..... - - 2.1 0.3 - -
----- ---- ----- ----- ---- -----
Ending Notional Amount...... $10.5 $8.0 $28.1 $29.4 $9.1 $ 6.1
===== ==== ===== ===== ==== =====
-44-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
Page
-------
Report of Independent Accountants................................ 46
Consolidated Balance Sheet at March 31, 2003 and 2002............ 47
Consolidated Statement of Income for the years ended
March 31, 2003 and 2002, the six months ended March 31, 2001,
and the year ended September 30, 2000......................... 48
Consolidated Statement of Shareholder's Equity for the years
ended March 31, 2003 and 2002, the six months ended
March 31, 2001 and the year ended September 30, 2000.......... 49
Consolidated Statement of Cash Flows for the years ended
March 31, 2003 and 2002, the six months ended March 31, 2001
and the year ended September 30, 2000......................... 50
Notes to Consolidated Financial Statements....................... 51-96
-45-
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and Shareholder of
Toyota Motor Credit Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholder's equity and cash flows present
fairly, in all material respects, the financial position of Toyota Motor Credit
Corporation and its subsidiaries at March 31, 2003 and 2002, and the results of
their operations and their cash flows for the years ended March 31, 2003 and
2002, the six months ended March 31, 2001 and for the year ended September 30,
2000 in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, effective
October 1, 2000, the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities".
/S/ PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
April 8, 2003
-46-
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in Millions)
March 31,
--------------------------
2003 2002
-------- --------
ASSETS
------
Cash and cash equivalents..................... $ 980 $ 747
Investments in marketable securities.......... 1,630 1,100
Finance receivables, net...................... 26,477 23,477
Investments in operating leases, net.......... 8,017 7,631
Derivative assets............................. 1,421 454
Other assets.................................. 708 630
Income taxes receivable....................... - 221
-------- --------
Total Assets............................ $ 39,233 $ 34,260
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
Notes and loans payable....................... $ 32,099 $ 27,026
Derivative liabilities........................ 514 1,124
Other liabilities............................. 869 819
Income taxes payable.......................... 26 -
Deferred income............................... 996 861
Deferred income taxes......................... 1,866 1,679
-------- --------
Total Liabilities....................... 36,370 31,509
-------- --------
Commitments and Contingencies (See Note 16)
Shareholder's Equity:
Capital stock, $l0,000 par value
(100,000 shares authorized; issued
and outstanding 91,500 in 2003 and 2002) 915 915
Retained earnings.......................... 1,930 1,820
Accumulated other comprehensive income..... 18 16
-------- --------
Total Shareholder's Equity.............. 2,863 2,751
-------- --------
Total Liabilities and
Shareholder's Equity................. $ 39,233 $ 34,260
======== ========
See Accompanying Notes to Consolidated Financial Statements.
-47-
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Dollars in Millions)
Fiscal Six Fiscal
Years Months Year
Ended Ended Ended
March 31, March 31, September 30,
----------------- --------- -------------
2003 2002 2001 2000
------ ------ --------- -------------
Financing Revenues:
Leasing................................. $2,522 $2,479 $1,246 $2,402
Retail financing........................ 1,136 917 390 768
Wholesale and other dealer financing.... 172 186 124 182
------ ------ ------ ------
Total financing revenues................... 3,830 3,582 1,760 3,352
Depreciation on leases.................. 1,626 1,580 753 1,440
Interest expense........................ 832 1,030 726 1,289
Derivative fair value adjustments....... 335 (38) 23 -
------ ------ ------ ------
Net financing revenues..................... 1,037 1,010 258 623
Insurance premiums earned and contract
revenues................................ 168 155 68 138
Investment and other income................ 212 136 105 25
------ ------ ------ ------
Net financing revenues and other revenues.. 1,417 1,301 431 786
------ ------ ------ ------
Expenses:
Operating and administrative............ 540 529 236 400
Losses related to Argentine investment.. 9 31 - -
Provision for credit losses............. 604 263 89 135
Insurance losses and loss adjustment
expenses............................. 87 76 35 81
------ ------ ------ ------
Total expenses............................. 1,240 899 360 616
------ ------ ------ ------
Income before equity in net loss of
subsidiary, provision for income taxes,
and cumulative effect of change
in accounting principle................. 177 402 71 170
Equity in net loss of subsidiary........... - - - 1
Provision for income taxes................. 67 159 27 65
------ ------ ------ ------
Income before cumulative effect of
change in accounting principle.......... 110 243 44 104
Cumulative effect of change in accounting
principle, net of tax benefits.......... - - (2) -
------ ------ ------ ------
Net Income................................. $ 110 $ 243 $ 42 $ 104
====== ====== ====== ======
See Accompanying Notes to Consolidated Financial Statements.
-48-
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
(Dollars in Millions)
Accumulated
Other
Capital Retained Comprehensive
Stock Earnings Income Total
------- -------- ------------- -------
Balance at September 30, 2000....... $ 915 $ 1,539 $ 19 $ 2,473
Net income for the six months
ended March 31, 2001............. - 42 - 42
Change in net unrealized gains
on available-for-sale
marketable securities............ - - (1) (1)
------- ------- ------- -------
Total comprehensive income.......... - 42 (1) 41
------- ------- ------- -------
Balance at March 31, 2001........... $ 915 $ 1,581 $ 18 $ 2,514
Net income for the year ended
March 31, 2002................... - 243 - 243
Change in net unrealized gains
on available-for-sale
marketable securities............ - - (2) (2)
------- ------- ------- -------
Total comprehensive income.......... - 243 (2) 241
------- ------- ------- -------
Dividends........................... - (4) - (4)
Balance at March 31, 2002........... $ 915 $ 1,820 $ 16 $ 2,751
Net income for the year ended
March 31, 2003................... - 110 - 110
Change in net unrealized gains
on available-for-sale
marketable securities............ - - 2 2
------- ------- ------- -------
Total comprehensive income.......... - 110 2 112
------- ------- ------- -------
Balance at March 31, 2003........... $ 915 $ 1,930 $ 18 $ 2,863
======= ======= ======= =======
See Accompanying Notes to Consolidated Financial Statements.
-49-
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Millions)
Fiscal Six Fiscal
Years Months Year
Ended Ended Ended
March 31, March 31, September 30,
----------------- --------- -------------
2003 2002 2001 2000
------ ------ --------- -------------
Cash flows from operating activities:
Net income...................................... $ 110 $ 243 $ 42 $ 104
------ ------ ------ ------
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effect of change in accounting
principles, net........................... - - 2 -
Derivative fair value adjustments........... 335 (38) 23 -
Depreciation and amortization............... 1,758 1,556 789 1,557
Provision for credit losses................. 604 263 89 135
Gain from sale of finance receivables, net.. (130) (81) (42) (5)
Gain from sale of marketable securities, net - (1) (6) (8)
Loss on asset impairment.................... 20 70 25 74
Loss and reserve related to Argentine
Investment................................ 9 31 - -
(Increase) in other assets.................. (805) (109) (219) (58)
Increase(decrease) in deferred income taxes. 178 197 (15) (68)
Increase(decrease) in other liabilities..... 983 (39) 60 199
------ ------ ------ ------
Total adjustments............................... 2,952 1,849 706 1,826
------ ------ ------ ------
Net cash provided by operating activities.......... 3,062 2,092 748 1,930
------ ------ ------ ------
Cash flows from investing activities:
Addition to investments in marketable securities (2,144) (1,528) (1,582) (1,409)
Disposition of investments in marketable
securities.................................... 1,513 1,477 1,378 985
Acquisition of finance receivables.............. (39,496) (21,759) (14,587) (25,161)
Liquidation of finance receivables.............. 31,643 14,370 10,568 19,238
Proceeds from sale of finance receivables....... 4,502 2,958 2,910 1,476
Addition to investments in operating leases..... (3,944) (3,990) (1,352) (3,085)
Disposition of investments in operating leases.. 1,900 2,247 1,177 2,262
Decrease in receivable from Affiliate........... - - - 644
------ ------ ------ ------
Net cash used in investing activities.............. (6,026) (6,225) (1,488) (5,050)
------ ------ ------ ------
Cash flows from financing activities:
Proceeds from issuance of notes and loans
payable....................................... 10,404 10,504 4,172 6,783
Payments on notes and loans payable............. (6,794) (6,535) (4,220) (5,582)
Net (decrease) increase in commercial paper .... (413) 617 912 1,909
------ ------ ------ ------
Net cash provided by financing activities.......... 3,197 4,586 864 3,110
------ ------ ------ ------
Net increase (decrease) in cash and cash
equivalents...................................... 233 453 124 (10)
Cash and cash equivalents at the beginning
of the period.................................... 747 294 170 180
------ ------ ------ ------
Cash and cash equivalents at the end of the
period........................................... $ 980 $ 747 $ 294 $ 170
====== ====== ====== ======
Supplemental disclosures:
Interest paid.................................... $ 750 $1,027 $ 750 $ 1,240
Income taxes (received)/paid..................... $ (362) $ 91 $ 121 $ 22
See Accompanying Notes to Consolidated Financial Statements.
-50-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Nature of Operations
- -----------------------------
Toyota Motor Credit Corporation ("TMCC") was incorporated in California in 1982
and commenced operations in 1983. As of March 31, 2003, TMCC is a wholly-owned
subsidiary of Toyota Financial Services Americas Corporation ("TFSA"), a
holding company owned 100% by Toyota Financial Services Corporation ("TFSC").
TFSC, in turn, is a wholly-owned subsidiary of Toyota Motor Corporation
("TMC"). TFSC was incorporated in July 2000 and is headquartered in Nagoya,
Japan. The purpose of TFSC is to manage TMC's finance operations worldwide.
TMCC has eight wholly-owned subsidiaries, two subsidiaries which provide retail
and wholesale financing in Mexico and Venezuela, one subsidiary engaged in the
insurance business, three limited purpose subsidiaries formed primarily to
acquire and securitize receivables, one subsidiary which acts as a holding
company for a corporation which provides retail and wholesale financing in the
Commonwealth of Puerto Rico, and one subsidiary which is an employee services
company in Mexico. References herein to "TMCC" denote Toyota Motor Credit
Corporation and references herein to "the Company" denote Toyota Motor Credit
Corporation and its consolidated subsidiaries.
The Company provides retail financing, wholesale financing, and certain other
financial products and services to authorized Toyota and Lexus vehicle dealers,
and to a lesser extent, other domestic and import franchised dealers and their
customers in the United States ("U.S.") (excluding Hawaii), the Commonwealth of
Puerto Rico, Mexico, and Venezuela. Contracts purchased in Mexico and
Venezuela are originated in each country's respective functional currency.
Foreign currency risk related to the Company's international operations is
considered insignificant given the small size of such foreign operations. TMCC
offers retail leasing to authorized Toyota and Lexus vehicle dealers and
certain other domestic and import franchised dealers and their customers in the
U.S. (excluding Hawaii).
In March 2003, the Company reorganized its Puerto Rican operations by
incorporating a new subsidiary in the Commonwealth of Puerto Rico. The new
corporation, Toyota Credit de Puerto Rico Corp. ("TCPR Corp."), is a wholly-
owned subsidiary of TCPR Holdings, Inc. TCPR Holdings, Inc., a California
corporation, was formerly known as Toyota Credit de Puerto Rico Corp. TCPR
Corp. has taken over the operations formerly conducted by TCPR Holdings, Inc.
TCPR Corp. provides retail and wholesale financing and certain other financial
products and services to authorized Toyota and Lexus dealers and their
customers in the Commonwealth of Puerto Rico.
The Company also holds minority interests in Banco Toyota Do Brasil ("BTB")
and Toyota Credit Argentina S.A. ("TCA"). BTB provides retail, lease and
wholesale financing to authorized Toyota vehicle dealers and their customers
in Brazil. TMCC's 15% investment in BTB is accounted for using the cost
method. The remaining interest in BTB is owned by TFSC. TMCC owns a 33%
interest in TCA with the remaining interest owned by TFSA. Through January
2002 TCA provided retail and wholesale financing to authorized Toyota vehicle
dealers and their customers in Argentina. Due to adverse economic conditions
experienced during and subsequent to January 2002, TCA ceased financing new
business and is currently collecting on outstanding receivables. TMCC
accounts for TCA using the equity method.
In fiscal 2002, TMCC wrote-off its investment in TCA due to adverse Argentine
economic conditions. During fiscal 2003, TMCC performed under a guarantee of
TCA's debt repaying $35 million of outstanding balances and accrued interest.
TCA repaid the remaining principal and accrued interest in March 2003. As of
March 31, 2003, TMCC's guarantees of TCA debt have been fully satisfied and
the guarantees were terminated.
-51-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies
- ---------------------------------------------------
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Change in Fiscal Year
- ---------------------
In June 2000, the Executive Committee of the Board of Directors of the Company
approved a change in the Company's fiscal year-end from September 30 to March
31. This change resulted in a six-month transition period from October 1, 2000
through March 31, 2001 (the "transition period"). Results related to the
transition period are included in this Form 10-K Report.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of TMCC and its
wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated.
Cash and Cash Equivalents
- -------------------------
Cash equivalents, consisting primarily of money market instruments and debt
securities, represent highly liquid investments with original maturities of
three months or less.
Investments in Marketable Securities
- ------------------------------------
Investments in marketable securities consist of debt and equity securities and
interests retained in the sale of receivables. The Company's accounting
policies related to the valuation of interests retained in the sale of
receivables are discussed under "Sale of Receivables and Valuation of Retained
Interests" within this footnote.
Debt and equity securities designated as available-for-sale are carried at fair
value using quoted market prices or discounted cash flow analysis with
unrealized gains or losses included in accumulated other comprehensive income,
net of applicable taxes. Debt securities designated as held-to-maturity are
carried at amortized cost and are reduced to net realizable value for other-
than-temporary declines in market value. The Company uses the specific
identification method to determine the cost basis of its investment portfolio.
Realized investment gains and losses are reflected in income and are determined
in accordance with the Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments is Debt and Equity Securities" ("SFAS
115").
-52-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies (Continued)
- ---------------------------------------------------
Investments in Operating Leases
- -------------------------------
Investments in operating leases are recorded at cost and depreciated on a
straight-line basis over the lease terms to the estimated residual value.
Revenue from operating leases is recognized on a straight-line basis over the
lease term.
