ITEM 1. BUSINESS
GENERAL
Toyota Motor Credit Corporation (“TMCC”) was incorporated in California in 1982 and commenced operations in 1983. TMCC and its consolidated subsidiaries, collectively referred to herein as the “Company”, are wholly-owned by Toyota Financial Services Americas Corporation (“TFSA”), a California corporation, which is a wholly-owned subsidiary of Toyota Financial Services Corporation (“TFSC”), a Japanese corporation. TFSC, in turn, is a wholly-owned subsidiary of Toyota Motor Corporation (“TMC”), a Japanese corporation. TFSC manages TMC’s worldwide finance operations. TMCC is marketed under the brands of Toyota Financial Services and Lexus Financial Services.
The Company provides a variety of finance and insurance products to authorized Toyota and Lexus vehicle dealers and, to a lesser extent, other domestic and import franchise dealers (collectively referred to as “vehicle dealers”) and their customers in the United States (excluding Hawaii) (“U.S.”) and Puerto Rico. The Company also provides finance products to commercial and industrial equipment dealers (“industrial equipment dealers”) and their customers. The Company’s products fall primarily into the following finance and insurance product categories:
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Finance - The Company provides a broad range of finance products including retail financing, leasing, and dealer financing to vehicle and industrial equipment dealers and their customers.
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Insurance - Through a wholly-owned subsidiary, the Company provides marketing, underwriting, and claims administration related to covering certain risks of vehicle dealers and their customers. The Company also provides coverage and related administrative services to certain affiliates.
The Company supports growth in earning assets through funding obtained in the capital markets as well as funds provided by operating activities. Refer to the “Liquidity and Capital Resources” section of Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) for a detailed discussion of the Company’s funding activities. A more detailed description of the products and services offered by the Company is contained within this Business section. Refer to Note 17 - Segment Information of the Notes to Consolidated Financial Statements for financial information including assets, revenues, and net income generated by these segments.
The Company primarily acquires and services finance, lease and insurance contracts from vehicle dealers through 30 dealer sales and services offices (“DSSOs”) located throughout the U.S. and three regional customer service centers (“CSCs”) and from industrial equipment dealers through a corporate department located at the Company’s headquarters in Torrance, California. The DSSOs primarily support vehicle dealer financing needs by providing services such as acquiring finance and lease contracts from vehicle dealers, financing inventories, and financing other dealer activities and requirements such as business acquisitions, facilities refurbishment, real estate purchases and working capital requirements. The DSSOs also provide information and support for the Company’s finance and insurance products sold in the U.S. The CSCs support customer account servicing functions such as collections, lease terminations, and administration of retail and lease customer accounts. The Central region CSC also supports insurance operations by providing customer service and handling claims processing. Refer to “Item 2., Properties” for information on the geographical location of the DSSOs and CSCs.
Public Filings
The Company’s filings with the Securities and Exchange Commission (“SEC”) may be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Company’s filings may also be found by accessing the SEC website (http://www.sec.gov). The SEC website contains reports, registration statements, proxy and information statements and other information regarding issuers that file electronically with the SEC. A link to the SEC website is also contained on the Company’s website (http://www.toyotafinancial.com) under “Investor Relations”. The Company will make available, without charge, electronic or paper copies of its filings upon written request to:
Toyota Motor Credit Corporation
South Western Avenue
Torrance, CA 90509
Attention: Corporate Communications
TMC files periodic reports and other information with the SEC, which can be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. TMC’s filings may also be found at http://www.toyota.com under “Shareholder Information” under “About Toyota”.
Seasonality
Revenues generated by receivables owned by the Company are generally not subject to seasonal variations. Although contract volume is subject to a certain degree of seasonality, this seasonality does not have a significant impact on revenues as collections, generally in the form of fixed payments, occur over the course of several years. The automotive finance industry, and therefore the Company, is subject to seasonal variations in credit losses, which are typically higher in the first and fourth calendar quarters of the year.
Geographic Distribution of Operations
The Company’s primary finance and insurance operations are located in the U.S. and Puerto Rico with earning assets principally sourced through Toyota and Lexus vehicle dealers. Prior to fiscal 2005, the Company also conducted business in Mexico and Venezuela through wholly-owned subsidiaries and held a minority interest in a TFSC majority-owned subsidiary in Brazil. On April 1, 2004, the Company transferred substantially all of its interests in the Mexican and Venezuelan subsidiaries and its holdings in the Brazilian subsidiary to TFSA. Refer to Note 1 for further discussion of the terms and conditions of the transfer. The combined assets, liabilities and net losses of the Company’s international subsidiaries totaled less than 1% of each of the consolidated assets, liabilities and net income of the Company as of and for fiscal 2004. The Company also holds minority interests of $1 million in Toyota Credit Argentina S.A. and Toyota Compania Financiera de Argentina S.A., both TFSA majority-owned subsidiaries in Argentina.
