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 six months ended
September 30, 2004 and 2003 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 and disclosure of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. 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 six months ended September 30, 2004 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 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
2004 Annual Report to the SEC on Form 10-K. As discussed below, the Company
intends to file an amendment to its 2004 Annual Report to the SEC on Form 10-K.
References herein to "TMCC" denote Toyota Motor Credit Corporation and
references herein to "the Company" denote Toyota Motor Credit Corporation and
its consolidated subsidiaries.
During the first quarter of fiscal 2005, the Company transferred substantially
all of its interests in Toyota Services de Mexico, S.A. de C.V. and Toyota
Services de Venezuela, C.A. ("TSV"), and its minority interest in Banco Toyota
do Brazil, S.A. ("BTB"), to its parent, Toyota Financial Services Americas
Corporation ("TFSA"). The transfer of the $17 million net carrying value of the
Company's interests in these entities was accounted for as a distribution of
assets and, accordingly, a reduction of shareholder's equity.
- 6 -
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 was 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 are 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 related derivative 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 other liabilities. The
Company also recorded other adjustments that were previously deemed not
material.
- 7 -
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, 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 Quarterly Report
on Form 10-Q for the period ended September 30, 2004. In addition, the Company
intends to file amendments to its Quarterly Report on Form 10-Q for the period
ended December 31, 2003, its Annual Report on Form 10-K for the fiscal year
ended March 31, 2004 and its Quarterly Report on Form 10-Q for the period ended
June 30, 2004 that will 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. The Company will not issue debt under
its U.S. dollar medium term notes program until the amended filings are
submitted to the Securities and Exchange Commission ("SEC"). The Company will
also file these amendments in connection with its Euro medium term notes
("EMTN") program and will not issue debt under the 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.
This Quarterly Report on Form 10-Q for the period ended September 30, 2004
includes restated financial statements and amendments to related disclosures for
the three and six month periods ended September 30, 2003 and as of March 31,
2004.
- 8 -
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Interim Financial Data and Restated Financial Results (Continued)
The adjustments to net income for the three and six months ended September 30,
2003 are summarized below:
Three Months Six Months
Ended Ended
September 30, 2003
(Dollars in millions)
Net income, as previously reported $ 215 $ 265
Adjustments (pre-tax):
Dealer incentive payments 3 10
Rate participation payments 1 9
Incremental direct costs 1 2
Fair value adjustment (1 ) (10 )
Other adjustments (3 ) 2
Total adjustments (pre-tax) 1 13
Tax effect of restatement adjustments - (5 )
Total net adjustments 1 8
Net income, as restated $ 216 $ 273
The amounts shown for dealer incentive and 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 adjustment represents additional
ineffectiveness recognized on certain foreign currency denominated notes
payable. The other adjustments primarily relate to items that were deemed not
material in prior periods but have been recorded in connection with this
restatement.
- 9 -
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Interim Financial Data and Restated Financial Results (Continued)
The Consolidated Balance Sheet as of March 31, 2004 included in this Form 10-Q
has been restated to include the effects of the adjustments and
reclassifications as follows:
March 31, 2004
As previously
reported As restated
(Dollars in millions)
ASSETS
Cash and cash equivalents $ 818 $ 818
Investments in marketable securities 1,125 1,125
Finance receivables, net 32,460 32,337
Investments in operating leases, net 7,685 7,590
Other assets 2,766 2,764
Total assets $ 44,854 $ 44,634
LIABILITIES AND SHAREHOLDER'S EQUITY
Notes and loans payable $ 36,822 $ 36,854
Other liabilities 2,363 1,992
Deferred income taxes 2,178 2,225
Total liabilities 41,363 41,071
Capital stock, $l0,000 par value (100,000 shares
authorized; issued and outstanding 91,500 in 2004
and 2003) 915 915
Retained earnings 2,531 2,604
Accumulated other comprehensive income 45 44
Total shareholder's equity 3,491 3,563
Total liabilities and shareholder's equity $ 44,854 $ 44,634
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 $147 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 $270 million and $105 million,
respectively, that was previously classified as other liabilities. The net
effect of these adjustments and reclassifications was an overall decrease in
finance receivables, net and investments in operating leases, net of $123
million and $95 million, respectively.