Finance Receivables
- -------------------
Finance receivables are recorded at the present value of the related future
cash flows including residual values for finance leases. Revenue associated
with finance receivables is recognized on a level-yield basis over the contract
term.
Allowance for Credit Losses
- ---------------------------
The Company maintains an allowance for credit losses to cover probable losses
on its owned portfolio resulting from the failure of customers to make
required payments. The Company's owned portfolio includes securitized
receivables that do not qualify for sale treatment under Statement of
Financial Accounting Standards ("SFAS") No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities" ("SFAS 140").
The allowance is evaluated at least quarterly, considering a variety of
factors and assumptions to determine whether reserves are considered adequate
to cover probable losses.
Evaluation of the appropriateness of the allowance is based on several factors
and assumptions. These factors and assumptions include: (1) segmentation of
loan pools based on common loan and/or risk characteristics;
(2) identification and interpretation of various portfolio and economic
indicators such as unemployment and personal bankruptcy rates that management
believes are key to estimating expected credit losses; and (3) consideration
of historical delinquency, loss analysis, and trends. Additionally,
management modifies its evaluation as the assumptions in the underlying
analyses and the credit environment change. The estimate of expected credit
losses is based upon information available at the reporting date.
Collection activity on delinquent accounts is terminated when it has been
determined that payments due will not be received and the related collateral
is either repossessed and sold or cannot be recovered. Any shortfalls between
proceeds received and the amounts due from customers are charged against the
allowance. Any recoveries are credited to the allowance. The allowance
related to the Company's earning assets is included in finance receivables,
net and investment in operating leases, net in the Consolidated Balance Sheet.
The related provision expense is included in the provision for credit losses
in the Consolidated Statement of Income.
-53-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies (Continued)
- ---------------------------------------------------
Determination of Impairment of Residual Values
- ----------------------------------------------
The Company has a substantial vehicle lease portfolio. The Company is exposed
to risk of loss on the disposition of vehicles at lease maturity to the extent
that net disposition proceeds are not sufficient to cover the carrying value
of leased assets. At origination, the contractual residual values associated
with leased vehicles represent the estimated market value of the assets at
lease maturity. Generally accepted accounting principles ("GAAP") require that
if the value of the residual declines and such decline is considered other
than temporary, the residual is written down to its estimated net realizable
value through an impairment charge in the year such determination is made.
The Company performs periodic evaluations of the carrying value of leased
assets to determine if impairment of residual values has occurred. Factors
considered in this evaluation include projected vehicle return rates,
historical trends, market information on new and used vehicle sales, and
general economic conditions. In accordance with GAAP, adjustments are made to
the carrying value of leased assets when management concludes that the decline
in residual value is other than temporary. Impairment charges are included in
depreciation expense in the Consolidated Statement of Income.
Analyzing the carrying value of leased assets involves a high degree of
judgment. As a result, actual losses related to residual value impairment
could be significantly different than expected losses. Management believes
that the net carrying values of leased assets at March 31, 2003 are
reasonable.
-54-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies (Continued)
- ---------------------------------------------------
Deferred Charges
- ----------------
Deferred charges included in other assets on the Consolidated Balance Sheet
consist primarily of underwriters' commissions and other debt issuance costs.
Deferred charges are amortized to interest expense over the life of the related
instruments on a straight-line basis, which is not materially different from
the effective interest method.
Repossessed Collateral
- ----------------------
Assets are classified as repossessed assets and carried at net realizable value
in other assets when physical possession of the collateral has occurred.
Management periodically compares the carrying value and fair value of
repossessed assets and records expense when the information indicates that the
carrying value of the assets exceed the fair value.
Derivative Instruments
- ----------------------
The Company uses derivative instruments to manage its exposure to market risks
such as interest rate and foreign exchange risks. Such instruments include
interest rate swaps, cross currency interest rate swaps, and option-based
products such as interest rate caps. In accordance with the provisions of
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (adopted in fiscal 2001) and
Statement of Financial Accounting Standards No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an amendment of FASB
Statement No. 133" ("SFAS 133/138") the Company records derivative instruments
as assets or liabilities on the Consolidated Balance Sheet, measured at fair
value.
Changes in the fair value of derivative instruments and the ineffective
portion of the Company's designated and effective fair value hedge
relationships are recognized and reported as derivative fair value adjustments
in the Consolidated Statement of Income. When the Company elects not to
designate a derivative instrument and hedged item as a fair value hedge at
inception of the hedge, or the relationship does not qualify for fair value
hedge accounting treatment under SFAS 133/138, the full amount of changes in
the fair value of the derivative instrument will be recognized in the
consolidated financial statements.
The Company reviews the effectiveness of its hedging relationships quarterly
and as appropriate, to determine whether the relationships have been, and will
continue to be, effective in offsetting changes in the fair value of
designated hedged items. If hedge accounting is discontinued due to
ineffectiveness, the Company will continue to carry the derivative instrument
on the Consolidated Balance Sheet at its fair value. In addition, the Company
will cease to adjust the hedged item for changes in fair value and amortize
the cumulative fair value adjustments recognized in prior periods over the
remaining hedged items' term.
-55-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies (Continued)
- ---------------------------------------------------
Insurance Operations
- --------------------
Revenues from providing coverages under various contractual agreements are
recognized over the terms of the agreements in relation to the timing and level
of anticipated expenses. Revenues from insurance premiums are earned over the
terms of the respective policies in proportion to estimated claim activities.
Certain costs of acquiring new business, consisting primarily of commissions
and premium taxes, are deferred and amortized over the term of the related
policies on the same basis as revenues are earned.
The liability for losses and loss expenses represents the accumulation of
estimates for reported losses and a provision for losses incurred but not
reported, including claim adjustment expenses. Loss reserve projections are
used to estimate loss reporting patterns, loss payment patterns, and ultimate
claim costs. The liabilities for reported losses and the estimate of
unreported losses are included in other liabilities in the Consolidated Balance
Sheet. Commissions and fees from services provided are recognized in relation
to the timing and level of services performed.
Income Taxes
- ------------
The Company uses the liability method of accounting for income taxes under
which deferred tax assets and liabilities are adjusted to reflect changes in
tax rates and laws in the period such changes are enacted resulting in
adjustments to the current fiscal year's provision for income taxes.
TMCC files a consolidated federal income tax return with its domestic
subsidiaries. TMCC files either separate or consolidated/combined state income
tax returns with Toyota Motor North America ("TMA") or other domestic
subsidiaries of TMCC. State income tax expense is generally recognized as if
TMCC and its domestic subsidiaries filed their tax returns on a stand-alone
basis. In those states where TMCC and its domestic subsidiaries join in the
filing of consolidated or combined income tax returns, TMCC and its domestic
subsidiaries are allocated their share of the total income tax expense based on
combined allocation/apportionment factors and separate company income or loss.
Based on the state tax sharing agreement with TMA, TMCC and its domestic
subsidiaries pay for their share of the combined income tax expense and are
reimbursed for the benefit of any of their tax losses utilized in the combined
state income tax returns.
-56-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies (Continued)
- ---------------------------------------------------
Sale of Receivables and Valuation of Retained Interests
- -------------------------------------------------------
TMCC's securitization transactions are completed using qualified special
purpose entities ("QSPE") with the exception of one transaction in fiscal 2002
described below. As such, the Company achieves sale accounting treatment
under the provisions of Statement of Financial Accounting Standards ("SFAS")
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" ("SFAS 140"). The securitization transaction
executed in September 2001, while similar in all material respects to those
securitization transactions described above, was structured and accounted for
as a collateralized borrowing. For accounting purposes, the finance
receivables and debt issued by the related trust remain in the Company's
Consolidated Balance Sheet although the assets of the related trust are not
available to TMCC's creditors.
Gains or losses on finance receivables sold are recognized in the period in
which the sale occurs and are accounted for in accordance with SFAS 140. The
recorded gains or losses on assets sold depend on the carrying amount and the
fair value of the assets at the sale date. The carrying amount is allocated
between the assets sold and the subordinated retained interests based on their
relative fair values at the sale date. Gains or losses on assets sold are
included in investment and other income in the Consolidated Statement of
Income.
The key economic assumptions used in the calculation of the initial gain or
loss on assets sold and the subsequent valuation of the retained interests
include the market interest rate environment, severity and rate of credit
losses, and the prepayment speed of the receivables. Discount rates applied
to the retained interests at the sale date are based on current market rates
for an investment with a similar term and risk. Management estimates the
credit loss rate based on a number of factors including vehicle contract mix,
loan credit scoring, and age of contracts sold. To determine the prepayment
assumption used, management considers historical prepayment speeds of
outstanding securitization transactions and the owned portfolio, the current
interest rate environment, and economic conditions. All key assumptions used
in the valuation of the retained interests are reviewed quarterly and are
revised as deemed appropriate.
The subordinated retained interests in the trusts are included in investments
in marketable securities and other assets in the Consolidated Balance Sheet.
These interests are not considered to have a readily available market value.
Therefore, the fair value of the retained interests is calculated by
discounting expected cash flows using management's estimates and other key
economic assumptions and is accounted for in accordance with SFAS 115.
The Company recognizes income from the retained interests over the life of the
underlying retained interests using the effective yield method. The yield
represents the excess of all forecasted cash flows over the initial amount
recorded as the retained interests at the sale date. As adjustments to
forecasted cash flows are made based upon market conditions, the Company
adjusts the rate at which income is earned prospectively. If forecasted
future cash flows result in an other-than temporary decline in the fair value
below the carrying amount, an impairment is recognized and is included in
investment and other income in the Consolidated Statement of Income.
Otherwise, any difference in the carrying amount and the fair value of the
retained interests is recognized as an unrealized gain or loss, net of income
taxes, and is included in accumulated other comprehensive income in the
Consolidated Balance Sheet.
-57-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies (Continued)
- ---------------------------------------------------
New Accounting Standards
- ------------------------
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities" ("SFAS 146"), which
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies EITF Issue No. 94-3 "Liability Recognition
for Certain Employee Terminations Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". SFAS 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred as opposed to the date of an
entity's commitment to an exit plan as required under EITF Issue No. 94-3.
SFAS 146 also requires that measurement of the liability associated with exit
or disposal activities be at fair value. SFAS 146 is effective for the
Company for exit or disposal activities that are initiated after December 31,
2002. The implementation of SFAS 146 did not have a material impact on the
Company's consolidated financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an interpretation of FASB Statements No.
5, 57, and 107 and Rescission of FASB Interpretation No. 34" ("FIN 45"). FIN
45 elaborates on the disclosures to be made by a guarantor in its financial
statements about its obligations under certain guarantees that it has issued.
FIN 45 also requires a guarantor to recognize, at the inception of a
guarantee, a liability for the fair value of the obligations it has undertaken
in issuing the guarantee. The disclosure provisions of FIN 45 are effective
for financial statements of interim or annual periods that end after December
15, 2002. The provisions for initial recognition and measurement are
effective on a prospective basis for guarantees that are issued or modified
after December 31, 2002, irrespective of a guarantor's year-end. The Company
adopted the disclosure provisions of FIN 45 in the quarter ended December 31,
2002. Adoption of the initial recognition and measurement provisions of FIN
45 did not have a material impact on the Company's consolidated financial
statements.
-58-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies (Continued)
- ---------------------------------------------------
New Accounting Standards (Continued)
- ------------------------
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51" ("FIN 46"). FIN 46 requires existing unconsolidated variable interest
entities to be consolidated by their primary beneficiaries if the entities do
not effectively disperse risks among parties involved. FIN 46 applies
immediately to variable interest entities created after January 31, 2003, and
to variable interest entities in which an enterprise obtains an interest after
that date. It applies in the first fiscal year or interim period beginning
after June 15, 2003, to variable interest entities in which an enterprise
holds a variable interest that it acquired before February 1, 2003. FIN 46
applies to public enterprises as of the beginning of the applicable interim or
annual period. FIN 46 may be applied prospectively with a cumulative-effect
adjustment as of the date on which it is first applied or by restating
previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year restated.
The implementation of FIN 46 did not have a material impact on the Company's
consolidated financial statements because all securitization transactions are
with entities that are qualifying special-purpose entities under SFAS 140
except for one transaction categorized as a collateralized borrowing which is
already included in the Company's consolidated financial statements.
In March 2003, the Emerging Issues Task Force ("EITF") released Issue No. 02-
9, "Accounting for Changes That Result in a Transferor Regaining Control of
Financial Assets Sold" ("EITF 02-9") for events occurring after April 2, 2003.
EITF 02-9 relates to securitizations that have been accounted for as sales
under SFAS 140. In the event that one or more of the control rules specified
by SFAS 140 are no longer met, the transferor would have to recognize those
assets and the related liabilities on the Consolidated Balance Sheet at fair
value. The implementation of EITF 02-9 is not expected to have a material
impact on the Company's consolidated financial statements because all
securitization transactions treated as a sale for accounting purpose remain in
QSPEs and the control rules of SFAS 140 continue to be met.
-59-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies (Continued)
- ---------------------------------------------------
New Accounting Standards (Continued)
- ------------------------
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends
and clarifies accounting for derivative instruments and improves financial
reporting by requiring that contracts with comparable characteristics be
accounted for similarly. The amendments to SFAS 133 fall principally into
three categories: amendments related to SFAS 133 implementation issues that
were previously cleared by the FASB, amendments clarifying the definition of a
derivative, and amendments relating to the definition of expected cash flows
in FASB Concepts Statement No. 7 "Using Cash Flow Information and Present
Value in Accounting Measurements". SFAS 149 is effective for contracts
entered into or modified after June 30, 2003. All of the Company's existing
derivatives have been recognized in the Company's consolidated financial
statements under prior SFAS statements. SFAS 149 does not alter current
valuation or disclosures. As such, the implementation of SFAS 149 is not
expected to have a material impact on the Company's consolidated financial
statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150").
SFAS 150 addresses certain financial instruments that, under previous
guidance, could be accounted for as equity, but now must be classified as
liabilities in statements of financial position. These financial instruments
include 1) mandatorily redeemable financial instruments, 2) obligations to
repurchase the issuer's equity shares by transferring assets, and 3)
obligations to issue a variable number of shares. SFAS 150 is effective for
all financial instruments entered into or modified after May 31, 2003, and
otherwise effective at the beginning of the first interim period beginning
after June 15, 2003. The implementation of SFAS 150 is not expected to have a
material effect on the Company's consolidated financial statements.