As of March 31, 2006, approximately 23% of managed vehicle retail and lease assets were located in California, 9% in Texas, 7% in New York, and 6% in New Jersey. Any material adverse changes to California’s, Texas’, New York’s or New Jersey’s economy could have an adverse effect on the Company’s financial condition and results of operations.
FINANCE OPERATIONS
The Company provides retail financing, leasing, wholesale financing, and certain other financial products and services to authorized Toyota and Lexus vehicle dealers and, to a lesser extent, other domestic and import franchised dealers and their customers in the U.S. and the Commonwealth of Puerto Rico as described under Item 1., “Business-General-Geographic Distribution of Operations”. The Company also offers financing for various industrial and commercial products such as forklifts, light and medium-duty trucks, and electric vehicles. Gross revenues related to transactions with industrial equipment dealers contributed 4% to total gross revenues in each of fiscal 2006, 2005 and 2004.
The table below summarizes the Company’s financing revenues by primary product.
1 Leasing revenues are shown gross of depreciation on operating leases. Leasing revenues net of depreciation on operating leases represent 27%, 29%, and 34%, of total net financing revenues for fiscal 2006, 2005, and 2004, respectively.
Lease Financing
The Company acquires new vehicle and industrial equipment lease contracts originated primarily through Toyota and Lexus vehicle dealers and industrial equipment dealers. Lease contracts to be acquired are evaluated against the Company’s credit standards and, if approved, the Company acquires the lease contracts and concurrently assumes ownership of the leased vehicles or industrial equipment. The Company views its lease arrangements, including its operating leases, as financing transactions as it does not seek to re-lease the vehicles or equipment upon default or at lease termination. The Company is responsible for contract administration and collection during the lease period. The Company uses a behavioral-based collection strategy to minimize risk of loss and employs various collection methods. The Company is permitted to take possession of vehicles or industrial equipment upon lessee default and has the right to enforce collection actions against the lessee. Upon default, the Company sells the vehicles or equipment through vehicle and industrial equipment dealers or auctions.
The Company is also responsible for the residual value of the leased asset if the lessee, vehicle dealer, or industrial equipment dealer does not purchase the asset at lease maturity. At the end of the lease term, lease customers have the option to purchase the leased asset at the contractual residual value or return the leased asset to the vehicle or industrial equipment dealer. If the leased asset is returned to the vehicle or industrial equipment dealer, the vehicle or industrial equipment dealer has the option of purchasing the leased asset or returning it to the Company. In an effort to minimize losses incurred at lease maturity, the Company has developed remarketing strategies to maximize proceeds and minimize disposition costs on used vehicles and industrial equipment sold at lease termination. The Company uses various channels to sell vehicles returned at lease maturity. Refer to the “Results of Operations- Residual Value Risk” section of the MD&A for further discussion of the Company’s remarketing activities. Industrial equipment returned by the lessee or industrial equipment dealer is sold through authorized Toyota industrial equipment dealers or wholesalers using a bidding process.
The Company may experience a higher risk of loss if customers fail to maintain required insurance coverage. The Company’s vehicle lease contracts require lessees to maintain minimum liability insurance and physical damage insurance covering loss or damage to the leased vehicle in an amount not less than the full value of the vehicle. TMCC monitors ongoing insurance compliance only in certain vicarious liability states. Due to recently-enacted federal law, states are no longer permitted to impose unlimited vicarious liability on lessors of leased vehicles. TMCC continues to monitor the impact of the repeal of unlimited vicarious liability. At this time, TMCC has not modified its insurance compliance monitoring programs as a result of this law. Refer to the “Regulatory Environment” section of this Business section for further discussion of this issue.
Toyota Lease Trust, a Delaware business trust (the “Titling Trust”), acts as lessor and holds title to leased vehicles in specified states. This arrangement was established to facilitate a previously utilized lease securitization program. Lease contracts acquired by the Titling Trust from Toyota and Lexus vehicle dealers are serviced by TMCC in the same manner as lease contracts owned directly by the Company. The Company holds an undivided trust interest in lease contracts owned by the Titling Trust, and these lease contracts are included in the Company’s lease assets unless and until such time as the interests in the contracts are transferred in a securitization transaction. The Company does not presently have an active lease securitization program.
