-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L4x1CEiRFXOfWfCK0VTgStAv1Mj/xivxr5l0C1agDOmllb0xniGZCaz09wDvaM9q WBCI9+KYSNzRukRU2on3wQ== 0000834071-03-000036.txt : 20030623 0000834071-03-000036.hdr.sgml : 20030623 20030623172115 ACCESSION NUMBER: 0000834071-03-000036 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030623 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TOYOTA MOTOR CREDIT CORP CENTRAL INDEX KEY: 0000834071 STANDARD INDUSTRIAL CLASSIFICATION: PERSONAL CREDIT INSTITUTIONS [6141] IRS NUMBER: 953775816 STATE OF INCORPORATION: CA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09961 FILM NUMBER: 03753874 BUSINESS ADDRESS: STREET 1: 19300 GRAMERCY PLACE STREET 2: NORTH BUILDING CITY: TORRANCE STATE: CA ZIP: 90509 BUSINESS PHONE: 3107871310 MAIL ADDRESS: STREET 1: 19300 GRAMERCY PLACE STREET 2: NORTH BUILDING CITY: TORRANCE STATE: CA ZIP: 90509 10-K 1 march10k.txt 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 -------------- 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 --------------- -------------- Commission file number 0-25175-01 ---------- TOYOTA MOTOR CREDIT CORPORATION - --------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) California 95-3775816 - ---------------------------------------- ----------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 19001 S. Western Avenue Torrance, California 90509 - ---------------------------------------- ----------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (310) 468-1310 ----------------------- Securities registered pursuant to section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- ----------------------- n/a n/a ------------------- ----------------------- 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 --- --- 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 - ------- 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 - ------------------ 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 - ------------------------- 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 - -------------- 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 -------- -------- ---------- ------------- Contract volume: Retail .................... 690,000 643,000 209,000 412,000 Lease ..................... 167,000 192,000 102,000 240,000 ------- ------- ------- ------- 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 - ---------------- 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 - -------------- 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 - ------------------------------------------ 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 - ------- 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 - ------------------------- 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 - --------- 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 - ----------- 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 ====== ====== ====== ====== ====== ======
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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- EX-10 4 ex10-4b.txt EXHIBIT 10.4(b) AMENDMENT 2003-1 TOYOTA MOTOR SALES, U.S.A., INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN The Toyota Motor Sales, U.S.A., Inc. Supplemental Executive Retirement Plan is hereby amended by this Amendment 2003-1, effective January 1, 2003 as follows: 1. Section 2.4 "Company" is hereby amended in its entirety to read as follows: "2.4 'Company' means Toyota Motor Sales, U.S.A., Inc. "Company" shall also mean any corporation that is affiliated with Toyota Motor Sales, USA, Inc. within the meaning of Section 414(b), (c), (m) or (o) of the Internal Revenue Code and which Toyota Motor Sales, USA, Inc. designates as a "Company" hereunder. "Company" currently includes Toyota Motor Credit Corporation and Toyota Motor Insurance Services, Inc." 2. Section 2.11 "Plan Year" is hereby amended in its entirety to read as follows: "2.11 'Plan Year' means the fiscal period commencing each October 1 and ending the following September 30. There was a short Plan Year commencing October 1, 1997 and ending December 31, 1997, and thereafter the Plan Year shall mean the calendar year." 3. Article V "Vesting of Benefits" is hereby amended by adding the following to the end of the paragraph: "If a Participant whose employment was transferred to TMSPS retires from TMSPS, Toyota Material Handling, USA, Inc. or its successor, and such Participant satisfies the other requirements of this Article V (including, but not limited to, the requirement that the Participant's Separation from Service occur pursuant to an agreement as described in this Article V), then such Participant shall be vested under this Plan." 4. Section 6.2 is hereby amended in its entirety to read as follows: "(a) Single Life Annuity. The normal form of payment under the Plan for a Participant who is not married on the date of his or her Separation from Service shall be a single life annuity providing monthly payments for the life of the Participant, and under which all benefit payments cease as of the date of death of the Participant. (b) Unreduced Joint and Survivor Annuity. 1 (i) The normal form of benefit payable to a Participant who is an Officer, Group Vice President or Vice President and lawfully married to a spouse on the date of his or her Separation from Service and who has been continuously married to such spouse throughout the twelve (12) month period ending on the Participant's date of Separation from Service shall be an unreduced fifty percent (50%) joint and survivor annuity, providing monthly payments during such Participant's life in the same amount as the monthly amount payable under the single life annuity form, and providing continued monthly payments after the Participant's death to the spouse to whom the participant is married on the date of his or her Separation from Service. Each such continued monthly payment payable to the surviving spouse after the Participant's death shall be fifty percent (50%) of the monthly payment amount payable during the Participant's lifetime. Such continuing payments shall continue during the life of the surviving spouse and shall cease on the date of death of such surviving spouse. (ii) A Participant whose benefit payments commence on or after January 1, 2000 and who is entitled to an unreduced fifty percent (50%) joint and survivor annuity under this subsection (b) shall be entitled to elect, in the alternative, a subsidized seventy-five percent (75%) or one hundred percent (100%) joint and survivor annuity. The subsidy with respect to the seventy-five percent (75%) or one hundred percent (100%) joint and survivor annuity shall be determined as follows: First, the percentage difference between the monthly amount of the unreduced fifty percent (50%) joint and survivor annuity under this subsection and the monthly reduced fifty percent (50%) joint and survivor annuity that would be payable under subsection (c) if it were applicable to the Participant shall be calculated. Second, the monthly seventy-five percent (75%) or one hundred percent (100%) joint and survivor annuity shall be preliminarily calculated as a reduced amount by reducing the single life annuity by application of the same reduction factors as are applied for purposes of determining such reduction under the Qualified Pension Plan. Third, such preliminary amount shall be increased by the percentage difference between the unreduced and reduced the fifty percent (50%) joint and survivor annuity calculated under the first step, above. The subsidy shall not apply to any other optional form of benefit available hereunder. (c) Reduced Joint and Survivor Annuity. The normal form of benefit payable to a Participant who is not an Officer, Group Vice President or Vice President, or who is lawfully married to a spouse on the date of his or her Separation from Service but who has not been continuously married to such spouse throughout the twelve (12) month period ending on the Participant's date of Separation from Service shall be a reduced fifty percent (50%) joint and survivor annuity, providing reduced monthly payments during such Participant's life, and providing continued monthly payments after the Participant's death to the spouse to whom the participant is married on the date of his or her Separation from Service. Such a Participant shall be entitled to elect, in the alternative, a reduced seventy-five percent (75%) or a reduced one hundred percent (100%) joint and survivor annuity. Each such continued monthly payment payable to the surviving spouse shall be 2 fifty percent (50%), seventy-five percent (75%) or one hundred percent (100%), as applicable, of the monthly payment amount payable during the Participant's lifetime. The reduction in the Participant's monthly benefits shall be determined by application of the same reduction factors as are applied for purposes of determining such reduction under the Qualified Pension Plan. Such continuing payments shall continue during the life of the surviving spouse and shall cease on the date of death of such surviving spouse. (d) Request for Optional Forms. A Participant may request the Committee to cause such Participant's benefits to be paid in another optional form provided from time to time under the Qualified Pension Plan, provided, however, that no such optional form shall reflect any actuarial subsidy attributable to the subsidy provided in Section 6.2(b) hereof. The payment form hereunder shall be the same as the payment form under the Qualified Pension Plan." 5. Section 7.1 "Death Benefit" is hereby amended in its entirety to read as follows: "7.1 DEATH BENEFIT In the event of the death of a Participant who is lawfully married to a spouse on the date of the Participant's death, a death benefit shall be payable to such surviving spouse. Such benefit shall consist of monthly payments, each of which is equal to the monthly amount that would have been paid to such spouse (a) had the Participant's Separation from Service occurred on the later of (i) the Participant's date of death, or (ii) the date on which the Participant's SERP Calculated Age would have equaled at least age fifty-five (55), (b) had the Participant's benefit commenced to be paid in the applicable payment form provided in Section 6.2, and (c) had the Participant's death occurred immediately after such commencement of benefits. For any death occurring on or after January 1, 2000, the applicable payment referred to above shall be the one hundred percent (100%) joint and survivor annuity, and, in the event of the death of a Participant for whom Section 6.2(b) is applicable, shall include the subsidy applicable to the one hundred percent (100%) joint and survivor annuity under section 6.2(b). Such death benefit shall begin to be paid as soon as practicable after the latest of (a) the Participant's date of death, (b) the date on which the Participant's SERP Calculated Age equals at least age fifty-five (55), and (c) the date on which such benefit applications, releases, and other documents as the Committee may require to be given are received by the Committee in form and manner satisfactory to the Committee. Death benefit payments shall cease as of the date of death of the spouse receiving such payments. No benefit shall be payable to any person other than a spouse described in the first sentence of this Section 7.1. This Plan shall not give effect to disclaimers, whether made under state or federal law. In the event of a death on or after January 1, 2003 of a Participant who is not lawfully married to a spouse on the date of the Participant's death, the beneficiary named by the Participant shall be eligible to receive one hundred twenty (120) monthly payments, each of which is equal to the monthly amount that would have been paid to such beneficiary (a) had the Participant's Separation from Service occurred on the later of (i) the Participant's date of death, or (ii) the date on which the Participant's SERP Calculated Age would have equaled at least age fifty-five (55), (b) had the 3 Participant's benefit commenced to be paid as a ten- (10-) year certain annuity (reduced according to the same reduction factors as are applied for purposes of determining such reduction under the Qualified Pension Plan), and (c) had the Participant's death occurred immediately after such commencement of benefits." 6. Article VIII "Right to Terminate or Modify Plan" is hereby amended in its entirety to read as follows: "By action of the Executive Committee of Toyota Motor Sales, U.S.A., Inc., Toyota may modify or terminate this Plan without further liability to any Eligible Employee or former employee or any other person. Notwithstanding the preceding provisions of this Article VIII, except as expressly required by law, this Plan may not be modified or terminated as to any Participant in a manner that adversely affects the payment of benefits in pay status, or that reduces the benefit calculated under Article IV with respect to the Participant's SERP Years of Service, SERP Pay, estimated Primary Social Security Benefits and Toyota Pension Plan Benefit through the date of modification or termination, except that in the event of the termination of the Plan as to all Participants, this Plan may in the sole discretion of the Executive Committee of said Board be modified to accelerate payment of benefits to Participants. Upon termination of the Plan, the benefit earned through the date of calculation (calculated according to Article IV using the Participant's SERP Years of Service, SERP Pay, estimated Primary Social Security Benefits and Toyota Pension Plan Benefit as of the date of termination) shall be fully vested." IN WITNESS WHEREOF, Toyota Motor Sales, U.S.A., Inc. has caused this instrument to be executed by its duly authorized officer this 1st day of January 2003. TOYOTA MOTOR SALES, U.S.A., INC. DATE: January 1, 2003 By: /s/ Dian Ogilvie ---------------------- ----------------------------- Its: Group Vice President ----------------------------- 4 EX-10 5 ex10-5b.txt EXHIBIT 10.5(b) AMENDMENT 2003-1 TOYOTA MOTOR SALES, U.S.A., INC. 401(K) EXCESS BENEFIT PLAN The Toyota Motor Sales, U.S.A., Inc. 401(k) Excess Benefit Plan is hereby amended by this Amendment 2003-1, effective January 1, 2003 as follows: 1. Section 1.1 "Purpose" is hereby amended in its entirety to read as follows: "1.1 Purpose. The purpose of the Toyota Motor Sales, U.S.A., Inc. Deferred Compensation Plan (the "Plan") is to attract and retain valuable executive employees by making available certain benefits that otherwise would be unavailable under the Company's Qualified 401(k) Plan because of limitations imposed under the Internal Revenue Code. Prior to its restatement in 2003, the Plan was known as the Toyota Motor Sales, U.S.A., Inc. 401(k) Excess Plan. This Plan is designed to qualify as an unfunded plan of deferred compensation for a select group of management or highly compensated employees described in 29 CFR section 2520.104-23 and Sections 201(a), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")." 