Reclassifications
- -----------------
Certain prior period amounts have been reclassified to conform with the current
period presentation.
-60-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Investments in Marketable Securities
- ---------------------------------------------
The estimated fair value and amortized cost of investments in marketable
securities are as follows:
March 31, 2003
-------------------------------------------
Fair Unrealized Unrealized
Cost Value Gains Losses
------ ------ ---------- ----------
(Dollars in Millions)
Available-for-sale securities:
Senior and subordinated
securities....................... $ 933 $ 943 $ 10 $ -
Interest-only strips................ 121 133 12 -
Other asset-backed securities....... 242 252 11 -
Corporate debt securities........... 102 109 7 (1)
Equity securities................... 149 147 1 (3)
U.S. debt securities................ 38 39 2 -
------ ------ ----- -----
Total available-for-sale securities.... $1,585 $1,623 $ 43 $ (4)
===== =====
Held-to-maturity securities:
U.S. debt securities................ 7 7
------ ------
Total marketable securities............ $1,592 $1,630
====== ======
March 31, 2002
-------------------------------------------
Fair Unrealized Unrealized
Cost Value Gains Losses
------ ------ ---------- ----------
(Dollars in Millions)
Available-for-sale securities:
Senior and subordinated
securities....................... $ 498 $ 506 $ 8 $ -
Interest-only strips................ 98 109 11 -
Other asset-backed securities....... 208 212 5 (1)
Corporate debt securities........... 110 109 2 (2)
Equity securities................... 129 134 9 (4)
U.S. debt securities................ 23 23 - -
------ ------ ------ -----
Total available-for-sale securities.... $1,066 $1,093 $ 35 $ (7)
====== =====
Held-to-maturity securities:
U.S. debt securities................ 7 7
------ ------
Total marketable securities............ $1,073 $1,100
====== ======
-61-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Investments in Marketable Securities (Continued)
- ---------------------------------------------
The proceeds from sales of available-for-sale securities were $456 million,
$474 million, $287 million, and $740 million for fiscal 2003 and 2002, the six
months ended March 31, 2001, and fiscal 2000, respectively. Realized gains on
sales of available-for-sale securities were $8 million, $5 million, $7 million,
and $13 million for fiscal 2003 and 2002, the six months ended March 31, 2001,
and fiscal 2000, respectively. Realized losses on available-for-sale
securities were $29 million including $25 million in impairment losses, $4
million, $1 million, and $5 million for the years ended fiscal 2003 and 2002,
the six months ended March 31, 2001, and fiscal 2000, respectively. The cash
flow information presented above relates to the Company's investment portfolio
of its insurance operations. Cash flows related to interests retained in
securitization transactions are discussed in Note 7: Sale of Receivables.
The contractual maturities of investments in marketable securities at
March 31, 2003 are as follows:
Available-for-Sale Held-to-maturity
Securities Securities
-------------------- ----------------
Fair Fair
Cost Value Cost Value
------ -------- ----- -----
(Dollars in Millions)
Within one year...................... $ 631 $ 631 $ 7 $ 7
After one year through five years.... 567 596 - -
After five years through ten years... 95 100 - -
After ten years...................... 143 149 - -
Equity securities.................... 149 147 - -
------ ------ ----- -----
Total............................. $1,585 $1,623 $ 7 $ 7
====== ====== ===== =====
-62-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Finance Receivables, Net
- ---------------------------------
Finance receivables, net consists of the following:
March 31,
-----------------------
2003 2002
-------- --------
(Dollars in Millions)
Retail............................... $ 16,160 $ 13,715
Finance leases ....................... 6,078 7,682
Wholesale and other dealer loans..... 5,608 3,626
-------- --------
27,846 25,023
Unearned income...................... (1,043) (1,340)
-------- --------
Finance receivables, net of
unearned income.............. $ 26,803 $ 23,683
Allowance for credit losses .......... (326) (206)
-------- --------
Finance receivables, net .......... $ 26,477 $ 23,477
======== ========
Contractual maturities are as follows:
Due in the Wholesale
Years Ending Finance and Other
March 31, Retail Leases Dealer Loans
------------- -------- --------- ------------
(Dollars in Millions)
2004.................. $ 4,273 $ 2,153 $ 4,740
2005.................. 4,069 1,507 157
2006.................. 3,539 1,000 161
2007.................. 2,672 888 205
2008.................. 1,345 530 226
Thereafter............ 262 - 119
------- ------- -------
Total.............. $16,160 $ 6,078 $ 5,608
======= ======= =======
-63-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Finance Receivables, Net (Continued)
- ---------------------------------
Finance leases included estimated unguaranteed residual values of $1.8 billion
and $1.9 billion at March 31, 2003 and 2002, respectively. The aggregate
balances related to finance receivables 60 or more days past due totaled $160
million and $189 million at March 31, 2003 and 2002, respectively.
Substantially all of retail and finance lease receivables do not involve
recourse to the dealer in the event of customer default.
A substantial portion of the Company's finance receivables has historically
been repaid prior to contractual maturity dates; contractual maturities and
future minimum lease payments should not be considered as necessarily
indicative of future cash collections.
-64-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Investments in Operating Leases, Net
- ---------------------------------------------
Investments in operating leases, net consisted of the following:
March 31,
-----------------------
2003 2002
-------- --------
(Dollars in Millions)
Vehicles................................. $ 9,687 $ 9,011
Equipment and other...................... 720 721
-------- --------
10,407 9,732
Accumulated depreciation................. (2,254) (2,034)
Allowance for credit losses.............. (136) (67)
-------- --------
Investments in operating leases, net.. $ 8,017 $ 7,631
======== ========
Future minimum rentals on operating leases for each of the five succeeding
fiscal years are as follows:
Future Minimum
Rentals on
Fiscal Operating Leases
------------- ----------------
(Dollars in Millions)
2004........................... $ 1,729
2005........................... 1,274
2006........................... 675
2007........................... 131
2008........................... 6
Thereafter..................... -
---------
Total....................... $ 3,815
=========
A substantial portion of the Company's operating lease contracts has
historically been terminated prior to maturity; future minimum rentals as
shown above should not be considered as necessarily indicative of future cash
collections.
-65-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Allowance for Credit Losses
- ------------------------------------
An analysis of the allowance for credit losses follows:
Years Six Months Year
Ended Ended Ended
March 31, March 31, September 30,
------------------- ---------- -------------
2003 2002 2001 2000
-------- -------- ---------- -------------
(Dollars in Millions)
Allowance for credit losses
at beginning of period........ $ 283 $ 227 $ 230 $ 202
Provision for credit losses....... 604 263 89 135
Charge-offs....................... (365) (190) (75) (116)
Recoveries........................ 35 20 9 19
Other adjustments................. (31) (37) (26) (10)
------ ------ ------ ------
Allowance for credit losses
at end of period.............. $ 526 $ 283 $ 227 $ 230
====== ====== ====== ======
At March 31, 2003, the allowance for credit losses consisted of $462 million
to cover probable losses on the Company's owned portfolio and $64 million to
cover probable losses on repossessed collateral in inventory as of the period
end dates shown above. Total repossessed collateral in inventory at March 31,
2003, 2002, 2001 and September 30, 2000 was $147 million, $114 million, $76
million, and $59 million, respectively. Repossessed collateral is included in
other assets in the Consolidated Balance sheet.
-66-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Sale of Receivables
- ----------------------------
TMCC retains servicing rights and earns a contractual servicing fee of 1% per
annum on the total monthly outstanding principal balance of its securitized
receivables. In a subordinated capacity, the Company retains interest-only
strips, subordinated securities, and reserve funds in these securitizations,
and these retained interests are held as restricted assets subject to limited
recourse provisions and provide credit enhancement to the senior securities in
the Company's securitization transactions. The retained interests are not
available to satisfy any obligations of TMCC. Investors in the
securitizations have no recourse to the Company beyond the Company's retained
subordinated interests and any amounts drawn on the revolving liquidity notes.
The Company's exposure to these retained interests exists until the
associated securities are paid in full. Investors do not have recourse to
other assets held by TMCC for failure of obligors on the receivables to pay
when due or otherwise.
In previous periods, the Company also securitized, sold, and serviced lease
finance receivables. During fiscal 2002, Toyota Leasing, Inc. ("TLI")
exercised its option to repurchase remaining outstanding receivables under all
lease securitization transactions then outstanding. As a result of the
repurchase, there was no outstanding balance of interests in securitized lease
finance receivables as of, and subsequent to, March 31, 2002.
The Company adopted SFAS 140 during the six months ended March 2001. The
effect of adopting SFAS 140 was not material to the Company's consolidated
financial statements.
-67-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Sale of Receivables (Continued)
- ----------------------------
Cash Flows Related to Sales of Receivables
- ------------------------------------------
The following table summarizes gains on assets sold, and certain cash flows
received from, and paid to, the securitization trusts that were accounted for
as sales during fiscal 2003 and 2002, and the six months ended March 2001:
Years Ended Six Months Ended
March 31, March 31,
------------------------ ----------------
2003 2002 2001
------ -------------- ----------------
Retail Lease Retail Lease Retail
------ ----- ------ ----- ------
(Dollars in Millions)
Gains on assets sold................. $ 130 - $ 81 - $ 46
Cash flow information:
Proceeds from new securitizations,
net of purchased and retained
securities........................ $3,195 - $2,081 - $2,226
Servicing fees received.............. $ 54 $ 5 $ 48 $ 8 $ 18
Excess interest received from
interest only strips.............. $ 119 $ 2 $ 136 $ 4 $ 43
Repurchase of lease receivables . - $(304) - $ (5) -
Other repurchases of receivables..... $ (1) $ (8) $ (2) - -
Reimbursement of servicer advances... $ 1 $ 19 $ 4 $ 4 $ 7
Maturity advances ............... - - - $(30) -
Reimbursements of maturity advances.. - $ 69 - $131 -
- ---------------
Amount represents optional redemptions associated with the maturity of lease
securitizations.
Maturity advances represent the difference between the aggregate amount of principal
collected and available to pay principal of the securities, and the outstanding balance of the
securities due on targeted maturity dates. The Company was reimbursed for prior period maturity
advances from principal collections in subsequent months.
-68-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Sale of Receivables (Continued)
- ----------------------------
Key economic assumptions used in estimating the fair value of retained
interests at the sale dates of the securitization transactions completed
during fiscal 2003 and 2002, and the six months ended March 2001 were as
follows:
Years Ended Six Months Ended
March 31, March 31,
------------------------- ----------------
2003 2002 2001
---------- ---------- ----------------
Prepayment speed
related to securitizations....... 1.5% 1.5% 1.5%
Weighted average life
(in years)....................... 1.45-1.85 1.26-1.38 1.39-1.58
Expected credit losses............... 0.75-0.80% 0.70% 0.50%-0.55%
Discount rate used
on the subordinated securities... 5.0% 5.0%-8.0% 7.6%-8.0%
Discount rate used
on other retained interests...... 8%-10% 8%-12% 10%-12%
Expected cumulative static pool losses over the life of the securitizations
are calculated by taking actual life to date losses plus projected losses and
dividing the sum by the original balance of each pool of assets. Expected
cumulative static pool credit losses for the retail loans securitized in
fiscal 2003 and 2002, and for the six months ended March 2001 were 0.99%,
1.09%, and 1.46%, respectively. Actual cumulative residual value impairment
losses were 5.95% and 3.75% for lease securitizations outstanding during
fiscal 2002 and the six months ended March 2001, respectively. There were no
outstanding lease securitizations in fiscal 2003.
-69-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Sale of Receivables (Continued)
- ----------------------------
At March 31, 2003, the key economic assumptions and the sensitivity of the
current fair value of the retained interests to an immediate 10% and 20%
adverse change in those assumptions are presented below.
Retail
Finance Receivables
--------------------------
(Dollars in Millions)
Retained interests included in
investments in marketable securities................. $ 1,076
Retained interests included in other assets.............. 46
-------
$ 1,122
Prepayment speed assumption.............................. 1.50%-1.60%
Impact of 10 percent adverse change................... $ (12)
Impact of 20 percent adverse change................... $ (24)
Residual cash flows discount rate (annual rate).......... 5.00%-10.00%
Impact of 10 percent adverse change................... $ (3)
Impact of 20 percent adverse change................... $ (7)
Expected credit losses................................... 0.68%-1.14%
Impact of 10 percent adverse change................... $ (8)
Impact of 20 percent adverse change................... $ (15)
These hypothetical scenarios do not reflect expected market conditions and
should not be used as a prediction of future performance. As the figures
indicate, changes in the fair value may not be linear. In addition, the
effect of a variation in a particular assumption on the fair value of the
retained interest is calculated without changing any other assumption. Actual
changes in one factor may result in changes in another, which might magnify or
counteract the sensitivities. Actual cash flows may differ from the above
analysis.
-70-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Sale of Receivables (Continued)
- ----------------------------
Finance receivable balances and delinquency amounts for managed receivables,
which include both owned and securitized receivables, at March 31, 2003 and
2002, are summarized as follows:
March 31,
-----------------------
2003 2002
-------- --------
(Dollars in Millions)
Retail finance receivables, net...... $ 22,118 $ 18,137
Finance leases ....................... 5,169 6,500
Wholesale and other dealer loans..... 5,608 3,626
-------- --------
Total finance receivables managed.... 32,895 28,263
Less:
Securitized retail
finance receivables.............. (6,092) (4,580)
-------- --------
Total finance receivables owned...... $ 26,803 $ 23,683
======== ========
Amount 60 Days Credit Losses
or More Net of
Past Due Recoveries
-------------- --------------
March 31, March 31,
-------------- --------------
2003 2002 2003 2002
------ ------ ------ ------
(Dollars in Millions)
Retail.............................. $146 $122 $166 $ 75
Finance lease....................... 55 112 119 64
Wholesale and other dealer loans.... - - - -
---- ---- ---- ----
Total managed portfolio............. $201 $234 $285 $139
==== ==== ==== ====
-71-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Derivatives and Hedging Activities
- -------------------------------------------
The Company manages its exposure to market risks such as interest rate and
foreign exchange risks using derivative instruments. These instruments include
interest rate swaps, cross currency interest rate swaps, and option-based
products such as interest rate caps.
Derivative instruments, while useful in managing interest rate and foreign
currency risks, involve an element of counterparty credit risk which is the
possibility that a counterparty may default. This risk is managed through the
use of credit standard guidelines, counterparty diversification, monitoring of
counterparty financial condition, use of master netting agreements with all
counterparties and exposure limits based on counterparty credit, exposure
amount and management risk tolerance.