Retail Financing
The Company acquires new and used vehicle and industrial equipment finance contracts primarily from Toyota, Lexus and, to a lesser extent, other domestic and import franchised dealers and industrial equipment dealers. Finance contracts to be acquired are evaluated against the Company’s credit standards and, if approved, the Company acquires the finance contracts and a security interest in the vehicle or industrial equipment that is financed under the contract. Thereafter, the Company has responsibility for contract administration and collection. The Company uses a behavioral-based collection strategy to minimize risk of loss and employs various collection methods. Upon commencement of the contracts, the Company perfects its security interests through Uniform Commercial Code (“UCC”) filings in the vehicles or industrial equipment financed and has the right to repossess the assets if customers fail to meet contractual obligations and the right to enforce collection actions against the obligors under the contracts. Upon default, the Company sells the vehicles or industrial equipment through vehicle or industrial equipment dealers or physical auctions. Repossessed vehicles are sold through a variety of distribution channels, similar to the sale of vehicles returned at lease end. Refer to the “Results of Operations- Residual Value Risk” section of the MD&A for further discussion of the Company’s remarketing activities.
Substantially all of the Company's retail finance receivables are non-recourse to the vehicle and industrial equipment dealers, which relieves the vehicle and industrial equipment dealers from financial responsibility in the event of repossession.
The Company may experience a higher risk of loss if customers fail to maintain required insurance coverage. The terms of the Company’s retail financing programs require customers to maintain physical damage insurance covering loss or damage to the financed vehicle or industrial equipment in an amount not less than the full value of the vehicle or equipment. TMCC currently does not monitor ongoing insurance compliance as part of its customary servicing procedures for retail accounts.
Dealer Financing
Dealer financing is comprised of wholesale financing and other financing options designed to meet dealer business needs.
Wholesale Financing
The Company provides wholesale financing, also referred to as floorplan financing, to vehicle and equipment dealers for inventories of new and used Toyota, Lexus and other vehicles and industrial equipment. The Company acquires a security interest in vehicles financed at wholesale, which the Company perfects through UCC filings, and these financings may be backed by corporate or individual guarantees from, or on behalf of, participating vehicle and industrial equipment dealers, dealer groups or dealer principals. In the event of vehicle or industrial equipment dealer default under a wholesale loan arrangement, the Company has the right to liquidate assets in which it has a perfected security interest and seek legal remedies pursuant to the wholesale loan agreement and any applicable guarantees.
TMCC and Toyota Motor Sales, U.S.A., Inc. (“TMS”), an affiliate of the Company, have entered into an Amended and Restated Repurchase Agreement. This agreement states that TMS will arrange for the repurchase of new Toyota and Lexus vehicles at the aggregate cost financed by TMCC in the event of vehicle dealer default under floorplan financing. The Company also entered into similar agreements with Toyota Material Handling, U.S.A., Inc. (“TMHU”), Hino Diesel Trucks, U.S.A., Inc, (“HINO”) and other domestic and import manufacturers. TMHU is the primary distributor of Toyota lift trucks in the U.S. and HINO is the exclusive U.S. distributor of commercial trucks manufactured by Hino Motors Ltd. of Japan.
Other Dealer Financing
The Company extends term loans and revolving lines of credit to vehicle and industrial equipment dealers for business acquisitions, facilities refurbishment, real estate purchases, and working capital requirements. These loans are typically secured with liens on real estate, vehicle inventory, and/or other dealership assets, as appropriate, and usually are guaranteed by the personal or corporate guarantees of the dealer principals or dealerships. The Company also provides financing to various multi-franchise dealer organizations, referred to as dealer groups, often as part of a lending consortium, for wholesale, working capital, real estate, and business acquisitions. 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 vehicle or industrial equipment 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.
Customer Concentration
At March 31, 2006, the 25 largest aggregate outstanding vehicle and industrial equipment dealer receivables totaled $2.452 billion, or 4.5% of net earning assets. Additionally, at March 31, 2006, the Company was committed to $3.848 billion under various funding facilities to these 25 largest vehicle and industrial equipment dealers or dealer groups, which, if entirely funded, would represent 7.0% of net earning assets. All of these receivables were current as of March 31, 2006. Adverse changes in the business or financial condition of a vehicle or industrial equipment dealer or dealer group to whom the Company has extended a substantial amount of financing or commitments, in particular when the financing is unsecured or not secured by realizable assets, could result in a material adverse effect on the Company’s financial condition and results of operations.
INSURANCE OPERATIONS
TMCC markets its insurance products through Toyota Motor Insurance Services, Inc. (“TMIS”), a wholly-owned subsidiary. The principal activities of TMIS and its wholly-owned insurance company subsidiaries include marketing, underwriting, and claims administration related to covering certain risks of Toyota, Lexus, and other domestic and import franchise dealers and their customers. The primary business of TMIS consists of issuing vehicle service and maintenance contracts and guaranteed auto protection (“GAP”) agreements sold to customers by or through Toyota and Lexus vehicle dealers, and certain other domestic or import vehicle dealers. TMIS also provides coverage and related administrative services to certain affiliates of the Company.
