10-Q/A 1 december2003_10qa.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2003 ------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------- -------- Commission file number 1-9961 ---------- 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 ----------------------- 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 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 January 31, 2004, 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- EXPLANATORY NOTE This Form 10-Q/A is being filed to amend the Toyota Motor Credit Corporation (the "Company") Quarterly Report on Form 10-Q/A for the period ended December 31, 2003 in order to reflect the restatement of the Company's Consolidated Financial Statements and amendments to related disclosures as of December 31 and March 31, 2003 and for the three and nine months ended December 31, 2003 and 2002. The restatement arose from management's determination that the Company's accounting methodology and the structure and design of certain financial systems relating primarily to the capitalization and amortization of incremental direct costs and fees were not in compliance with Statement of Financial Accounting Standards No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases" ("SFAS 91"), and that certain adjustments are necessary to the Company's Consolidated Financial Statements. Incremental direct costs and incentive payments made to vehicle dealers were expensed when incurred rather than capitalized and amortized over the life of the related contracts. The majority of these costs and fees consisted of incremental direct costs and fees paid or received primarily in connection with the acquisition of retail and vehicle lease contracts, and incentive and rate participation payments made to vehicle dealers. In addition, other incentives in the form of rate participation payments made to vehicle dealers were deferred and amortized using a method that was inconsistent with the revenue recognition method of the underlying contracts. During the course of its review, the Company determined that additional adjustments and reclassifications to previously reported results were required. These additional adjustments related to the Company's accounting for notes payable during periods when the notes payable and the related derivatives did not qualify for hedge accounting. The Company did not properly record foreign currency transaction gains and losses on certain notes payable during these periods and did not properly determine the calculation of additional basis adjustments once the hedge was re-established on the notes payable. Additionally, the reclassifications primarily related to unearned income that was reclassified to finance receivables, net, and investments in operating leases, net, that had been previously misclassified in deferred income. The Company also recorded other adjustments that were previously deemed not material. The adjustments and reclassifications, including their impact on the Consolidated Financial Statements, are further described in Note 1 of the Notes to Consolidated Financial Statements. Generally, no attempt has been made in this Form 10-Q/A to modify or update other disclosures presented in the original report on Form 10-Q except as required to reflect the effects of the restatement. This Form 10-Q/A does not reflect events occurring after the filing of the original Form 10-Q or modify or update those disclosures. Information not affected by the restatement is unchanged and reflects the disclosure made at the time of the original filing of the Form 10-Q with the Securities and Exchange Commission on February 13, 2004. Accordingly, this Form 10-Q/A should be read in conjunction with the Company's filings made with the Securities and Exchange Commission subsequent to the filing of the original Form 10-Q, including any amendments to those filings. The following items have been amended as a result of the restatement: - Part I - Item 1 - Financial Statements - Part I - Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Part I - Item 4 - Controls and Procedures; and - Part II - Item7 - Exhibits and Reports on Form 8-K In addition, the Company's Form 10-K/A for the period ended March 31, 2004 dated December 8, 2004, the Form 10-Q/A for the period ended June 30, 2004 dated December 16, 2004, the Form 10-Q for the period ended September 30, 2004 dated November 22, 2004, the Form 8-K dated September 29, 2004 and the Form 8- K dated October 11, 2004 are hereby incorporated by reference. -2- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS TOYOTA MOTOR CREDIT CORPORATION CONSOLIDATED BALANCE SHEET (Dollars in Millions) (Unaudited) (Restated)
December 31, March 31, 2003 2003 ------------ ------------ ASSETS ------ Cash and cash equivalents............... $ 946 $ 980 Investments in marketable securities.... 1,407 1,630 Finance receivables, net................ 30,597 26,349 Investments in operating leases, net.... 7,661 7,925 Derivative assets....................... 2,510 1,409 Other assets............................ 558 708 -------- -------- Total assets................... $ 43,679 $ 39,001 ======== ======== LIABILITIES AND SHAREHOLDER'S EQUITY ------------------------------------ Notes and loans payable................. $ 36,082 $ 32,156 Derivative liabilities.................. 23 139 Other liabilities....................... 1,212 1,232 Income taxes payable.................... 51 26 Deferred income......................... 762 666 Deferred income taxes................... 2,130 1,887 -------- -------- Total liabilities................. 40,260 36,106 -------- -------- Commitments and contingent liabilities (See note 8) Shareholder's equity: Capital stock, $l0,000 par value (100,000 shares authorized; 91,500 issued and outstanding)... 915 915 Retained earnings.................... 2,464 1,963 Accumulated other comprehensive income............................ 40 17 -------- -------- Total shareholder's equity........ 3,419 2,895 -------- -------- Total liabilities and shareholder's equity........... $ 43,679 $ 39,001 ======== ========
See Accompanying Notes to Consolidated Financial Statements. -3- TOYOTA MOTOR CREDIT CORPORATION CONSOLIDATED STATEMENT OF INCOME (Dollars in Millions) (Unaudited) (Restated)
Three Months Ended Nine Months Ended December 31, December 31, ------------------ ----------------- 2003 2002 2003 2002 ------- ------- ------- ------- Financing revenues: Leasing.................................... $ 588 $ 601 $ 1,763 $ 1,801 Retail financing........................... 321 302 948 870 Wholesale and other dealer financing....... 47 47 145 133 ------- ------- ------- ------- Total financing revenues...................... 956 950 2,856 2,804 Depreciation on leases..................... 373 385 1,176 1,097 Interest expense........................... 88 190 414 946 ------- ------- ------- ------- Net financing revenues........................ 495 375 1,266 761 Insurance premiums earned and contract revenues................................... 44 39 130 118 Investment and other income/(loss)............ 45 (16) 146 65 ------- ------- ------- ------- Net financing revenues and other revenues..... 584 398 1,542 944 ------- ------- ------- ------- Expenses: Operating and administrative............... 135 139 401 389 Losses related to Argentine investment..... - - - 11 Provision for credit losses................ 76 151 263 400 Insurance losses and loss adjustment expenses................................ 28 22 83 66 ------- ------- ------- ------- Total expenses................................ 239 312 747 866 ------- ------- ------- ------- Income before income taxes.................... 345 86 795 78 Provision for income taxes.................... 117 37 294 31 ------- ------- ------- ------- Net income.................................... $ 228 $ 49 $ 501 $ 47 ======= ======= ======= =======
See Accompanying Notes to Consolidated Financial Statements. -4- TOYOTA MOTOR CREDIT CORPORATION CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY (Dollars in Millions) (Unaudited) (Restated)
Accumulated Other Capital Retained Comprehensive Stock Earnings Income/(Loss) Total ------- -------- ------------- ------- Balance at March 31, 2002........ $ 915 $ 1,873 $ 14 $ 2,802 ------- -------- ------------- ------- Net income for the nine months ended December 31, 2002....... - 47 - 47 Change in net unrealized gain on available-for-sale marketable securities (net of tax).................. - - (4) (4) ------- -------- ------------- ------- Total comprehensive income....... - 47 (4) 43 ------- -------- ------------- ------- Balance at December 31, 2002.... $ 915 $ 1,920 $ 10 $ 2,845 ======= ======== ============= ======= Balance at March 31, 2003........ $ 915 $ 1,963 $ 17 $ 2,895 ------- -------- ------------- ------- Net income for the nine months ended December 31, 2003....... - 501 - 501 Change in net unrealized gain on available-for-sale marketable securities (net of tax).................. - - 23 23 ------- -------- ------------- ------- Total comprehensive income....... - 501 23 524 ------- -------- ------------- ------- Balance at December 31, 2003.... $ 915 $ 2,464 $ 40 $ 3,419 ======= ======== ============= =======
See Accompanying Notes to Consolidated Financial Statements. -5- TOYOTA MOTOR CREDIT CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in Millions) (Unaudited) (Restated)
Nine Months Ended December 31, ------------------------- 2003 2002 -------- -------- Cash flows from operating activities: Net income................................................ $ 501 $ 47 -------- -------- Adjustments to reconcile net income to net cash provided by operating activities: Derivative fair value adjustment.................... (144) 312 Depreciation and amortization....................... 1,364 1,273 Recognition of deferred income...................... 98 (200) Provision for credit losses......................... 263 400 Gain from securitization of finance receivables..... (30) (55) Foreign currency transaction loss................... - 69 Gain from sale of marketable securities............. (7) - Loss on impairment of retained interests............ - 11 Loss and reserve related to Argentine Investment.... - 11 Decrease in other assets............................ 112 178 Increase in deferred income taxes................... 260 160 Increase (decrease) in other liabilities............ 32 (16) -------- -------- Total adjustments......................................... 1,948 2,143 -------- -------- Net cash provided by operating activities.................... 2,449 2,190 -------- -------- Cash flows from investing activities: Addition to investments in marketable securities.......... (1,401) (1,469) Disposition of investments in marketable securities....... 1,530 1,165 Acquisition of finance receivables........................ (36,402) (29,512) Liquidation of finance receivables........................ 30,011 23,207 Proceeds from sale of finance receivables................. 1,825 3,002 Addition to investments in operating leases............... (2,222) (2,665) Disposition of investments in operating leases............ 1,282 1,375 -------- -------- Net cash used in investing activities........................ (5,377) (4,897) -------- -------- Cash flows from financing activities: Proceeds from issuance of notes and loans payable......... 9,020 6,949 Payments on notes and loans payable....................... (7,696) (5,551) Net increase in commercial paper.......................... 1,570 1,419 -------- -------- Net cash provided by financing activities.................... 2,894 2,817 -------- -------- Net (decrease)/increase in cash and cash equivalents......... (34) 110 Cash and cash equivalents at the beginning of the period..... 980 747 -------- -------- Cash and cash equivalents at the end of the period........... $ 946 $ 857 ======== ======== Supplemental disclosures: Interest paid............................................. $ 497 $ 569 Income taxes paid/(received).............................. $ 43 $ (378)