Fair-Value Hedges
- -----------------
The Company enters into interest rate swap and cross currency interest rate
swap agreements to convert its fixed-rate debt to variable-rate U.S. dollar
debt. The currency exposure for all foreign currency debt is hedged at
issuance using cross currency interest rate swaps that convert fixed-rate non-
U.S. dollar debt to variable-rate U.S. dollar denominated payments. Such
derivatives are linked to specific liabilities at inception and initially
qualify for hedge accounting treatment under SFAS 133/138.
Non-designated Derivatives
- --------------------------
The Company's primary market risk exposure is interest rate risk, in
particular U.S. dollar London Interbank Offered Rate ("LIBOR"). Interest rate
risk results from differences in the re-pricing characteristics of the
Company's assets and liabilities. Interest rate risk exposure is managed on a
portfolio basis using derivatives such as interest rate swaps and option-based
products such as interest rate caps ("non-designated derivatives"). Since
these derivatives are not linked to specific assets or liabilities, they do
not qualify for hedge accounting treatment under SFAS 133/138.
Accounting for Derivatives and Hedging Activities
- -------------------------------------------------
In accordance with SFAS 133/138, the Company records derivative instruments on
its Consolidated Balance Sheet as assets or liabilities, measured at fair
value. Changes in the fair value of derivative instruments and the
ineffective portion of the Company's designated and effective fair value hedge
relationships are recognized and reported as derivative fair value adjustments
in the consolidated financial statements. Additional information regarding
the Company's accounting for derivatives is disclosed in Note 2-Summary of
Significant Accounting Policies - Derivative Instruments.
Fiscal 2003 results
- -------------------
The Company recognized a $335 million unfavorable Derivative Adjustment
(reported as Derivative fair value adjustments in the Consolidated Statement
of Income) during fiscal 2003. The unfavorable Derivative Adjustment
reflected a $331 million unfavorable adjustment to the fair market value of
the Company's non-designated derivatives and a $4 million unfavorable
adjustment related to the ineffective portion of the Company's fair value
hedges.
-72-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Derivatives and Hedging Activities(continued)
- ------------------------------------------------------
Fiscal 2002 results
- -------------------
The Company recognized a $38 million favorable Derivative Adjustment during
fiscal 2002. The favorable Derivative Adjustment reflected a $43 million
favorable adjustment to the fair market value of the Company's non-designated
derivatives and a $5 million unfavorable adjustment related to the ineffective
portion of the Company's fair value hedges.
-73-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Notes and Loans Payable
- --------------------------------
Notes and loans payable and the related weighted average interest rates at
March 31, 2003 and March 31, 2002 are summarized in the following table:
Years Ended Wtd. Avg. Int. Rates
March 31, March 31,
----------------------- --------------------
2003 2002 2003 2002
--------- ---------- --------- --------
(Dollars in Millions)
Short-term debt ........... $ 4,843 $ 5,012 1.36% 1.83%
Long-term debt ............ $ 26,034 $ 22,678 1.43% 1.59%
--------- ---------
Fair Value Adjustment ..... $ 1,222 $ (664)
--------- ---------
Notes and Loans Payable... $ 32,099 $ 27,026 1.42% 1.64%
========= =========
- --------------------
Includes the effect of interest rate and cross currency interest rate swap agreements.
Short-term debt consists primarily of commercial paper and, to a lesser extent, debt
incurred under lines of credit.
Consists primarily of domestic and euro MTNs, eurobonds and domestic bonds and, to a lesser
extent, debt related to collateralized borrowings, and debt incurred under lines of credit.
Adjusts debt to fair market value in accordance with SFAS 133/138.
Unsecured notes denominated in various foreign currencies included in notes and
loans payable totaled $11 billion and $7 billion at March 31, 2003 and 2002,
respectively. Concurrent with the issuance of these unsecured notes, the
Company entered into cross currency interest rate swap agreements to convert
these obligations into variable rate U.S. dollar obligations.
-74-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Notes and Loans Payable (Continued)
- --------------------------------
Scheduled maturities of the Company's debt portfolio are summarized below:
March 31, 2003
----------------------
(Dollars in Millions)
Commercial paper........................ $ 4,819
Other debt
due in the fiscal years ending:
2003................................ -
2004................................ 7,248
2005................................ 5,198
2006................................ 4,861
2007................................ 2,265
2008................................ 4,415
Thereafter.......................... 3,293
--------
Total other debt.................... 27,280
--------
Notes and loans payable......... $ 32,099
========
- --------------------
Consists of domestic and euro MTNs, euro and domestic bonds, and, to a lesser extent, debt
related to collateralized borrowings, and debt incurred under revolving credit facilities
-75-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Notes and Loans Payable (Continued)
- --------------------------------
Notes and loans payable at March 31, 2003 and 2002 include the effects of
Derivative Adjustments as discussed in Note 8 - Derivatives and Hedging
Activities of the Notes to Consolidated Financial Statements. The Derivative
Adjustments recorded during fiscal 2003, 2002 and the six months ended March
31, 2001 consisted of the following:
Years
Ended
March 31,
--------------------------------
2003 2002 2001
-------- -------- --------
(Dollars in Millions)
Increase in derivative assets............ $ 967 $ 75 $ 379
Decrease/(Increase)in derivative
liabilities........................... 610 290 (1,414)
(Increase)/decrease in fair value of
debt portfolio........................ (1,912) (327) 1,012
-------- -------- --------
Net Derivative Adjustment................ $ (335) $ 38 $ (23)
======== ======== ========
- --------------------
The Company adopted and implemented FAS133/138 in October 2000. The figures above represent
amounts related to implementation and activities for the six months ended March 31, 2001.
-76-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 - Fair Value of Financial Instruments
- ---------------------------------------------
The fair value of financial instruments at March 31, 2003 and 2002, was
estimated using the valuation methodologies described below. Considerable
judgment was employed in interpreting market data to develop estimates of fair
value; accordingly, the estimates presented herein are not necessarily
indicative of the amounts that could be realized or would be paid in a current
market exchange. The use of different market assumptions or valuation
methodologies could have a material effect on the estimated fair value amounts.
The carrying amounts and estimated fair values of the Company's financial
instruments at March 31, 2003 and 2002 are as follows:
March 31,
-----------------------------------------
2003 2002
-------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
(Dollars in Millions)
Balance sheet financial
instruments:
Assets:
Cash and cash equivalents.......... $ 980 $ 980 $ 747 $ 747
Investments in marketable
securities...................... $ 1,630 $ 1,630 $ 1,100 $ 1,100
Finance receivables, net........... $ 21,373 $ 21,920 $ 17,048 $ 17,294
Derivative Assets:
Cross currency interest rate
swap agreements............... $ 719 $ 719 $ 12 $ 12
Interest rate swap agreements... $ 669 $ 669 $ 346 $ 346
Option-based products........... $ 33 $ 33 $ 92 $ 92
Indexed note swap agreements.... $ - $ - $ 4 $ 4
Liabilities:
Notes and loans payable............ $ 32,099 $ 32,099 $ 27,026 $ 27,026
Derivative Liabilities:
Cross currency interest rate
swap agreements............... $ 165 $ 165 $ 970 $ 970
Interest rate swap agreements... $ 349 $ 349 $ 148 $ 148
Indexed note swap agreements.... $ - $ - $ 6 $ 6
-77-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 - Fair Value of Financial Instruments (Continued)
- ---------------------------------------------
The fair value estimates presented herein are based on information available
as of March 31, 2003 and 2002. The methods and assumptions used to estimate
the fair value of financial instruments are summarized as follows:
Cash and Cash Equivalents
- -------------------------
The carrying amount of cash and cash equivalents approximates market value due
to the short maturity of these investments.
Investments in Marketable Securities
- ------------------------------------
The fair value of marketable securities was estimated using quoted market
prices or discounted cash flow analysis.
Finance Receivables, Net
- ------------------------
The carrying amounts of $5.4 billion and $3.4 billion of variable rate finance
receivables at March 31, 2003 and 2002, respectively, were assumed to
approximate fair value as these receivables reprice at prevailing market
rates. The fair value of fixed rate finance receivables was estimated by
discounting expected cash flows using the rates at which loans of similar
credit quality and maturity would be originated as of March 31, 2003 and 2002.
Derivative Assets and Liabilities
- ---------------------------------
The estimated fair value of the Company's derivative assets and liabilities
was derived by discounting expected cash flows using quoted market exchange
rates, quoted market interest rates, or quoted market prices, as of March 31,
2003 and 2002 as applicable to each instrument.
Notes and Loans Payable
- -----------------------
The fair value of notes and loans payable was estimated by discounting
expected cash flows using the interest rates at which debt of similar credit
quality and maturity would be issued as of March 31, 2003 and 2002. The
Company also utilizes quoted market exchange rates, quoted market interest
rates, or quoted market prices, when appropriate, in developing cash flows.
The carrying amount of commercial paper was assumed to approximate fair value
due to the short maturity of these instruments.
-78-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Pension and Other Benefit Plans
- -----------------------------------------
All full-time employees of TMCC, Toyota Credit de Puerto Rico Corp, and TMCC's
insurance subsidiaries are eligible to participate in the TMS pension plan
commencing on the first day of the month following hire. Benefits payable
under this non-contributory defined benefit pension plan are based upon the
employees' years of credited service and the highest 60 consecutive months'
compensation, reduced by a percentage of social security benefits. The
Company's pension expense was $9 million, $8 million, $3 million, and $5
million for fiscal 2003, 2002, the six months ended March 31, 2001, and fiscal
2000, respectively. At March 31, 2003, 2002, and 2001, and September 30, 2000,
the accumulated benefit obligation and plan net assets for employees of the
Company were not determined separately from TMS. TMS funding policy is to
contribute annually the maximum amount deductible for federal income tax
purposes.
-79-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 - Provision for Income Taxes
- ------------------------------------
The provision for income taxes consisted of the following:
Years Six Months Year
Ended Ended Ended
March 31, March 31, September 30,
---------------- ---------- -------------
2003 2002 2001 2000
------ ------ ---------- -------------
(Dollars in Millions)
Current
Federal, net of foreign tax credit. $ (98) $ (55) $ 30 $ 68
Foreign............................ 8 9 2 3
State.............................. (26) (6) 10 41
----- ----- ----- -----
Total current................... (116) (52) 42 112
----- ----- ----- -----
Deferred
Federal............................ 162 174 (11) (21)
State.............................. 21 37 (4) (26)
----- ----- ----- -----
Total deferred.................. 183 211 (15) (47)
----- ----- ----- -----
Provision for income taxes.... $ 67 $ 159 $ 27 $ 65
===== ===== ===== =====
A reconciliation between the U.S. federal statutory tax rate and the effective
tax rate is as follows:
Years Six Months Year
Ended Ended Ended
March 31, March 31, September 30,
---------------- ---------- -------------
2003 2002 2001 2000
------ ------ ---------- -------------
Provision for income taxes at
U.S. federal statutory tax rate..... 35.00% 35.00% 35.00% 35.00%
State and local taxes
(net of federal tax benefit)........ 4.67% 4.97% 5.63% 5.88%
Other, deferred state liability
benefit due to reduced
effective state rate................ (6.55)% - - -
Other, includes expense for
deferred tax assets valuation....... 4.81% (0.45)% (3.19)% (2.43)%
----- ----- ----- -----
Effective tax rate...................... 37.93% 39.52% 37.44% 38.45%
===== ===== ===== =====
-80-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 - Provision for Income Taxes (Continued)
- ------------------------------------
The deferred federal and state income tax liabilities are as follows:
March 31,
-----------------------
2003 2002
------ ------
(Dollars in Millions)
Federal...................................... $1,697 $1,524
State........................................ 169 155
------ ------
Net deferred income tax liability........ $1,866 $1,679
====== ======
The Company's deferred tax assets and liabilities consisted of the following:
March 31,
-----------------------
2003 2002
------ ------
(Dollars in Millions)
Liabilities:
Lease transactions....................... $2,329 $1,664
State taxes.............................. 249 193
Revenue recognition...................... 1 (1)
Other.................................... 174 102
------ ------
Deferred tax liabilities............. 2,753 1,958
------ ------
Assets:
Mark-to-market........................... 108 (15)
Provision for losses..................... 205 91
Deferred administrative fees............. 154 130
Net operating loss
and foreign tax credit carryforwards. 381 36
Deferred acquisition costs............... 35 30
Unearned insurance premiums.............. 9 7
------ ------
Deferred tax assets.................. 892 279
------ ------
Valuation allowance.................. 5 -
------ ------
Net deferred income tax liability $1,866 $1,679
====== ======
-81-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 - Provision for Income Taxes (Continued)
- ------------------------------------
TMCC and its domestic subsidiaries have federal tax net operating loss
carryforwards of $759 million which expire beginning in fiscal 2023 through
2024. TMCC and its domestic subsidiaries have state tax net operating loss
carryforwards of $1,296 million which expire beginning in fiscal 2004 through
2024. In addition, TMCC and its domestic subsidiaries have foreign tax
credits totaling $20 million, which were reduced in fiscal 2003 by a $5
million valuation allowance.