Substantially all of the business conducted by TMIS is in connection with the sale of vehicles by related Toyota and Lexus vehicle dealers and certain other domestic or import vehicle dealers in the U.S. In addition, TMIS obtains a significant portion of vehicles service contract business by providing limited warranty coverage to TMS on certain pre-owned vehicles. Changes in the volume of vehicle sales, changes in vehicle dealers’ utilization of programs offered by TMIS, or changes in the level of coverage purchased by TMS could materially impact the level of TMIS operations. Gross revenues from insurance operations contributed 6%, 7% and 6% to total gross revenues for fiscal 2006, 2005 and 2004, respectively.
Products and Services
Vehicle Service Agreements (“VSA”), Certified Pre-owned, and GAP
Vehicle service contracts offer vehicle owners and lessees mechanical breakdown protection for new and used vehicles secondary to the manufacturer’s new vehicle warranty. VSA coverage is available on Toyota and Lexus vehicles and other domestic and import vehicles. Certified pre-owned contracts offer coverage on Toyota and Lexus vehicles only. GAP insurance, or debt cancellation agreements, provides coverage for a lease or retail contract deficiency balance in the event of a total loss of the covered vehicle.
Wholesale Inventory
TMIS, through its wholly-owned subsidiary, provides insurance to TMCC covering Toyota, Lexus and certain other domestic and import vehicle dealers’ inventory financed by TMCC. TMIS has obtained reinsurance on the inventory insurance policy covering the excess of certain dollar maximums per occurrence and in the aggregate. Through reinsurance, TMIS limits its exposure to losses by obtaining the right to reimbursement from the assuming company for the reinsured portion of losses.
Other Products and Administrative Services
TMIS administers various other products and programs including prepaid maintenance programs covering Toyota, Lexus and certain other domestic and import vehicles. TMIS, through its wholly-owned subsidiary, provides umbrella liability insurance to TMS and affiliates covering certain dollar value layers of risk above various primary or self-insured retentions. On all layers in which TMIS has provided coverage, 99% of the risk is ceded to various reinsurers. TMIS also provides administrative services to certain affiliates of the Company as discussed in Item 1., “Business - Relationships with Affiliates”.
RELATIONSHIPS WITH AFFILIATES
The Company's business is substantially dependent upon the sale of Toyota and Lexus vehicles and its ability to offer competitive financing in the U.S. TMS is the primary distributor of Toyota and Lexus vehicles in the U.S. Automobiles and light trucks sold by TMS during fiscal 2006, 2005 and 2004 totaled 2.3 million units, 2.1 million units, and 1.9 million units, respectively. During fiscal 2006, 2005, and 2004, Toyota and Lexus vehicles accounted for approximately 13.4%, 12.5%, and 11.4%, respectively, of all retail automobile and light and medium-duty truck unit sales volume in the U.S.
Certain lease and retail financing programs offered by the Company on vehicles and industrial equipment are subvened by affiliates of the Company or other entities. TMS sponsors subvention programs on certain new and used Toyota and Lexus vehicles that result in reduced monthly payments to qualified retail and lease customers. Reduced monthly payments on certain Toyota industrial equipment to qualified lease and retail financing customers are subvened by various affiliates or other entities.
Subvention amounts received in connection with these programs typically approximate the amounts required by TMCC to maintain yields at levels consistent with standard program levels. The level of subvention program activity varies based on the Company’s and its affiliates’ marketing strategies, economic conditions, and level of vehicle sales. Subvention amounts received vary based on the mix of Toyota and Lexus vehicles and timing of programs and are earned over expected retail receivable and lease contract terms.
TMCC and TMS are parties to a Shared Services Agreement which covers certain technological and administrative services, such as information systems support, facilities, insurance coverage, and corporate services provided by each entity to the other. TMCC and TMS are also parties to an Amended and Restated Repurchase Agreement, which provides that TMS will arrange for the repurchase of new Toyota and Lexus vehicles at the aggregate cost financed by TMCC in the event of vehicle dealer default under floorplan financing. The Company is also a party to similar agreements with TMHU, HINO and other domestic and import manufacturers. TMHU is the primary distributor of Toyota lift trucks in the U.S. and HINO is the exclusive U.S. distributor of commercial trucks manufactured by Hino Motors Ltd. of Japan. TMCC and Toyota Financial Savings Bank, a Nevada thrift company owned by TFSA (“TFSB”), are parties to a Master Services Agreement under which TMCC provides a number of administrative and other services to TFSB. In exchange, TFSB supports TMCC’s customer and dealer strategy. In fiscal 2006, the Master Services Agreement between TMCC and TFSB was amended and restated to include a number of additional services to be provided to TFSB by TMCC and certain limited services to be provided to TMCC by TFSB. These agreements are further discussed in Note 16 - Related Party Transactions of the Notes to Consolidated Financial Statements.