See Accompanying Notes to Consolidated Financial Statements. -6- TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Interim Financial Data and Restated Financial Results -------------------------------------------------------------- Interim Financial Data The accompanying information pertaining to the three and nine months ended December 31, 2003 and 2002 is unaudited and has been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. 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, liabilities, revenues, expenses, and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. In the opinion of management, the unaudited financial information reflects all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the interim periods presented. The results of operations for the three and nine months ended December 31, 2003 are not necessarily indicative of those expected for any other interim period or for a full year. Certain prior period amounts have been reclassified to conform with the current period presentation. These include the reclassification of the derivative fair value adjustment into interest expense in the consolidated statement of income, made in response to recent Securities and Exchange Commission ("SEC") public announcements related to the income statement presentation of certain derivative activities. The reclassification had no impact on net financing revenues and other revenues or net income. These financial statements should be read in conjunction with the consolidated financial statements, significant accounting policies, and other notes to the consolidated financial statements included in Toyota Motor Credit Corporation's 2003 Annual Report to the SEC on Form 10-K together with the amendment to the Company's 2004 Annual Report with the Securities and Exchange Commission filed on December 8, 2004, which includes restated financial statements as of and for the fiscal year ended March 31, 2003. References herein to "TMCC" denote Toyota Motor Credit Corporation and references herein to "the Company" denote Toyota Motor Credit Corporation and its consolidated subsidiaries. -7- TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Interim Financial Data and Restated Financial Results (Continued) -------------------------------------------------------------- Restatement In October 2004, the Company announced that as part of its ongoing review of accounting policies and in connection with its planned implementation of new transaction systems, management determined that the Company's accounting methodology and the structure and design of certain financial systems relating primarily to the capitalization and amortization of incremental direct costs and fees were not in compliance with Statement of Financial Accounting Standards No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases". Incremental direct costs and incentive payments made to certain vehicle dealers were expensed when incurred rather than amortized over the life of the related contracts. The majority of these costs and fees consisted of incremental direct costs and fees paid or received primarily in connection with the acquisition of retail and vehicle lease contracts, and incentive and rate participation payments made to vehicle dealers. In addition, other incentives in the form of rate participation payments made to vehicle dealers were deferred and amortized using a method that was inconsistent with the revenue recognition method of the underlying contracts. This resulted in a cumulative understatement of net financing and other revenues and overstatement of operating and administrative expenses, resulting in a cumulative understatement of net income, as well as a cumulative understatement of finance receivables, net, investments in operating leases, net, deferred income taxes, and retained earnings. As a result, the Company determined that certain adjustments were necessary to the Company's Consolidated Financial Statements as of March 31, 2004 and 2003 and for each of the fiscal years in the three-year period ended March 31, 2004 and the three months ended June 30, 2004. After making this determination, the Company conducted a further review of its policies and determined that additional adjustments and reclassifications to the Consolidated Financial Statements were necessary. These additional adjustments are required to correct the accounting treatment of notes payable during periods when the notes payable and the related derivatives did not qualify for hedge accounting. The Company did not properly record foreign currency transaction gains or losses for certain notes payable during these periods and did not properly determine the calculation of additional basis adjustments once the hedge was re-established on the notes payable. These adjustments are reflected as a cumulative decrease in interest expense and investment and other income/(loss) related to foreign currency transactions resulting in a cumulative decrease in net income in the Consolidated Statements of Income as well as a cumulative increase in notes and loans payable and a decrease in deferred income taxes and retained earnings in the Consolidated Balance Sheets. Additionally, the reclassifications primarily related to unearned income that was reclassified to finance receivables, net, and investments in operating leases, net, that had been previously misclassified in deferred income. The Company also recorded other adjustments that were previously deemed not material. -8- TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Interim Financial Data and Restated Financial Results (Continued) -------------------------------------------------------------- The combined results of all adjustments and reclassifications described above is a cumulative increase in net financing revenues and net income and a decrease in investment and other income/(loss), interest expense and operating and administrative expenses in the Consolidated Statements of Income, as well as a decrease in finance receivables, net, investments in operating leases, net, and other liabilities, and an increase in notes and loans payable, deferred income taxes and retained earnings in the Consolidated Balance Sheets. The impact of these adjustments and reclassifications in any particular quarterly or annual period may vary from the cumulative impact described above. The adjustments to the Consolidated Financial Statements resulted in differences in the timing of revenue recognition, but did not materially affect previously reported cash flows. These Consolidated Financial Statements included in this Form 10-Q/A have been restated to reflect the above adjustments and reclassifications. This amended Form 10-Q/A also includes amendments to related disclosures for the fiscal periods covered by this report. In addition, the Company has filed an amendment to its Annual Report on Form 10-K for the fiscal year ended March 31, 2004 and is filing an amendment to its Quarterly Report on Form 10-Q for the period ended June 30, 2004 concurrently with this Form 10-Q/A that include restated financial statements and amendments to related disclosures for the fiscal periods covered by those reports, including selected financial data for the fiscal years ended September 30, 1999 and 2000 and the six months ended March 31, 2001 and selected quarterly financial data for each of the four quarters in fiscal years ended March 31, 2004 and 2003. The adjustments to net income for the three and nine months ended December 31, 2003 and 2002 are summarized below:
Three Months Ended Nine Months Ended December 31, December 31, ------------------ ------------------ 2003 2002 2003 2002 ------- ------- ------- ------- (Dollars in Millions) Net income, as previously reported...... $ 204 $ 93 $ 469 $ 68 Adjustments (pre-tax) Dealer incentive payments............ 6 (1) 16 6 Rate participation payments.......... 5 5 14 16 Incremental direct costs............. 1 - 2 1 Fair value hedge adjustment.......... 24 2 15 10 Foreign currency transaction losses - (78) - (69) Other adjustments.................... 3 - 5 1 ------- ------- ------- ------- Total adjustments (pre-tax) ............ 39 (72) 52 (35) Tax effect of restatement adjustments... (15) 28 (20) 14 Total net adjustments................... 24 (44) 32 (21) ------- ------- ------- ------- Net income, as restated................. $ 228 $ 49 $ 501 $ 47 ======= ======= ======= =======
-9- TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Interim Financial Data and Restated Financial Results (Continued) -------------------------------------------------------------- The amounts shown for dealer incentive payments, rate participation payments and incremental direct costs represent the substantial portion of the net adjustments related to the acquisition of retail and vehicle lease contracts for the periods presented. The fair value hedge adjustment represents additional ineffectiveness recognized on certain foreign currency denominated notes payable. The foreign currency transaction adjustment represents foreign currency transaction losses on certain foreign currency denominated notes payable during periods when the notes payable and the related derivatives did not qualify for hedge accounting. The other adjustments primarily relate to items that were deemed not material in prior periods but have been recorded in connection with this restatement. -10- TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Interim Financial Data and Restated Financial Results (Continued) -------------------------------------------------------------- The Consolidated Balance Sheets as of December 31 and March 31, 2003 included in this Form 10-Q/A have been restated to include the effects of the adjustments and reclassifications as follows:
December 31, 2003 March 31, 2003 ------------------------- ------------------------- As previously As previously reported As restated reported As restated ------------- ----------- ------------- ----------- (Dollars in Millions) ASSETS ------ Cash and cash equivalents........... $ 946 $ 946 $ 980 $ 980 Investments in marketable securities 1,407 1,407 1,630 1,630 Finance receivables, net............ 30,722 30,597 26,477 26,349 Investments in operating leases, net 7,755 7,661 8,017 7,925 Derivative assets................... 2,345 2,510 1,421 1,409 Other assets........................ 558 558 708 708 -------- -------- -------- -------- Total assets............... $ 43,733 $ 43,679 $ 39,233 $ 39,001 ======== ======== ======== ======== LIABILITIES AND SHAREHOLDER'S EQUITY ------------------------------------ Notes and loans payable............. $ 36,044 $ 36,082 $ 32,099 $ 32,156 Derivative liabilities.............. 221 23 514 139 Other liabilities................... 849 1,212 869 1,232 Income taxes payable................ 51 51 26 26 Deferred income..................... 1,125 762 996 666 Deferred income taxes............... 2,088 2,130 1,866 1,887 -------- -------- -------- -------- Total liabilities............. 40,378 40,260 36,370 36,106 -------- -------- -------- -------- Shareholder's equity: Capital stock, $l0,000 par value (100,000 shares authorized; 91,500 issued and outstanding) 915 915 915 915 Retained earnings................ 2,399 2,464 1,930 1,963 Accumulated other comprehensive income........................ 41 40 18 17 -------- -------- -------- -------- Total shareholder's equity.... 3,355 3,419 2,863 2,895 -------- -------- -------- -------- Total liabilities and shareholder's equity....... $ 43,733 $ 43,679 $ 39,233 $ 39,001 ======== ======== ======== ========