2. Section 2.3 "Company" is hereby amended in its entirety to read as follows: "2.3 Company means Toyota Motor Sales, U.S.A., Inc., and shall include any corporation that is affiliated with Toyota Motor Sales, U.S.A., Inc., within the meaning of Section 414(b), (c), (m) or (o) of the Internal Revenue Code and which Toyota Motor Sales, U.S.A., Inc. designates as a "Company" hereunder. "Company" currently includes Toyota Motor Credit Corporation and Toyota Motor Insurance Services, Inc." 3. Section 2.7 "Eligible Employee" is hereby amended in its entirety to read as follows: "2.7 Eligible Employee means, for any Plan Year, any employee of the Company who in the sole discretion of the Committee, is determined to be eligible for the SERP." 4. Section 2.12 "Plan" is hereby amended in its entirety to read as follows: "2.12 Plan means the Toyota Motor Sales, U.S.A., Inc. Deferred Compensation Plan, as set forth herein." 5. Section 2.14 "Plan Year" is hereby amended in its entirety to read as follows: 1 "2.14 Plan Year means the fiscal period commencing each October 1 and ending the following September 30. There was a short plan year commencing October 1, 1997 and ending December 31, 1997, and thereafter Plan Year shall mean the calendar year." 6. Section 2.16 "Separation from Service" is hereby amended by adding the following sentence to the end of the paragraph: "In the case of a Participant whose employment transfers to another company which is affiliated with Toyota (as determined by the Committee in its sole discretion) a Separation from Service shall not occur until such individual ceases to be an employee of any such affiliated company." 7. Section 3.1(a) "Eligibility to Participate" is hereby amended to read as follows: "(a) Each Eligible Employee shall become a Participant hereunder upon delivery to the Committee, such properly completed enrollment forms and agreements as the Committee may require, including, but not limited to, a beneficiary designation form and a form electing the manner in which distributions will be payable with respect to such Participant's Account hereunder. (i) Any election of payment method shall be applicable only to the extent provided in Section 7.2, and shall be irrevocable, unless the Committee, in its sole discretion, permits an Eligible Employee to change his or her election of payment method to a method providing payments over a longer period of time than originally elected by the Eligible Employee and which will not reasonably result in any increase in the amount otherwise payable in any taxable year of the Participant during which payment would have been made under the method of payment previously elected. The Committee shall not, however, permit any such change in a payment method election except prior to the first day of the calendar year in which the Participant will have both attained age fifty-five (55) and completed at least five (5) Years of Vesting Service (determined as provided in the Toyota Pension Plan). No payment option shall be selected by a Participant which is not among a list of payment options generally made available to all Participants by the Committee at the time of such selection. No assurance regarding the tax effects of making such change is provided to a participant who elects to change a form of payment. (ii) Notwithstanding subsection (i) above, effective January 1, 2003, to the extent an election of payment method is applicable as provided in Section 7.2, a Participant shall be allowed to elect among a lump sum distribution, or substantially equal quarterly installments over five (5), ten (10) or fifteen (15) years. A Participant may change such election as long as the change in election is made at least twelve months plus one day before the Participant's Separation from Service. Furthermore, any such change in election must extend, rather than accelerate, the payout period. Any attempt to change an election which would either accelerate the payout period or which is made after the date which is twelve months and one day before the Separation from Service shall be void. To the extent a Participant's Separation from Service occurs for any reason before the Participant's attainment of age fifty-five (55) and completion of at least five 2 (5) Years of Vesting Service (determined as provided in the Toyota Pension Plan), any election by the Participant shall not be valid, and payouts shall instead be made in accordance with Section 7.2(b). For purposes of determining a Participant's age under this Section 3.1, in the case of a Participant who is eligible for the Supplemental Executive Retirement Plan, "age" shall mean "SERP Age" as defined therein." 8. Section 4.1 "Participant Compensation Deferrals" is hereby amended by adding the following to the end of the paragraph: "An individual who is designated by the Committee as an Eligible Employee during the individual's first year of employment with the Company shall be eligible to participate in this plan upon being designated an Eligible Employee. The Compensation Deferral Agreement of such an individual must be filed within thirty days of the date the individual is designated as an Eligible Employee, and shall become effective for compensation payable as soon as administratively feasible after the Compensation Deferral Agreement is filed." 9. Section 4.2 "Amounts of Participant Compensation Deferrals" is hereby amended in its entirety to read as follows: "Participant Compensation Deferrals may be made by Participants as follows: (a) With respect to deferral of Bonus Compensation a Participant may elect to defer, in increments of ten (10) percentage points, an amount of such Participant's Bonus Compensation not in excess of fifty percent (50%) of such Participant's Bonus Compensation. Effective January 1, 2000, the limit on the percentage of Bonus Compensation that may be deferred is increased to one hundred percent (100%); provided, however, that any applicable withholding (such as the employee portion of FICA) may not be deferred. If a Participant's Bonus Compensation for a Plan Year is paid in more than one installment, a deferral election with respect to Bonus Compensation for a Plan Year shall be applied to all such installments, whether or not such installments are equal in amount and whether or not such installments are paid in the same Plan Year or calendar year. Thus, a Participant's election to defer 40% of such Participant's bonus that is paid in two installments will result in a deferral of 40% of each installment. (b) In the case of a Participant whose rate of compensation will result in such Participant having Excess Base Pay Compensation, such Participant may elect to defer, in increments of whole percentage points, a portion of such Participant's Excess Base Pay Compensation. The maximum of such excess compensation permitted to be deferred shall be ten percent (10%) of such Excess Base Pay Compensation. Effective January 1, 2000, the limitation on the deferral of Excess Base Pay Compensation is increased to fifteen percent (15%). No such election to defer a portion of such Excess Base Pay Compensation shall provide for a deferral of less than six percent (6%) of such Excess Base Pay Compensation. (c) Effective January 1, 2000, if a Participant's "Flex Perk" account maintained by the Company is at the maximum limitation on such accounts as permitted 3 under the Flex Perk program at the time balances under the Flex Perk program are increased to reflect the Company's annual contribution to such program, the amount that would have been added to the Participant's Flex Perk account but for such limitation shall be credited to such Participant's Account hereunder." 10. Section 4.3 "Provisions of Compensation Deferral Agreement" is amended by restating sub-paragraphs (b) and (d) thereof in their entirety as follows: "(b) A Participant Compensation Deferral Agreement for a Plan Year shall remain in effect throughout the Plan Year, shall not be subject to change by the Participant during such year, and automatically shall continue for subsequent Plan years unless changed by the Participant prior to the commencement of any Plan Year. Unless otherwise specified in an election described in the next following sentence, the election made by a Participant for a Plan Year shall also apply to the Participant's Bonus Compensation with respect to the Company's fiscal year that starts within the Plan Year. Notwithstanding the general requirement that the Compensation Deferral Agreement be made prior to the commencement of the Plan Year, a Participant may provide a new or revised election with respect to Bonus Compensation at any time prior to the commencement of the Company's fiscal year for which the bonus relates. (d) To the extent that the value of a Participant's Account is permitted, at the discretion of the Committee, to be determined by reference to one or more indices designated by the Participant from time to time, neither the Company, the Committee nor any person other than such Participant shall have responsibility or liability for any adverse economic consequences or loss resulting from the Participant's designation." 11. Section 7.2 "Form and Date of Payment" is hereby amended by adding the following sentence immediately after the first sentence of the first paragraph, and by deleting the last sentence in the last paragraph: "For purposes of determining a Participant's age under this Section 7.2, in the case of a Participant who is eligible for the Supplemental Executive Retirement Plan, `age' shall mean `SERP Age' as defined therein." IN WITNESS WHEREOF, Toyota Motor Sales, U.S.A., Inc. has caused this instrument to be executed by its duly authorized officer this 1st day of January 2003. TOYOTA MOTOR SALES, U.S.A., INC. DATE: January 1, 2003 By: /s/ Dian Ogilvie ---------------------- ----------------------------- Its: Group Vice President ----------------------------- 4 EX-10 6 ex10-7.txt EXHIBIT 10.7 AUGUST 1, 2002 TOYOTA MOTOR CORPORATION and [EMPLOYEE] ====================================================== AGREEMENT FOR THE GRANT OF OPTIONS TO ACQUIRE COMMON SHARES OF TOYOTA MOTOR CORPORATION UNITED STATES OF AMERICA ====================================================== CONTENTS
CLAUSE PAGE 1. Interpretation..............................................................................1 2. Grant of Options............................................................................2 3. Incentive Stock Options.....................................................................2 4. Exercise, Lapse and Refusal of Options......................................................3 5. Manner of Exercise of Options...............................................................5 6. Adjustments to the Number of Common Shares..................................................5 7. Securities and relevant Legislation.........................................................6 8. No Guarantee of Continuing Employment or Office.............................................6 9. Employee Undertaking........................................................................7 10. Data Processing Consent.....................................................................7 11. Costs and Taxes.............................................................................7 12. Securities Accounts.........................................................................8 13. General.....................................................................................8 14. Termination of this Agreement...............................................................9 15. Claims Against the Company..................................................................9 16. Notices....................................................................................10 17. Amendments and Waivers.....................................................................11 18. Governing Law..............................................................................11 19. Entire Agreement...........................................................................11 20. Severability...............................................................................11 APPENDIX 1 Adjustments (English translation).......................................................14 1. Share Split or Share Consolidation.........................................................14 2. Issue of New Shares or Disposal of Treasury Shares.........................................15 3. General....................................................................................16 Appendix 2 FORM OF Exercise Notice - 2002 STOCK OPTION.............................................17 Appendix 3 FORM OF Notice of Termination...........................................................19
THIS OPTION AGREEMENT is made with effect from August 1, 2002 BETWEEN (1) TOYOTA MOTOR CORPORATION a company registered in Japan and whose registered office is at Toyota-Cho, Toyota, Aichi, 471-8571 JAPAN (the Company); and (2) [ ] of [ ] (the GRANTEE) and currently employed by [ ] (the Employing Company). WHEREAS the Company intends to grant the Grantee options to acquire common shares of the Company and set out the exercise conditions thereof. IT IS AGREED as follows: 1. INTERPRETATION 1.1 In this Agreement, unless the context otherwise requires, the following words and expressions shall have the following meanings: AGREEMENT means this Option Agreement; BOARD means the board of directors of the Company from time to time or a duly appointed committee thereof; BANK BUSINESS DAY means any day on which the UFJ Bank Limited is open for business in Japan; COMMON SHARES means the ordinary shares of the Company from time to time; COMPANY BUSINESS DAY means any day on which the Company is open for business in Japan; EXERCISE PERIOD means the period commencing on August 1, 2004 and ending on July 31, 2008, provided that if July 31, 2008 is not a Company Business Day, then the final day of the Exercise Period shall be the Company Business Day immediately preceding July 31, 2008; GRANT DATE means, August 1, 2002, the date on which the Company grants the Options to the Grantee; GROUP means the Company and its Subsidiaries; OPTION means a right to acquire 100 Common Shares under this Agreement (or such number as may be increased or decreased pursuant to Clause 6) and Options shall be construed accordingly; REORGANIZATION means any capitalization or rights issue, split, consolidation, or other reorganization or reduction of the share capital of the Company; Page 1 SUBSIDIARY means any entity in which the Company owns, directly or indirectly, at least 50% of the issued share capital thereof; and YEN means the lawful currency of Japan. 1.2 Any reference herein to the provisions of any statute or subordinate legislation shall be deemed to refer to the same as in force from time to time including any modification, amendment or re-enactment thereof. 1.3 Clause headings are inserted for ease of reference only and shall not affect the construction of this Agreement. 