Employees of TMCC, Toyota Credit de Puerto Rico Corp, and TMCC’s insurance subsidiaries are generally eligible to participate in the TMS pension plan, the Toyota Savings Plan sponsored by TMS, and various health and life and other post-retirement benefits sponsored by TMS, as discussed further in Note 13 - Pension and Other Benefit Plans of the Notes to Consolidated Financial Statements.
Credit support agreements exist between the Company and TFSC and TFSC and TMC. These agreements are further discussed in the “Liquidity and Capital Resources” section of the MD&A and Note 16 - Related Party Transactions of the Notes to Consolidated Financial Statements.
TMIS provides administrative services to TMS which are discussed in Note 16 - Related Party Transactions of the Notes to Consolidated Financial Statements. In addition, TMIS provides various levels and types of insurance coverage to TMS, including the certified pre-owned program. TMIS, through its wholly-owned subsidiary, provides umbrella liability insurance to TMS and affiliates covering certain dollar value layers of risk above various primary or self-insured retentions. On all layers in which TMIS has provided coverage, 99% of the risk is ceded to various reinsurers.
COMPETITION
The Company operates in a highly competitive environment and competes with other financial institutions including national and regional commercial banks, credit unions, savings and loan associations and finance companies. In particular, the Company faces intensified competition from credit unions that offer competitive interest rates for retail financing. The Company, to a lesser extent, competes with other automobile manufacturers’ affiliated finance companies that actively seek to purchase retail consumer contracts through Toyota and Lexus independent dealerships for retail financing and leasing. The Company competes with national and regional commercial banks and other automobile manufacturers’ affiliated finance companies for dealer financing. No single competitor is dominant in the industry. The Company competes primarily through service quality, its relationship with TMS, and financing rates. The Company seeks to provide exceptional customer service and competitive financing programs to its vehicle and industrial equipment dealers and to their customers. The Company’s relationship with TMS is an advantage in providing Toyota and Lexus financing for purchases or leases of Toyota and Lexus vehicles.
Competition for the principal products and services provided through the insurance operations is primarily from national and regional independent service contract providers. The Company competes primarily through service quality, its relationship with TMS and pricing. The Company seeks to offer its vehicle dealers competitively priced products and excellent customer service. The Company's relationship with TMS provides an advantage in selling its products and services.
REGULATORY ENVIRONMENT
The finance and insurance operations of the Company are regulated under both federal and state law. The Company is governed by, among other federal laws, the Equal Credit Opportunity Act, the Truth-in Lending Act, the Fair Credit Reporting Act and the consumer data privacy and security provisions of the Gramm-Leach Bliley Act. A majority of states (as well as the Commonwealth of Puerto Rico) have enacted legislation establishing licensing requirements to conduct retail and other finance and insurance activities. Most states also impose limits on the maximum rate of finance charges. In certain states, the margin between the present statutory maximum interest rates and borrowing costs is sufficiently narrow that, in periods of rapidly increasing or high interest rates, there could be an adverse effect on the Company's operations in these states if the Company were unable to pass on increased interest costs to its customers. State laws also impose requirements and restrictions on the Company with respect to, among other matters, required credit application and finance and lease disclosures, late and other fees and charges, the right to repossess a vehicle for failure to pay or other defaults under the finance or lease contract, other rights and remedies the Company may exercise in the event of a default under the finance or lease contract, privacy matters and other consumer protection matters. In addition, state laws differ as to whether anyone suffering injury to person or property involving a leased vehicle may bring an action against the owner of the vehicle merely by virtue of that ownership. To the extent that applicable state law permits such an action, the Company may be subject to liability to such an injured party. However, the laws of most states either do not permit such suits or limit the lessor’s liability to the amount of any liability insurance that the lessee was required under applicable law to maintain (or, in some states, the lessor was permitted to maintain), but failed to maintain. The Company’s lease contracts in the U.S. contain provisions requiring the lessees to maintain levels of insurance satisfying applicable state law, and the Company maintains certain levels of contingent liability insurance for protection from catastrophic claims. TMCC monitors ongoing lease insurance compliance only in certain vicarious liability states. Due to recently-enacted federal law, states are no longer permitted to impose unlimited vicarious liability on lessors of leased vehicles. TMCC continues to monitor the impact of the repeal of unlimited vicarious liability. At this time, TMCC has not modified its insurance compliance monitoring programs as a result of this law. The Company encounters higher risk of loss if the customers fail to maintain the required insurance coverage.
The Company's insurance operations are subject to state insurance regulations and licensing requirements. State laws vary with respect to which products are regulated and what types of corporate licenses are required to offer certain products and services. Insurance company subsidiaries must be appropriately licensed in certain states in which they conduct business and must maintain minimum capital requirements as determined by their state of domicile. Failure to comply with these state requirements could have an adverse effect on insurance operations in a particular state. The Company actively monitors applicable laws and regulations in each state in order to maintain compliance.