-11- TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Interim Financial Data and Restated Financial Results (Continued) -------------------------------------------------------------- As of December 31, 2003 Finance receivables, net, and investments in operating leases, net, were impacted by the cumulative deferral of incremental direct costs and fees paid or received primarily in connection with the acquisition of retail and vehicle lease contracts, and incentive and rate participation payments made to vehicle dealers. The impact of these items was an increase to finance receivables, net, and investments in operating leases, net, of $138 million and $10 million, respectively. Finance receivables, net, and investments in operating leases, net, were also impacted by the reclassification of deferred subvention and acquisition fee revenue of approximately $263 million and $104 million, respectively, that was previously classified as deferred income. The net effect of these adjustments and reclassifications was an overall decrease in finance receivables, net, and investments in operating leases, net, of $125 million and $94 million, respectively. Derivative assets increased $165 million and derivative liabilities decreased $198 million due to the reclassification of accrued interest on derivatives that was previously classified as other liabilities and the reclassification between derivative assets and liabilities as the Company began accounting for master netting agreements within its derivative contracts. Notes and loans payable increased $38 million. This increase resulted from the cumulative impact of a $62 million foreign currency transaction loss on foreign currency denominated notes payable during periods when the notes payable and the related derivatives did not qualify for hedge accounting, a $25 million reversal of improperly recorded fair value losses and a $1 million loss related to additional basis adjustments associated with the re- establishment of hedge relationships that were previously ineffective. Other liabilities increased $363 million due to the reclassification of accrued interest on derivatives into derivative assets and liabilities discussed above. Deferred income decreased $363 million primarily as a result of the $367 million reclassification of deferred subvention and acquisition fee revenue from deferred income to finance receivables, net, and investments in operating leases, net, noted above, partially offset by a $4 million adjustment related to items that were deemed not material in prior periods but have been recorded in connection with this restatement. -12- TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Interim Financial Data and Restated Financial Results (Continued) -------------------------------------------------------------- As of March 31, 2003 Finance receivables, net, and investments in operating leases, net, were impacted by the cumulative deferral of incremental direct costs and fees paid or received primarily in connection with the acquisition of retail and vehicle lease contracts, and incentive and rate participation payments made to vehicle dealers. The impact of these items was an increase to finance receivables, net, and investments in operating leases, net, of $105 million and $10 million, respectively. Finance receivables, net, and investments in operating leases, net, were also impacted by the reclassification of deferred subvention and acquisition fee revenue of approximately $233 million and $102 million, respectively, that was previously classified as deferred income. The net effect of these adjustments and reclassifications was an overall decrease in finance receivables, net, and investments in operating leases, net, of $128 million and $92 million, respectively. Derivative assets and derivative liabilities decreased $12 million and $375 million, respectively, due to the reclassification of accrued interest on derivatives that was previously classified as other liabilities and the reclassification between derivative assets and liabilities as the Company began accounting for master netting agreements within its derivative contracts. Notes and loans payable increased $57 million. This increase resulted from the cumulative impact of a $62 million foreign currency transaction loss on foreign currency denominated notes payable during periods when the notes payable and the related derivatives did not qualify for hedge accounting, a $4 million reversal of improperly recorded fair value losses and a $5 million gain related to additional basis adjustments associated with the re- establishment of hedge relationships that were previously ineffective. The remaining $4 million increase primarily relates to items that were deemed not material in prior periods but have been recorded in connection with this restatement. Other liabilities increased $363 million due to the reclassification of accrued interest on derivatives into derivative assets and liabilities discussed above. Deferred income decreased $330 million resulting from the $335 million reclassification of deferred subvention and acquisition fee revenue from deferred income to finance receivables, net, and investments in operating leases, net, noted above. The remaining $5 million adjustment related to items that were deemed not material in prior periods but have been recorded in connection with this restatement. -13- TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Interim Financial Data and Restated Financial Results (Continued) -------------------------------------------------------------- The Consolidated Statements of Income for the three and nine months ended December 31, 2003 and 2002 included in this Form 10-Q/A have been restated to include the effects of the adjustments and reclassifications as follows:
Three Months Ended Nine Months Ended December 31, December 31, ----------------------------- -------------------------------- 2003 2002 2003 2002 ------------ --------------- -------------- --------------- (Dollars in Millions) Financing revenues: Leasing....................... $ 605 $ 588 $ 630 $ 601 $1,840 $1,763 $1,883 $1,801 Retail financing.............. 311 321 293 302 911 948 841 870 Wholesale and other dealer 45 47 45 47 137 145 127 133 financing. ................ ----- ----- ----- ----- ------ ------ ------ ------ Total financing revenues......... 961 956 968 950 2,888 2,856 2,851 2,804 Depreciation on leases........ 389 373 415 385 1,252 1,176 1,182 1,097 Interest expense.............. 115 88 192 190 433 414 955 946 ----- ----- ----- ----- ----- ----- ----- ------ Net financing revenues........... 457 495 361 375 1,203 1,266 714 761 Insurance premiums earned and contract revenues............. 46 44 41 39 138 130 124 118 Investment and other income/(loss) 45 45 71 (16) 159 146 152 65 ----- ----- ----- ----- ------ ------ ------ ------ Net financing revenues and other revenues...................... 548 584 473 398 1,500 1,542 990 944 ----- ----- ----- ----- ------ ------ ------ ------ Expenses: Operating and administrative.. 142 135 142 139 420 401 400 389 Losses related to Argentine investment................. - - - - - - 11 11 Provision for credit losses... 76 76 151 151 263 263 400 400 Insurance losses and loss adjustment expenses........ 24 28 22 22 74 83 66 66 ----- ----- ----- ----- ------ ------ ------ ------ Total expenses................... 242 239 315 312 757 747 877 866 ----- ----- ----- ----- ------ ------ ------ ------ Income before income taxes... 306 345 158 86 743 795 113 78 Provision for income taxes....... 102 117 65 37 274 294 45 31 ----- ----- ----- ----- ------ ------ ------ ------ Net income....................... $ 204 $ 228 $ 93 $ 49 $ 469 $ 501 $ 68 $ 47 ===== ===== ===== ===== ====== ====== ====== ====== -------------------- As previously reported As restated
-14- TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Interim Financial Data and Restated Financial Results (Continued) -------------------------------------------------------------- Leasing revenues decreased $17 million and $77 million in the three and nine months ended December 31, 2003, respectively, and $29 million and $82 million in the three and nine months ended December 31, 2002, respectively. These decreases were primarily due to the reclassification of residual value losses on direct finance leases from depreciation on leases to leasing revenues in the amounts of $16 million and $76 million in the three and nine months ended December 31, 2003, respectively and $30 million and $85 million in the three and nine months ended December 31, 2002, respectively. The remaining differences were due to the deferral and amortization of incremental direct costs and fees paid or received in connection with the acquisition of vehicle lease contracts, and incentive and rate participation payments made to vehicle dealers. Retail financing revenues increased $10 million and $37 million in the three and nine months ended December 31, 2003, respectively, and $9 million and $29 million for the three and nine months ended December 31, 2002, respectively. These increases were due to the net deferral and amortization of incremental direct costs and fees paid or received in connection with the acquisition of retail financing contracts, and incentive and rate participation payments made to vehicle dealers. Wholesale and other dealer financing revenues increased $2 million and $8 million in the three and nine months ended December 31, 2003, respectively, and $2 million and $6 million in the three and nine months ended December 31, 2002, respectively, primarily due to the reclassification of insurance premiums on wholesale lines which should have been eliminated in consolidation. Interest expense decreased $27 million and $19 million in the three and nine months ended December 31, 2003, respectively, and $2 million and $9 million for the three and nine months ended December 31, 2002, respectively. The decrease in the three months ended December 31, 2003 resulted from the net effect of a $26 million reversal of improperly recorded fair value losses and a $2 million loss related to additional basis adjustments associated with the re-establishment of hedge relationships that were previously ineffective. The offsetting $3 million increase primarily relates to items that were deemed not material in prior periods but have been recorded in connection with this restatement. The decrease in the nine months ended December 31, 2003 resulted from the net effect of a $22 million reversal of improperly recorded fair value losses and a $7 million loss related to additional basis adjustments associated with the re-establishment of hedge relationships that were previously ineffective. The offsetting $4 million increase primarily relates to items that were deemed not material in prior periods but have been recorded in connection with this restatement. The decrease in interest expense in the three months ended December 31, 2002 resulted from a $2 million gain related to additional basis adjustments associated with the re-establishment of hedge relationships that were previously ineffective. The decrease in the nine months ended December 31, 2002 resulted from the net effect of a $4 million reversal of improperly recorded fair value losses and a $5 million gain related to additional basis adjustments associated with the re-establishment of hedge relationships that were previously ineffective. -15- TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Interim Financial Data and Restated Financial Results (Continued) -------------------------------------------------------------- Investment and other income remained unchanged and decreased $13 million in the three and nine months ended December 31, 2003, respectively. Investment and other income decreased $87 million in both the three and nine months ended December 31, 2002. The $13 million decrease in investment and other income in the nine months ended December 31, 2003 primarily represents adjustments to gains on securitization transactions resulting from the impact of incremental direct costs incurred with the acquisition of retail and vehicle lease contracts and dealer incentive and rate participation payments made to vehicle dealers that had not previously been capitalized. The $87 million decrease in investment and other income in both the three and nine months ended December 31, 2002 was primarily attributable to $78 and $69 million of foreign currency transaction losses in the three and nine months ended December 31, 2002, respectively. These foreign currency transaction losses were incurred on certain foreign currency denominated notes payable during periods when the notes payable and the related derivatives did not qualify for hedge accounting. The remaining decreases of $9 million and $18 million for the three and nine months ended December 31, 2002 primarily represent adjustments to gains on securitization transactions resulting from the impact of incremental direct costs incurred with the acquisition of retail and vehicle lease contracts and dealer incentive and rate participation payments made to vehicle dealers that had not previously been capitalized. Operating and administrative expenses decreased $7 million and $19 million in the three and nine months ended December 31, 2003, respectively, primarily due to the deferral of incremental direct costs paid in connection with the acquisition of retail and vehicle lease contracts in the amounts of $3 million and $10 million in the three and nine months ended December 31, 2003. The remaining $4 million and $9 million increases in the three and nine months ended December 31, 2003, respectively, represent the reclassification of certain expenses which should have been recorded as insurance losses and loss adjustment expenses. Operating and administrative expenses decreased $3 million and $11 million for the three and nine months ended December 31, 2002, respectively, due to the deferral of incremental direct costs paid in connection with the acquisition of retail and vehicle lease contracts. -16- TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Interim Financial Data and Restated Financial Results (Continued) -------------------------------------------------------------- The adjustments and reclassifications addressed in the previous sections resulted in changes to certain components of net cash provided by operating activities and net cash used in investing activities included in the Consolidated Statement of Cash Flows but did not change net cash provided by financing activities and cash and cash equivalents at December 31 and March 31, 2003. The primary adjustment affecting net cash from operating activities related to the recognition of deferred subvention and acquisition fee revenue. The primary adjustments affecting net cash used in investing activities included increases in cash used to acquire finance receivables and investments in operating leases, respectively. These increases related to the cumulative deferral of incremental direct costs and fees paid or received in connection with the acquisition of retail and vehicle lease contracts and deferred subvention fee revenue. The adjustments to the Consolidated Statement of Cash Flows for the nine months ended December 31, 2003 and 2002 are summarized below:
Nine Months Ended December 31, 2003 2002 ------- ------- (Dollars in Millions) Total adjustment to net income.................. $ 32 $ (21) Derivative fair value adjustment................ (19) (10) Increase in depreciation and amortization for incremental direct costs, dealer participation payments, and rate participation payments..................... 27 17 Recognition of deferred subvention and acquisition fee revenue................ 98 (200) Foreign currency transaction loss ........... - 69 Change in other assets due to reduction in gain from sale of finance receivables for incremental direct costs, dealer incentive payments, and rate participation payments and reclassification of deferred subvention and acquisition fee revenue................ (12) (36) ------- ------- Adjustment to net cash provided by operating activities................................. $ 126 $ (181) ======= ======= Adjustment to acquisition of finance receivables for incremental direct costs, dealer incentive payments, and deferred subvention and acquisition fee revenue.................. $ (178) $ 120 Adjustment to acquisition of operating leases for incremental direct costs, dealer incentive payments, and deferred subvention and acquisition fee revenue.................. 52 61 ------- ------- Adjustment to net cash used in investing activities................................... $ (126) $ 181 ======= =======
-17- TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 2 - Finance Receivables ---------------------------- Finance receivables, net, consisted of the following:
December 31, March 31, 2003 2003 ------------ ------------ (Dollars in Millions) (Restated) Retail receivables........................ $ 21,013 $ 16,160 Finance leases............................ 4,817 6,078 Wholesale and other dealer loans.......... 6,042 5,608 -------- -------- 31,872 27,846 Deferred origination costs................ 105 66 Unearned income........................... (1,044) (1,237) Allowance for credit losses............... (336) (326) -------- -------- Finance receivables, net .............. $ 30,597 $ 26,349 ======== ========
Finance leases included estimated unguaranteed residual values of $1.4 billion and $1.8 billion at December 31 and March 31, 2003, respectively. The aggregate balances related to finance receivables 60 or more days past due totaled $162 million and $160 million at December 31 and March 31, 2003, respectively. Substantially all of retail and finance lease receivables do not involve recourse to the dealer in the event of customer default. -18- TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 3 - Investments in Operating Leases ---------------------------------------- Investments in operating leases, net, consisted of the following:
December 31, March 31, 2003 2003 ------------ ------------ (Dollars in Millions) (Restated) Vehicles.................................. $ 9,736 $ 9,687 Equipment and other....................... 693 720 ------- ------- 10,429 10,407 Deferred origination fees................. (56) (54) Deferred income........................... (38) (38) Accumulated depreciation.................. (2,508) (2,254) Allowance for credit losses .............. (166) (136) ------- ------- Investments in operating leases, net...... $ 7,661 $ 7,925 ======= =======
Note 4 - Allowance for Credit Losses ------------------------------------ An analysis of the allowance for credit losses follows:
Three Months Ended Nine Months Ended December 31, December 31, ------------------ ------------------ 2003 2002 2003 2002 ------- ------- ------- ------- (Dollars in Millions) Allowance for credit losses at beginning of period............... $ 544 $ 417 $ 526 $ 283 Provision for credit losses............. 76 151 263 400 Charge-offs............................. (88) (98) (264) (227) Recoveries.............................. 17 9 43 24 Other................................... 1 (13) (18) (14) ------- ------- ------- ------- Allowance for credit losses at end of period..................... $ 550 $ 466 $ 550 $ 466 ======= ======= ======= =======
At December 31, 2003, the allowance for credit losses consisted of $502 million to cover probable losses on the Company's owned portfolio and $48 million to cover probable losses on repossessed collateral in inventory. Total repossessed collateral in inventory at December 31, 2003 was $119 million. Repossessed collateral is included in other assets in the consolidated balance sheet. -19- TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 5 - Derivatives and Hedging Activities ------------------------------------------- In response to recent SEC public announcements related to the income statement presentation of certain derivative activities, the Company's derivative fair value adjustment was reclassified into interest expense in the consolidated statement of income. The following table summarizes the net unrealized gains and losses for the items included in the Company's derivative fair value adjustment:
Three months ended Nine months ended December 31, December 31, ------------------ ------------------ 2003 2002 2003 2002 ------ ------ ------ ------ (Dollars in Millions) (Unrealized (Gain)/Loss) (Restated) Non-designated derivatives............... $ (86) $ 36 $ (132) $ 428 Previously designated derivatives that no longer qualify as fair value hedges... - 5 18 3 Ineffective portion of the Company's fair value hedges........... (21) (59) (30) (118) ------ ------ ------ ------ Derivative fair value adjustment......... $ (107) $ (18) $ (144) $ 313 ====== ====== ====== ======
-20- TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 6 - Notes and Loans Payable -------------------------------- The following table summarizes the items comprising notes and loans payable and the related weighted average interest rates:
December 31, March 31, December 31, March 31, 2003 2003 2003 2003 --------- --------- --------- --------- (Dollars in Millions) (Restated) Short-term debt ................. $ 8,246 $ 4,843 1.07% 1.36% Long-term debt .................. 25,515 26,034 1.26% 1.43% Fair value hedge adjustments 2,321 1,279 --------- --------- Notes and loans payable..... $ 36,082 $ 32,156 1.22% 1.42% ========= ========= -------------------- Includes the effect of certain United States ("U.S.") dollar interest rate swap agreements and cross currency interest rate swap agreements. Adjusts debt to fair market value in accordance with Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" and related amendments ("SFAS 133, as amended").
Included in long-term debt are unsecured notes denominated in various foreign currencies totaling approximately $11.5 billion and $11.4 billion at December 31 and March 31, 2003, 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. -21- TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 7 - Liquidity Facilities and Letters of Credit --------------------------------------------------- The following table summarizes the Company's committed and uncommitted facilities:
Committed Uncommitted Unused Facilities -------------------- -------------------- -------------------- December 31, March 31, December 31, March 31, December 31, March 31, 2003 2003 2003 2003 2003 2003 -------- -------- -------- -------- -------- -------- (Dollars in Millions) 364-day syndicated bank credit facilities........ $ 3,600 $ 2,800 $ - $ - $ 3,600 $ 2,800 5-year syndicated bank credit facility - TMCC... 1,400 1,400 - - 1,400 1,400 Letters of credit facilities - - 60 60 59 59 -------- -------- -------- -------- -------- -------- Total facilities $ 5,000 $ 4,200 $ 60 $ 60 $ 5,059 $ 4,259 ======== ======== ======== ======== ======== ========
During the second quarter of fiscal 2004, Toyota Credit de Puerto Rico Corp. ("TCPR Corp.") established a $400 million, 364-day syndicated bank credit facility, which is restricted to its own use. In addition, a TMCC 364-day syndicated bank credit facility, which is restricted to TMCC's own use, was increased to $3.2 billion and renewed during September 2003 for an additional 364-day period. -22- TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 8 - Commitments and Contingencies -------------------------------------- TMCC has entered into certain guarantees and commitments. As of December 31, 2003, TMCC had not recorded any liabilities under such arrangements. The maximum commitment amounts under the guarantees and commitments as of December 31, 2003 are summarized in the table below:
Maximum Commitment Amount -------------- (Dollars in Millions) Credit facilities with dealers and affiliates................. $ 3,239 Guarantees of affiliate pollution control and solid waste disposal bonds......... 148 Lease commitments......................... 147 Revolving liquidity notes related to securitizations............. 48 Guarantee of Banco Toyota Do Brasil debt("BTB")..................... 30 ------- Total guarantees and commitments............. $ 3,612 =======
The Company maintains credit facilities with dealers and affiliates. These credit facilities may be used for business acquisitions, facilities refurbishment, real estate purchases, and working capital requirements. These loans are typically collateralized with liens on real estate, vehicle inventory, and/or other dealership assets, as appropriate. The Company obtains a personal guarantee from the dealer or corporate guarantee from the dealership when deemed prudent. Although the loans are typically collateralized or guaranteed, the value of the underlying collateral or guarantees may not be sufficient to cover the Company's exposure under such agreements. The Company prices the credit facilities according to the risks assumed in entering into the credit facility. During the first quarter of fiscal 2004, TCPR Corp. extended a $90 million revolving line of credit to Toyota de Puerto Rico Corp. ("TDPR"), a wholly- owned subsidiary of Toyota Motor Sales, U.S.A., Inc. ("TMS"). This $90 million commitment is included in the table above under credit facilities with dealers and affiliates. The revolving line of credit has a one-year renewable term, with interest due monthly. Any loans outstanding under this revolving line of credit are not guaranteed by TMS. -23- TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 8 - Commitments and Contingencies (Continued) -------------------------------------- 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 a 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 an Indiana manufacturing facility of an affiliate. Under these affiliate bond guarantees, TMCC would be required to perform 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 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 December 31, 2003. During the first quarter of fiscal 2004, the Company entered into a 15-year lease agreement with TMS. The lease agreement is for the Company's new headquarters location in the TMS headquarters complex in Torrance, California. At December 31, 2003, minimum future commitments under lease agreements to which the Company is a lessee, including those under the agreement discussed above, are as follows: fiscal years ending 2004 - $21 million; 2005 - $19 million; 2006 - $17 million; 2007 - $15 million; 2008 - $10 million; 2009 - $9 million; and thereafter - $56 million. -24- TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 8 - Commitments and Contingencies (Continued) -------------------------------------- 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 TMCC is entitled to reimbursement of amounts drawn on the liquidity notes. Reimbursement of amounts drawn on the liquidity notes is subordinated to principal and interest payments due on the securities. 