- 10 -
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Interim Financial Data and Restated Financial Results (Continued)
Notes and loans payable increased $32 million. This increase resulted from the
cumulative impact of a $62 million foreign currency transaction loss, a $30
million reversal of improperly recorded fair value losses and a $3 million loss
related to additional basis adjustments associated with the re-establishment of
hedge relationships that were previously ineffective. The remaining $3 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 decreased $375 million as a result of the reclassification of
deferred subvention and acquisition fee revenue from other liabilities to
finance receivables, net and investments in operating leases, net, noted above.
The remaining $4 million adjustment primarily relates to items that were deemed
not material in prior periods but have been recorded in connection with this
restatement.
- 11 -
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 six months ended
September 30, 2003 included in this Form 10-Q have been restated to include the
effects of the adjustments and reclassifications as follows:
Three Months Ended Six Months Ended
September 30, 2003 September 30, 2003
As previously As previously
reported As restated reported As restated
(Dollars in millions)
Financing revenues:
Leasing $ 613 $ 591 $ 1,235 $ 1,175
Retail financing 310 323 600 627
Wholesale and other dealer
financing 43 46 92 98
Total financing revenues 966 960 1,927 1,900
Depreciation on leases 405 383 863 803
Interest expense 87 91 318 326
Net financing revenues 474 486 746 771
Insurance premiums earned and
contract revenues 47 44 92 86
Investment and other income 78 65 114 101
Net financing and other revenues 599 595 952 958
Expenses:
Operating and administrative 142 134 278 266
Provision for credit losses 78 78 187 187
Insurance losses and loss
adjustment expenses 25 28 50 55
Total expenses 245 240 515 508
Income before provision for
income taxes 354 355 437 450
Provision for income taxes 139 139 172 177
Net income $ 215 $ 216 $ 265 $ 273
- 12 -
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Interim Financial Data and Restated Financial Results (Continued)
Leasing revenues and depreciation expense both decreased $22 million and $60
million for the three and six months ended September 30, 2003, respectively,
resulting from the reclassification of downward adjustments to residual values
related to finance leases previously misclassified as depreciation expense. This
reclassification was made to conform the September 2003 results to a
reclassification previously implemented in the March 2004 Consolidated Financial
Statements. Retail revenues increased $13 million and $27 million for the three
and six months ended September 30, 2003, respectively, primarily as a result of
the deferral and amortization of incremental direct costs and fees paid
primarily in connection with the acquisition of retail contracts, and incentive
and rate participation payments made to vehicle dealers. Wholesale and other
dealer financing increased $3 million and $6 million for the three and six
months ended September 30, 2003, respectively, due to the reclassification of
insurance premiums on wholesale lines previously misclassified in insurance
premiums earned and contract revenues.
Interest expense increased $4 million for the three months ended September 30,
2003 due to the net effect of $2 million of additional ineffectiveness and a $3
million loss related to additional basis adjustments associated with the
re-establishment of hedge relationships that were previously ineffective. The
remaining $3 million increase primarily relates to items that were deemed not
material in prior periods but have been recorded in connection with this
restatement. Interest expense increased $8 million for the six months ended
September 30, 2003, due to the net effect of a $5 million reversal of improperly
recorded fair value losses and a $4 million loss related to additional
ineffectiveness associated with the re-establishment of hedge relationships that
were previously ineffective. The remaining $1 million adjustment primarily
relates to items that were deemed not material in prior periods but have been
recorded in connection with this restatement.
Investment and other income decreased $13 million for both the three and six
months ended September 30, 2003, respectively, due to adjustments to gains on
securitization transactions resulting from the impact of incremental direct
costs and fees paid primarily in connection with the acquisition of retail
contracts, and incentive and rate participation payments made to vehicle
dealers.
Operating and administrative expenses decreased $8 million and $12 million for
the three and six months ended September 30, 2003, respectively, primarily as a
result of the $4 million and $8 million, respectively, deferral of incremental
direct costs incurred in connection with the acquisition of retail and vehicle
lease contracts. The remaining $4 million decrease for both the three and six
months ended September 30, 2003 was due to a reclassification of certain
expenses between insurance losses and loss adjustments expenses and operating
and administrative expenses.