1.4 Where the context permits the singular shall include the plural and vice versa and the masculine shall include the feminine. Words importing individuals shall be treated as importing bodies corporate, corporations, unincorporated associations and partnerships and vice-versa. 1.5 References to Clauses, and Appendices 1, 2 and 3 are to the clauses and the appendices of this Agreement. Appendices 1, 2 and 3 form part of this Agreement. 2. GRANT OF OPTIONS 2.1 The Company hereby grants to the Grantee on the Grant Date 20 Options subject to the terms and conditions of this Agreement. 2.2 No consideration shall be payable by the Grantee on the grant of the Options. 2.3 This Agreement represents the Grantee's right to the Options. The Grantee shall not request the Company to issue any certificates representing the Options. 2.4 The Options are personal to the Grantee and may not be transferred, assigned, pledged, charged to or otherwise alienated or exercised by any other person and any attempt to do so will result in the Options lapsing. 2.5 The benefit of the Options does not constitute part of the Grantee's base salary or remuneration and will not be taken into account in determining any other employment-related rights that the Grantee may have, such as for the purpose of calculating any pension entitlements, severance pay or notice for termination of employment. 3. INCENTIVE STOCK OPTIONS 3.1 It is intended that the Options constitute incentive stock options as defined in Section 422 of the United States Internal Revenue Code of 1986, as amended and any regulations promulgated thereunder (the CODE); provided, however, that to the extent the Options do not satisfy one or more provisions of Section 422 of the Code, they shall be treated as non-qualified stock options. Page 2 4. EXERCISE, LAPSE AND REFUSAL OF OPTIONS EXERCISE 4.1 The Grantee may exercise all or some of the Options during the Exercise Period in the manner set forth in Clause 5. 4.2 Each Option must be exercised in full and no Option may be partially exercised. 4.3 Subject to Clause 6, the price to be paid for each Common Share to be issued or transferred upon exercise of each Option shall be Yen 2,958 (in words, two thousand, nine hundred and fifty eight) which number was calculated by multiplying the closing price of the Common Shares listed on the Tokyo Stock Exchange on the Grant Date by 1.025 (rounded up to the nearest whole Yen) (the EXERCISE PRICE). LAPSE 4.4 Notwithstanding any other provision in this Agreement, the Options shall lapse automatically and become of no effect on the earlier of: (a) the expiry of the Exercise Period; (b) the death of the Grantee; (c) the Grantee being declared bankrupt or entering into any general composition with or for the benefit of his creditors; (d) a shareholders' meeting approving a merger agreement or a share-for-share agreement (kabushiki kokan) as a result of which the Company decides to invalidate the Options on the basis that the Company will cease as a legal entity or it will become a wholly-owned subsidiary of another company; and (e) the termination of this Agreement in accordance with Clause 14. 4.5 Subject to Clause 4.6, the Options shall lapse automatically and become of no effect if the Grantee ceases to be a director or employee of a member of the Group. For the avoidance of doubt, the Grantee shall not be treated for such purposes as ceasing to be a director or an employee of a member of the Group if the Grantee remains or simultaneously becomes a director or employee of another member of the Group. 4.6 Where a Grantee ceases to be a director or an employee of a member of the Group by reason of: (a) injury, disability or ill-health (as determined by the Board); (b) retirement at or after the date on which he is bound or entitled to retire under his contract of employment or otherwise; (c) the company of which he is a director or employee ceasing to be a member of the Group; Page 3 (d) the business (or part of a business) in which he is employed or of which he is a director being transferred to a transferee which is not a member of the Group; or (e) any other reason at the Board's absolute discretion, the Grantee may, subject always to the provisions of Clause 4.1, exercise the Options during the period of six (6) months following such cessation of office or employment, and failing such exercise the Options shall lapse automatically. 4.7 For the purposes of Clauses 4.5 and 4.6, a Grantee shall not be treated as ceasing to be an employee of a member of the Group if he is absent from work solely as a result of an authorized leave of absence until such Grantee ceases to be entitled to exercise any statutory or contractual right to return to work. REFUSAL 4.8 The Company may refuse to accept exercise by the Grantee of the Options within 30 days of the date of the Exercise Notice (as defined in Clause 1.1(a) below) for any of the following reasons: (a) the Company determines in good faith that the exercise impedes the intended issuance of new shares regardless of the type including, without limitation, shares, bonds with warrants or any other securities to be issued; (b) the Company determines that the Options have lapsed pursuant to Clauses 4.4, 4.5 or 4.6; (c) there has been insufficient time to confirm the Adjusted Exercise Price stipulated in Appendix 1; or (d) the Company determines in good faith that the exercise of the Options may materially impede the business of the Company; provided, however that the Company shall not refuse to accept exercise by the Grantee of the Options on the final Company Business Day of the Exercise Period. 4.9 If the Company refuses to accept the exercise by the Grantee of the Options for any one of Clauses (a) to (d) above: (a) the Company shall give written notice to the Grantee of such refusal, provided, however, that the Company is not obliged to disclose the reasons for such refusal; and (b) the Options shall remain outstanding until the earlier of: (i) the Grantee's exercise of such Options pursuant to Clause 5; or (ii) lapse of the Options pursuant to Clauses 4.4, 4.5 or 4.6. Page 4 5. MANNER OF EXERCISE OF OPTIONS 5.1 Subject to Clause 4.2, the Grantee may exercise one or more of the Options in whole, but not in part, during the Exercise Period in accordance with the following procedure: (a) the Grantee is required to send to the Company a notice of its intention to exercise the Options (the EXERCISE NOTICE) in the form attached as Appendix 2 (or in such other form as prescribed by the Company from time to time); (b) within five (5) Company Business days the Company shall send to the Grantee an acknowledgement that such Exercise Notice has been received; (c) the Grantee shall, within four (4) Bank Business Days from the date the Company notifies the Grantee that they have received the Exercise Notice, pay an amount calculated by multiplying the Exercise Price by the number of Common Shares to be obtained upon exercise of the Option(s) (the EXERCISING PURCHASE PRICE) to UFJ Bank Limited or such other bank as shall be appointed by the Company from time to time (the APPOINTED BANK); provided, however, that if the last Bank Business Day is not also a Company Business Day, then the date for payment shall be the next Company Business Day. The date of exercise shall be the date of receipt by the Company of payment of the Exercising Purchase Price. (d) Upon confirmation by the Company that the Grantee has fully paid the Exercising Purchase Price pursuant to this Clause 5.1 and any Tax Liabilities pursuant to Clause 11, the Company shall promptly issue or transfer (as the case may be) the relevant number of Common Shares to the Grantee's securities account in accordance with Clause 12. Upon payment of the Exercising Purchase Price by the Grantee to the Appointed Bank, the Grantee shall legally own the Common Shares acquired upon the exercise of the Options. 5.2 The Grantee may withdraw the Exercise Notice up until such time as the Grantee pays the Exercising Purchase Price by giving written notice to the Company to that effect; provided, however, that once the Grantee has paid the Exercising Purchase Price in full, the Grantee cannot withdraw the Exercise Notice. 5.3 Notwithstanding Clause 5.2 above, following payment by the Grantee of the Exercising Purchase Price, the Exercise Notice shall be deemed withdrawn if the Company notifies the Grantee of its refusal to accept the exercise of the Options pursuant to Clauses 4.8 and 4.9. In such circumstances, the Company shall repay the Exercising Purchase Price to the Grantee, provided, however, that the Company shall not pay any interest with respect to any repayment to the Grantee. 6. ADJUSTMENTS TO THE NUMBER OF COMMON SHARES 6.1 In the event of a Reorganization of the share capital of the Company, the Exercise Price and the total number of Common Shares underlying an Option may be adjusted in accordance with the formulae set out in Appendix 1. Page 5 7. SECURITIES AND RELEVANT LEGISLATION 7.1 The Options may not be exercised if the exercise of the Options or the issue of Common Shares thereafter would be contrary to any enactment or regulation at the time being in force in any country having jurisdiction in relation thereto. In particular, the Options shall not be exercisable unless the offer and sale of the Common Shares subject to the Options have been registered under the United States Securities Act of 1933, as amended and qualified under applicable state "blue sky" laws, or the Company has determined that an exemption from registration under the Securities Act of 1933 and from qualification under such state "blue sky" laws is available. Neither the Employing Company nor the Company shall be bound to take any action or obtain the consent of any governmental authority to such acquisition, exercise or issue or to take any action to ensure that any such acquisition, exercise or issue is in accordance with any such enactment or regulation if such action would, in the opinion of the Employing Company or the Company (as the case may be), be unduly onerous and neither the Employing Company nor the Company shall have any liability in respect thereof to the Grantee. 7.2 The Grantee hereby agrees to abide by the Securities and Exchange Law of Japan, and all relevant securities laws, insider trading legislation, commercial codes, tax laws, any other relevant laws, rules and regulations (including relevant foreign, state and local laws) and relevant internal rules (including, without limitation, all insider information and trading prohibition rules and the rules on, buying and selling Common Shares in relation to the exercise of any Options and the subsequent sale of the Common Shares acquired upon exercise). The Company may, at its discretion, impose such conditions on the exercise of the Options as it shall deem necessary in order for such exercise to comply with any applicable enactments or regulations, including but not limited to, the requirement that an investment representation be given by the Grantee or that certificates for shares of Common Stock be subject to a legend describing restrictions on transfer. If the Grantee has any questions about the application of relevant laws and rules, the Grantee shall immediately contact the Company to discuss them; provided, however, that the Grantee is solely responsible for obtaining his own legal advice in connection with the exercise of the Options. 8. NO GUARANTEE OF CONTINUING EMPLOYMENT OR OFFICE 8.1 The rights, obligations and status of the Grantee under the terms and conditions of his office or employment with the Employing Company shall not be affected by this Agreement. Neither this Agreement nor any action taken or omitted to be taken hereunder shall be construed as in any way: (a) guaranteeing the Grantee's continued office or employment with the Company, Employing Company or any member of the Group; or (b) giving the Grantee the right to continue or be re-instated in his office or the employ of the Company, the Employing Company or any member of the Group whether before during or after the Exercise Period. 8.2 The Grantee hereby waives any and all rights to compensation or damages in consequence of the termination of his office or employment with the Company, the Employing Company or any member of the Group for any reason whatsoever insofar Page 6 as those rights arise, or may arise, from his ceasing to have rights under or being entitled to exercise the Options pursuant to this Agreement as a result of such termination or from the loss or diminution in value of such rights or entitlements. If necessary, the Grantee's terms of employment shall be varied accordingly. 9. EMPLOYEE UNDERTAKING In accordance with the purpose of this Agreement, the Grantee shall devote himself to his work with integrity as an employee or director of the Employing Company. 10. DATA PROCESSING CONSENT 10.1 The Company and the Employing Company may hold personal information relating to the Grantee, including, without limitation, payroll, address, service period, demographics and similar information in connection with this Agreement and may at any time process and use such personal information in order to perform and facilitate the implementation, management and administration of the matters contemplated and set out in this Agreement provided that such use is not prohibited by law. Subject to any applicable prohibitions, the Company may, at any time to the extent required, make the Grantee's personal information available to other persons within or outside the Group for such purposes, including, but not limited, in connection with the exercise of the Options. The Grantee hereby irrevocably consents to the processing, use, transfer and registration of such personal information within or outside the Group. Before transferring any data to a person or entity outside the Group, the Company or the Employing Company (as the case may be) undertakes to inform the Grantee of: (a) the identity of any recipient or category of recipients of such personal information, the relevant data categories; and (b) the Grantee's rights to consult and to the extent necessary rectify and complete the registered personal information. 11. COSTS AND TAXES 11.1 The Company shall have the right to require the Grantee to remit to the Company, prior to the delivery of any certificates evidencing Common Shares acquired upon exercise of an Option, an amount sufficient to satisfy any applicable income tax, capital gains tax, social security contributions or other tax charge or duty (the TAX LIABILITIES) which may be assessed or chargeable in connection with the grant or exercise of the Options. In addition, prior to the Company's determination of such Tax Liabilities, the Grantee may make an irrevocable election to satisfy, in whole or in part, such obligation to remit taxes, by directing the Company to cause Common Shares to be withheld (but not in excess of a rate that the Company determines is necessary to avoid unfavorable accounting treatment) that would otherwise be received by such Grantee. Such election may be denied by the Board at its discretion, or may be made subject to certain conditions specified by the Board, including, without limitation, conditions intended to avoid the imposition of liability against the individual under applicable laws. The Grantee shall indemnify the Company in respect of any Tax Liabilities payable in respect of the Options and for Page 7 which the Company is liable whether pursuant to any withholding obligations or otherwise. 