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. TMCC has guaranteed payments of up to $30 million in principal, interest, fees, and expenses with respect to 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. Under the terms of the guarantee, TMCC would be required to perform 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 offshore payments. TMCC has entered into a separate indemnity agreement with BTB. The indemnity agreement includes provisions whereby TMCC is entitled to reimbursement from BTB. TMCC has not been required to perform under the BTB guarantee as of December 31, 2003. In the ordinary course of business, the Company enters into agreements containing indemnification provisions standard in the industry related to several types of transactions, such as debt funding, derivatives, securitization transactions, and its vendor and supplier agreements. Performance under these indemnities would occur upon a breach of the representations, warranties or covenants made or given, or a third party claim. In addition, the Company has agreed in certain debt and derivative issuances, and subject to certain exceptions, to gross-up payments due to third parties in the event that withholding tax is imposed on such payments. Due to the difficulty in predicting events which could cause a breach of the indemnification provisions or trigger a gross-up obligation, the Company is not able to estimate its maximum exposure to future payments that could result from claims made under such provisions. The Company has not made any material payments in the past as a result of these provisions, and as of December 31, 2003, the Company does not believe it is probable that it will have to make any material payments in the future. As such, no amounts have been recorded under these indemnifications as of December 31, 2003. -25- TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 8 - Commitments and Contingencies (Continued) -------------------------------------- The Company sells discrete pools of retail finance receivables to wholly owned consolidated bankruptcy remote special purpose entities ("SPE"). TMCC makes certain representations and warranties to the SPE, and the SPE makes corresponding representations and warranties to the securitization trust, relating to receivables sold in a securitization. TMCC and the SPE may be required to repurchase any receivables in the event of a breach of a representation and warranty relating to the receivable that materially and adversely affects the interest of the SPE, or securitization trust, as applicable. In addition, TMCC, as servicer of the receivables, may be required to repurchase any receivable in the event of a breach of a covenant by the servicer with respect to the receivable that materially and adversely affects the interest of the securitization trust or of certain extensions or modifications of a receivable as to which TMCC, as servicer, does not commit to make advances to fund reductions in interest payments. The repurchase price is generally the outstanding principal balance of the receivable and accrued interest. These provisions are customary for securitization transactions. Receivables repurchased under these provisions during the nine months ended December 31, 2003 totaled $1 million. As servicer, TMCC is required to advance certain shortfalls in obligor payments to the related securitization trust to the extent it believes the advance will be recovered from future collections of the related receivable. Each securitization trust is required to reimburse the Company for these advances from collections on all receivables before making other required payments. These provisions are customary for securitization transactions. Advances outstanding at December 31, 2003 totaled $16 million. 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 in 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 December 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. -26- TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 9 - Related Party Transactions ----------------------------------- As of December 31, 2003, there have been no material changes to related party agreements or relationships as described in the Company's annual report on Form 10-K for the year ended March 31, 2003, except for the finance receivables with TDPR and the lease agreement with TMS, as described in Note 8. The table below summarizes amounts included in the Company's consolidated balance sheet and statement of income under various related party agreements or relationships:
December 31, March 31, 2003 2003 ---------- ---------- (Dollars in Millions) (Restated) Assets: Finance receivables with affiliate... $ 33 $ 1 Rate subvention receivable from affiliates....................... $ 18 $ 30 Notes receivable under home loan program................ $ 7 $ 11 Other................................ $ - $ 6 Deferred rate subvention income...... Finance receivables.............. $(226) $(189) Operating leases................. $ (36) $ (36) Liabilities: Intercompany payables................ $ 90 $ 116 Other................................ $ 2 $ -
Three Months Ended Nine Months Ended December 31, December 31, ------------------ ------------------ 2003 2002 2003 2002 ------- ------- ------- ------- (Dollars in Millions) (Restated) Revenues: Manufacturers' subvention support and other revenues.................... $ 48 $ 44 $ 142 $ 107 Affiliate insurance premiums and commissions revenue............... $ 13 $ 9 $ 35 $ 29 Expenses: Employee benefits expense.............. $ 12 $ 12 $ 36 $ 29 Shared services charges and other amounts.......................... $ 14 $ 10 $ 59 $ 32 Credit support fees incurred........... $ 4 $ 3 $ 12 $ 10
-27- TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 10 - Segment Information ----------------------------- Financial results for the Company's operating segments are summarized below:
December 31, March 31, ----------- ------------ 2003 2003 -------- -------- (Dollars in Millions) (Restated) Assets: Financing operations................. $ 42,783 $ 38,298 Insurance operations................. 1,104 912 Eliminations/reclassifications....... (208) (209) -------- -------- Total assets....................... $ 43,679 $ 39,001 ======== ========
Three Months Ended Nine Months Ended December 31, December 31, ------------------ ------------------ 2003 2002 2003 2002 ------- ------- ------- ------- (Dollars in Millions) (Restated) Gross revenues: Financing operations................. $ 987 $ 925 $ 2,966 $ 2,843 Insurance operations................. 58 48 166 144 ------- ------- ------- ------- Total gross revenues............... $ 1,045 $ 973 $ 3,132 $ 2,987 ======= ======= ======= ======= Net income: Financing operations................. $ 215 $ 39 $ 466 $ 20 Insurance operations................. 13 10 35 27 ------- ------- ------- ------- Total net income................... $ 228 $ 49 $ 501 $ 47 ======= ======= ======= =======
-28- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS As discussed in the Explanatory Note, this Form 10-Q/A is being filed with the Securities and Exchange Commission ("SEC") to reflect the restatement of Toyota Motor Credit Corporation's Consolidated Financial Statements and amendments to related disclosures as of December 31 and March 31, 2003 and for the three and nine months ended December 31, 2003 and 2002. Accordingly, the discussion and amounts included in this MD&A have been revised to reflect these amendments. EARNING ASSETS AND CONTRACT VOLUME Net Earning Assets ------------------ The composition of the Company's net earning assets is summarized below:
December 31, March 31, December 31, 2003 2003 2002 ------------ ------------ ------------ (Dollars in Millions) (Restated) Vehicle lease earning assets Investment in operating leases, net...... $ 7,381 $ 7,586 $ 7,334 Finance leases, net...................... 3,910 4,939 5,354 -------- -------- -------- Total vehicle lease earning assets........ 11,291 12,525 12,688 Vehicle retail finance receivables, net... 20,716 15,802 15,900 Vehicle wholesale and other financing 6,753 6,409 6,016 Allowance for credit losses .......... (502) (462) (381) -------- -------- -------- Total net earning assets.................. $ 38,258 $ 34,274 $ 34,223 ======== ======== ======== ---------------------- 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. Includes amounts to cover probable losses on the Company's owned portfolio, but excludes amounts related to repossessed collateral in inventory.
Net earning assets at December 31, 2003 increased $4.0 billion or 12% compared to both March 31, 2003 and December 31, 2002. The growth in earning assets during this period was driven by the increased volume of vehicle retail financing and vehicle wholesale and other financing, partially offset by a decrease in vehicle lease financing. The significant increase in retail finance receivables primarily resulted from the continued growth in the number of new vehicles financed under the Company's retail financing programs. This growth was generated in large part by an increased use of marketing incentives sponsored by Toyota Motor Sales, U.S.A., Inc. ("TMS") and higher Toyota and Lexus vehicle sales levels, which increased 12% and 8% for the three and nine months ended December 31, 2003, respectively, when compared to the same periods in the prior year. Also contributing to the growth in retail finance receivables during the current year periods was a decrease in the amount of retail finance receivables securitized when compared to the same periods in the prior year. Vehicle wholesale and other financing receivables also increased when compared to March 31, 2003 and December 31, 2002 primarily due to an increase in dealer inventory financed by the Company and increases in the number of vehicle dealers receiving vehicle wholesale financing. Vehicle lease earning assets continued to decrease when compared to March 31, 2003 and December 31, 2002 due to a general shift in programs sponsored by TMS from lease to retail as well as the Company's reduced emphasis on leasing, in line with industry trends. -29- The allowance for credit losses at December 31, 2003 increased $40 million or 9% and $121 million or 32% when compared to March 31, 2003 and December 31, 2002, respectively. Refer to the "Provision for Credit Losses" section of the Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") for further discussion regarding the Company's delinquency and charge-off experience. Contract Volume --------------- The composition of the Company's contract volume and market share is summarized below:
Three Months Ended Nine Months Ended December 31, December 31, ------------------ ------------------ 2003 2002 2003 2002 ------- ------- ------- ------- Total contract volume: Vehicle retail....................... 194,000 153,000 647,000 521,000 Vehicle lease........................ 25,000 33,000 90,000 121,000 ------- ------- ------- ------- Total................................... 219,000 186,000 737,000 642,000 ======= ======= ======= ======= TMS subvened contract volume: Vehicle retail....................... 57,000 46,000 207,000 134,000 Vehicle lease........................ 5,000 6,000 24,000 21,000 ------- ------- ------- ------- Total................................... 62,000 52,000 231,000 155,000 ======= ======= ======= ======= Market share : Vehicle retail....................... 35.8% 31.1% 38.3% 32.4% Vehicle lease........................ 6.6% 9.8% 7.5% 10.9% ----- ----- ----- ----- Total................................... 42.4% 40.9% 45.8% 43.3% ===== ===== ===== ===== -------------------- Market share represents the percentage of total TMS sales of new Toyota and Lexus vehicles financed by TMCC. Total TMS sales excludes fleet sales, sales of Toyota Services de Mexico, S.A. de C.V., Toyota Services de Venezuela, C.A., and a private Toyota distributor.