- 13 -
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 September 30, 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 purchase 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 six months
ended September 30, 2003 are summarized below:
Six Months Ended
September 30, 2003
(Dollars in millions)
Total adjustment to net income $ (8 )
Derivative fair value adjustment 8
Increase in depreciation and amortization for
incremental direct costs,
dealer participation payments, and rate participation
payments 15
Recognition of deferred subvention and acquisition fee
revenue (139 )
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 (23 )
Adjustment to net cash provided by operating
activities $ (131 )
Adjustment to acquisition of finance receivables for
incremental direct
costs, dealer incentive payments, and deferred
subvention and acquisition
fee revenue $ 88
Adjustment to acquisition of operating leases for
incremental direct costs,
dealer incentive payments, and deferred subvention and
acquisition fee
revenue 43
Adjustment to net cash used in investing
activities $ 131
- 14 -
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Finance Receivables
Finance receivables, net consisted of the following:
September 30, March 31,
2004 2004
(Dollars in millions)
(Restated)
Retail receivables $ 26,591 $ 22,693
Finance leases 3,191 4,325
Wholesale and other dealer loans 6,179 6,571
35,961 33,589
Deferred origination costs 134 117
Unearned income (864 ) (987 )
Allowance for credit losses (421 ) (382 )
Finance receivables, net $ 34,810 $ 32,337
The aggregate balances related to finance receivables 60 or more days past due
totaled $159 million and $115 million at September 30 and March 31, 2004,
respectively. Substantially all retail and finance lease receivables do not
involve recourse to the dealer in the event of customer default.
Note 3 - Investments in Operating Leases
Investments in operating leases, net consisted of the following:
September 30, March 31,
2004 2004
(Dollars in millions)
(Restated)
Vehicles $ 10,120 $ 9,700
Equipment and other 722 688
10,842 10,388
Deferred origination fees (62 ) (57 )
Deferred income (45 ) (38 )
Accumulated depreciation (2,657 ) (2,565 )
Allowance for credit losses (87 ) (138 )
Investments in operating leases, net $ 7,991 $ 7,590
The aggregate balances related to investments in operating leases, net of 60 or
more days past due totaled $29 million and $23 million at September 30 and March
31, 2004, respectively.
- 15 -
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Allowance for Credit Losses
An analysis of the allowance for credit losses follows:
Three Months Ended Six Months Ended
September 30, September 30,
2004 2003 2004 2003
(Dollars in millions)
Allowance for credit losses at
beginning of period $ 512 $ 502 $ 520 $ 462
Provision for credit losses 50 78 96 187
Charge-offs, net of recoveries (54 ) (65 ) (104 ) (134 )
Sale of receivables - (19 ) - (19 )
Distribution of net assets to TFSA - - (4 ) -
Allowance for credit losses at end of
period $ 508 $ 496 $ 508 $ 496
Note 5 - Derivatives and Hedging Activities
The following table summarizes the net unrealized gains and losses included in
the Company's derivative fair value adjustment, which is included in interest
expense:
Three Months Ended Six Months Ended
September 30, September 30,
2004 2003 2004 2003
(Dollars in millions)
Unrealized (Gain)/Loss
(Restated) (Restated)
Ineffectiveness related to
designated hedges $ (9) $ 3 $ 19 $ 9
Currency basis swaps (1) 13 (3 ) (12 ) (3 )
Non-designated hedges
Interest rate swaps 10 (80 ) (15 ) (62 )
Interest rate caps 5 1 (2 ) 20
Other - - (1 ) (1 )
Derivative fair value adjustment $ 19 $ (79 ) $ (11 ) $ (37 )
(1) Currency basis swaps used in combination with interest rate swaps to convert
non-U.S. dollar debt to U.S. dollar denominated payments are not eligible
for hedge accounting.
- 16 -
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Notes and Loans Payable
Notes and loans payable and the related weighted average contractual interest
rates are summarized as follows:
Weighted Average Contractual
Interest Rates
September 30, March 31, September 30, March 31,
2004 2004 2004 2004
(Dollars in millions)
(Restated)
Commercial paper $ 9,020 $ 8,094 1.59 % 1.03 %
Notes and loans payable (1) 28,197 26,849 3.41 % 3.44 %
Carrying value adjustment (2) 1,528 1,911
Notes and loans payable $ 38,745 $ 36,854 2.98 % 2.90 %
(1) Includes foreign currency transaction adjustments of $4 million at both
September 30, 2004 and March 30, 2004.