11.2 Except as provided for in Clause 11.1, the Grantee is responsible for: (a) the cost of opening an account at the Securities Company (as defined in Clause 12.1 below); (b) the relevant charges payable in connection with any money transfers; (c) all other charges of the Appointed Bank and/or Securities Company which may be imposed from time to time; and (d) all other expenses that are imposed on the exercise of Options. 11.3 The Company shall have the right to require the Grantee to remit to the Company an amount sufficient to satisfy any such costs and expenses prior to the delivery of any certificate evidencing Common Shares acquired upon exercise of an Option. Such amount may be satisfied by directing the Company to withhold Common Shares in the manner set forth in Clause 11.1. 12. SECURITIES ACCOUNTS 12.1 Pursuant to Japanese laws and regulations, the Grantee is required to appoint an agent and maintain a non-resident offshore account in Japan with respect to the Common Shares to be acquired upon exercise of the Options. The Grantee hereby agrees that it shall, through the Company, entrust the custody, management and disposal of such Common Shares (the SERVICES) to a securities company or bank (the SECURITIES COMPANY); provided, however, that the Grantee shall retain the right to determine and direct the Securities Company to sell, transfer or dispose of all or any portion of the Common Shares on the Grantee's behalf and the Securities Company may not sell, transfer or otherwise dispose of the Common Shares without the Grantee's prior approval. The Company shall determine and appoint such Securities Company (or change such appointment) in its absolute discretion and notify the Grantee of such appointment (or change in such appointment) in accordance with Clause 16. 12.2 Following the Grant Date and prior to the exercise of the Options the Grantee is required to open an account in the Grantee's name at the Securities Company and follow the necessary procedures set out separately by the Company in order to enable the Securities Company to perform the Services. 13. GENERAL 13.1 The existence of the Options shall not affect in any way the right or power of the Company or its shareholders to make or authorize any Reorganization or other adjustment, recapitalization, reorganization or change in the Company's capital structure, or any merger, corporate split, Common Shares exchange or consolidation of the Company, or any issue of Common Shares, bonds, debentures, preferred or prior preference stocks ahead of or convertible into, or otherwise affecting the Common Shares of the Company or the rights thereof or any other securities, or the dissolution or liquidation of the Company or any sale or transfer of all or any part of Page 8 its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. 13.2 The grant of options under this Agreement or future agreement is a voluntary benefit and does not create any entitlement to options or shares in the future, even in the case of repeated grants of options. 13.3 The Grantee shall have no rights as a stockholder with respect to any Common Shares issuable upon exercise of an Option until payment of the Exercising Purchase Price for such Common Shares as provided in Clause 5.1(d), and no adjustment shall be made for dividends or distributions or other rights in respect of any Common Share for which the record date is prior to the date on which the Grantee pays the Exercising Purchase Price therefor. The Grantee acknowledges that the Group has no duty to disclose confidential information to the Grantee that is not generally available to holders of Common Shares. 13.4 The Board shall have the right to interpret the provisions of this Agreement and to make all rules and determinations which it deems necessary or advisable for the administration of the Agreement. The decisions of the Board or, in the case of matters requiring shareholder approval, resolutions of the shareholders meeting (whichever is applicable), including without limitation all calculations required hereunder, shall be final and binding with respect to all matters relating to this Agreement and the Options. 14. TERMINATION OF THIS AGREEMENT 14.1 If, by reason of imposition of Taxation Liabilities or a change in the applicable laws or regulations, this Agreement is rendered illegal or otherwise unenforceable, the Grantee may, subject to Clause 14.2 below, terminate this Agreement with retroactive effect to the Grant Date by giving written notice in the form attached in Appendix 3 (or as otherwise prescribed by the Company from time to time); provided that Clause 15.1 shall continue and remain in full force and effect notwithstanding the termination of this Agreement. 14.2 The Grantee may only retroactively terminate this Agreement if he has not exercised any of the Options. If the Grantee has exercised one or more Options then the Grantee may at any time during the Exercise Period, in respect of any outstanding Options, terminate this Agreement without retroactive application by giving written notice in the form attached in Appendix 3 (or as otherwise prescribed by the Company from time to time); provided that Clause 15.1 shall continue and remain in full force and effect notwithstanding the termination of this Agreement. 15. CLAIMS AGAINST THE COMPANY 15.1 The Grantee shall not make any claim against the Company, the Employing Company or their respective directors, shareholders, affiliates, representatives, auditors or employees for any compensation whatsoever in connection with this Agreement. 15.2 If, following delivery by the Grantee to the Company of an Exercise Notice, the Company fails or delays, due to its willful or gross negligence, to deliver the Page 9 Common Shares to the Grantee within 30 Company Business Days, and as a direct result of such failure or delay the Grantee suffers damage or loss, the Grantee may claim compensation limited to the difference between the Exercising Purchase Price, which was paid by the Grantee to the Company, and the aggregate market price of the Common Shares at the time of acquisition by the Grantee, if the Exercising Purchase Price is higher than the aggregate market price of the Common Shares. For the avoidance of doubt, refusal by the Company to accept the exercise by the Grantee of the Options pursuant to Clause 4 shall not be grounds for compensation under this Clause 15. 15.3 Nothing in this Clause 15 shall prohibit the Grantee from making a claim against the Company, the Employing Company or their respective directors, shareholders, affiliates, representatives, auditors or employees enforcing rights expressly provided for under the provisions of this Agreement. 15.4 If the Grantee exercises Options or disposes of Common Shares in breach of any provisions of this Agreement, the Grantee shall, upon the Company's request, refund the greater of: (a) the difference between the Exercising Purchase Price, which was paid by the Grantee to the Company, and the aggregate market price of the Common Shares at the time of acquisition by the Grantee; or (b) the entire profit which the Grantee makes by the disposal of the Common Shares. In either (a) or (b), the Grantee shall make such refund promptly in accordance with the Company's instructions. 16. NOTICES TO THE GRANTEE 16.1 Any communication or notice to be given under or in connection with this Agreement shall be in the English language and may be communicated by letter, telex, facsimile transmission or email to the home address set out as first written above or to such other address, telex or facsimile number or email address as the Grantee may from time to time have notified (in accordance with this Clause 16.1) to the Company. TO THE COMPANY 16.2 Any communication or notice to be given under or in connection with this Agreement shall be in the English language and may be communicated by letter, telex, facsimile transmission or email to the business address set out as first written above or to such other address, telex or facsimile number or email address as the Company may from time to time have notified (in accordance with this Clause 16.2) to the Grantee. Page 10 RECEIPT OF NOTICE 16.3 Any notice so served by letter, telex, facsimile transmission or email shall be deemed to have been received: (a) in the case of telex, facsimile transmission or email, twelve (12) hours after the time of dispatch; and (b) in the case of post, special delivery or registered post, twelve (12) Company Business Days from the date of posting. 17. AMENDMENTS AND WAIVERS 17.1 No amendment to the provisions of this Agreement shall be effective unless such amendments are: (a) consistent with the terms of the resolution of the Company's general shareholders meeting and Board meeting dated June 26, 2002, to grant options, as such resolutions may be modified or amended from time to time; and (b) made in writing and signed by the parties hereto or their duly authorized representatives. 17.2 All rights, remedies and powers conferred upon the parties hereto are cumulative and shall not be deemed or construed to be exclusive of any other rights, remedies or powers now or hereafter conferred upon the parties hereto or either of them by law or otherwise. 17.3 Any failure at any time to insist upon or enforce any such right, remedy or power shall not be construed as a waiver thereof. 18. GOVERNING LAW 18.1 This Agreement shall be governed by and construed in all respects in accordance with the laws of Japan. 18.2 Each of the parties hereto hereby irrevocably submits to the jurisdiction of the courts of Japan. 19. ENTIRE AGREEMENT 19.1 This Agreement constitutes the entire Agreement between the parties relating to the subject matter of this Agreement and supersedes all prior representations, writings, negotiations and understandings with respect hereto. 19.2 The parties acting in good faith will determine any matter not set out herein. 20. SEVERABILITY Any provision of this Agreement that is invalid, illegal or unenforceable in any jurisdiction shall as to that jurisdiction, be ineffective to the extent of such Page 11 invalidity, illegality or unenforceability, without affecting in any way the remaining provisions hereof in such jurisdiction or rendering that or any other provision of this Agreement invalid, illegal or unenforceable in any other jurisdiction. Page 12 IN WITNESS whereof this Agreement has been executed on the day and year first above written in two originals, each party acknowledging receipt of one duly executed original. By: TOYOTA MOTOR CORPORATION ---------------------------- By: FUJIO CHO Title: President By: [ ] ---------------------------- [ ] Date: Page 13 APPENDIX 1 ADJUSTMENTS (ENGLISH TRANSLATION) Note: The following English translation is not a literal translation but is provided for convenience only and the original terms and conditions of the Options in Japanese will prevail in all circumstances. All references to dates in the following translation are to Tokyo time. 1. SHARE SPLIT OR SHARE CONSOLIDATION 1.1 If the Company splits or consolidates its shares from and including August 1, 2002, the Exercise Price shall be adjusted in accordance with the following formula: Adjusted Exercise = Pre-adjusted Exercise Price x 1 Price ----------------------- Ratio of share split/ consolidation The Adjusted Exercise Price shall be rounded up to the nearest whole Yen. 1.2 The "Pre-adjusted Exercise Price" used in the formula in Clause 1.1 above shall be the Exercise Price effective on the day prior to the date on which the Adjusted Exercise Price is applied pursuant to 1.3 below. 1.3 The Adjusted Exercise Price shall be applied as follows: (a) if the Company splits its shares, the Adjusted Exercise Price shall be applied from the date following the allotment date (wariate-bi) of the split shares; or (b) if the Company consolidates its shares, the Adjusted Exercise Price shall be applied from the date following the expiry of the period provided for in Clause 1 of Article 215 of the Commercial Code (Law No. 48 of 1899). 1.4 Where the Board decides that Common Shares will be issued pursuant to a share split in exchange for a capitalization of distributable profit on the condition that the allotment date of the split shares is specified as a date prior to the date of the shareholders' meeting in which such capitalization is approved, the Adjusted Number of Shares calculated in accordance with the following formula shall be issued/transferred to any Grantee who exercises the whole of the Option during the period between the date following the allotment date of the split shares and the date of the shareholders' meeting in which such capitalization is approved: Number of shares which should have been issued or Adjusted Adjusted transferred upon the Number of Pre-Adjusted - Exercise Price x exercise of the Shares = Exercise Price Option without the adjustment of the Exercise Price ------------------------------------------------------------ Adjusted Exercise Price Page 14 The Adjusted Number of Shares shall be rounded down to the nearest whole Yen. 2. ISSUE OF NEW SHARES OR DISPOSAL OF TREASURY SHARES 2.1 If the Company disposes of its treasury shares or issues new Common Shares for an amount which is less than the then current market price from and including August 1, 2002 (excluding all instances where options, warrants or other rights to acquire shares of the Company are exercised or where the Company transfers its treasury shares in accordance with a resolution of a shareholders' meeting pursuant to paragraph 2 of Article 5 of the Supplementary Provisions for the Commercial Code and paragraph 2 of Article 210-2 of the former Commercial Code), the Exercise Price shall be adjusted in accordance with the following formula: Number of Number of new issued and Common Amount to outstanding Shares to x be paid per Common + be issued new Common Shares or Share to be disposed issued Adjusted Exercise = Pre-adjusted x ------------------------- Price Exercise price Current market price per Common Share ----------------------------------------- Number of issued + Number of new Common and outstanding Shares to be issued Common Shares The Adjusted Exercise Price shall be rounded down to one decimal place. 2.2 The "Pre-adjusted Exercise Price" used in the formula in Clause 2.1 above shall be the Exercise Price on the day prior to the date on which the Adjusted Exercise Price is applied. 