Total contract volume increased for the three and nine months ended December 31, 2003, respectively, when compared to the same periods in the prior year due to increased vehicle retail contract volume. The growth in vehicle retail contract volume during both periods was attributable to the combined effects of higher Toyota and Lexus vehicle sales, incremental volume from the increased number of wholesale dealers serviced by TMCC, and continued use of new vehicle incentive programs sponsored by TMS. In contrast, vehicle lease contract volume decreased for the three and nine months ended December 31, 2003, respectively, when compared to the same periods in the prior year. The decline in lease contract volume was due to a general shift in programs subvened by TMS from lease to retail as well as the Company's reduced emphasis on leasing, in line with industry trends. -30- RESULTS OF OPERATIONS --------------------- Net income increased $179 million and $454 million for the three and nine months ended December 31, 2003, respectively, when compared to the same periods in the prior year. The increases in net income for both periods reflect reductions in total interest expense and in provision for credit losses and increases in investment and other income. The decrease in total interest expense reflects the effect of declines in short term interest rates and the positive impact of changes in market interest rates on the valuation of the Company's derivatives, partially offset by the effects of higher average outstanding balances of notes and loans payable used to finance asset growth. The decrease in provision for credit losses reflects continued improvement in the Company's overall delinquency experience. The increase in investment and other income is due to the absence of foreign currency transaction losses in the three and nine months ended December 31, 2003. These items, and other factors influencing the Company's financial results are discussed in more depth within this MD&A section. TOTAL FINANCING REVENUES ------------------------ Total financing revenues remained essentially level for the three and nine months ended December 31, 2003 when compared to the same periods in the prior year as a result of offsetting fluctuations in leasing and retail financing revenues. Retail financing revenues increased as a result of the continued growth in vehicle retail finance receivables, partially offset by reductions in portfolio yield. Leasing revenues declined during both periods due to reductions in portfolio yield and vehicle lease earning assets. Wholesale and other dealer financing revenues remained relatively unchanged during both periods as increases in average vehicle wholesale and other receivables outstanding were offset by reductions in portfolio yield. The decrease in portfolio yield reflects general decreases in market interest rates. Portfolio yield on the Company's total net earning assets decreased from 6.69% for the three months ended December 31, 2002 to 6.21% for the three months ended December 31, 2003, and from 6.95% for the nine months ended December 31, 2002 to 6.12% for the nine months ended December 31, 2003. The changes in leasing and retail financing revenues are consistent with the general shift in programs sponsored by TMS from lease to retail as well as the Company's reduced emphasis on leasing, in line with industry trends. Refer to the "Earning Assets and Contract Volume" section of the MD&A for further discussion regarding earning asset changes. -31- DEPRECIATION ON LEASES ---------------------- Straight-line depreciation expense, recorded over the original contract life, is based upon the depreciable basis of leased vehicles ("depreciable basis"). Depreciable basis is the difference between a leased vehicle's original book value ("capitalized cost") and its contractual residual value established at lease origination. Additional depreciation expense is recorded ratably over the remaining life of the lease when the residual value at lease maturity is estimated to be less than the contractual residual value. Factors affecting the estimated residual value at lease maturity include, but are not limited to, new vehicle incentive programs, new vehicle pricing, and used vehicle supply. The evaluation of these factors involves significant assumptions, complex analysis, and management judgment. Any difference between the undepreciated value at termination and the proceeds received at sale is recorded at the time of asset disposal as depreciation expense for operating leases and as a reduction to leasing revenue for direct finance leases. Total depreciation expense decreased $12 million or 3% for the three months ended December 31, 2003 when compared to the same period in the prior year. The decrease was comprised of a $35 million decrease in additional depreciation expense, partially offset by a $23 million increase in straight- line depreciation. The decline in additional depreciation expense resulted primarily from lower losses incurred at lease termination, attributable to lower average losses per vehicle sold ("loss severity") during the quarter, coupled with a reduction in the number of leased vehicles returned at maturity and sold at auction. In prior periods, the Company recorded additional depreciation expense in response to the continued decline in used vehicle prices. These actions were taken to bring contractual residual values in line with expected residual values at lease maturity. Additionally, the Company continued to adjust contractual residual values on new lease volume to take into account lower expected used vehicle prices. These adjustments have contributed to the increase in straight-line depreciation and the corresponding decrease in additional depreciation expense. The decline in additional depreciation was also influenced by the reclassification of residual value losses on direct finance leases from depreciation on leases to leasing revenues in the amounts of $16 million and $30 million in the three months ended December 31, 2003 and 2002, respectively. The increase of $79 million or 7% in total depreciation expense for the nine months ended December 31, 2003 when compared to the same period in the prior year was comprised of an increase in straight-line depreciation. Increases in straight-line depreciation expense resulted from the overall increase in the depreciable basis. Additional depreciation expense for the nine months ended December 31, 2003 when compared to the same period in the prior year remained unchanged. However, the balance was affected by offsetting factors and reclassifications. Additional depreciation decreased $9 million in the nine months ended December 31, 2003 when compared to the same period in the prior year primarily resulting from adjustments to contractual residual values at lease inception in response to expected lower end-of-term market values. The impact of these adjustments was offset by an increase in loss severity, primarily during the first quarter of fiscal 2004, experienced on units returned at maturity when compared to the same prior year period. The total $9 million decrease in additional depreciation for the nine months ended December 31, 2003 when compared with the prior year was fully offset by the reclassification of residual value losses on direct finance leases from depreciation on leases to leasing revenues in the amounts of $76 million and $85 million in the nine months ended December 31, 2003 and 2002, respectively. -32- INTEREST EXPENSE ---------------- Interest expense is comprised of interest paid on notes and loans payable, including net settlements on interest rate swaps, and unrealized gains and losses included in the Company's derivative fair value adjustment. During the current year, the Company's derivative fair value adjustment was reclassified into interest expense in response to recent SEC public announcements regarding the income statement presentation of certain derivative activities. The following table summarizes the primary components of interest expense:
Three months ended Nine months ended December 31, December 31, ------------------ ------------------ 2003 2002 2003 2002 ------ ------ ------ ------ (Dollars in Millions) (Restated) Interest on notes and loans payable, including net settlements on interest rate swaps............................ $ 195 $ 208 $ 558 $ 633 Derivative fair value adjustment............ (107) (18) (144) 313 ------ ------ ------ ------ Total interest expense...................... $ 88 $ 190 $ 414 $ 946 ====== ====== ====== ======
The decrease in total interest expense for the three and nine months ended December 31, 2003 reflects the effect of declines in short term interest rates and the positive impact of changes in market interest rates on the valuation of the Company's derivatives, partially offset by the effects of higher average outstanding balances of notes and loans payable used to finance asset growth. Interest on notes and loans payable, including net settlements on interest rate swaps, benefited from a decline in short term interest rates. The impact of the decrease in rates was partially offset by an increase in the average outstanding balance of notes and loans payable from $29 billion for the nine months ended December 31, 2002 to $34 billion for the nine months ended December 31, 2003. The following table summarizes the net unrealized gains and losses for the items included in the Company's derivative fair value adjustment, which is included in interest expense. The unrealized gains were primarily due to an increase in the value of the Company's non-designated derivatives. These derivatives are used to manage interest rate risk on a portfolio basis.
Three months ended Nine months ended December 31, December 31, ------------------ ------------------ 2003 2002 2003 2002 ------ ------ ------ ------ (Dollars in Millions) (Unrealized (Gain)/Loss) (Restated) Non-designated derivatives............... $ (86) $ 36 $ (132) $ 428 Previously designated derivatives that no longer qualify as fair value hedges... - 5 18 3 Ineffective portion of the Company's fair value hedges........... (21) (59) (30) (118) ------ ------ ------ ------ Derivative fair value adjustment......... $ (107) $ (18) $ (144) $ 313 ====== ====== ====== ======
-33- INSURANCE PREMIUMS EARNED AND CONTRACT REVENUES ----------------------------------------------- Insurance premiums earned and contract revenues recognized from insurance operations increased $5 million or 13% and $12 million or 11% for the three and nine months ended December 31, 2003, respectively, when compared to the same periods in the prior year due to increased contract volume and an increase in total agreements in force. INVESTMENT AND OTHER INCOME/(LOSS) --------------------------------- The following table summarizes the Company's investment and other income/(loss):
Three Months Ended Nine Months Ended December 31, December 31, ------------------ ------------------ 2003 2002 2003 2002 ------ ------ ------ ------ (Dollars in Millions) (Restated) Investment and servicing fee income....... $ 33 $ 23 $ 86 $ 69 Gains from securitization of finance receivables.................... - 31 30 55 Loss on impairment of retained interests..................... - - - (11) ------ ------ ------ ------ Investment income from securitizations. 33 54 116 113 Investment income from marketable securities and other income............ 12 8 30 21 Foreign currency transaction losses....... - (78) - (69) ------ ------ ------ ------ Total investment and other income/(loss) $ 45 $ (16) $ 146 $ 65 ====== ====== ====== ======
For the three months ended December 31, 2003, total investment and other income increased when compared with the same period in the prior year primarily due to the absence of foreign currency transaction losses and an increase in investment income from marketable securities and other income, partially offset by a decrease in investment income from securitizations. For the nine months ended December 31, 2003, total investment and other income increased when compared with the same period in the prior year primarily due to the absence of foreign currency transaction losses and an increase in investment income from marketable securities and other income. For the three months ended December 31, 2003, investment income from securitizations decreased when compared with the same period in the prior year primarily due to the absence of a securitization transaction during the most recent quarter. There was one securitization transaction during the third quarter of fiscal 2003. -34- For the nine months ended December 31, 2003, investment income from securitizations remained relatively unchanged when compared with the same period in the prior year. However, the components within investment income from securitizations changed. Servicing fee income increased primarily due to an increase in the average outstanding principal balance of the securitized receivables on which such income is earned. Gains from securitization of finance receivables decreased primarily due to a decrease in the number of securitization transactions. During the nine months ended December 31, 2003, the Company entered into one securitization transaction totaling $1.9 billion compared to two securitization transactions during the nine months ended December 31, 2002 totaling $3.1 billion. The Company also incurred impairment losses on retained interests during the nine months ended December 31, 2002 as a result of projected credit losses on the related retail finance receivables exceeding the existing loss assumptions. No impairment loss on retained interests was recorded during the nine months ended December 31, 2003. Investment income from marketable securities and other income increased for the three and nine months ended December 31, 2003 when compared to the same periods in the prior year primarily as a result of higher net realized gains on investments in corporate and U.S. debt securities. During the three and nine months ended December 31, 2003, net realized gains on debt securities were $2 million and $6 million, respectively, compared to net realized losses of $1 million during both the three and nine months ended December 31, 2002. Foreign currency transaction gains and losses result from fluctuations in the value of the dollar relative to other currencies on foreign currency denominated notes payable during periods when the notes payable and the associated derivatives do not qualify for hedge accounting. In periods where hedge accounting is applied, the foreign currency transaction gains and losses on foreign currency denominated notes payable resulting from such fluctuations are recorded as a component of interest expense in the Consolidated Statement of Income together with the change in value of the associated derivatives. Refer to the "Use of Derivative Instruments" section in the 2004 Annual Report on Form 10-K, as amended, for further discussion of hedge accounting. During the three and nine months ended December 31, 2002, certain foreign currency denominated notes payable and the associated derivatives did not qualify for hedge accounting and the Company recorded net foreign currency transaction losses of $78 million and $69 million, respectively. During the three and nine months ended December 31, 2003, all foreign currency denominated notes payable were in qualifying hedge accounting relationships and therefore all foreign currency transaction gains or losses were recorded as a component of interest expense in the Consolidated Statement of Income rather than as a component of investment and other income. OPERATING AND ADMINISTRATIVE EXPENSES ------------------------------------- Operating and administrative expenses increased $12 million, or 3% for the nine months ended December 31, 2003 when compared to the same period in fiscal 2003. The higher level of expense reflected increases in personnel expenses related to increased headcount and training activities, charges related to technology services provided by TMS, and losses on disposal of assets in connection with the Company's move to the new headquarters location in the TMS headquarters complex in Torrance, California. LOSSES RELATED TO ARGENTINE INVESTMENT -------------------------------------- During the nine months ended December 31, 2002, TMCC recorded an $11 million charge against income to increase the reserve related to the Company's guarantee of Toyota Credit Argentina S.A.'s ("TCA") offshore outstanding debt to $37 million. During the remainder of fiscal 2003, TMCC satisfied its obligations under the guarantees and terminated the guarantees. Accordingly, no additional charges were recorded during the three or nine months ended December 31, 2003. -35- PROVISION FOR CREDIT LOSSES --------------------------- The Company is exposed to credit risk on its owned portfolio. Credit risk is the risk that customers will not make required payments to the Company in accordance with their contractual obligation. The Company's level of credit losses is influenced primarily by two factors: the total number of contracts that default and loss per occurrence. The Company maintains an allowance for credit losses to cover probable losses resulting from the non-performance of its customers. The following tables provide information related to the Company's allowance for credit losses and credit loss experience:
Three Months Ended Nine Months Ended December 31, December 31, ------------------ ------------------ 2003 2002 2003 2002 ------- ------- ------- ------- (Dollars in Millions) Allowance for credit losses at beginning of period............... $ 544 $ 417 $ 526 $ 283 Provision for credit losses............. 76 151 263 400 Charge-offs............................. (88) (98) (264) (227) Recoveries.............................. 17 9 43 24 Other .................................. 1 (13) (18) (14) ------- ------- ------- ------- Allowance for credit losses at end of period..................... $ 550 $ 466 $ 550 $ 466 ======= ======= ======= =======
December 31, ------------------- 2003 2002 ------ ------ (Dollars in Millions) (Restated) Annualized net credit losses as a percentage of average earning assets . 0.81% 0.83% Aggregate balances 60 or more days past due ................................ $ 196 $ 260 Over-60 day delinquencies as a percentage of gross earning assets ........ 0.50% 0.75% Allowance for credit losses as a percentage of gross earning assets ...................... 1.41% 1.34% -------------------- 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 Company's portfolio growth. For purposes of this table, "earning assets" include earning assets and repossessed collateral that has not yet been sold. Net credit loss ratios have been annualized using nine-month results.