Note 13 - Comprehensive Income
- ------------------------------
The table below summarizes the components of the Company's total comprehensive
income for the periods presented below:
Years Six Months Year
Ended Ended Ended
March 31, March 31, September 30,
-------------- ---------- -------------
2003 2002 2001 2000
------ ------ ---------- -------------
(Dollars in Millions)
Net income................................ $110 $243 $ 42 $104
Other comprehensive income:
Net unrealized (loss) gain arising
during period (net of tax (benefit)
provision of ($6), ($1), $2, and $5
in 2003, 2002, 2001, and 2000)...... (10) (1) 3 9
Less: reclassification adjustment for
net loss (gain) included
in net income (net of tax (benefit)
provision of ($9), $0, $2, and $3
in 2003, 2002, 2001, and 2000)...... 12 (1) (4) (5)
---- ---- ---- ----
Net unrealized gain (loss) on
available-for-sale marketable
securities.......................... 2 (2) (1) 4
---- ---- ---- ----
Total Comprehensive Income................ $112 $241 $ 41 $108
==== ==== ==== ====
-82-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 - Related Party Transactions
- ------------------------------------
The tables below summarize amounts included in the Company's Consolidated
Balance Sheets and Statements of Income for the fiscal periods presented, under
various related party agreements or relationships:
March 31,
-------------------------------
2003 2002
---------- ----------
(Dollars in Millions)
Consolidated Balance Sheet:
Accrued credit support fee payable...... $ 7 $ 6
Net inter-company payable............... $ 59 $ 52
Notes payable under
affiliate MTN program............... $ 1 -
Notes receivable under
home loan program................... $ 9 $ 5
Years Six Months Year
Ended Ended Ended
March 31, March 31, September 30,
-------------------- ---------- -------------
2003 2002 2001 2000
------ ------ ---------- -------------
(Dollars in Millions)
Consolidated Statement of Income:
Credit support fees incurred............ $ (13) $ (12) $ (6) $ -
Shared services charges................. (63) (51) (27) (25)
Rent expense under facilities leases.... (5) (5) (3) (5)
Marketing, wholesale support,
and other revenues.................. 143 132 61 116
Affiliate insurance premiums and
commissions revenue................. 40 40 19 33
Affiliate loans and investments .... - 1 1 14
TMS support for certain vehicle
disposition losses.................. - - - 35
------ ------ ------ ------
Total................................... $ 102 $ 105 $ 45 $ 168
====== ====== ====== ======
- ---------------
Includes amounts earned on inter-company loan or investment transactions.
Credit Support Fee Agreement and Credit Support Agreements
- ----------------------------------------------------------
During fiscal 2001, TMCC and TFSC entered into a credit support fee agreement
(the "Credit Support Fee Agreement"). The Credit Support Fee Agreement
requires TMCC to pay to TFSC a semi-annual fee equal to 0.05% per annum of the
weighted average outstanding amount of TMCC's bonds and other liabilities or
securities entitled to credit support under the TMC and TFSC credit support
agreements described below.
-83-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 - Related Party Transactions (Continued)
- ------------------------------------
In connection with the creation of TFSC and the transfer of ownership of TMCC
from TMS to TFSA, TMC and TFSC entered into a credit support agreement ("the
TMC Credit Support Agreement"). Under the terms of this agreement, TMC has
agreed to certain ownership, subsidiary net worth, and debt service provisions
in support of TFSC operations. The agreement is not a guarantee by TMC of any
securities or obligations of TFSC.
Concurrent with the execution of the TMC Credit Support Agreement, TFSC and
TMCC entered into a credit support agreement ("the TFSC Credit Support
Agreement"). Under this agreement, TFSC agreed to certain ownership,
subsidiary net worth, and debt service provisions similar to those under the
TMC Credit Support Agreement. This agreement is not a guarantee by TFSC of
any securities or other obligations of TMCC. The TMC Credit Support Agreement
and the TFSC Credit Support Agreement are governed by, and construed in
accordance with, the laws of Japan.
Net Inter-Company Payable
- -------------------------
Amounts represent net inter-company payable balances due to TMS, arising from
various transactions between the Company and TMS. The nature of such
transactions is discussed throughout this footnote.
Affiliate MTN Program
- ---------------------
Certain employees of TMCC and its affiliates, including certain officers and
directors of TMCC, have purchased MTNs from TMCC. Each of the notes
outstanding at March 31, 2003 had an original term of ten years. The interest
rate was fixed at inception at a rate equal to 0.80% above the rate for ten-
year Treasury notes. The notes were required to be in a minimum principal
amount of $100,000. Each holder of a note has a one-time option to convert
his note at par to a floating rate note bearing interest at LIBOR plus 0.15%.
Each holder also has the right to require TMCC to repurchase each note, in
whole but not in part, at its then market value, as determined by TMCC.
Executive MTNs are included in notes and loans payable in the Consolidated
Balance Sheet.
Home Loan Program
- -----------------
Under a program available to certain levels of management of the Company,
certain officers, directors, and other members of management of the Company
have received mortgage loans from the Company secured by residential real
property. All of these loans were made prior to July 30, 2002.
Shared Services
- ---------------
On October 1, 2000, TMS and TMCC entered into a Shared Services Agreement
covering certain technological and administrative services, such as
information systems support, facilities and corporate services provided by
each entity to the other after the ownership of TMCC was transferred to TFSA.
Rent Expense
- ------------
The Company leases its headquarters facility and Iowa Service Center from TMS.
-84-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 - Related Party Transactions (Continued)
- ------------------------------------
Marketing, Wholesale Support, and Other Revenues
- ------------------------------------------------
Revenues are comprised of amounts earned from funds provided by TMS and Toyota
Material Handling, U.S.A., Inc. in support of special retail and lease
marketing incentive programs offered by TMCC and amounts related to lease and
wholesale financing of aircraft or other products to, or from, affiliates.
Affiliate Insurance Premiums and Commissions Revenue
- ----------------------------------------------------
Toyota Motor Insurance Services, Inc. ("TMIS") provides certain insurance
services, and insurance and reinsurance coverage to TMS.
Affiliate Loans and Investments
- -------------------------------
In fiscal 2000, TMCC extended an uncommitted revolving line of credit to
iStarSystems, Inc., a corporation owned 80% by TMS. The line of credit was
increased to $43 million in fiscal 2002. Interest on amounts borrowed was
charged at a floating rate of LIBOR plus 3.75% per annum and was guaranteed by
TMS. During fiscal 2002, TMS repaid the outstanding balance of $40 million and
the line of credit was terminated. TMCC recognized $2 million, $1 million, and
$1 million, in interest income on the loan during fiscal 2002, the six months
ended March 2001, and fiscal 2000, respectively.
During fiscal 2000, TMCC had an arrangement to borrow funds from or invest
funds with TMS at short-term market rates. For the year ended September 30,
2000, interest earned on investments totaled $13 million, with the highest
amounts of funds invested with TMS totaling $797 million. This arrangement was
officially terminated in October 2000, when ownership of TMCC was transferred
from TMS to TFSA; however, in September 2001 TMS made a short-term $282 million
loan to TMCC at an interest rate of 3.53% during the financial market
disruptions that occurred relative to the events of September 11, 2001. The
loan, including $1 million of interest, was repaid in full prior to
September 30, 2001.
TMS Support for Certain Vehicle Disposition Losses
- --------------------------------------------------
Included in depreciation on leases in the Consolidated Statement of Income for
the year ended September 30, 2000 were amounts received by the Company under
an arrangement with TMS to support vehicle disposition losses.
-85-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 - Lines of Credit/Standby Letters of Credit
- ----------------------------------------------------
To support its commercial paper program and for general corporate purposes,
TMCC maintains syndicated bank credit facilities with certain banks whose
commitments aggregated $4.2 billion and $3.5 billion, at March 31, 2003 and
2002, respectively. No loans were outstanding under any of these bank credit
facilities as of March 31, 2003 and 2002.
In addition, TMCC maintains uncommitted lines of credit to facilitate issuance
and maintenance of letters of credit. Available lines of credit totaled $60
million and $61 million as of March 31, 2003 and 2002, respectively.
Approximately $0.7 million and $0.5 million in letters of credit were
outstanding as of March 31, 2003 and 2002, respectively.
-86-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 - Commitments and Contingent Liabilities
- ------------------------------------------------
Guarantees and Comfort Letters
- ------------------------------
TMCC has entered into guarantees or comfort letters on behalf of its
subsidiaries and certain affiliates. The outstanding balances of the
commitments covered by the guarantees and comfort letters as of March 31, 2003
are summarized in the table below:
Outstanding
Balance of
Maximum Liabilities
Commitment underlying the
Amount Commitment
---------- ---------------
(Dollars in Millions)
Guarantees:
BTB debt................................. $ 30 $ 12
Toyota Services de Venezuela, C.A.
("TSV") debt......................... 33 15
Affiliate pollution control
and solid waste disposal bonds...... 148 148
Comfort Letters:
Toyota Services de Mexico, S.A. de C.V.
("TSM") credit facilities............ 73 24
TSV office lease......................... 1 1
------ ------
Total guarantees and comfort letters......... $ 285 $ 200
====== ======
- ---------------
The outstanding balances underlying the commitments are liabilities of the respective
subsidiaries or affiliates.
Subsidiary Guarantees
- ---------------------
TMCC has executed a guarantee totaling $30 million in respect of the offshore
bank loan of BTB. This guarantee will remain in effect until the loan is
repaid in full and TMCC elects to terminate the guarantee. The loan matures
in fiscal 2005. TMCC would be required to perform under this guarantee on
behalf of BTB, should BTB default on payments for any reason including but not
limited to, financial insolvency, cross border payment restrictions, and other
sovereign restrictions on off-shore payments. TMCC has entered into a
separate indemnity agreement with BTB. The indemnity agreement includes
reimbursement provisions whereby TMCC is entitled to reimbursement from BTB.
-87-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 - Commitments and Contingent Liabilities (Continued)
- ------------------------------------------------
Subsidiary Guarantees (Continued)
- ---------------------
TMCC has also entered into guarantees totaling $33 million with Venezuelan
banks on behalf of TSV regarding local bank credit facilities. These
guarantees allow TSV to obtain uncommitted bank lines of credit for a period
of one year (subject to renewal at TMCC's election). These guarantees will
remain in effect for as long as any loans advanced during the term of the
guarantee are outstanding, or the loans are repaid in full and TMCC elects to
terminate the guarantees. Maturities for bank loan advances range from one
month to 36 months. The initial credit facilities may be extended for
additional periods by mutual agreement between TSV and the banks, subject to
TMCC's discretion to continue its guarantees. TMCC would be required to
perform under these guarantees on behalf of TSV, should TSV default on
payments as a result of financial insolvency. Currently, the Company has not
entered into a separate reimbursement agreement with TSV.
TMCC has not been required to perform under the BTB and the TSV guarantees as
of March 31, 2003.
TMCC guaranteed TCA's offshore U.S. dollar bank loans in a principal amount
not to exceed $65 million. In 2001, the Argentine government imposed foreign
exchange controls restricting TCA's ability to send payments out of Argentina
to service its offshore debt. In 2002, the Argentine government established
re-denomination policies that adversely affected TCA's financial condition and
further limited its ability to fully satisfy its offshore U.S. dollar loans.
As a result, in fiscal 2002, TMCC established a $26 million reserve pursuant
to its guaranty of TCA's offshore outstanding debt. The reserve was increased
to $37 million at September 30, 2002.
During fiscal 2003, TMCC performed under its guarantees and repaid $35 million
of the then $37 million outstanding balance and accrued interest. TCA repaid
the remaining outstanding balance and accrued interest. As of March 31, 2003,
all of TMCC's guarantees of TCA's debt have been satisfied and the guarantees
are terminated.
TMCC has entered into a separate indemnity agreement with TCA. The indemnity
agreement and a subsequent letter agreement executed between TMCC and TCA
includes reimbursement provisions whereby TMCC is entitled to reimbursement
from TCA for the principal amount paid by TMCC to TCA's banks under the
guarantees, while the interest portion was forgiven. Though TMCC is entitled
to reimbursement of amounts paid under the guarantees, receipt of such
reimbursement is not certain as to amount or timing.
-88-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 - Commitments and Contingent Liabilities (Continued)
- ------------------------------------------------
Affiliate Bond Guarantees
- -------------------------
TMCC has guaranteed payments of principal, interest, and premiums, if any, on
$88 million principal amount of flexible rate demand solid waste disposal
revenue bonds issued by Putnam County, West Virginia, of which $40 million
matures in June 2028, $28 million matures in August 2029, and $20 million
matures in April 2030. The bonds were issued in connection with the West
Virginia manufacturing facility of an affiliate.
TMCC has guaranteed payments of principal, interest, and premiums, if any, on
$60 million principal amount of flexible rate demand pollution control revenue
bonds issued by Gibson County, Indiana, of which $10 million matures in
October 2027, January 2028, January 2029, January 2030, February 2031, and
September 2031, respectively. The bonds were issued in connection with the
Indiana manufacturing facility of an affiliate.
TMCC would be required to perform under the affiliate bond guarantees in the
event of any of the following:
a) payment of any installment of interest, principal, premium, if any, or
purchase price on the bonds, is not made when the payment becomes due and
payable;
b) the occurrence of certain events of bankruptcy involving the benefactor
manufacturing facilities or TMCC;
c) failure by the benefactor manufacturing facilities to observe or perform
any covenant, condition or agreement under the guarantees, other than as
referred to in (a) above;
d) failure by the bond issuers to observe or perform any covenant, condition
or agreement under the guarantees, other than as referred to in (a) above;
e) failure by TMCC to observe or perform any covenant, condition, agreement
or obligation under the guarantees.
These guarantees include reimbursement provisions whereby TMCC is entitled to
reimbursement by the benefactor manufacturing facilities for all principal and
interest paid and fees incurred on behalf of the benefactor manufacturing
facilities and to default interest on those amounts. TMCC has not been
required to perform under any of these affiliate bond guarantees as of March
31, 2003.
-89-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 - Commitments and Contingent Liabilities (Continued)
- ------------------------------------------------
Subsidiary Comfort Letters
- --------------------------
TMCC has signed comfort letters with Mexican banks on behalf of TSM regarding
local bank credit facilities. Under the provisions of these comfort letters,
TMCC would be required to exercise its influence to induce TSM to meet all
obligations under TSM's credit facilities should TSM default on payments as a
result of financial insolvency. These comfort letters allow TSM to obtain
uncommitted bank lines of credit for a period of one year (which term is
subject to renewal at TMCC's election). These comfort letters will remain in
effect for as long as any loans advanced during the term of the comfort
letters are outstanding. Maturities for bank loan advances range from one
month to 36 months. The initial credit facilities may be extended for
additional periods by mutual agreement between TSM and the banks, subject to
TMCC's agreement to extend the term of its comfort letters. These comfort
letters do not contain any reimbursement provisions.
TMCC has signed a comfort letter on behalf of TSV in favor of the landlord
of TSV's 5-year office lease. The comfort letter provides that if any
currency exchange controls are imposed in Venezuela that render it illegal
for TSV to pay the rent to the Landlord in U.S. Dollars (which is required
under the Lease), then TMCC will pay the rental fees that are owed to the
landlord during the currency exchange restriction period to a bank account
located outside of Venezuela. Though currency exchange controls have been
imposed in Venezuela, such controls have not prohibited TSV from meeting its
obligations under the lease agreement. The lease is cancelable at the
convenience of TSV as of October 2004. This comfort letter does not contain
any reimbursement provisions.