This adjustment results from changes in foreign currency rates when the
underlying debt instrument did not qualify for hedge accounting.
(2) Includes basis adjustments to debt in designated and de-designated hedge
relationships.
Included in notes and loans payable are unsecured notes denominated in various
foreign currencies totaling $10,646 million and $10,460 million at September 30
and March 31, 2004, respectively. Concurrent with the issuance of these
unsecured notes, the Company entered into cross currency interest rate swap
agreements or a combination of interest rate swaps coupled with currency basis
swaps to convert non-U.S. dollar debt to U.S. dollar denominated payments.
At September 30, 2004 and March 31, 2004, notes and loans payable of $142
million and $226 million, respectively, were collateralized by retail finance
receivables of $161 million and $261 million, respectively, arising from a
securitization transaction accounted for as a collateralized borrowing executed
in fiscal 2002. The retail finance receivables serve as collateral for the
payment of the notes and loans payable and are therefore restricted from TMCC's
creditors.
- 17 -
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Liquidity Facilities and Letters of Credit
The following table summarizes TMCC's and its subsidiary, Toyota Credit de
Puerto Rico Corp.'s ("TCPR") credit facilities:
TMCC TCPR Total
September 30, March 31, September 30, March 31, September 30, March 31,
2004 2004 2004 2004 2004 2004
(Dollars in millions)
364-day
syndicated
bank credit
facilities -
committed $ 1,967 $ 3,600 $ 133 $ 400 $ 2,100 $ 4,000
5-year
syndicated
bank credit
facility -
committed 3,933 1,400 267 - 4,200 1,400
Letters of
credit
facilities -
uncommitted 55 55 - - 55 55
Total credit
facilities $ 5,955 $ 5,055 $ 400 $ 400 $ 6,355 $ 5,455
In July 2004, the Company renewed and decreased its 364-day syndicated bank
credit facilities from $4,000 million to $2,100 million and renewed and
increased its 5-year syndicated bank credit facilities from $1,400 million to
$4,200 million.
Of the total credit facilities, $2 million of the uncommitted letters of credit
facilities was used at September 30, 2004 and March 31, 2004. No amounts were
drawn on the committed facilities as of September 30, 2004 and March 31, 2004.
- 18 -
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Commitments and Contingencies
Commitments and Guarantees
TMCC has entered into certain commitments and guarantees described below. The
maximum commitment amounts under these commitments and guarantees as of
September 30, 2004 are summarized in the table below:
Maximum Commitment
Amount
(Dollars in millions)
Commitments:
Credit facilities with vehicle and industrial equipment
dealers $ 3,382
Credit facilities with affiliates 190
Lease commitments (1) 132
Total commitments 3,704
Guarantees and other contingencies:
Guarantees of affiliate pollution control and solid
waste disposal bonds 148
Revolving liquidity notes related to securitizations 48
Guarantees of affiliate debt 35
Total guarantees and commitments $ 3,935
(1) Includes $89 million in lease commitments with affiliates.
Commitments
During the first quarter of fiscal 2005, TMCC entered into a reciprocal credit
agreement with TFSA which allows each company to borrow up to $100 million from
the other at a daily market interest rate, generally the federal funds rate,
determined on the date of each advance, with no stated maturity date. This
commitment is included in the table above under "Credit facilities with
affiliates." As of September 30, there have been no other material changes to
TMCC's commitments as described in the Company's Annual Report on Form 10-K for
the year ended March 31, 2004.
Of the total credit facilities available to vehicle and industrial equipment
dealers, $2,354 million and $2,249 million were outstanding at September 30,
2004 and March 31, 2004, respectively. Of the total credit facilities available
to affiliates, $21 million and $25 million were outstanding with Toyota de
Puerto Rico Corp., a subsidiary of Toyota Motor Sales, U.S.A. Inc., at September
30, 2004 and March 31, 2004, respectively. In addition, during the six months
ended September 30, 2004, $34 million was drawn by TFSA and accounted for as a
distribution of assets, and, accordingly, a reduction of shareholder's equity.