-36- The decrease in the provision for credit losses recorded during the three and nine months ended December 31, 2003 when compared to the same periods in the prior year reflects continued improvement in the Company's overall delinquency experience. During the third quarter of fiscal 2003 the Company was experiencing historically high delinquency and charge-off rates primarily as a result of the Company's field restructuring and the general weakness of the economy. The higher level of provision recorded in the prior year reflected management's expectations for increased losses in the near term. The lower amount of provision expense recorded in the current year reflects recent favorable trends and management's expectations for probable losses on the currently owned portfolio. The increase in total charge-offs, net of recoveries, for the nine months ended December 31, 2003 when compared to the same period in the prior year was consistent with management's expectations. Delinquency and Net Credit Loss Experience ------------------------------------------ The Company's delinquency and net credit loss experience continued to be influenced by the combined impact of the following factors: - Continued economic uncertainty - Lower used vehicle prices - Longer term financing - Tiered/risk based pricing - The Company's field restructuring The impact of the listed factors on the Company's current year delinquency and net credit loss experience is consistent with the impact to fiscal 2003 results as discussed in the "Provision for Credit Losses" section of the Company's 2003 Annual Report on Form 10-K, except as discussed below. The impact of the tiered/risk based pricing program ("tiered pricing"), which was fully implemented as of March 2001, continues to diminish as a contributing factor to higher delinquency and credit loss rates. While the implementation of tiered pricing has resulted in increased overall credit losses, the period-to-period effects continue to lessen over time. Similarly, the impact of the Company's field restructuring, completed in fiscal 2003, has been significantly reduced due to improvements in operating efficiencies at the customer service centers. While the Company's credit loss rates have declined from historical highs reached during fiscal 2003, credit loss rates remain at elevated levels. Management does not anticipate a return to historically high delinquency and credit loss rates in the near term but remains cautious regarding the extent to which these favorable trends are expected to continue. -37- LIQUIDITY AND CAPITAL RESOURCES ------------------------------- The objective of the Company's liquidity strategy is to ensure access to the capital markets, meet obligations and other commitments on a timely and cost- effective basis, and support growth in earning assets. Significant reliance is placed on the Company's ability to obtain debt and securitization funding in the capital markets. Debt issuances have generally been in the form of commercial paper and unsecured term debt. The Company does not rely on any one source of funding and may choose to reallocate its funding activities depending upon market conditions, relative costs, and other factors. Except as discussed below, management does not anticipate changes in the Company's ability to access the unsecured debt and securitization markets in the foreseeable future. The Company believes that debt and securitization funding, combined with cash provided by operating and investing activities, will provide sufficient liquidity to meet future funding requirements. Commercial Paper ---------------- Short-term funding needs are met through the issuance of commercial paper. Commercial paper outstanding under the Company's commercial paper programs ranged from approximately $6.0 billion to $8.7 billion during the quarter ended December 31, 2003, with an average outstanding balance of $7.3 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. Medium term notes ("MTNs") and bonds have provided the Company with significant sources of funding. During the quarter ended December 31, 2003, the Company issued approximately $2.4 billion of MTNs and bonds, all of which had original maturities ranging from greater than one year to approximately ten years. At December 31, 2003, the Company had total MTNs and bonds outstanding of $27.3 billion, of which $11.5 billion was denominated in foreign currencies. The remaining maturities of all MTNs and bonds outstanding at December 31, 2003 ranged from less than one year to approximately ten years. 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 $4 billion was available for issuance at January 31, 2004. Under the Company's Euro MTN program, which provides for the issuance of debt securities in the international capital markets, the maximum aggregate principal amount authorized to be outstanding at any time is $20 billion, of which approximately $6 billion was available for issuance at January 31, 2004. 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. The Company intends to amend certain of its filings with the United Kingdom Listing Authority in connection with its EMTN program to reflect adjustments to its Consolidated Financial Statements as of and for the three and nine months ended December 31, 2003 and as of and for the three months ended June 30, 2004. The Company will not issue debt under its EMTN program until the amended filings are submitted to the United Kingdom Listing Authority. The Company is working to complete these filings as soon as practicable. In any event, the Company believes it has sufficient alternative sources of liquidity to fund its operations. -38- Securitization Funding ---------------------- TMCC's securitization program allows the Company to access an additional source of funding, thus further diversifying its investor base and enhancing its liquidity position. With the exception of the securitization transaction executed in September 2001, TMCC's securitization transactions are treated as sales for accounting purposes. The outstanding balance of securitized retail finance receivables serviced by TMCC totaled $5.7 billion at December 31, 2003. During the nine months ended December 31, 2003, the Company sold retail receivables totaling $1.9 billion in connection with securities issued under a shelf registration statement maintained with the SEC. Of the $1.9 billion sold, the Company invested $0.6 billion in purchased and retained senior class and other securities, resulting in $1.3 billion of net funding. As of January 31, 2004, $6.2 billion of securities were available for issuance under the current SEC shelf registration statement. Liquidity Facilities and Letters of Credit ------------------------------------------ For additional liquidity purposes, the Company maintains syndicated bank credit facilities with banks whose commitments aggregated $5.0 billion at December 31, 2003. No amounts were outstanding under the syndicated bank credit facilities as of December 31, 2003. During the second quarter of fiscal 2004, TCPR Corp. established a $400 million, 364-day syndicated bank credit facility, which is restricted to its own use. In addition, the TMCC 364-day syndicated bank credit facility, which is restricted to its own use, was increased to $3.2 billion and renewed during September 2003 for an additional 364-day period.