TMCC has not been required to perform under the TSM and the TSV comfort
letters as of March 31, 2003.
-90-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 - Commitments and Contingent Liabilities (Continued)
- ------------------------------------------------
Other Commitments
- -----------------
In addition to the commitments previously discussed, TMCC has also entered
into revolving forms of guaranteed or contingent arrangements. Commitments
outstanding as of March 31, 2003 are summarized in the table below:
Outstanding
Balance of
Maximum Liabilities
Commitment underlying the
Amount Commitment
---------- --------------
(Dollars in Millions)
Revolving liquidity notes
related to securitizations................ $ 39 $ -
Credit facilities with
dealers ............................... 2,923 1,835
Lease commitments............................. 52 52
------ ------
Total $3,014 $1,887
====== ======
- ---------------
The outstanding balances underlying the commitments are liabilities of the respective
dealers.
In certain securitization structures, revolving liquidity notes are used in
lieu of reserve funds to provide credit enhancement to the senior securities.
Under these revolving liquidity notes, investors may draw upon the notes to
cover any shortfall in interest and principal payments. The draws are funded
by TMCC and repayments of the liquidity notes are subordinated to principal
and interest payments due on the securities, and in certain circumstances, may
require deposits for the reserve funds. TMCC must fund the entire amount
available under the revolving liquidity notes if TMCC's short-term unsecured
debt rating is downgraded below P-1 or A-1 by Moody's Investors Service, Inc.
or Standard & Poor's Ratings, Group, a division of The McGraw-Hill Companies,
Inc., respectively.
The Company maintains credit facilities with dealers. These credit facilities
can be used for business acquisitions, facilities refurbishment, real estate
purchases, and working capital requirements. These loans are typically secured
with liens on real estate, vehicle inventory, and/or other dealership assets,
as appropriate, and usually are secured by the personal or corporate guarantees
of the dealers.
-91-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 - Commitments and Contingent Liabilities (Continued)
- ------------------------------------------------
At March 31, 2003, the Company is a lessee under lease agreements for
facilities with minimum future commitments as follows: years ending 2004 -
$18 million; 2005 - $12 million; 2006 - $10 million; 2007 - $6 million;
March 31, 2008 - $3 million; and thereafter - $3 million.
TMCC has guaranteed the obligations of TMIS relating to vehicle service
agreements issued in certain states. These states require a letter of
guaranty from TMCC to support the financial obligations of TMIS as a service
contract provider. These guarantees have been given without regard to any
security, but are limited to the duration of the agreements, which may have
terms that range from 12 months to 84 months. The liability for these
agreements is limited to the original manufacturer's suggested retail price
for new vehicles and fair market value, at the time the agreement was issued,
for used vehicles. Should TMIS become unable to satisfy its obligations
related to these agreements, TMCC would be required to perform under the
guarantees. As of March 31, 2003, TMCC has approximately 167,000 agreements
guaranteed by TMCC. TMCC has not paid any amounts under these guarantees
during fiscal 2003.
Various legal actions, governmental proceedings and other claims are pending or
may be instituted or asserted in the future against the Company with respect to
matters arising from the ordinary course of business. Certain of these actions
are or purport to be class action suits, seeking sizeable damages and/or
changes in the Company's business operations, policies and practices. Certain
of these actions are similar to suits that have been filed against other
financial institutions and captive finance companies. Management and internal
and external counsel perform periodic reviews of pending claims and actions to
determine the probability of adverse verdicts and resulting amounts of
liability. The amounts of liability on pending claims and actions as of March
31, 2003 were not determinable; however, in the opinion of management, the
ultimate liability resulting therefrom should not have a material adverse
effect on the Company's consolidated financial position or results of
operations.
-92-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17 - Segment Information
- -----------------------------
The Company's operating segments include finance and insurance operations.
Finance operations include retail leasing, retail and wholesale financing and
certain other financial services to authorized Toyota and Lexus vehicle and
Toyota industrial equipment dealers and their customers in the U.S. (excluding
Hawaii), the Commonwealth of Puerto Rico, Mexico, and Venezuela. Insurance
operations are performed by TMIS and its subsidiaries. The principal
activities of TMIS include marketing, underwriting, claims administration and
providing certain insurance and contractual coverage to Toyota and Lexus
vehicle dealers and their customers. In addition, TMIS insures and reinsures
certain TMS and TMCC risks.
The accounting policies of the operating segments are the same as those
described in Note 2 - Summary of Significant Accounting Policies of the Notes
to Consolidated Financial Statements. Currently, the Company's finance and
insurance segments operate only in the U.S., the Commonwealth of Puerto Rico,
Mexico, and Venezuela. Substantially all of the Company's finance and
insurance segments are located within the U.S.
Financial results for the Company's operating segments are summarized below:
March 31,
-------------------------
2003 2002
---------- ----------
(Dollars in Millions)
Assets:
Financing operations...................... $38,529 $33,669
Insurance operations...................... 912 780
Eliminations/reclassifications............ (208) (189)
------- -------
Total assets............................ $39,233 $34,260
======= =======
-93-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17 - Segment Information (Continued)
- -----------------------------
Years Six Months Year
Ended Ended Ended
March 31, March 31, September 30,
----------------------- ---------- -------------
2003 2002 2001 2000
--------- --------- ---------- -------------
(Dollars in Millions)
Gross revenues:
Financing operations.................. $ 4,036 $ 3,689 $ 1,845 $ 3,350
Insurance operations.................. 174 184 88 165
--------- --------- --------- ---------
Total gross revenues................ $ 4,210 $ 3,873 $ 1,933 $ 3,515
========= ========= ========= =========
Depreciation and amortization:
Financing operations.................. $ 1,756 $ 1,555 $ 789 $ 1,556
Insurance operations.................. 2 1 - 1
--------- --------- --------- ---------
Total depreciation and amortization. $ 1,758 $ 1,556 $ 789 $ 1,557
========= ========= ========= =========
Interest Expense:
Financing operations.................. $ 832 $ 1,030 $ 726 $ 1,289
Insurance operations.................. - - - -
--------- --------- --------- ---------
Total interest expense $ 832 $ 1,030 $ 726 $ 1,289
========= ========= ========= =========
Interest Income:
Financing operations.................. $ 29 $ 37 $ 32 $ 26
Insurance operations.................. 26 26 14 23
--------- --------- --------- ---------
Total interest income $ 55 $ 63 $ 46 $ 49
========= ========= ========= =========
Income tax expense:
Financing operations.................. $ 54 $ 139 $ 18 $ 62
Insurance operations.................. 13 20 9 3
--------- --------- --------- ---------
Total income tax expense............ $ 67 $ 159 $ 27 $ 65
========= ========= ========= =========
Net Income:
Financing operations.................. $ 85 $ 199 $ 22 $ 70
Insurance operations.................. 25 44 20 34
--------- --------- --------- ---------
Net Income.......................... $ 110 $ 243 $ 42 $ 104
========= ========= ========= =========
Capital expenditures:
Financing operations.................. $ 25 $ 32 $ 14 $ 18
Insurance operations.................. 1 2 - 2
--------- --------- --------- ---------
Total capital expenditures.......... $ 26 $ 34 $ 14 $ 20
========= ========= ========= =========
-94-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18 - Selected Quarterly Financial Data (Unaudited)
- -------------------------------------------------------
Total Net
Financing Interest Depreciation Income
Revenues Expense on Leases (Loss)
---------- -------- ------------ --------
(Dollars in Millions)
Fiscal 2003:
First quarter.............. $ 924 $ 213 $ 373 $ (29)
Second quarter............. 959 212 394 4
Third quarter.............. 968 209 415 93
Fourth quarter............. 979 198 444 42
------ ------ ------ ------
Total................... $3,830 $ 832 $1,626 $ 110
====== ====== ====== ======
Fiscal 2002:
First quarter.............. $ 874 $ 296 $ 374 $ 50
Second quarter............. 882 268 380 21
Third quarter.............. 909 244 415 62
Fourth quarter............. 917 222 411 110
------ ------ ------ ------
Total................... $3,582 $1,030 $1,580 $ 243
====== ====== ====== ======
-95-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19 - Subsequent Events
- ---------------------------
In April 2003, TMCC executed a comfort letter with a Mexican bank on behalf of
TSM regarding a bank credit facility. This comfort letter allows TSM to
borrow in Mexican Pesos up to a maximum amount equivalent to $19 million U.S.
dollars. In May and June 2003, TMCC increased by $5 million and $25 million
U.S. dollars, respectively, the maximum amount of borrowings supported under
existing comfort letters with Mexican banks on behalf of TSM. As a result,
TSM is allowed to borrow in Mexican Pesos up to a maximum amount equivalent to
$65 million U.S. dollars. As of June 23, 2003, the maximum borrowings
permitted under the TSM comfort letters described above and in Note 16 -
Commitment and Contingent Liabilities of the Notes to the Consolidated
Financial Statements total $122 million U.S. dollars.
Under the comfort letters described in the preceding paragraph, TMCC would be
required to exercise its influence to induce TSM to meet all obligations under
the credit facilities should TSM default on payments as a result of financial
insolvency. These comfort letters do not contain any reimbursement
provisions. Maturities for bank loan advances range from one month to five
years. These comfort letters will remain in effect for as long as any
associated TSM loans are outstanding. These comfort letters may be extended
for additional periods by mutual agreements between TMCC and the banks. As of
June 23, 2003, the amounts outstanding under the facilities covered by all TSM
comfort letters totaled $43 million U.S. dollars.
In May 2003, Toyota Credit de Puerto Rico Corp extended a $90 million
revolving line of credit to Toyota de Puerto Rico Corp., a wholly-owned
subsidiary of TMS. The revolving line of credit has a one-year renewable
term, with interest due monthly at the rate of 3-month LIBOR plus 90 basis
points. Any loans outstanding under this revolving line of credit are not
guaranteed by TMS. As of June 23, 2003, no loans were outstanding under this
revolving line of credit.
-96-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There is nothing to report with regard to this item.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information regarding the directors and
executive officers of TMCC as of April 30, 2003.
Name Age Position
- ---- --- --------------------------------------
George Borst ............. 54 Director, President and
Chief Executive Officer, TMCC;
Director, Secretary and Chief
Financial Officer, TFSA
Tadashi Nagashino......... 51 Director, Executive Vice President
and Treasurer, TMCC
David Pelliccioni......... 55 Director, Group Vice President
and Secretary, TMCC
John Stillo............... 50 Vice President and Chief
Financial Officer, TMCC
Ryuji Araki............... 63 Director, TMCC;
Director, TFSC;
Executive Vice President, TMC Board of
Directors
Hideto Ozaki.............. 57 Director, TMCC; Director and
President, TFSA; President and
Director, TFSC
Yoshio Ishizaka........... 63 Director, TMCC;
Director, TFSC;
Executive Vice President, TMC Board of
Directors
Yoshimi Inaba............. 57 Director, TMCC
Director, TMC
James Press............... 56 Director, TMCC
All directors of TMCC are elected annually and hold office until their
successors are elected and qualified. Officers are elected annually and serve
at the discretion of the Board of Directors.
Mr. Borst was named Director, President and Chief Executive Officer of TMCC in
October 2000, and Director, Secretary and Chief Financial Officer of TFSA in
August 2000. Mr. Borst was named Senior Vice President of TMS in June 1997.
From April 1997 to September 2000, Mr. Borst was Director and Senior Vice
President and General Manager of TMCC. From January 1993 to May 1997,
Mr. Borst was Group Vice President of TMS. Mr. Borst has been employed with
TMCC and TMS, in various positions, since 1985.
-97-
Mr. Nagashino was named Director, Executive Vice President, and Treasurer of
TMCC in January 2003. From January 2002 to December 2002, he served as General
Manager for TMC's Planning Department in the TMC Accounting Division. From
January 1997 to December 2001, he was Project General Manager for the
Secretarial Division of TMC. From January 1996 to December 1996, he was TMC's
Deputy General Manager of the Financial Planning & Insurance Department in the
Finance Division. From January 1992 to December 1995, he was Managing Director
of Toyota Motor Finance, UK. Mr. Nagashino has been employed with TMC, in
various positions worldwide, since 1975.
Mr. Pelliccioni was named Director, Group Vice President - Sales, Marketing and
Operations, and Secretary of TMCC in January 2002. From August 2001 to January
2002, Mr. Pelliccioni was Vice President - Sales, Marketing and Operations of
TMCC. From May 1999 to August 2001, Mr. Pelliccioni was Vice President - Field
Operations of TMCC. From 1998 to August 2001, Mr. Pelliccioni was Vice
President of TMS. Mr. Pelliccioni has been employed with TMCC and TMS, in
various positions, since 1988.
Mr. Stillo was named Vice President and Chief Financial Officer of TMCC in
2001. From June 2000 to January 2001, Mr. Stillo was Executive Vice President,
Investments and Capital Planning at Associates First Capital Corporation. From
August 1997 to June 2000, Mr. Stillo was Executive Vice President and
Comptroller at Associates First Capital Corporation.
Mr. Araki was named Director of TFSC in July 2000, and Director of TMCC in
September 1995. Mr. Araki was named Executive Vice President of TMC's Board of
Directors in June 2001. Mr. Araki was Director of TFSA from August 2000 to
July 2001. Mr. Araki was Senior Managing Director of TMC's Board of Directors
from June 1999 to June 2001 and has served on TMC's Board of Directors since
September 1992. From June 1997 to June 1999, Mr. Araki was Managing Director
of TMC. Mr. Araki has been employed with TMC, in various positions, since
1962.
Mr. Ozaki was named Director and President of TFSA in August 2000, President
and Director of TFSC in July 2000, and Director of TMCC in October 1999. From
June 1999 to June 2000, Mr. Ozaki was Director of TMC. From September 1997 to
June 1999, Mr. Ozaki was the general manager of the finance division of TMC.
From January 1997 to August 1997, Mr. Ozaki was the Project General Manager of
the Finance Division of TMC. From January 1994 to December 1996, Mr. Ozaki was
the Project General Manager of the Accounting Division of TMC. Mr. Ozaki has
been employed with TMC, in various positions, since 1968.
Mr. Ishizaka was named Director of TMCC in October 2000, and Executive Vice
President of TMC's Board of Directors in June 2001. Mr. Ishizaka was Senior
Managing Director of TMC from June 1999 to June 2001. From June 1996 to June
1999, Mr. Ishizaka was President of TMS. From September 1992 to June 1999, Mr.