2.3 The "Number of issued and outstanding Common Shares" used in the formula in Clause 2.1 above shall be the total number of issued and outstanding Common Shares on the allotment date of the new shares being issued or the date on which the treasure shares are disposed, whichever is applicable. If such date is not specified, the "Number of issued and outstanding Common Shares" shall be the total number of issued and outstanding Common Shares on the date one month prior to the date on which the Adjusted Exercise Price is applied; provided that where two or more events, which require the adjustment of the Exercise Price, occur within a short period of time of each other and the number of issued and outstanding Common Shares which is used in calculating the Adjusted Exercise Price triggered by one of those events can be calculated appropriately, such number of issued and outstanding shares shall be used. 2.4 The "Current market price per Common Share" used in the formula in Clause 2.1 above shall be the average daily closing price (including the trend quotations) of Page 15 the Company's Common Shares on the Tokyo Stock Exchange for the 30 day period starting on the 45th dealing day before the date on which the Adjusted Exercise Price is applied, excluding any days on which the closing price is not reported. The average daily closing price shall be calculated to two decimal places and rounded down to one decimal place. 2.5 The Adjusted Exercise Price calculated in accordance with the formula in Clause 2.1 above shall be applied from the date following the date of disposal of treasury shares or the allotment date of the Common Shares to be issued if such date is specified, or from the date following the payment date for the Common Shares to be issued or disposed of. 3. GENERAL 3.1 If the difference between the Adjusted Exercise Price and the Pre- adjusted Exercise Price is less than one Yen, the Exercise Price shall not be adjusted on that occasion; provided, however, that the exact Adjusted Exercise Price originally calculated in accordance with the formula set out in Clause 1 or 2 above shall be used as the Pre-adjusted Exercise Price on the subsequent occasion that an adjustment occurs. 3.2 Except as otherwise provided in Clauses 1 or 2 above, the Company shall adjust the Exercise Price, as the Company considers appropriate: (a) in the event of capital decrease, merger or demerger of the Company; or (b) if an event occurs which otherwise causes a change (or potential change) in the number of issued shares of the Company. If the Exercise Price is adjusted, the Company shall issue an individual notice to the Grantee prior to the date that the Adjusted Exercise Price is applied as specified in Clause 1 or 2 above; provided, however, that in the event of a share split as set out in Clause 1.4 above or where the Company is unable to issue an individual notice prior to the date that the Adjusted Exercise Price is applied, the Company shall issue an individual notice to the Grantee promptly after such date. Page 16 APPENDIX 2 FORM OF EXERCISE NOTICE - 2002 STOCK OPTION [Date] To: Toyota Motor Corporation (the COMPANY) From: [Employee name] (the GRANTEE) Pursuant to Clauses 4 and 5 of the Agreement for the Grant of Options to Acquire Common Shares of Toyota Motor Corporation, executed with effect from August 1, 2002 (the AGREEMENT), I warrant and claim for the issue or transfer (at the Company's discretion) of the Common Shares as follows: 1. WARRANT I warrant that, as of June 26, 2002, the date on which the general shareholders' meeting resolved to grant options, I was neither: (a) a "major shareholder" (oguchi kabunusi); nor (b) a "special related person" (tokubetsu kankeisya) to any "major shareholder", as those terms are defined under Japanese laws and regulations.(1) 2. EXERCISE OF STOCK OPTIONS I hereby exercise the following Options in accordance with the terms of the Agreement:
- ----------------------------- --------------- ----------------------------------------------------------- Address THE GRANTEE --------------- ----------------------------------------------------------- Name and position - ----------------------------- --------------- ----------------------------------------------------------- DATE OF THE GENERAL SHAREHOLDER MEETING June, 26 2002 Exercise Period From: August 1, 2004 To: July 31, 2008 (inclusive) - ----------------------------- --------------------- -------------------- -------------------------------- GRANT DATE August 1, 2002 - ----------------------------- --------------------- -------------------- -------------------------------- Right Classification Relative shares Exercise Price per share TERMS OF THE OPTION ----------- --------------------- --------------------- ------------------- Option Common shares [insert number] [insert price] shares Yen - ----------------------------- ----------- --------------------- --------------------- -------------------
- ------------------------------------------------------------------------------ (1) Special Taxation Measures Law (Law No. 26 of 1957) Paragraph 1 of Article 29-2; and Enforcement Regulation of the Special Taxation Measures Law Paragraphs 1 and 2 of Article 19-3. Page 17
- ----------------------------- --------------- ----------------------------------------------------------- Number of shares to Total Exercise be acquired by Price DETAILS OF THE EXERCISE Exercise Date exercise of the Option - ----------------------------- --------------------------------- --------------------- ------------------- [yyyy/mm/dd] [insert number] [insert price] Yen shares - ----------------------------- ------------ -------------------------------------------------------------- Address 1 Toyota-machi, Toyota-shi, Aichi-ken COMPANY ------------ -------------------------------------------------------------- (GRANTING COMPANY) Name Toyota Motor Corporation - ----------------------------- ------------ --------------------------------------------------------------
Page 18 APPENDIX 3 FORM OF NOTICE OF TERMINATION OF 2002 STOCK OPTION AGREEMENT [Date] To: Toyota Motor Corporation (the COMPANY) From: [Employee's name] (the GRANTEE) TERMINATION OF AGREEMENT PURSUANT TO CLAUSE 14.1 ABOVE Pursuant to Clause 14.1 of the Agreement for the Grant of Options to Acquire Common Shares of Toyota Motor Corporation, executed with effect from August 1, 2002 (the AGREEMENT), I notify you that I hereby retroactively terminate the Agreement, such termination to be effective from the date of execution of the Agreement. I hereby acknowledge and agree that I have no claim under Clause 15 of the Agreement, whether present or future against the Company, the Employing Company or any of their subsidiaries arising in connection with the Agreement or the termination thereof. TERMINATION OF AGREEMENT PURSUANT TO CLAUSE 14.2 Pursuant to Clause 14.2 of the Agreement for the Grant of Options to Acquire Common Shares of Toyota Motor Corporation, executed with effect from August 1, 2002, I notify you that I hereby terminate the Agreement effective as of the date of this notice. I hereby acknowledge and agree that I have no claim under Clause 15 of the Agreement, whether present or future against the Company, the Employing Company or any of their subsidiaries arising in connection with the Agreement or the termination thereof. Page 19 EX-10 7 ex10-15.txt EXHIBIT 10.15 DESCRIPTION OF HOME LOAN PROGRAM Certain officers and directors of TMCC have received mortgage loans from the Company secured by real property. The loans are secured by first trust deeds. The interest rate for each loan was based on 3 month LIBOR plus, in either case, a specified margin ranging from .75% to 2% depending on the term of the loan. The borrower received the lowest rate applicable in the quarter in which the loan application was submitted up to the date loan documents were prepared. The original term of the loans is either 10, 15, 20 or 30 years. The interest rate is fixed at inception for all loans except that a borrower could elect a first 10 years fixed, last 20 years variable option for a 30 year loan. The Company paid appraisal and all other closing costs for the loans. The Company is not currently funding new loans under this program. The forms of the following loan documents are included in this exhibit: 1. Form of Fixed Rate Note Secured by Deed of Trust 2. Form of Fixed Rate/Variable Rate Note Secured by Deed of Trust 3. Form of Loan Disclosure Statement 4. Form of Deed of Trust 5. Form of Notice of Right to Cancel 20F NOTE SECURED BY DEED OF TRUST ----------------------------- Date: _________________ Amount: $_____________ Borrowers: _______________________________, husband and wife (__________________ is an associate of Toyota Motor Sales, U.S.A., Inc. or one of its affiliates or subsidiaries) Property: ___________________________. 1. BORROWERS' PROMISE TO PAY ------------------------- In return for a loan that we (the "Borrowers") have received, we promise to pay U.S. $________________ (this amount is called "principal"), plus interest, to the order of Toyota Motor Credit Corporation (hereinafter "Lender" or "TMCC"). We understand that the Lender may transfer this Note. The Lender or anyone who takes this Note by transfer and who is entitled to receive payments under this Note is called the "Note Holder." 2. INTEREST -------- Interest will be charged on unpaid principal from the date loan proceeds are disbursed until the full amount of principal has been repaid. Interest calculations will be based on a 365 day year, and the actual number of days loan proceeds are outstanding, and the outstanding principal balance. Between the date of loan funding and _______________ interest will accrue and be due and payable at the rate of ____% per annum. 3. PAYMENTS -------- a. MATURITY DATE. The entire outstanding principal balance, and any accrued unpaid interest, late charges or other costs for which Borrower is responsible under the terms of this Note or the Deed of Trust, will be due and payable on the earlier of __________________or the date of acceleration of the loan as described in Sections 5, 9 and 11a below (the "Maturity Date"). b. MONTHLY PAYMENT DUE DATE. On the 15th day of each calendar month until the Maturity Date, we promise to pay Note Holder, at 19001 S. Western Avenue, PO Box 3457, Torrance, California 90510-3457, Attn.: __________M.D._______(or at a different place if required by Note Holder) our "Monthly Payment" established as set forth below. C. FIXED MONTHLY PAYMENT. Beginning on _______________and ending on _____________ the Monthly Payment will be $_________. This payment is based upon the principal, a fixed interest rate of _____%, and a ___ year amortization. d. PAYMENT FOR INTEREST ACCRUED BETWEEN LOAN FUNDING AND 14TH DAY OF MONTH. We also acknowledge that we will be billed by Lender for, and agree to pay, daily interest on our Loan between the date Lender wire transfer funds our Loan and the 14th day of ____________ (the "Partial Month Payment"). The Partial Month Payment will be due on________________. 4. BORROWERS' RIGHT TO PREPAY -------------------------- I have the right to make payments of principal at any time before they are due. A payment of principal only is known as a "prepayment". When we make a 1 prepayment, we will tell the Note Holder in writing that we are doing so. We may make a full prepayment or partial prepayments without paying any prepayment charge. The Note Holder will use all of my prepayments to reduce the amount of accrued unpaid interest, and then principal that we owe under this Note. If we make a partial prepayment which is less than 21% of the principal balance of the Note, there will be no change in the amount of my monthly payment. If we make a partial prepayment which is 21% or more of the principal balance of the Note, and we simultaneously give the Lender a written request for an adjustment in my monthly payment amount (a "Recasting"), that payment adjustment will be effective as of the second monthly payment due following the date of prepayment. Lender will calculate the Recasting of my loan based upon an amortization schedule using (i) the new principal balance, (ii) the then current interest rate under Section 2 above, and (iii) the number _____ minus the number of whole months since the funding of the Note. 5. BORROWERS' FAILURE TO PAY AS REQUIRED ------------------------------------- a. LATE CHARGE FOR OVERDUE PAYMENTS: If the Note Holder has not received the full amount of any Monthly Payment fifteen (15) calendar days after the due date, we will pay a late charge to the Note Holder. The amount of the charge will be 5.00% of my overdue payment of principal and interest. We will pay this late charge immediately but only once on each late payment. b. DEFAULT: If we do not pay the full amount of each monthly payment within fifteen (15) days of the date it is due, we will be in default. c. NOTICE OF DEFAULT: If we are in default, the Note Holder may send me a written notice telling me that if we do not pay the overdue amount by a certain date, the Note Holder may require me to pay immediately the full amount of principal which has not been paid and all the interest that we owe on that amount. The date specified in the notice must be at least thirty (30) days after the date on which the notice is delivered or mailed to me. d. NO WAIVER BY NOTE HOLDER: Even if, at a time when we are in default, the Note Holder does not require me to pay immediately in full as described above, the Note Holder will still have the right to do so if we are in default at a later time. e. PAYMENT OF NOTE HOLDER'S COSTS AND EXPENSES: If the Note Holder has required me to pay immediately in full as described above, the Note Holder will have the right to be paid back by me for all its costs and expenses in enforcing or collecting this Note including actual attorneys' fees, costs and other expenses. 6. GIVING OF NOTICES ----------------- Unless applicable law requires a different method, any notice which must be given to me under this Note will be given by delivering it or by mailing it by first class mail to me at the Property address above or at a different address if we give the Note Holder a notice of a different address. Any notice that must be given to the Note Holder under this Note will be given by mailing it by first class mail to the Note Holder at the address stated in Section 3 above or at a different address if we are given a notice of that different address. 