No such amounts were drawn during the prior year.
- 19 -
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Commitments and Contingencies (Continued)
Guarantees and Other Contingencies
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 receives an annual fee of $100,000 for
guaranteeing such payments. TMCC has not been required to perform under any of
these affiliate bond guarantees as of September 30, 2004. Because these are
affiliate guarantees, TMCC is not required to recognize a liability for the fair
value of the guarantees.
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 November 2004. 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 September 30, 2004. Because these are affiliate guarantees,
TMCC is not required to recognize a liability for the fair value of the
guarantees.
- 20 -
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Commitments and Contingencies (Continued)
During the first quarter of fiscal 2005, the Company reduced the maximum amount
guaranteed of TSV debt from $35 million to $5 million. The guarantee relates to
principal, interest, fees, and expenses with respect to a Venezuelan bank credit
facility on behalf of TSV. The credit facility would allow TSV to borrow up to
the amount of the guarantee for a period of one year. The guarantee will remain
in effect until the loan is repaid in full, and TMCC elects to terminate the
guarantee. Under the terms of the guarantee, TMCC would be required to perform
on behalf of TSV should TSV default on payments as a result of financial
insolvency. The Company has entered into a separate reimbursement agreement
with TSV which includes provisions whereby TMCC is entitled to reimbursement
from TSV in the event TSV defaults under its loan agreement covered by this
guarantee and TMCC is called upon to perform its guarantee obligations. TMCC
has not been required to perform under the TSV guarantee as of September 30,
2004. Because these are affiliate guarantees, TMCC is not required to recognize
a liability for the fair value of the guarantees.
In certain securitization structures, revolving liquidity notes ("RLN") are used
in lieu of deposits to a cash reserve fund. The securitization trust may draw
upon the RLN to cover any shortfall in interest and principal payments to
investors. The Company funds any draws, and the terms of the RLN obligate the
securitization trust to repay amounts drawn plus accrued interest. Repayments
of principal and interest due under the RLN are subordinated to principal and
interest payments on the asset-backed securities and, in some circumstances, to
deposits into a reserve account. If collections are insufficient to repay
amounts outstanding under a RLN, the Company will recognize a loss for the
outstanding amounts. The Company must fund the entire amount available under
the RLN into a reserve account if the Company's short term unsecured debt
ratings are downgraded below P-1 by Moody's Investors Service, Inc. or A-1 by
Standard & Poor's Ratings Group, a division of the McGraw-Hill Companies, Inc.
No amounts were outstanding under the RLN as of September 30, 2004. The Company
has not recognized a liability for the RLN because it does not expect to incur
any future cash flows related to the RLN.
Indemnification
In the ordinary course of business, the Company enters into agreements
containing indemnification provisions standard in the industry related to
several types of transactions, including, but not limited to, 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. In
addition, certain of the Company's funding arrangements would require the
Company to pay lenders for increased costs due to certain changes in laws or
regulations. Due to the difficulty in predicting events which could cause a
breach of the indemnification provisions or trigger a gross-up or other payment
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 September 30, 2004, 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 September 30, 2004.
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Commitments and Contingencies (Continued)
Receivable Repurchase Obligations
The Company sells discrete pools of retail finance receivables to wholly owned
consolidated bankruptcy remote special purpose entities ("SPEs"). TMCC makes
certain representations and warranties to the SPEs, and the SPEs make
corresponding representations and warranties to securitization trusts, relating
to receivables sold in securitization transactions. TMCC and the SPEs may be
required to repurchase any receivable in the event of a breach of a
representation and warranty relating to the receivable that would materially and
adversely affect the interest of the SPEs, or any securitization trust, as
applicable. In addition, TMCC, as the 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 any receivable that would materially and adversely
affect the interest of any securitization trust or of certain extensions or
modifications of a receivable as to which TMCC, as the 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 plus any
accrued interest thereon. These provisions are customary in the securitization
industry. No receivables were repurchased under these provisions during the six
months ended September 30, 2004.