Ishizaka was Director of TMC. Mr. Ishizaka has been employed with TMC, in
various positions, since 1964.
Mr. Inaba was named Director of TMCC and TMS and President of TMS in June
1999, and was named Director of TMC in June 1997. From June 1999 to September
2000, Mr. Inaba was President of TMCC. From June 1997 to June 1999, Mr. Inaba
was the General Manager of the Europe, Africa and United Kingdom Division of
TMC. From June 1996 to May 1997, Mr. Inaba was Senior Vice President of TMS.
Mr. Inaba has been employed with TMC, in various positions worldwide, since
1968.
Mr. Press was named Director of TMCC in July 1999. He is also Chief Operating
Officer, a Director and Executive Vice President of TMS, positions he has held
since February 2001, June 1996 and April 1999, respectively. From April 1998
to March 1999, he was a Senior Vice President of TMS. From April 1995 to
March 1998, Mr. Press was Senior Vice President and General Manager of Lexus.
Mr. Press has been employed with TMS, in various positions, since 1970.
-98-
Effective June 30, 2003, the Company expects that Mr. Inaba will resign from
the Board of Directors and be replaced by Yukitoshi Funo, age 56. Mr. Funo is
also expected to be elected President and Chief Executive Officer of TMS in
place of Mr. Inaba. In 1997, Mr. Funo was named Senior Vice President of TMS.
In 2000, Mr. Funo was named a Director of TMC. In that role, Mr. Funo
continued to supervise Toyota's operations for the Americas. In 2001, his
duties were expanded to include overseeing government and industrial affairs.
Mr. Funo has been employed with TMC, in various positions worldwide, since
1970.
ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation Table
The following table sets forth all compensation awarded to, earned by, or paid
to the Company's Principal Executive Officer and the most highly compensated
executive officers whose salary and bonus for the latest fiscal year exceeded
$100,000, for services rendered in all capacities to the Company for fiscal
2003 and 2002, the six months ended March 31, 2001, and fiscal 2000.
-99-
Long Term
Compensation
------------
Annual Compensation Awards
------------------------------------- ------------ All
Securities Other($)
Other Annual Underlying
Name and Compensation Options/SARS
Principal Position Period Salary ($) Bonus ($) ($) (#)
- --------------------- ------ ---------- --------- ------------- ------------ -------
George Borst 2003 $373,080 $273,025 - $ 5,000 $30,746
Chief Executive Officer 2002 $355,440 $196,330 - $ 2,000 $28,298
Principal Executive 2001 $162,870 $170,350 - - $15,044
Officer 2000 $316,290 $179,200 - - $24,558
Nobukazu Tsurumi 2003 $235,479 $ 41,189 - - -
Executive 2002 $293,249 $ 54,121 - - -
Vice President 2001 $200,128 $ 25,588 - - -
2000 $247,124 $ 55,948 - - -
David Pelliccioni 2003 $261,480 $167,760 $74,296 - $21,968
Group Vice President 2002 $224,312 $ 99,075 - - $19,016
John Stillo 2003 $279,420 $116,130 - - $22,683
Chief Financial Officer 2002 $186,947 $ 56,250 $75,605 - $13,707
- ------------
Effective January 1, 2003, Mr. Tsurumi was no longer an executive officer of TMCC. The
compensation presented for Mr. Tsurumi for fiscal year 2003 reflects amounts earned for services to
the Company during the partial period of the fiscal year served.
During fiscal 2002, Mr. Pelliccioni was appointed as Group Vice President and member of the
TMCC Board of Directors. The compensation presented for Mr. Pelliccioni for fiscal 2002 reflects
amounts earned for services to the Company in all capacities for the full fiscal year.
Mr. Stillo joined the Company during fiscal 2002. The compensation presented for Mr. Stillo
for fiscal 2002 reflects amounts earned for services to the Company during the partial period of the
fiscal year served.
$65,000 of the reported amount represents a country club initiation fee.
$72,105 of the reported amount represents relocation costs.
Pursuant to the Toyota Global Incentive Plan, TMC granted Mr. Borst 50 options during fiscal
2003. Each stock option is exercisable for 100 shares of stock of TMC. Pursuant to the Toyota
Global Incentive Plan, the Company acquired certain warrants during fiscal 2002. Each warrant is
exercisable for 100 shares of stock of TMC. The Company granted Mr. Borst an option to acquire 20
warrants during fiscal 2002.
Amounts for fiscal 2003 include the Company's allocated contribution under the TMS Savings Plan
(the "Plan"), a tax-qualified 401(k) Plan, and under the Deferred Compensation Plan (the "Deferred
Plan"), a non-qualified deferred compensation plan. Participants in the Plan may elect, subject to
applicable law, to contribute up to 15% of their base compensation on a pre-tax basis to which the
Company adds an amount equal to two-thirds of the first 6% of the employee's contribution.
Participants in the Deferred Plan may elect, subject to applicable law, to contribute 6% to 15% of
their base compensation on a pre-tax basis that is above the federal limit and up to 100% of their
annual bonus, less applicable FICA taxes to which the Company adds an amount equal to two-thirds of
the first 6% of the employee's base pay contribution. Participants are vested 25% each year with
respect to the Company's contribution in both the Plan and the Deferred Plan and are fully vested
after four years. Subject to the limitations of the Plan and the Deferred Plan, employee and
Company contributions are invested in various investment options at the discretion of the employee.
For fiscal 2003, the following amounts relate to the Plan: $8,176 (Borst), $8,140 (Pelliccioni), and
$8,132 (Stillo). For fiscal 2003, the following amounts relate to the Deferred Plan: $5,835
(Borst), $1,407 (Pelliccioni), and $2,397 (Stillo).
Amounts for fiscal 2003 include TMCC's cost of providing coverage under a health care plan
for executives which provides for an annual reimbursement of up to $5,000 in health care expenses
for each of the named individuals and his family not covered under TMCC's basic medical plan
available to all employees. In addition, under this plan the named individuals are entitled to
receive an annual physical at a specified medical facility. For the 2003 fiscal year, the
following amounts relate to the executive medical plan: $6,014 (Borst), $4,874 (Pelliccioni), and
$6,739 (Stillo).
Amounts for fiscal 2003 include TMCC's cost of providing coverage under disability plans for
executives. Under the plans, the named individuals are entitled to receive a benefit equal to
75% of the named individual's base pay plus bonus. One of the policies may be converted into a
long-term care policy upon retirement. For the 2003 fiscal year, the following amounts relate to
the executive disability plan: $2,026 (Borst), $1,201 (Pelliccioni), and $1,108 (Stillo).
-100-
Amounts for fiscal 2003 include the Company's cost of providing additional life insurance
under an executive life insurance plan. All employees of TMCC receive coverage equal to two
times annual base salary. Under the additional life insurance plan, the named individuals
receive coverage equal to an additional one times annual base salary, up to an aggregate under
both plans of $2.5 million. In addition, the Company contributes a fixed amount each year to the
policy's cash value. For the 2003 fiscal year, the following amounts relate to the executive life
insurance plan: $7,095 (Borst), $4,746 (Pelliccioni), and $3,507 (Stillo).
Amounts for fiscal 2003 include the Company's cost of providing personal excess liability
coverage for bodily injury, property damage and personal injury liability in a maximum amount
equal to $10,000,000 for Mr. Borst and Mr. Pelliccioni and $5,000,000 for Mr. Stillo. The named
individuals must maintain certain levels of underlying coverage to qualify for the excess
coverage. For the 2003 fiscal year, the following amounts relate to this coverage: $1,600
(Borst), $1,600 (Pelliccioni), and $800 (Stillo).
Employee Benefit Plan
The following pension plan table presents typical annual retirement benefits
under the TMS Pension Plan for various combinations of compensation and years
of credited service for participants who retire at age 62, assuming no final
average bonus and excluding Social Security offset amounts. The amounts are
subject to Federal statutory limitations governing pension calculations and
benefits.
Annual Benefits for
Final Average Years of Credited Service
Annual ------------------------------------
Compensation 15 20 25
------------- -------- -------- --------
$50,000 $15,000 $20,000 $25,000
$100,000 $30,000 $40,000 $50,000
$150,000 $45,000 $60,000 $75,000
$200,000 $60,000 $80,000 $100,000
$250,000 $75,000 $100,000 $125,000
$300,000 $90,000 $120,000 $150,000
$350,000 $105,000 $140,000 $175,000
$400,000 $120,000 $160,000 $200,000
$450,000 $135,000 $180,000 $225,000
$500,000 $150,000 $200,000 $250,000
$550,000 $165,000 $220,000 $275,000
$600,000 $180,000 $240,000 $300,000
$650,000 $195,000 $260,000 $325,000
$700,000 $210,000 $280,000 $350,000
$750,000 $225,000 $300,000 $375,000
$800,000 $240,000 $320,000 $400,000
All full-time employees of TMCC, Toyota Credit de Puerto Rico Corp, and TMCC's
insurance subsidiaries are eligible to participate in the TMS Pension Plan
commencing on the first day of the month following hire. Benefits payable
under this non-contributory defined benefit pension plan are based upon final
average compensation, final average bonus and years of credited service. Final
average compensation is defined as the average of the participant's base rate
of pay, plus overtime, during the highest-paid 60 consecutive months prior to
the earlier of termination or normal retirement. Final average bonus is
defined as the highest average of the participant's fiscal year bonus, and
basic seniority-based cash bonus for non-managerial personnel, over a period of
60 consecutive months prior to the earlier of termination or normal retirement.
A participant generally becomes eligible for the normal retirement benefit at
age 62, and may be eligible for early retirement benefits starting at age 55.
-101-
The annual normal retirement benefit under the Pension Plan, payable monthly,
is an amount equal to the number of years of credited service (up to 25 years)
multiplied by the sum of (i) 2% of the participant's final average compensation
less 2% of the estimated annual Social Security benefit payable to the
participant at normal retirement and (ii) 1% of the participant's final average
bonus. The normal retirement benefit is subject to reduction for certain
benefits under any union-sponsored retirement plan and benefits attributable to
employer contributions under any defined-contribution retirement plan
maintained by TMS and its subsidiaries or any affiliate that has been merged
into the TMS Pension Plan.
The TMS Supplemental Executive Retirement Plan (TMS SERP), a non-qualified non-
contributing benefit plan, authorizes a benefit to be paid to eligible
executives, including Mr. Borst, Mr. Pelliccioni, and Mr. Stillo. Benefits
under the TMS SERP, expressed as an annuity payable monthly, are based on 2% of
the executive's compensation recognized under the plan multiplied by the years
of service credited under the plan (up to a maximum of 30), offset by benefits
payable under the TMS Pension Plan and the executive's primary Social Security
benefit. A covered participant's compensation may include base pay and a
percentage (not in excess of 100%) of bonus pay, depending on the executive's
length of service in certain executive positions. Similarly, an additional
one-half year or one-quarter of service is credited under the TMS SERP for each
year of service as an officer above the vice president level at or below that
level, respectively. The years of service specified below include such
additional service credit. No benefit is payable under the TMS SERP to an
executive unless the executive's termination of employment occurs on a date,
after the executive reaches age 55, that is agreed in writing by the President
of TMS and the executive; and the executive is vested in benefits under the TMS
Pension Plan, or unless the executive accepts an invitation to retire extended
by the President of TMS.
Mr. Borst is a participant in the TMS Pension Plan and the TMS SERP, and had
24 years of total credited service as of March 31, 2003. Based upon years of
credited service allocable to TMCC, Mr. Borst may be entitled to receive
approximately $88,000 in annual pension plan benefits when Mr. Borst reaches
age 62. Mr. Borst is also entitled to receive pension benefits from TMS based
upon services to and compensation by TMS.
Mr. Pelliccioni is a participant in the TMS Pension Plan and the TMS SERP, and
had 16 years of total credited service as of March 31, 2003. Based upon years
of credited service allocable to TMCC, Mr. Pelliccioni may be entitled to
receive approximately $26,000 in annual pension plan benefits when Mr.
Pelliccioni reaches age 62. Mr. Pelliccioni is also entitled to receive
pension benefits from TMS based upon services to and compensated by TMS.
Mr. Stillo is a participant in the TMS Pension Plan and the TMS SERP, and had
2 years of total credited service as of March 31, 2003. Based upon years of
credited service allocable to TMCC, Mr. Stillo may be entitled to receive
approximately $13,000 in annual pension plan benefits when Mr. Stillo reaches
age 62.
-102-
Toyota Global Incentive Plan
During fiscal 2003, TMC granted stock options to 61 global executives of TMC
and TMC affiliated companies under the Toyota Global Incentive Plan. One
executive of TMCC was a recipient of the stock options, as presented in the
tables below.
OPTION / SAR GRANTS IN LAST FISCAL YEAR
Potential
Realized
Value at
Assumed
Annual
Rates of
Stock Price
Appreciation
Individual Grants for Option Term
- ---------------------------------------------------------------- ------------------
% of
Total
Options/
Number of SARs
Securities Granted to Exercise
Underlying Employees or Base
Options/SARs In Fiscal Price Expiration
Name Granted Year ($/Sh) Date 5% ($) 10% ($)
- ------------ ------------ ---------- ---------- ---------- ------ -------
George Borst 5,000 100% $24.81 7/31/2008 $26.05 $27.29
- -----------------
Each stock option is exercisable for 100 shares of stock of Toyota Motor Corporation, the
Company's ultimate parent. TMC granted the above-named individual 50 options.
The percentage listed above reflects the relative percentage of the total options received
by the Company's executives during fiscal 2003. The grants received by the above-named
individual amounted to 3.2% of the total option grants made during the last fiscal year to Toyota
executives worldwide pursuant to the Toyota Global Incentive Plan.
The exercise price per share is equal to Yen 2,958 per share, the closing price of Toyota
Motor Corporation shares on the Tokyo Stock Exchange on August 1, 2002 x 1.025. The exercise
price per share included in the above table was calculated using the exchange rate of $1 =
Yen 119.21 as in effect on August 1, 2002.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
FY-End (#) FY-End (#)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized ($) Unexercisable Unexercisable
- ------------ --------------- ------------ ------------------- ---------------
George Borst None $0 0 Exercisable/ 0 Exercisable/
7,000 Unexercisable 0 Unexercisable
-103-
Compensation of Directors
No amounts are paid to members of the TMCC Board of Directors for their
services as directors.