7. OBLIGATIONS OF PERSONS UNDER THIS NOTE -------------------------------------- If more than one person signs this Note, each person is fully and personally obligated to keep all of the promises made in this Note, including the promise to pay the full amount owed. The Note Holder may enforce its rights under this Note against each person individually or against all of us together. This means that any one of us may be required to pay all of the amounts owed under this Note. 2 8. WAIVERS ------- I waive the rights of presentment and notice of dishonor. "Presentment" means the right to require the Note Holder to demand payment of amounts due. "Notice of dishonor" means the right to require the Note Holder to give notice to other persons that amounts due have not been paid. 9. ACCELERATION AFTER TERMINATION OF EMPLOYMENT -------------------------------------------- If your, the associate's, employment with Toyota Motor Sales, U.S.A., Inc., its subsidiaries or affiliates, terminates for any reason, the unpaid principal balance and interest will become due and payable ninety (90) days after date of termination. TMCC will not be required to give notice of the acceleration of the Note. Following termination of the associate's employment and until we have paid all principal, interest and any other charges that we may owe under this Note, we will continue to make the monthly payments as specified in Section 3. TMCC will have the right to proceed under Section 5 if we fail to make the monthly payments required after termination of the associate's employment. 10. GOVERNING LAW ------------- This Note is governed by California law, subject to Section 2924(i) of the California Civil Code, which provides that the Note Holder will give written notice to the Borrowers (Trustors), or their successor in interest, of prescribed information at least ninety (90) and not more than one hundred fifty (150) days before any balloon payment is due. 11. SECURED NOTE ------------ This Note is secured by a first deed of trust (the "Deed of Trust") dated the same day as this Note encumbering the Property identified above. We understand and acknowledge that the Deed of Trust imposes a number of obligations on me for the protection of TMCC. Some of these obligations are described as follows: a. ACCELERATION OF NOTE ON TRANSFER OR ENCUMBRANCE OF PROPERTY BY BORROWER: -------------------------------------------------------------- In the event that we sell, convey, enter into a contract of sale, lease with option to purchase, further encumber or alienate the Property, or any part thereof, or any interest therein, or shall be divested of our title or any interest therein in any manner or way, whether voluntarily or involuntarily, without the written consent of TMCC being first obtained, TMCC will have the right, at its option, to declare any indebtedness or obligations secured by the Property immediately due and payable regardless of the maturity date specified in this Note. If TMCC exercises this option, TMCC will give me notice of acceleration. The notice will provide a period of not less than thirty (30) days from the date the notice is delivered or mailed within which we must pay all sums secured by the Deed of Trust. If we fail to pay these sums prior to the expiration of the thirty (30) day period, TMCC may invoke any remedies permitted by the Deed of Trust without further notice or demand on me. If the option is not exercised, a reasonable transfer fee will be paid. We further agree to pay for any statement regarding the obligation secured hereby in any amount demanded by TMCC, not to exceed the maximum allowed by law at the time when such statement is requested. b. INSURANCE: We will keep the Property insured against fire and other hazards in an amount sufficient to cover the replacement value of the improvements located on the Property. In consideration of TMCC's making this Loan, we will furnish TMCC evidence of such insurance coverage naming TMCC as loss payee, and 3 specifying the date of any renewals and evidence of paid renewals. In the event of loss or damage, we will give prompt notice to TMCC and the insurance carrier. c. INDEMNITY RE TITLE: We represent that we have title to the Property and will defend and hold TMCC harmless against any and all liability including any costs, damages, expenses and actual attorney's fees incurred by TMCC in connection with any action, claim, proceeding or suit arising from any liens, encumbrances, rights or easements affecting title of the Property securing this Note. "BORROWER" - --------------------------- -------------------------- Executive Home Loan Note - 20F 4 10F20V NOTE SECURED BY DEED OF TRUST ----------------------------- Date: ___________ Amount: $____________ Borrowers: ______________________________ (______________is an associate of Toyota Motor Sales, U.S.A., Inc. or one of its affiliates or subsidiaries) Property: _________________________________ 1. BORROWERS' PROMISE TO PAY ------------------------- In return for a loan that we (the "Borrowers") have received, we promise to pay U.S. $______________ (this amount is called "principal" or the "Loan"), plus interest, to the order of Toyota Motor Credit Corporation (hereinafter "Lender" or "TMCC"). We understand that the Lender may transfer this Note. The Lender or anyone who takes this Note by transfer and who is entitled to receive payments under this Note is called the "Note Holder." 2. INTEREST -------- Interest will be charged on unpaid principal from the date Loan proceeds are disbursed until the full amount of principal has been repaid. Interest calculations will be based on a 365 day year, and the actual number of days Loan proceeds are outstanding, and the outstanding principal balance. Between the date of Loan funding and _________________interest will accrue and be due and payable at the rate of ____% per annum. Between ________________ and the date when the Loan is paid in full interest will accrue and be due and payable at the "Variable Interest Rate" specified below. The "Variable Interest Rate" will be adjusted, up or down, on __________ 15th of each year beginning in _____, and will be the lowest "3 Month LIBOR Rate" in effect between ________________ and ___________ of that year plus three quarter percent (3/4%) per annum. The "3 Month LIBOR Rate" is the three (3) month London Interbank Offered Rate in effect from time to time as published by TMCC. In the event there is any later question about the 3 Month LIBOR Rate, reference shall be made to the reports of the LIBOR rates published monthly in the Wall Street Journal. If the 3 Month LIBOR Rate is renamed or no longer be published, a substitute variable interest rate index selected by the TMCC Rate Committee shall be used to determine the Variable Interest Rate. 3. PAYMENTS -------- a. MATURITY DATE. The entire outstanding principal balance, and any accrued unpaid interest, late charges or other costs for which Borrower is responsible under the terms of this Note or the Deed of Trust, will be due and payable on the earlier of ______________ or the date of acceleration of the Loan as described in Sections 5, 9 and 11a below (the "Maturity Date"). b. MONTHLY PAYMENT DUE DATE. On the 15th day of each calendar month beginning in _____________ and until the Maturity Date, we promise to pay Note Holder, at PO Box 3457, Torrance, California 90510-3457, Attn.: Mail Drop __________(or at a different place if required by Note Holder) our "Monthly Payment" established as set forth below. 1 c. FIXED MONTHLY PAYMENT. Beginning on _____________and ending on ____________ the Monthly Payment will be $_____________. This payment is based upon the principal, a fixed interest rate of ______%, and 30 year amortization. d. PAYMENT FOR INTEREST ACCRUED BETWEEN LOAN FUNDING AND 14TH DAY OF MONTH. We also acknowledge that we will be billed by Lender for, and agree to pay, daily interest on our Loan between the date Lender wire transfers funds our Loan and the 14th day of _____________ (the "Partial Month Payment"). The Partial Month Payment will be due on ____________. e. ADJUSTED MONTHLY PAYMENTS. Beginning on ____________our Monthly Payment will increase or decrease as of the Monthly Payment due on the fifteenth (15th) day of each ______ (the "Payment Change Date") until the Maturity Date. Once a year, Lender will send us a written notice telling us our "Adjusted Monthly Payment." If we do not receive such a written notice prior to ______ 15th in any year, we will so advise the Lender in writing, and keep making our Monthly Payments, in the prior year's amount, until that notice is received by us. f. CALCULATION OF ADJUSTED MONTHLY PAYMENT. Each Adjusted Monthly Payment will be calculated by Lender as of the fifteenth (15th) day of _____ in each year (the "Adjustment Date") based upon an amortization schedule using (a) the outstanding principal balance on the Adjustment Date, (b) the Variable Interest Rate, and (c) 360 minus the number of whole calendar months since the date Loan proceeds were disbursed to us. 4. BORROWERS' RIGHT TO PREPAY -------------------------- We have the right to make payments of principal at any time before they are due. A payment of principal only is known as a "prepayment". When we make a prepayment, we will tell the Note Holder in writing that we are doing so. We may make a full prepayment or partial prepayments without paying any prepayment charge. The Note Holder will use all of our prepayments to reduce the amount of accrued unpaid interest, and then principal that we owe under this Note. If we make a partial prepayment which is less than 21% of the principal balance of the Note, there will be no change in the amount of our monthly payment. If we make a partial prepayment which is 21% or more of the principal balance of the Note, and we simultaneously give the Lender a written request for an adjustment in our monthly payment amount (a "Recasting"), that payment adjustment will be effective as of the second monthly payment due following the date of prepayment. We may give Lender this notice no more than once in any twelve (12) month period. Lender will calculate the Recasting of our Loan based upon an amortization schedule using (i) the new principal balance, (ii) the then current interest rate under Section 2 above, and (iii) the number 360 minus the number of whole months since the funding of the Note. 5. BORROWERS' FAILURE TO PAY AS REQUIRED ------------------------------------- a. LATE CHARGE FOR OVERDUE PAYMENTS: In addition to the continuing accrual of interest on our Loan balance, if the Note Holder has not received the full amount of any Monthly Payment fifteen (15) calendar days after the due date, we will pay a late charge to the Note Holder. The amount of the charge will be 5.00% of our overdue payment of principal and interest. We will pay this late charge immediately but only once on each late payment. b. DEFAULT: If we do not pay the full amount of each Monthly Payment by the last calendar day of the calendar month when it is due, we will be in default. c. NOTICE OF DEFAULT: If we are in default, the Note Holder may send us a written notice telling us that if we do not pay the overdue amount by a certain date, the 2 Note Holder may require us to pay immediately the full amount of principal which has not been paid and all the interest that we owe on that amount. The date specified in the notice must be at least thirty (30) days after the date on which the notice is delivered or mailed to us. d. NO WAIVER BY NOTE HOLDER: Even if, at a time when we are in default, the Note Holder does not require us to pay immediately in full as described above, the Note Holder will still have the right to do so if we are in default at a later time. e. PAYMENT OF NOTE HOLDER'S COSTS AND EXPENSES: If the Note Holder has required us to pay immediately in full as described above, the Note Holder will have the right to be paid back by us for all its costs and expenses in enforcing or collecting this Note including actual attorneys' fees, costs and other expenses. 6. GIVING OF NOTICES ----------------- Unless applicable law requires a different method, any notice which must be given to us under this Note will be given by delivering it or by mailing it by first class mail to us at the Property address above or at a different address if we give the Note Holder a notice of a different address. Any notice that must be given to the Note Holder under this Note will be given by mailing it by first class mail to the Note Holder at the address stated in Section 3 above or at a different address if we are given a notice of that different address. 7. OBLIGATIONS OF PERSONS UNDER THIS NOTE -------------------------------------- If more than one person signs this Note, each person is fully and personally obligated to keep all of the promises made in this Note, including the promise to pay the full amount owed. The Note Holder may enforce its rights under this Note against each person individually or against all of us together. This means that any one of us may be required to pay all of the amounts owed under this Note. 8. WAIVERS ------- We waive the rights of presentment and notice of dishonor. "Presentment" means the right to require the Note Holder to demand payment of amounts due. "Notice of dishonor" means the right to require the Note Holder to give notice to other persons that amounts due have not been paid. 9. ACCELERATION AFTER TERMINATION OF EMPLOYMENT -------------------------------------------- If your, the associate's, employment with Toyota Motor Sales, U.S.A., Inc., its subsidiaries or affiliates, terminates for any reason, the unpaid principal balance and interest will become due and payable ninety (90) days after date of termination. TMCC will not be required to give notice of the acceleration of the Note. Following termination of the associate's employment and until we have paid all principal, interest and any other charges that we may owe under this Note, we will continue to make the monthly payments as specified in Section 3. TMCC will have the right to proceed under Section 5 if we fail to make the monthly payments required after termination of the associate's employment. 