The Company continually reviews its operations for compliance with applicable laws. Future administrative rulings, judicial decisions, and legislation may require modification of the Company's business practices and documentation.
As a registrant with the SEC under the Securities Exchange Act of 1934, as amended, the Company is subject to various federal securities laws and regulations including, but not limited to, the Sarbanes-Oxley Act of 2002. The Company is also subject to similar laws and regulations in the foreign countries in which it obtains debt funding. The Company maintains policies and procedures to ensure compliance with applicable laws and regulations.
EMPLOYEE RELATIONS
At April 30, 2006, the Company had approximately 2,940 full-time employees. The Company considers its employee relations to be satisfactory. The Company is not subject to any collective bargaining agreements with its employees.
ITEM 1A.
ITEM 1A. RISK FACTORS
The Company is exposed to certain risks and uncertainties that could have a material adverse impact to the Company’s financial condition and operating results.
Sales of Toyota and Lexus Vehicles
The Company's business is substantially dependent upon the sale of Toyota and Lexus vehicles and its ability to offer competitive financing in the U.S. TMS is the primary distributor of Toyota and Lexus vehicles in the U.S. TMS also sponsors special rate retail financing and lease (“subvention”) programs offered by the Company in the U.S. on certain new and used Toyota and Lexus vehicles. The level of subvention varies based on TMS’s marketing strategies, economic conditions, and volume of vehicle sales. Changes in the volume of sales of such vehicles resulting from governmental action, changes in consumer demand, changes in the level of TMS sponsored subvention programs, increased competition, or changes in pricing of imported units due to currency fluctuations or other events could impact the level of finance and insurance operations of the Company. To date, the level of sales of Toyota and Lexus vehicles has not restricted the Company’s operations. Refer to Item 1., “Business - Relationships with Affiliates” and Note 16 - Related Party Transactions of the Notes to Consolidated Financial Statements for further discussion regarding the Company’s relationship with TMS.
Credit Support
The Company’s credit ratings depend, in part, on the existence of the credit support arrangements discussed in the “Liquidity and Capital Resources-Credit Support Agreements” section of the MD&A and on the financial condition and operating results of TMC. Should the Company for any reason not have the benefit of these arrangements (or replacement arrangements acceptable to the rating agencies), or should the credit ratings of the credit support providers identified in such arrangements be lowered, the Company would expect that its credit ratings would be lower than its current ratings, leading to higher borrowing costs. However, the Company believes that the credit support arrangements will continue to be available.
Residual Value Risk
Residual value risk is the risk that the estimated residual value at lease origination will not be recoverable. When the market value of a leased vehicle at contract maturity is less than its contractual residual value, there is a higher probability that the vehicle will be returned to the Company. A higher rate of vehicle returns exposes the Company to greater risk of loss at lease termination. Refer to the “Results of Operations- Residual Value Risk” section of the MD&A for further discussion regarding the Company’s exposure to this risk.
Credit Risk
Credit risk is the risk of loss arising from the failure of a customer or dealer to meet the terms of any contract with the Company or otherwise fail to perform as agreed. Refer to the “Results of Operations- Credit Risk” section of the MD&A for further discussion regarding the Company’s exposure to this risk.
Liquidity Risk
Liquidity risk is the risk arising from the inability of the Company to meet obligations when they come due in a timely manner. The Company’s liquidity strategy is to maintain the capacity to fund the acquisition of assets and repay liabilities in a timely and cost-effective manner under adverse market conditions. Refer to the “Liquidity and Capital Resources” section of the MD&A for further discussion regarding the Company’s exposure to this risk.
Market Risk
Market risk is the risk that changes in market interest rates or prices will negatively impact the Company’s income, capital, and market value. Policies governing market risk exposure are established and periodically reviewed by the Company’s senior management as conditions warrant. The Company uses derivative instruments, along with other tools and strategies, to manage its market risk. The Company has established procedures to ensure that the Company’s risk management, including its use of derivatives, is in accordance with the Company’s policy framework. Refer to Item 7A., “Quantitative and Qualitative Disclosures About Market Risk” for further discussion regarding the Company’s exposure to this risk.
Operational Risk
Operational risk is the risk of loss resulting from, among other factors, inadequate or failed processes, systems or internal controls, theft, fraud, or natural disaster. Operational risk can occur in many forms including, but not limited to, errors, business interruptions, failure of controls, inappropriate behavior of or misconduct by the Company’s employees or those contracted to perform services for the Company, and vendors that do not perform in accordance with their contractual agreements. These events can potentially result in financial losses or other damages to the Company, including damage to the Company’s reputation.