Advancing Requirements
As a servicer of receivables sold through securitization, TMCC is required to
advance delinquent obligor payments to the applicable securitization trust to
the extent it believes such advance will be recovered from future collections of
the related receivable. Each securitization trust is required to reimburse the
Company for any outstanding advances from collections on all receivables before
making other required payments. These provisions are customary in the
securitization industry. Advances outstanding at September 30, 2004 totaled $6
million.
Litigation
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 Company establishes reserves for legal claims when payments
associated with the claims become probable and the costs can be reasonably
estimated. The actual costs of resolving legal claims may be substantially
higher or lower than the amounts reserved for these claims. However, based on
information currently available, the advice of counsel, and established
reserves, in the opinion of management, the ultimate liability resulting
therefrom will not have a material adverse effect on the Company's consolidated
financial position or results of operations.
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Related Party Transactions
As of September 30, 2004, there have been no material changes to the related
party agreements or relationships as described in the Company's Annual Report on
Form 10-K for the year ended March 31, 2004, except for the reciprocal credit
agreement with TFSA described in Note 8. The tables below summarize amounts
included in the Company's Consolidated Balance Sheets and Statements of Income
for the fiscal periods presented under various related party agreements or
relationships:
September 30, March 31,
2004 2004
(Dollars in millions)
(Restated)
Assets:
Rate subvention receivable from affiliates $ 39 $ 24
Finance receivables with affiliates $ 21 $ 25
Intercompany receivables $ 3 $ 1
Notes receivable under home loan program $ 7 $ 7
Deferred rate subvention income
Finance receivables $ (327 ) $ (252 )
Operating leases $ (19 ) $ (21 )
Liabilities:
Intercompany payables $ 76 $ 95
Shareholder's Equity:
Reduction of retained earnings for distribution of net assets
to TFSA $ 23 $ -
Reduction of retained earnings for advance to TFSA under
credit agreement $ 22 $ -
- 23 -
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Related Party Transactions (Continued)
Three Months Ended Six Months Ended
September 30, September 30,
2004 2003 2004 2003
(Dollars in millions)
(Restated) (Restated)
Revenues:
Manufacturers' subvention support and
other revenues $ 59 $ 47 $ 113 $ 92
Affiliate insurance premiums and
commissions revenue $ 14 $ 11 $ 29 $ 22
Expenses:
Shared services charges and other
amounts $ 16 $ 22 $ 36 $ 45
Credit support fees incurred $ 4 $ 4 $ 9 $ 9
Employee benefits expense $ 13 $ 12 $ 27 $ 24
Note 10 - Segment Information
Financial results for the Company's operating segments are summarized below:
September 30, March 31,
2004 2004
(Dollars in millions)
(Restated)
Assets:
Financing operations $ 46,049 $ 43,728
Insurance operations 1,235 1,137
Eliminations/reclassifications (281 ) (231 )
Total assets $ 47,003 $ 44,634
- 24 -
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 - Segment Information (Continued)
Three Months Ended Six Months Ended
September 30, September 30,
2004 2003 2004 2003
(Dollars in millions)
(Restated) (Restated)
Gross revenues:
Financing operations $ 1,016 $ 1,016 $ 2,004 $ 1,980
Insurance operations 81 62 146 124
Eliminations/reclassifications (9 ) (9 ) (18 ) (17 )
Total gross revenues $ 1,088 $ 1,069 $ 2,132 $ 2,087
Net income:
Financing operations $ 149 $ 206 $ 336 $ 252
Insurance operations 22 10 33 21
Net income $ 171 $ 216 $ 369 $ 273
Note 11 - Subsequent Events
On November 19, 2004, TMCC entered into a Master Services Agreement with Toyota
Financial Savings Bank ("TFSB"), a Nevada thrift company owned by TFSA to
provide certain administrative services to TFSB in exchange for TFSB's
willingness to make available certain financial products and services to TMCC's
customers and dealers. Under the terms of the agreement, TMCC will charge TFSB
an amount that would not exceed an amount that would be charged to an
unaffiliated third party. The fees may be amended from time to time by written
agreement, and the agreement may be terminated by either party with 30 days
notice. TMCC will not charge TFSB for any such services during the first three
years of the agreement.
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