10. GOVERNING LAW ------------- This Note is governed by California law, subject to Section 2924(i) of the California Civil Code, which provides that the Note Holder will give written notice to the Borrowers (Trustors), or their successor in interest, of prescribed information at least ninety (90) and not more than one hundred fifty (150) days before any balloon payment is due. 3 11. SECURED NOTE ------------ This Note is secured by a first deed of trust (the "Deed of Trust") dated the same day as this Note encumbering the Property identified above. We understand and acknowledge that the Deed of Trust imposes a number of obligations on us for the protection of TMCC. Some of these obligations are described as follows: a. ACCELERATION OF NOTE ON TRANSFER OR ENCUMBRANCE OF PROPERTY BY BORROWER: -------------------------------------------------------------- In the event that we sell, convey, enter into a contract of sale, lease with option to purchase, further encumber or alienate the Property, or any part thereof, or any interest therein, or shall be divested of our title or any interest therein in any manner or way, whether voluntarily or involuntarily, without the written consent of TMCC being first obtained, TMCC will have the right, at its option, to declare any indebtedness or obligations secured by the Property immediately due and payable regardless of the maturity date specified in this Note. If TMCC exercises this option, TMCC will give us notice of acceleration. The notice will provide a period of not less than thirty (30) days from the date the notice is delivered or mailed within which we must pay all sums secured by the Deed of Trust. If we fail to pay these sums prior to the expiration of the thirty (30) day period, TMCC may invoke any remedies permitted by the Deed of Trust without further notice or demand on us. If the option is not exercised, a reasonable transfer fee will be paid. We further agree to pay for any statement regarding the obligation secured hereby in any amount demanded by TMCC, not to exceed the maximum allowed by law at the time when such statement is requested. b. INSURANCE: We will keep the Property insured against fire and other hazards in an amount sufficient to cover the replacement value of the improvements located on the Property. In consideration of TMCC's making this Loan, we will furnish TMCC evidence of such insurance coverage naming TMCC as loss payee, and specifying the date of any renewals and evidence of paid renewals. In the event of loss or damage, we will give prompt notice to TMCC and the insurance carrier. c. INDEMNITY RE TITLE: We represent that we have title to the Property and will defend and hold TMCC harmless against any and all liability including any costs, damages, expenses and actual attorney's fees incurred by TMCC in connection with any action, claim, proceeding or suit arising from any liens, encumbrances, rights or easements affecting title of the Property securing this Note. "BORROWER" By: ________________________ By: ________________________ 4 20F LOAN DISCLOSURE STATEMENT Borrowers' Names: (________________is an associate of Toyota Motor Sales, U.S.A., Inc. or one of its affiliates or subsidiaries) Property Address: ___________________________ Lender's Name Toyota Motor Credit Corporation, 19001 S. Western Ave. and Address: P.O. Box 2958, Torrance, California 90509 1. AMOUNT FINANCED: The amount of credit provided to you or on your behalf . . . . . . . . . . . . . . . . . $___________ 2. INTEREST RATE: . . . . . . . . . . . . . . . . . ____% 3. ANNUAL PERCENTAGE RATE: . . . . . . . . . . . . . . ____% This is the cost of your credit over the term of the loan at a yearly rate. 4. FINANCE CHARGE: . . . . . . . . . . . . . . . . . . . $___________ The dollar amount the credit will cost you. 4. TOTAL OF PAYMENTS: The amount you will have paid after you have made all payments as scheduled . . . . . . . . . $___________ 6. PAYMENT SCHEDULE: Your payment schedule assuming your loan funding date is ________________ will be: No. of Payments Payment Amount When Payments are Due __ Interest Payment Per $________Est. _______________ Diem at $[__________DAYS] Monthly Starting __ Principal & Interest $ _______________ 7. Estimates. The above payments and charges are estimates and are based on the assumption that all payments are made when due. If any payment is made prior to its due date, the Finance Charge and Total of Payments will be less than estimated and if any payment is made after its due date, the Finance Charge and Total of Payments will be more than estimated. 8. Insurance. You are required to obtain property insurance in the amount of the full replacement cost of the improvements located on the property and name Lender as loss payee. You may obtain the insurance from anyone you want. Credit life insurance and credit disability insurance are not required to obtain credit, and will not be provided by Lender. 9. Late Charge. If a payment is late more than 15 days, you will be charged 5.00% of the payment amount (or the unpaid portion if less than the payment amount) as a late charge. 10. Security Interest. The Amount Financed shown above is secured by a first priority deed of trust and assignment of rents on the property identified in the Property Address above, more particularly described in the deed of trust to be executed by you in favor of Lender. 11. Prepayment. If you pay off the loan early, you will not have to pay a penalty or prepayment charge. 12. Demand Feature. In the event of a sale or transfer of the property identified in the Property Address above without the written consent of Lender, or should you default in the payment of any principal or interest when due, the entire balance of the principal and interest shall, at Lender's option, become immediately due and payable. 13. Associate Termination. In the event your, the associate's, employment with Toyota Motor Sales, U.S.A., Inc., its subsidiaries or affiliates 1 should terminate for any reason, other than death or retirement, the unpaid principal balance and interest shall become due and payable ninety (90) days following the associate's termination. 14. Assumption. The loan is not assumable by any other person or entity. SEE YOUR LOAN DOCUMENTS FOR ANY ADDITIONAL INFORMATION ABOUT NONPAYMENT, DEFAULT AND ANY REQUIRED PAYMENT IN FULL BEFORE THE MATURITY DATE. YOU HEREBY ACKNOWLEDGE RECEIPT OF A COPY OF THIS DISCLOSURE STATEMENT. THIS LOAN IS MADE PURSUANT TO THE CONSUMER FINANCE LENDERS LAW, DIVISION 10 OF THE FINANCIAL CODE. ACKNOWLEDGMENT OF RECEIPT OF DISCLOSURES. THE UNDERSIGNED BORROWER(S) HEREWITH ACKNOWLEDGE THAT AT LEAST ONE PRIMARY BORROWER RECEIVED A COPY OF THIS DISCLOSURE STATEMENT WHICH WAS COMPLETED AND FILLED IN PRIOR TO YOUR SIGNING BELOW. "BORROWER" - -------------------------- --------- ---------------------- --------- Date Date 2 | RECORDING REQUESTED BY | | | | | AND WHEN RECORDED MAIL TO | | | | | | DEED OF TRUST WITH ASSIGNMENT OF RENTS AS ADDITIONAL SECURITY This DEED OF TRUST, made___________, between herein called TRUSTOR,________________________________________________ whose address is______________________________________________________ ______________________________________________________________________ CHICAGO TITLE COMPANY, a California Corporation, herein called TRUSTEE, and ______________________________________________, herein called BENEFICIARY, Trustor irrevocably grants, transfers and assigns to Trustee in Trust, with Power of Sale that property in County_____________ California, described as: ____________________________________________________________________________ ____________________________________________________________________________ Together with the rents, issues and profits thereof, subject, however, to the right, power and authority hereinafter given to and conferred upon Beneficiary to collect and apply such rents, issues and profits. For the Purpose of Securing (1) payment of the sum of $ ______________________ with interest thereon according to the terms of a promissory note or notes of even date herewith made by Trustor, payable to order of Beneficiary, and extensions or renewals thereof; (2) the performance of each agreement of Trustor incorporated by reference or contained herein or reciting it is so secured; (3) Payment of additional sums and interest thereon which may hereafter be loaned to Trustor, or his successors or assigns, when evidenced by a promissory note or notes reciting that they are secured by this Deed of Trust. To protect the security of this Deed of Trust, and with respect to the property above described, Trustor expressly makes each and all of the agreements, and adopts and agrees to perform and be bound by each and all of the terms and provisions set forth in subdivision A of that certain Fictitious Deed of Trust referenced herein, and it is mutually agreed that all of the provisions set forth in subdivision B of that certain Fictitious Deed of Trust 1 recorded in the book and page of Official Records in the office of the county recorder of the county where said property is located, noted below opposite the name of such county, namely:
COUNTY BOOK PAGE COUNTY BOOK PAGE COUNTY BOOK PAGE COUNTY BOOK PAGE Alameda 1288 556 Kings 858 713 Placer 1028 379 Sierra 38 187 Alpine 3 130-31 Lake 437 110 Plumes 166 1307 Siskiyou 506 762 Amador 133 438 Lassen 192 367 Riverside 3778 347 Solano 1287 621 Butte 1330 513 Los Angeles T-3878 874 Sacramento 71-10-26 615 Sonoma 2067 427 Calveras 185 338 Madera 911 136 San Benito 300 405 Stanislaus 1970 56 Colusa 323 391 Marin 1849 122 San Bernardino 6213 768 Sutter 655 585 Contra Costa 4684 1 Mariposa 90 453 San Francisco A-804 596 Tehama 457 183 De[ Norte 101 549 Mendocino 667 99 San Joaquin 2855 283 Trinity 108 595 El Dorado 704 635 Merced 1660 753 San Luis Obispo 1311 137 Tulare 2530 108 Fresno 5052 623 Modoc 191 93 San Mateo 4778 175 Tuolumne 177 160 Glenn 469 76 Mono 69 302 Santa Barbara 2065 881 Ventura 2607 237 Humboldt 801 83 Monterey 357 239 Santa Clara 6626 664 Yolo 769 16 Imperial 1189 701 Napa 704 742 Santa Cruz 1638 607 Yuba 398 693 Inyo 165 672 Nevada 363 94 Shasta 800 633 Kern 3756 690 Orange 7182 18 San Diego Series 5 Book 1964, Page 149774
shall inure to and bind the parties hereto, with respect to the property above described. Said agreements, terms and provisions contained in said subdivisions A and B, (identical in all counties) are preprinted on the following pages hereof and are by the within reference thereto, incorporated herein and made a part of this Deed of Trust for all purposes as fully as if set forth at length herein, and Beneficiary may charge for a statement regarding the obligation secured hereby, provided the charge thereof does not exceed the maximum allowed by laws. The undersigned Trustor, requests that a copy of any notice of default and any notice of sale hereunder be mailed to him at his address hereinbefore set forth. ____________________________________ ____________________________________ 2 CERTIFICATE OF ACKNOWLEDGEMENT OF NOTARY PUBLIC STATE OF CALIFORNIA, ) ) COUNTY OF ) On _________________________ before me, __________________________ , personally appeared ________________________________ personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s), acted, executed the instrument. WHEREAS my hand and official seal. (Signature of Notary Public) CERTIFICATE OF ACKNOWLEDGEMENT OF NOTARY PUBLIC STATE OF CALIFORNIA, ) ) COUNTY OF ) On _________________________ before me, __________________________ , personally appeared ________________________________ personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s), acted, executed the instrument. WHEREAS my hand and official seal. (Signature of Notary Public) 3 DO NOT RECORD The following is a copy of Subdivisions A and B of the fictitious Deed of Trust recorded in each County in California as stated in the foregoing Deed of Trust and incorporated by reference in said Deed of Trust as being a part thereof as if set forth at length therein. A. To protect the security of this Deed of Trust, Trustor agrees: (1) To keep said property in good condition and repair; not to remove or demolish any building thereon; to complete or restore promptly and in good and workmanlike manner any building which may be constructed, damaged or destroyed thereon and to pay when due all claims for labor performed and materials furnished therefor; to comply with all laws affecting said property or requiring any alterations or improvements to be made thereon; not to commit or permit waste thereof; not to commit, suffer, or permit any act upon said property in violation of law; to cultivate, irrigate, fertilize, fumigate, prune and do all other acts which from the character or use of said property may be reasonably necessary, the specific enumerations herein not excluding the general. (2) To provide, maintain and deliver to Beneficiary fire insurance satisfactory to and with loss payable to Beneficiary. The amount collected under any fire or other insurance policy may be applied by Beneficiary upon any indebtedness secured hereby and in such order as Beneficiary may determine, or at option of Beneficiary the entire amount so collected or any part thereof may be released to Trustor. Such application or release shall not cure or waive any default or notice of default hereunder or invalidate any act done pursuant to such notice. (3) To appear in and defend any action or proceeding purporting to affect the security hereof or the rights or powers of Beneficiary or Trustee; and to pay all costs and expenses, including cost of evidence of title and attorney's fees in a reasonable sum, in any action or proceeding in which Beneficiary or Trustee may appear, and in any suit brought by Beneficiary to foreclose this Deed. (4) To pay: at least ten days before delinquency all taxes and assessments affecting said property, including assessments on appurtenant water stock; when due, all encumbrances, charges and liens, with interest, on said property or any part thereof, which appear to be prior or superior hereto; all costs, fees and expenses of this Trust. Should Trustor fail to make any payment or to do any act as herein provided, then Beneficiary or Trustee, but without obligation so to do and without notice to or demand upon Trustor and without releasing Trustor from any obligation hereof, may, make or do the same in such manner and to such extent as either may deem necessary to protect the security hereof, Beneficiary or Trustee being authorized to enter upon said property for such purposes; appear in and defend any action or proceeding purporting to affect the security hereof or the rights or powers of Beneficiary or Trustee; pay, purchase, contest or compromise any encumbrance, charge, or lien which in the judgement of either appears to be prior or superior hereto; and, in exercising any such powers, pay necessary expenses, employ counsel and pay his or her reasonable fees. (5) To pay immediately and without demand all sums so expanded by Beneficiary or Trustee, with interest from date of expenditure at the 4 amount allowed by law in effect at the date hereof, and to pay for any statement provided for by law in effect at the date hereof regarding the obligation secured hereby, any amount demanded by the Beneficiary not to exceed the maximum allowed by law at the time when said statement is demanded. B. It is mutually agreed: (1) That any award of damages in connection with any condemnation for public use of or injury to said property or any part thereof is hereby assigned and shall be paid to Beneficiary who may apply or release such moneys received by him or her in the same manner and with the same effect as above provided for regarding disposition of proceeds of fire or other insurance. (2) That by accepting payment of any sum secured hereby after its due date, Beneficiary does not waive his or her right either to require prompt payment when due of all other sums so secured or to declare default for failure so to pay. (3) That at any time or from time to time, without liability therefor and without notice, upon written request of Beneficiary and presentation of this Deed and said note for endorsement, and without affecting the personal liability of any person for payment of the indebtedness secured hereby, Trustee may: reconvey any part of said property; consent to the making of any map or plat thereof; join in granting any easement thereon; or join in any extension agreement or any agreement subordinating the lien or charge hereof. (4) That upon written request of Beneficiary stating that all sums secured hereby have been paid, and upon surrender of this Deed and said note to Trustee for cancellation and retention or other disposition as Trustee in its sole discretion may choose and upon payment of its fees, Trustee shall reconvey, without warranty, the property then held hereunder. The recitals in such reconveyance of any matters or facts shall be conclusive proof of the truthfulness thereof. The Grantee in such reconveyance may be described as "the person or persons legally entitled thereto." (5) That as additional security, Trustor hereby gives to and confers upon Beneficiary the right, power and authority, during the continuance of these Trusts, to collect the rents, issues and profits of said property, reserving unto Trustor the right, prior to any default by Trustor in payment of any indebtedness secured hereby or in performance of any agreement hereunder, to collect and retain such rents, issues and profits as they become due and payable. Upon any such default, Beneficiary may at any time without notice, either in person, by agent, or by a receiver to be appointed by a court, and without regard to the adequacy of any security for the indebtedness hereby secured, enter upon and take possession of said property or any part thereof, in his or her own name sue for or otherwise collect such rents, issues, and profits, including those past due and unpaid, and apply the same, less costs and expenses of operation and collection, including reasonable attorney's fees, upon any indebtedness secured hereby, and in such order as Beneficiary may determine. The entering upon and taking possession of said property , the collection of such rents, issues and profits and the application thereof as aforesaid, shall not cure or waive any default or notice of default hereunder or invalidate any act done pursuant to such notice. 