The Company relies on internal and external information and technological systems to manage the Company’s operations and is exposed to risk of loss resulting from breaches in the security or other failures of these systems. Additionally, the replacement of the Company’s major legacy transaction systems and the migration of the Company’s data center as part of the technology initiative discussed in the “Results of Operations- Operating and Administrative Expenses” section of the MD&A could have a significant impact on the Company’s ability to conduct its core business operations and increase the Company’s risk of loss resulting from disruptions of normal operating processes and procedures that may occur during the implementation of new information and transaction systems.
In order to monitor and manage operational risk, the Company maintains a framework of internal controls designed to provide a sound and well-controlled operational environment. However, as discussed more fully in Item 9A., “Controls and Procedures”, during fiscal 2005, the Company discovered certain material weaknesses in its disclosure controls and procedures. As a result of its remediation efforts, management believes these control deficiencies no longer constitute material weaknesses as of March 31, 2006.
However, due to the complexity of the Company’s business, the challenges inherent in implementing control structures across global organizations, new problems could be identified in the future, and management can provide no assurance that these problems will not have a material effect on the Company’s operations.
The Company strives to maintain appropriate levels of operational risk relative to its business strategies, competitive and regulatory environment, and markets in which it operates. The Company also maintains appropriate levels of insurance coverage for those operating risks that can be mitigated through the purchase of insurance. Notwithstanding these control measures and insurance coverages, the Company remains exposed to operational risk. However, while the Company’s approach to operational risk management is intended to mitigate such losses, management can provide no assurance that these problems will not have a material effect on the Company’s operations.
Regulatory Risk
Regulatory risk is the risk arising from the failure to comply with applicable regulatory requirements and the risk of liability and other costs imposed under various laws and regulations, including changes in legislation and new regulatory requirements. Refer to the "Regulatory Environment" section of this Business section for further discussion of the Company's exposure to this risk.
Counterparty Credit Risk
Counterparty credit risk is the risk that a counterparty may fail to perform on its contractual obligations in a derivatives contract. Refer to Item 7.A., “Quantitative and Qualitative Disclosures About Market Risk” for further discussion regarding the Company’s exposure to this risk.
Factors Affecting Earnings
The Company’s earnings are affected by a variety of factors, including changes in the overall market for retail financing, leasing or dealer financing, changes in the level of sales of Toyota and Lexus vehicles in the U.S., rates of growth in the number and average balance of customer accounts, the U.S. regulatory environment, competition, rates of default by its customers, changes in the U.S. and international funding markets, the used vehicle market, levels of operating and administrative expenses, including, but not limited to, personnel costs and technology costs, general economic conditions in the U.S. and other factors. Refer to “Competition” and “Regulatory Environment” in Item 1., “Business” for discussion regarding the Company’s exposure to risk of loss resulting from the competitive and regulatory environments. Refer to the MD&A for discussion of the Company’s exposure to credit risk, residual value risk. Refer to Item 7A., “Quantitative and Qualitative Disclosures About Market Risk” for further discussion regarding the Company’s exposure to market risk.
Competition
The Company operates in a highly competitive environment. Increases in competitive pressures could have an adverse impact on the Company’s contract volume, market share, revenues, and margins. Refer to Item 1., “Business - Competition” for further discussion of the competitive factors affecting the Company's business.
Risk of Catastrophes
The Company’s business is exposed to the risk of catastrophes, including natural events, such as hurricanes, tornados, earthquakes and fires, and other events, such as explosions, terrorist attacks and riots. The incidence and severity of catastrophes and severe weather conditions are inherently unpredictable. These events may affect consumer spending in the vicinity of the disasters in the U.S. and may otherwise adversely affect the Company’s business, earnings or financial condition.
Concentration of Customer Risk
The Company is exposed to customer concentration risk in certain states, as well as in the aggregation of the outstanding receivable balances of its 25 largest customers. Factors adversely affecting the economy in these states or any of its large vehicle and industrial equipment dealer receivables could have an adverse effect on the Company’s consolidated financial position or results of operations. Refer to “Geographic Distribution of Operations” and “Finance Operations-Dealer Financing-Customer Concentration” in Item 1., “Business” for further discussion regarding the Company’s exposure to this risk.
Insurance Reserves
The Company’s insurance subsidiary is subject to the risk of loss if its reserves for unearned premium and service revenues on unexpired policies and contracts in-force are not sufficient. The risk associated with using historical loss experience as a basis for establishing earnings factors used to recognize revenue over the term of the contract or policy is that the timing of revenue recognition will materially vary from the actual loss development. The Company’s insurance subsidiary is also subject to the risk of loss if its reserves for reported losses, losses incurred but not reported and loss adjustment expenses are not sufficient. The risk associated with the projection of future loss payments is the assumption that historical loss development patterns will reasonably predict loss development patterns on existing agreements in force. Management mitigates the risks associated with the use of such estimates by using credentialed actuaries to evaluate the adequacy of its reserves, by periodically reviewing the methods used for making such estimates and by having experienced claims personnel actively manage the claim settlement process. Because the reserve establishment process is an estimate, actual losses may vary from amounts established in earlier periods. Refer to Note 2 of the Notes to Consolidated Financial Statements for further description of the reserve setting process.