Committed Uncommitted Unused Facilities -------------------- -------------------- -------------------- December 31, March 31, December 31, March 31, December 31, March 31, 2003 2003 2003 2003 2003 2003 -------- -------- -------- -------- -------- -------- (Dollars in Millions) 364-day syndicated bank credit facilities........ $ 3,600 $ 2,800 $ - $ - $ 3,600 $ 2,800 5-year syndicated bank credit facility - TMCC... 1,400 1,400 - - 1,400 1,400 Letters of credit facilities - - 60 60 59 59 -------- -------- -------- -------- -------- -------- Total facilities $ 5,000 $ 4,200 $ 60 $ 60 $ 5,059 $ 4,259 ======== ======== ======== ======== ======== ========
-39- Credit Ratings -------------- Effective January 2004, Standard & Poor's Ratings Group, a division of The McGraw-Hill Companies, Inc. ("S&P") revised the outlook of Toyota Motor Corporation ("TMC") and its supported subsidiaries, including TMCC, from negative to stable. As of January 31, 2004, the ratings and outlook established by Moody's Investors Service, Inc. ("Moody's") and S&P for TMCC were as follows:
Rating Agency Senior Debt Commercial Paper Outlook --------------- ------------- ------------------ --------- S&P AAA A-1+ Stable Moody's Aaa P-1 Stable
CONTRACTUAL OBLIGATIONS AND CREDIT-RELATED COMMITMENTS ------------------------------------------------------ During the first quarter of fiscal 2004, the Company entered into a 15-year lease agreement with TMS. The lease agreement is for the Company's new headquarters location in the TMS headquarters complex in Torrance, California. At December 31, 2003, minimum future commitments under lease agreements to which the Company is a lessee, including those under the agreement discussed above, are as follows: fiscal years ending 2004 - $21 million; 2005 - $19 million; 2006 - $17 million; 2007 - $15 million; 2008 - $10 million; 2009 - $9 million; and thereafter - $56 million. -40- 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 vehicle and component pricing due to the appreciation of the Japanese yen against the U.S. dollar; the effect of governmental actions; changes in tax laws; changes in regulations that affect retail installment lending, leasing or insurance; the effect of competitive pressures on the used car market and residual values and the continuation of the other factors causing changes in vehicle returns and termination 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 implementation of new technology systems; the effectiveness of the Company's internal control or financial systems, or a failure of internal control resulting in a loss; the continuation of factors causing changes in 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; 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; losses resulting from default by any dealers to which the Company has a significant credit exposure; with respect to financial reporting disclosure matters, the discovery of facts not presently known to the Company or management that may be discovered in connection with its ongoing review of internal controls over financial reporting; 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. -41- NEW ACCOUNTING STANDARDS ------------------------ In December 2003, the Financial Accounting Standards Board ("FASB") issued a revision to SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits - an amendment of FASB Statements No. 87, 88, and 106" ("SFAS 132"). The revised Statement retains the disclosure requirements contained in SFAS 132, but requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. SFAS 132 is effective for financial statements for fiscal years ending after December 15, 2003. The implementation of SFAS 132 is not expected to have a material impact on the Company's consolidated financial statements. -42- Review by Independent Accountants With respect to the unaudited consolidated financial information of Toyota Motor Credit Corporation for the three-month and nine-month periods ended December 31, 2003 and 2002, PricewaterhouseCoopers LLP ("PricewaterhouseCoopers") reported that they have applied limited procedures in accordance with professional standards for a review of such information. However, their separate report dated February 13, 2004, except for Note 1 which is dated as of December 16, 2004 appearing herein, states that they did not audit and they do not express an opinion on that unaudited consolidated financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers is not subject to the liability provisions of Section 11 of the Securities Act of 1933 for their report on the unaudited consolidated financial information because that report is not a "report" or a "part" of the registration statement prepared or certified by PricewaterhouseCoopers within the meaning of Sections 7 and 11 of the Act. -43- ITEM 4. CONTROLS AND PROCEDURES The following has been amended to reflect the restatement of the Company's consolidated financial statements as discussed further in the Explanatory Note and in Note 1 of the Notes to Consolidated Financial Statements. 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 Act of 1934, as amended ("Exchange Act"), is recorded, processed, summarized, and reported within the time periods specified in the Commission's rules and forms. Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in its Exchange Act reports is accumulated and communicated to the Company's management including its principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure. In October 2004, the Company announced that as part of its ongoing review of accounting policies and in connection with its planned implementation of new transaction systems, management determined that the Company's accounting methodology and the structure and design of certain financial systems relating primarily to the capitalization and amortization of incremental direct costs and fees were not in compliance with Statement of Financial Accounting Standards No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases". Incremental direct costs and incentive and rate participation payments made to vehicle dealers were expensed when incurred rather than capitalized and amortized over the life of the related contracts. The majority of these costs and fees consisted of incremental direct costs and fees paid or received primarily in connection with the acquisition of retail and vehicle lease contracts, and incentive and rate participation payments made to vehicle dealers. In addition, other incentives in the form of rate participation payments made to vehicle dealers were deferred and amortized using a method that was inconsistent with the revenue recognition method of the underlying contracts. This resulted in a cumulative understatement of net financing and other revenues and overstatement of operating and administrative expenses, resulting in a cumulative understatement of net income, as well as a cumulative understatement of finance receivables, net, investments in operating leases, net, deferred income taxes, and retained earnings. As a result, the Company determined that certain adjustments were necessary to the Company's Consolidated Financial Statements as of March 31, 2004 and 2003 and for each of the fiscal years in the three-year period ended March 31, 2004 and the three months ended June 2004. After making this determination, the Company conducted a further review of its policies and determined that additional adjustments and reclassifications to the Consolidated Financial Statements were necessary. These additional adjustments are required to correct the accounting treatment of notes payable during periods when the notes payable and the related derivatives did not qualify for hedge accounting. The Company did not properly record foreign currency transaction gains or losses for certain notes payable during these periods and did not properly determine the calculation of additional basis adjustments once the hedge was re-established on the notes payable. These adjustments are reflected as a cumulative decrease in interest expense and investment and other income related to foreign currency transactions resulting in a cumulative decrease in net income in the Consolidated Statements of Income as well as a cumulative increase in notes and loans payable and a decrease in deferred income taxes and retained earnings in the Consolidated Balance Sheets. Additionally, the reclassifications primarily related to unearned income that was reclassified to finance receivables, net, and investments in operating leases, net, that had been previously misclassified in deferred income. The Company also recorded other adjustments that were previously not deemed material. -44- The combined results of all adjustments and reclassifications described above is a cumulative increase in net financing revenues and net income and a decrease in investment and other income, interest expense and operating and administrative expenses in the Consolidated Statements of Income, as well as a decrease in finance receivables, net, investments in operating leases, net, and other liabilities, and an increase in notes and loans payable, deferred income taxes and retained earnings in the Consolidated Balance Sheets. The impact of these adjustments and reclassifications in any particular quarterly or annual period may vary from the cumulative impact described above. The adjustments to the Consolidated Financial Statements resulted in differences in the timing of revenue recognition, but did not materially affect previously reported cash flows. These adjustments and reclassifications are reflected in this amended Quarterly Report on Form 10-Q/A for the period ended December 31, 2003. In addition, the Company has filed amendments to its Annual Report on Form 10-K for the period ended March 31, 2004 and its Quarterly Report on Form 10-Q for the period ended June 30, 2004 that include restated financial statements and amendments to related disclosures for the fiscal periods covered by those reports. The Company also restated, by means of a Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004, its consolidated financial statements for the three and six months ended September 30, 2003. In light of the restatement, the Company believes that a material weakness existed in its internal controls related to the financial reporting for acquired retail and vehicle lease contracts. This weakness related to the design and review of revenue recognition policies, particularly in the areas of incremental direct costs and fees paid or received primarily in connection with the acquisition of retail and vehicle lease contracts and incentive and rate participation payments made to vehicle dealers, in the policies and procedures necessary to ensure accurate measurement and recording of amounts over the life of the contracts and in the structure and design of related financial information systems. In addition, the Company believes that a material weakness existed in its internal controls related to the financial reporting of foreign currency transaction adjustments and in the monitoring of hedging activities. This weakness related to the application of accounting policies related to the accounting for foreign currency transaction gains and losses on debt instruments that no longer qualified for hedge accounting. The Company's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") evaluated the effectiveness of the Company's disclosure controls and procedures in place as of the end of the period covered by this quarterly report pursuant to Rule 13a-15(b) of the Exchange Act. Based on this evaluation, the CEO and CFO have concluded that the disclosure controls and procedures did not provide reasonable assurance of effectiveness as of that period because of the material weaknesses identified above. The Company intends to devote significant resources to revising its policies, procedures, and financial information systems to comply with the methods required by GAAP related to revenue recognition to ensure accurate measurement and recording of amounts associated with the acquisition of retail and vehicle lease contracts and dealer incentive and rate participation payments at acquisition and over the life of the contracts. In addition, the Company is reviewing its accounting policies related to debt instruments during the periods when the debt does not qualify for hedge accounting. The Company does not expect that these errors will recur in future periods as it now employs regression analysis to assess the effectiveness of its hedges. The Company began using regression analysis to assess its hedge effectiveness in January 2004. Prior to this date, the Company employed the dollar-offset method. -45- The Company is implementing the following enhancements to its internal controls. - The Company is currently developing new financial models for calculating incremental direct cost and fee amortization and reviewing existing systems to confirm that proper calculations are used. The Company anticipates finalizing its financial models by the end of calendar year 2004 and completing its systems review by the end of fiscal year 2005. - The Company is reviewing its accounting policies for debt instruments where the debt did not qualify for hedge accounting and anticipates completing its review and updating its policies by the end of calendar year 2004. - The Company has hired a new Corporate Manager and Chief Accounting Officer and is in the process of filling two management positions dedicated to the development, documentation, and proper application of accounting policies, including accounting for deferred fees and costs, derivatives, and foreign currency transaction gains and losses. The Company anticipates filling these two positions by the end of fiscal year 2005. - The accounting policies group in conjunction with the marketing group will review new marketing and related programs. The Company anticipates that the marketing program review process will be implemented by the end of calendar year 2004. - The Company will also review other existing accounting policies, and develop appropriate supporting documentation to ensure that generally accepted accounting principles are applied appropriately. The Company anticipates completing its accounting policies review by the end of the fiscal year. The Company is currently in the process of reviewing and formalizing the consolidated enterprise's internal controls and procedures for financial reporting in accordance with the SEC's rules implementing the internal control reporting requirements included in Section 404 of the Sarbanes-Oxley Act of 2002 ("Section 404"). Changes have been and will be made to the Company's internal controls over financial reporting as a result of these efforts. There was no change in the Company's internal control over financial reporting identified in connection with the disclosure controls and procedures evaluation referred to above during the period covered by this quarterly report that materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. However, subsequent to December 31, 2003 and prior to the filing of this Form 10-Q/A, the Company began implementing changes to its internal controls, as described above, to correct the material weaknesses identified above. The Company will continue to evaluate the effectiveness of its internal controls and procedures on an ongoing basis, and will take further action as appropriate. -46- PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The exhibits listed on the accompanying Exhibit Index, on page 49, are filed as part of this report. (b) Reports on Form 8-K The following reports on Form 8-K were filed by the registrant during the quarter ended December 31, 2003: Date of Report Items Reported ----------------- --------------------- December 2, 2003 Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. November 12, 2003 Item 12. Disclosure of Results of Operations and Financial Condition. -47- SIGNATURES Pursuant to the requirements 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. TOYOTA MOTOR CREDIT CORPORATION ------------------------------- (Registrant) Date: December 16, 2004 By /S/ GEORGE E. BORST ------------------------------- George E. Borst President and Chief Executive Officer (Principal Executive Officer) Date: December 16, 2004 By /S/ JOHN F. STILLO ------------------------------- John F. Stillo Vice President and Chief Financial Officer (Principal Financial Officer) -48- EXHIBIT INDEX Exhibit Method Number Description of 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 (3) 12.1 Calculation of Ratio of Earnings to Fixed Charges Filed Herewith 15.1 Report of Independent Registered Public Accounting Filed Firm Herewith 15.2 Letter regarding unaudited interim financial Filed information Herewith ----------------- (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. -49- EXHIBIT INDEX Exhibit Method Number Description of Filing ------- ----------- --------- 31.1 Certification of Chief Executive Officer Filed Herewith 31.2 Certification of Chief Financial Officer Filed Herewith 32.1 Certification pursuant to 18 U.S.C. Section 1350 Furnished Herewith 32.2 Certification pursuant to 18 U.S.C. Section 1350 Furnished Herewith -50-