Compensation Committee Interlocks and Insider Participation
Members of the Executive Committee of the Board of Directors, which consists of
the directors of TMCC other than Mr. Araki and Mr. Ishizaka, participate in
decisions regarding the compensation of the executive officers of the Company.
Certain of the members of the Executive Committee are current or former
executive officers and directors of the Company. Certain of the members of
the Executive Committee are also current executive officers and directors of
TFSC and TMS and its affiliates and participate in compensation decisions for
those entities.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
As of the date hereof, all of TMCC's capital stock is owned by TFSA. As of
March 31, 2003, TMCC's directors and named executive officers, individually and
as a group, owned less then 1% of the total outstanding stock of TMC, the
Company's ultimate parent.
ITEM 13. CERTAIN RELATIONSHIPS AND TRANSACTIONS.
Transactions between the Company, TFSA, TFSC, TMS, TMMNA and others are
included in Note 2 - Summary of Significant Accounting Policies, Note 11 -
Pension and Other Benefit Plans, Note 14 - Related Party Transactions, Note 16
- - Commitment and Contingent Liabilities and Note 19 - Subsequent Events of the
Notes to the Consolidated Financial Statements as well as Item 1 and Item 7.
Certain directors and executive officers of TMCC are also directors and
executive officers of TFSA, TFSC, TMS, and TMC as described in Item 10.
Certain employees of TMCC and its affiliates, including certain executive
officers and directors of TMCC, have purchased MTNs from TMCC. Each of the
notes outstanding at March 31, 2003 had an original term of ten years. The
interest rate was fixed at inception at a rate equal to 0.80% above the rate
for ten-year Treasury notes. The notes were required to be in a minimum
principal amount of $100,000. Each holder of a note has a one-time option to
convert his note at par to a floating rate note bearing interest at LIBOR plus
0.15%. Each holder also has the right to require TMCC to repurchase each
note, in whole but not in part, at its then market value, as determined by
TMCC. The executive officers and directors of TMCC who owned notes during the
last fiscal year are: George Borst ($500,000), John Stillo ($200,000), and
Yoshio Ishizaka ($10,000).
Under a program available to certain levels of management of the Company, the
following executive officers and directors of the Company have received
mortgage loans from the Company secured by residential real property. All of
these loans were made prior to July 30, 2002.
-104-
Aggregate
Amount Amount
Outstanding Outstanding
During the as of
Last Fiscal Year March 31, 2003 Interest
Name/Title (in Thousands) (in Thousands) Rate
- -------------------------- ---------------- -------------- --------
George Borst
President, Chief Executive
Officer and Director $1,600 $1,565 3.22%
David Pelliccioni
Director, Group Vice
President and Secretary $ 473 $ 456 3.22%
John Stillo
Vice President and
Chief Financial Officer $1,733 $1,695 2.56%
Yoshimi Inaba
Director $1,600 $1,562 3.39%
James Press
Director $1,610 $1,576 2.47%
ITEM 14. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the reports filed or
submitted under the Securities Exchange of 1934, as amended ("Exchange Act"),
is recorded, processed, summarized and reported within the time periods
specified in the Commission's rules and forms.
Within the 90 days prior to the filing date of this annual report, the
Company's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO")
evaluated the effectiveness of such disclosure controls and procedures in place
pursuant to Rule 13a-14 of the Exchange Act. Based on the evaluation, the CEO
and CFO concluded that such disclosure controls and procedures are effective.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of the evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
-105-
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1)Financial Statements
Included in Part II, Item 8 of this Form 10-K. See Index to
Financial Statements on page 46.
(2)Exhibits
The exhibits listed on the accompanying Exhibit Index, starting on
page 111, are filed as part of, or incorporated by reference into,
this Report.
(b)Reports on Form 8-K
The following reports on Form 8-K were filed by the registrant during
the quarter ended March 31, 2003:
Date of Report Items Reported
----------------- ----------------------
February 12, 2003 Item 5. Other Events
-106-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Torrance,
State of California, on the 23rd day of June 2003.
TOYOTA MOTOR CREDIT CORPORATION
By /s/ George E. Borst
------------------------------
George E. Borst
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on the 23rd day of June 2003.
Signature Title
--------- -----
President and Chief Executive Officer
and Director
/s/ George E. Borst (Principal Executive Officer)
- ------------------------------------
George E. Borst
Executive Vice President and
/s/ Tadashi Nagashino Treasurer and Director
- ------------------------------------
Tadashi Nagashino
Vice President and
Chief Financial Officer
/s/ John F. Stillo (Principal Financial Officer)
- ------------------------------------
John F. Stillo
Corporate Controller
/s/ Larry Spangler (Principal Accounting Officer)
- ------------------------------------
Larry Spangler
/s/ David Pelliccioni Director
- ------------------------------------
David Pelliccioni
/s/ Yoshimi Inaba Director
- ------------------------------------
Yoshimi Inaba
/s/ James Press Director
- ------------------------------------
James Press
-107-
CERTIFICATIONS
I, George E. Borst, certify that:
1. I have reviewed this annual report on Form 10-K of Toyota Motor Credit
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: June 23, 2003
By /s/ GEORGE E. BORST
------------------------
George E. Borst
President and
Chief Executive Officer
-108-
CERTIFICATIONS
I, John F. Stillo, certify that:
1. I have reviewed this annual report on Form 10-K of Toyota Motor Credit
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: June 23, 2003
By /s/ JOHN F. STILLO
------------------------
John F. Stillo
Vice President and
Chief Financial Officer
-109-
EXHIBIT INDEX
Method
Exhibit of
Number Description Filing
- ------- ----------- --------
3.1(a) Articles of Incorporation filed with the California
Secretary of State on October 4, 1982. (1)
3.1(b) Certificate of Amendment of Articles of Incorporation
filed with the California Secretary of State on
January 24, 1984. (1)
3.1(c) Certificate of Amendment of Articles of Incorporation
filed with the California Secretary of State on
January 25, 1985. (1)
3.1(d) Certificate of Amendment of Articles of Incorporation
filed with the California Secretary of State on
September 6, 1985. (1)
3.1(e) Certificate of Amendment of Articles of Incorporation
filed with the California Secretary of State on
February 28, 1986. (1)
3.1(f) Certificate of Amendment of Articles of Incorporation
filed with the California Secretary of State on
December 3, 1986. (1)
3.1(g) Certificate of Amendment of Articles of Incorporation
filed with the California Secretary of State on
March 9, 1987. (1)
3.1(h) Certificate of Amendment of Articles of Incorporation
filed with the California Secretary of State on
December 20, 1989. (2)
3.2 Bylaws as amended through December 8, 2000. (6)
4.1 Issuing and Paying Agency Agreement dated August 1,
1990 between TMCC and Bankers Trust Company. (3)
4.2(a) Indenture dated as of August 1, 1991 between TMCC and
The Chase Manhattan Bank, N.A. (4)
- -----------------
(1) Incorporated herein by reference to the same numbered Exhibit filed
with the Company's Registration Statement on Form S-1, File No. 33-22440.
(2) Incorporated herein by reference to the same numbered Exhibit filed
with the Company's Report on Form 10-K for the year ended September 30,
1989, Commission File number 1-9961.
(3) Incorporated herein by reference to Exhibit 4.2 filed with the Company's
Report on Form 10-K for the year ended September 30, 1990,
Commission File number 1-9961.
(4) Incorporated herein by reference to Exhibit 4.1(a), filed with the
Company's Registration Statement on Form S-3, File No. 33-52359.
(6) Incorporated herein by reference to the same numbered Exhibit filed
with the Company's Report on Form 10-Q for the quarter ended December 31,
2000, Commission File number 1-9961.
-110-
EXHIBIT INDEX
Method
Exhibit of
Number Description Filing
- ------- ----------- ------
4.2(b) First Supplemental Indenture dated as of
October 1, 1991 among TMCC, Bankers Trust Company
and The Chase Manhattan Bank, N.A. (5)
4.3 Fourth Amended and Restated Agency Agreement dated
October 1, 2002 among TMCC, J.P. Morgan Chase Bank,
and J.P. Morgan Bank Luxembourg S.A.
(24)
4.4 TMCC has outstanding certain long-term debt as set
forth in Note 9 of the Notes to Consolidated Financial
Statements. Not filed herein as an exhibit, pursuant
to Item 601(b) (4)(iii)(A) of Regulation S-K under
the Securities Act of 1933, is any instrument which
defines the rights of holders of such long-term debt,
where the total amount of securities authorized
thereunder does not exceed 10% of the total assets
of TMCC and its subsidiaries on a consolidated
basis. TMCC agrees to furnish copies of all such
instruments to the Securities and Exchange Commission
upon request.
10.1 Form of Indemnification Agreement between TMCC and
its directors and officers. (12)
10.2 Five-year Credit Agreement dated September 12, 2002
among TMCC, Bank of America N.A., as Administrative Agent,
JPMorgan Chase Bank as Syndication Agent, The Bank of
Tokyo-Mitsubishi, Ltd. and Citibank, N.A. as Documentation
Agents, Banc of America Securities LLC as Sole Lead
Arranger and Sole Book Manager and the other Banks
named therein (13)
- -----------------
(5) Incorporated herein by reference to Exhibit 4.1 filed with the Company's
Current Report on Form 8-K dated October 16, 1991, Commission File
No. 1-9961.
(12) Incorporated herein by reference to Exhibit 10.6 filed with the Company's
Registration Statement on Form S-1, Commission File No. 33-22440.
(13) Incorporated herein by reference to Exhibit 10.16 filed with the
Company's Report on Form 10-Q for the quarter ended September 30, 2002,
Commission File No. 1-9961.
(24) Incorporated herein by reference to Exhibit 4.3 filed with the Company's
Report on Form 10-Q for the quarter ended September 30, 2002,
Commission File No. 1-9961.
-111-
EXHIBIT INDEX
Method
Exhibit of
Number Description Filing
- ------- ----------- ------
10.3 364-Day Credit Agreement
dated September 12, 2002 among TMCC, Bank of America
N.A. as Administrative Agent, JPMorgan Chase
Bank as Syndication Agent, The Bank of Tokyo-Mitsubishi
Ltd., and Citibank N.A. as Documentation Agents,
Banc of America Securities LLC as Sole Lead Arranger
and Sole Book Manager and the other Banks named therein. (23)
10.4(a) Toyota Motor Sales, U.S.A., Inc. Supplemental
Executive Retirement Plan. * (10)
10.4(b) Amendment 2003-1 to the Toyota Motor Sales, U.S.A., Inc.
Supplemental Executive Retirement Plan. * Filed
Herewith
10.5(a) Toyota Motor Sales, U.S.A., Inc. 401(k)
Excess Plan. * (11)
10.5(b) Amendment 2003-1 to the Toyota Motor Sales, U.S.A., Inc.
401(k) Excess Benefit Plan. * Filed
Herewith
10.6 Form of Agreement for the Grant of an Option to Acquire
Warrants to Subscribe for Common Stock of Toyota Motor
Corporation. * (39)
10.7 Form of Option Agreement for the Grant of Options to
Acquire the Common Stock of Toyota Motor Corporation* Filed
Herewith
- ----------------
(23) Incorporated herein by reference to Exhibit 10.15 filed with the
Company's Report on Form 10-Q for the quarter ended September 30, 2002,
Commission File No. 1-9961.
(10) Incorporated herein by reference to Exhibit 10.1 filed with the
Company's Report on Form 10-Q for the quarter ended December 31, 1995,
Commission File No. 1-9961.
(11) Incorporated herein by reference to Exhibit 10.2 filed with the
Company's Report on Form 10-Q for the quarter ended December 31, 1995,
Commission File No. 1-9961.
*- Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to applicable rules of the Securities and
Exchange Commission.
(39) Incorporated herein by reference to Exhibit 10.8 filed with the Company's
Report on Form 10-K for the year ended March 31, 2002, Commission File
No. 1-9961.
-112-
EXHIBIT INDEX
Method
Exhibit of
Number Description Filing
- ------- ----------- ------
10.8 Amended and Restated Trust and Servicing Agreement
dated as of October 1, 1996 by and among TMCC,
TMTT, Inc., as titling trustee and U.S. Bank National
Association, as trust agent. (18)
10.9 Credit Support Agreement dated July 14, 2000 between
TFSC and TMC. (29)
10.10 Credit Support Agreement dated October 1, 2000 between
TMCC and TFSC. (30)
10.11 Amended and Restated Repurchase Agreement dated
effective as of October 1, 2000, between TMCC and TMS (33)
10.12 Shared Services Agreement dated October 1, 2000
between TMCC and TMS. (32)
10.13 Credit Support Fee Agreement dated March 30, 2001
between TMCC and TFSC (34)
10.14 Medium Term Note Agreements * (35)
10.15 Mortgage Loans Agreements * Filed
Herewith
12.1 Calculation of ratio of earnings to fixed charges. Filed
Herewith
- ----------------
(18) Incorporated herein by reference to Exhibit 4.1 filed with Toyota Auto
Lease Trust 1997-A's Report on Form 8-A dated December 23, 1997,
Commission File No. 333-26717
(29) Incorporated herein by reference to Exhibit 10.9 filed with the Company's
Report on Form 10-K for the year ended September 30, 2000, Commission
File No. 1-9961.
(30) Incorporated herein by reference to Exhibit 10.10 filed with the
Company's Report on Form 10-K for the year ended September 30, 2000,
Commission File No. 1-9961.
(32) Incorporated herein by reference to Exhibit 10.12 filed with the Company's
Report on Form 10-K for the year ended September 30, 2000, Commission
File No. 1-9961.
(33) Incorporated herein by reference to Exhibit 10.11 filed with the Company's
Report on Form 10-K for the fiscal year ended March 31, 2001, Commission
File No. 1-9961.
(34) Incorporated herein by reference to Exhibit 10.13 filed with the Company's
Report on Form 10-K for the fiscal year ended March 31, 2001, Commission
File No. 1-9961.
(35) Incorporated herein by reference to Exhibit 10.14 filed with the Company's
Report on Form 10-Q for the quarter ended December 31, 2002, Commission
File No. 1-9961.
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to applicable rules of the Securities and
Exchange Commission.
-113-
EXHIBIT INDEX
Method
Exhibit of
Number Description Filing
- ------- ----------- ------
21.1 TMCC's list of subsidiaries. Filed
Herewith
23.1 Consent of Independent Accountants. Filed
Herewith
99.1 Section 906 Certifications Furnished
Herewith
-114-