5 (6) That upon default by Trustor in payment of any indebtedness secured hereby or in performance of any agreement hereunder, Beneficiary may declare all sums secured hereby immediately due and payable by delivery to Trustee of written declaration of default and demand for sale and of written notice of default and of election to cause to be sold said property, which notice Trustee shall Cause to be filed for record. Beneficiary also shall deposit with Trustee this Deed, said note and all documents evidencing expenditures secured hereby. After the lapse of such time as may then be required by law following the recordation of said notice of default, and notice of sale having been given as then required by law, Trustee, without demand on Trustor, shall sell said property at the time and place fixed by it in said notice of sale, either as a whole or in separate parcels, and in such order as it may determine, at public auction to the highest bidder for cash in lawful money of the United States, payable at time of sale. Trustee may postpone sale of all or any portion of said property by public announcement at such time and place of sale, and from time to time thereafter may postpone such sale by public announcement at the time fixed by the preceding postponement. Trustee shall deliver to such purchaser its deed conveying the property so sold, but without any covenant or warranty, express or implied. The recitals in such deed of any matters or facts shall be conclusive proof of the truthfulness thereof. Any person, including Trustor, Trustee, or Beneficiary as hereinafter defined, may purchase at such sale. After deducting all costs, fees and expenses of Trustee and of this Trust, including cost of evidence of title in connection with sale, Trustee shall apply the proceeds of sale to payment of: all sums expended under the terms hereof, not then repaid, with accrued interest at the amount allowed by law in effect at the date hereof; all other sums then secured hereby; and the remainder, if any, to the person or persons legally entitled thereto. (7) Beneficiary, or any successor in ownership of any indebtedness secured hereby, may from time to time, by instrument in writing, substitute a successor or successors to any Trustee named herein or acting hereunder, which instrument, executed by the Beneficiary and duly acknowledged and recorded in the office of the recorder of the county or counties where said property is situated, shall be conclusive proof of proper substitution of such successor Trustee or Trustees, who shall, without conveyance from the Trustee predecessor, succeed to all its title, estate, rights, powers and duties. Said instrument must contain the name of the original Trustor, Trustee and Beneficiary hereunder, the book and page where this Deed is recorded and the name and address of the new Trustee. (8) That this Deed applies to, inures to the benefit of, and binds all parties hereto, their heirs, legatees, devisees, administrators, executors, successors, and assigns. The term Beneficiary shall mean the owner and holder, including pledgees of the note secured hereby, whether or not named as Beneficiary herein. In this Deed, whenever the context so requires, the masculine gender includes the feminine and/or the neuter, and the singular number includes the plural. (9) The Trustee accepts this Trust when this Deed, duty executed and acknowledged, is made a public record as provided by law. Trustee is not obligated to notify any party hereto of pending sale under any other Deed 6 of Trust or of any action or proceeding in which Trustor, Beneficiary or Trustee shall be a party unless brought by Trustee. DO NOT RECORD REQUEST FOR FULL RECONVEYANCE - ------------- TO CHICAGO TITLE COMPANY The undersigned is the legal owner and holder of the note or notes and of all other indebtedness secured by the foregoing Deed of Trust. Said note or notes, together with all other indebtedness secured by said Deed of Trust, have been fully paid and satisfied; and you are hereby requested and directed, on payment to you of any sums owing to you under the terms of said Deed of Trust, to cancel said note or notes above mentioned, and all other evidence of indebtedness secured by said Deed of Trust delivered to you herewith, together with the said Deed of Trust, and to reconvey, without warranty, to the parties designated by the terms of said Deed of Trust, all the estate now held by you under the same. Dated Please mail Deed of Trust, Note and Reconveyance to __________________________________ Do not lose or destroy this Dead of Trust OR THE NOTE which it secures. Both must be delivered to the Trustee for cancellation before reconveyance will be made. 7 EXHIBIT A [Legal Description] 8 EXHIBIT "B" ACCELERATION OF NOTE ON TRANSFER OR ENCUMBRANCE OF PROPERTY BY BORROWER IN THE EVENT THAT WE SELL, CONVEY, ENTER INTO A CONTRACT OF SALE, LEASE WITH OPTION TO PURCHASE, FURTHER ENCUMBER OR ALIENATE THE PROPERTY, OR ANY PART THEREOF, OR ANY INTEREST THEREIN, OR SHALL BE DIVESTED OF OUR TITLE OR ANY INTEREST THEREIN IN ANY MANNER OR WAY, WHETHER VOLUNTARILY OR INVOLUNTARILY, WITHOUT THE WRITTEN CONSENT OF BENEFICIARY BEING FIRST OBTAINED, BENEFICIARY WILL HAVE THE RIGHT, AT ITS OPTION, TO DECLARE ANY INDEBTEDNESS OR OBLIGATIONS SECURED BY THIS DEED OF TRUST IMMEDIATELY DUE AND PAYABLE REGARDLESS OF THE MATURITY DATE SPECIFIED IN THE NOTE WHICH EVIDENCES THE INDEBTEDNESS WHICH THIS DEED OF TRUST SECURES (THE "NOTE"). IF BENEFICIARY EXERCISES THIS OPTION, BENEFICIARY WILL GIVE TRUSTOR NOTICE OF ACCELERATION. THE NOTICE WILL PROVIDE A PERIOD OF NOT LESS THAN THIRTY (30) DAYS FROM THE DATE THE NOTICE IS DELIVERED OR MAILED WITHIN WHICH TRUSTOR MUST PAY ALL SUMS SECURED BY THE DEED OF TRUST. IF TRUSTOR FAILS TO PAY THESE SUMS PRIOR TO THE EXPIRATION OF THE THIRTY (30) DAY PERIOD, BENEFICIARY MAY INVOKE ANY REMEDIES PERMITTED BY THIS DEED OF TRUST WITHOUT FURTHER NOTICE OR DEMAND ON TRUSTOR. ACCELERATION AFTER TERMINATION OF EMPLOYMENT - -------------------------------------------- IF TRUSTOR'S EMPLOYMENT WITH TOYOTA MOTOR SALES, U.S.A., INC., ITS SUBSIDIARIES OR AFFILIATES, TERMINATES FOR ANY REASON, OTHER THAN DEATH OR RETIREMENT, THE UNPAID PRINCIPAL BALANCE AND INTEREST WILL BECOME DUE AND PAYABLE NINETY (90) DAYS AFTER DATE OF TERMINATION. BENEFICIARY WILL NOT BE REQUIRED TO GIVE NOTICE OF THE ACCELERATION OF THE NOTE. FOLLOWING TERMINATION OF SUCH EMPLOYMENT AND UNTIL WE HAVE PAID ALL PRINCIPAL, INTEREST AND ANY OTHER CHARGES THAT WE MAY OWE UNDER THE NOTE, WE WILL CONTINUE TO MAKE THE MONTHLY PAYMENTS AS SPECIFIED IN SECTION 3 OF THE NOTE. BENEFICIARY WILL HAVE THE RIGHT TO PROCEED UNDER SECTION 5 OF THE NOTE IF WE FAIL TO MAKE THE MONTHLY PAYMENTS REQUIRED AFTER TERMINATION OF SUCH EMPLOYMENT. _________ Initials _________, Initials 9 CREDITOR: TOYOTA MOTOR CREDIT CORPORATION DEBTORS: (THE "HOME") NOTICE OF RIGHT TO CANCEL Your Right to Cancel You are entering into a transaction that will result in a mortgage/lien/security interest on your home. You have a legal right under federal law to cancel this transaction without cost, within three business days from whichever of the following events occurs last: (1) the date of the transaction, which is ___________, 200_; or (2) the date you received your Truth in Lending disclosures; or (3) the date you received this notice of your right to cancel. If you cancel the transaction, the mortgage/lien/security interest is also cancelled. Within 20 calendar days after we receive your notice, we must take the steps necessary to reflect the fact that the mortgage/lien/security interest on your home has been cancelled, and we must return to you any money or property you have given to us or to anyone else in connection with this transaction. You may keep any money or property we have given you until we have done the things mentioned above, but you must then offer to return the money or property. If it is impractical or unfair for you to return the property, you must offer its reasonable value. You may offer to return the property at your home or at the location of the property. Money must be returned to the address below. If we do not take possession of the money or property within 20 calendar days of your offer, you may keep it without further obligation. 1 How to Cancel If you decide to cancel this transaction, you must do so by notifying us in writing, at Toyota Motor Credit Corporation Legal Department - Mail Drop____ 19001 South Western Avenue Torrance, CA 90501 Attention: _____________ You may use any written statement that is signed and dated by you and states your intention to cancel, and/or you may use this notice by dating and signing below. Keep one copy of this notice because it contains important information about your rights. If you cancel by mail or telegram, you must send the notice no later than midnight of ________, 200__ (or midnight of the third business day following the latest of the three events listed above). If you send or deliver your written notice to cancel some other way, it must be delivered to the above address no later than that time. By signing this Notice, you acknowledge that you have received this information on your "Three Day Right of Recission" on the date stated next to your name below. - ---------------------- ------ Date - ---------------------- ------ Date I WISH TO CANCEL - -------------------------- ----------------------- Consumer's Signature Date: 2 EX-12 8 ex12-1.txt EXHIBIT 12.1 TOYOTA MOTOR CREDIT CORPORATION CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
Years Six Months Years Ended Ended Ended March 31, March 31, September 30, -------------------- ---------- ---------------------------- 2003 2002 2001 2000 1999 1998 -------- -------- ---------- ------ ------ ------- (Dollars in Millions) Consolidated 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 ------ ------ ------ ------ ------ ------ Fixed charges: Interest................... 832 1,030 726 1,289 940 994 Portion of rent expense representative of the interest factor (deemed to be one-third)........ 8 7 3 6 6 5 Interest associated with TCA's off-shore debt Repaid by TMCC ..... 1 - - - - - ------ ------ ------ ------ ------ ------ Total fixed charges........... 841 1,037 729 1,295 946 999 ------ ------ ------ ------ ------ ------ Earnings available for fixed charges.......... $1,018 $1,439 $ 800 $1,465 $1,176 $1,250 ====== ====== ====== ====== ====== ====== Ratio of earnings to fixed charges.............. 1.21 1.39 1.10 1.13 1.24 1.25 ====== ====== ====== ====== ====== ====== - ----------------- The Company has guaranteed certain obligations of affiliates and subsidiaries as discussed in Note 16 of the Consolidated Financial Statements. During fiscal 2003, TMCC performed under its guarantee of TCA's outstanding off-shore debt and repaid $35 million of the outstanding balance and accrued interest thereon.
EX-21 9 ex21-1.txt EXHIBIT 21.1 TOYOTA MOTOR CREDIT CORPORATION LIST OF SUBSIDIARIES State or Country of Subsidiary Incorporation/Formation - ---------- ----------------------- Toyota Motor Insurance Services, Inc. California Toyota Motor Insurance Company Iowa Toyota Motor Insurance Corporation of Vermont Vermont Toyota Motor Insurance Agency of Massachusetts, Inc. Massachusetts Toyota Motor Credit Receivables Corporation California Toyota Leasing, Inc. California Toyota Auto Finance Receivables LLC Delaware TCPR Holdings, Inc. California Toyota Credit de Puerto Rico Corp Commonwealth of Puerto Rico Toyota Services de Mexico, S.A. de C.V. Mexico TFSM Servicios de Mexico, S.A. de C.V. Mexico Toyota Services de Venezuela, C.A. Venezuela EX-23 10 ex23-1.txt EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS ---------------------------------- We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-103406, 333-103406-01, and 333-84692) of Toyota Motor Credit Corporation of our report dated April 8, 2003 relating to the financial statements, which appears in this Form 10-K. /S/ PRICEWATERHOUSECOOPERS LLP Los Angeles, California June 23, 2003 EX-99 11 ex99-1.txt EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 * In connection with the Annual Report of Toyota Motor Credit Corporation (the "Company") on Form 10-K for the period ending March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, George E. Borst, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ George E. Borst George E. Borst Chief Executive Officer June 23, 2003 - ---------------- * A signed original of this written statement required by Section 906 has been provided to Toyota Motor Credit Corporation and will be retained by Toyota Motor Credit Corporation and furnished to the Securities and Exchange Commission or its staff upon request. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002* In connection with the Annual Report of Toyota Motor Credit Corporation (the "Company") on Form 10-K for the period ending March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John F. Stillo, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ John F. Stillo John F. Stillo Chief Financial Officer June 23, 2003 - ---------------- * A signed original of this written statement required by Section 906 has been provided to Toyota Motor Credit Corporation and will be retained by Toyota Motor Credit Corporation and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----