Reinsurance Credit Risk
Reinsurance credit risk is the risk that a reinsurer providing reinsurance coverage to the Company’s insurance subsidiary will be unable to meet its obligations under the agreement. The Company mitigates this risk by holding letters of credit on behalf of certain reinsurers which are available to the Company as collateral for reinsurance balances. In addition, the Company monitors the financial condition of its reinsurers and does not believe that it is exposed to any material credit risk.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
There are no unresolved SEC staff comments to report.
ITEM 2.
ITEM 2. PROPERTIES
The Company’s finance and insurance headquarters operations are located in Torrance, California.
Field operations for both finance and insurance are located in three regional customer service centers (“CSC”), three regional management offices and 30 dealer sales and service offices (“DSSO”) in cities throughout the U.S. Two of the DSSOs share premises with the regional customer services centers. All three of the regional management offices share premises with DSSO offices. The Central region CSC is located in Cedar Rapids, Iowa, and is leased from TMS. The Western region CSC is located in Chandler, Arizona. The Eastern region CSC is located in Owings Mills, Maryland. The Company also has offices in the Commonwealth of Puerto Rico. All premises are occupied under lease.
The Company believes that its properties are suitable to meet the requirements of its business.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Various legal actions, governmental proceedings and other claims are pending or may be instituted or asserted in the future against the Company 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 and associated costs of defense 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, management of the Company expects that the ultimate liability resulting therefrom will not have a material adverse effect on the Company's consolidated financial statements. The Company cautions that the eventual development, outcome and cost of legal proceedings are by their nature uncertain and subject to many factors, including but not limited to, the discovery of facts not presently known to the Company or determinations by judges, juries or other finders of fact which do not accord with the Company’s evaluation of the possible liability from existing litigation.
Fair Lending Class Actions
An alleged class action in the U.S. District Court - Central District of California, Baltimore v. Toyota Motor Credit Corporation filed in November 2000 claims that the Company’s pricing practices discriminate against African-Americans and Hispanics. Two additional cases pending in the state courts in California, (Herra v. Toyota Motor Credit Corporation and Gonzales v. Toyota Motor Credit Corporation) filed in the Superior Court of California Alameda County in April 2003 and in the Superior Court of the State of California in August 2003, respectively, contain similar allegations claiming discrimination against minorities. The cases have been brought by various individuals. Injunctive relief is being sought in all three cases and the cases also include a claim for actual damages in an unspecified amount. The parties have reached an agreement to settle these cases. The settlement is pending approval by the court. Under the settlement, TMCC agreed to stop purchasing contracts with markups greater than amounts approved under the settlement and to include disclosures on its contracts that explain that the finance charge may be negotiable and that the dealer may keep part of the finance charge. TMCC also agreed to: (i) offer 850,000 pre-approved offers of credit (that cannot be marked up) to African-American and Hispanic consumers; (ii) contribute $750,000 to non-profit entities for consumer education purposes with a focus on minorities; (iii) pay $95,000 in damages; (iv) pay up to $10,600,000 in attorneys’ fees and costs; and (v) on submission of a valid claim, provide eligible class members with either a certificate of credit applicable to their next financing with TMCC in amounts ranging from $50 to $400 or a check in amounts ranging from $25 to $225, depending upon the amount of their payment over the applicable buy rate or, in certain circumstances, the time their contracts were assigned to TMCC. TMCC is fully reserved for this settlement.
There are also non-class action cases making similar claims in other jurisdictions. The Company believes that it has strong defenses to these claims.
New Jersey Consumer Fraud Action
An action in the New Jersey Superior Court, Jorge v. Toyota Motor Insurance Services (“TMIS”), filed in November 2002 claims that the TMIS Gold Plan Vehicle Service Agreement (“VSA”) is unconscionable on its face and violates the New Jersey Consumer Fraud Act. In September 2004, the case was certified as a class action consisting of all New Jersey consumers who purchased a TMIS Gold Plan VSA. The plaintiffs are seeking injunctive relief as well as actual damages and treble damages in an unspecified amount. In May 2005, the New Jersey Supreme Court issued a ruling granting TMIS' motion for leave to appeal the trial court's denial of TMIS' motion for summary judgment. A hearing before the Court of Appeals in this case was held on April 26, 2006 and TMIS is waiting for a written decision on this matter. The Company believes it has strong defenses to these claims.
Litigation is subject to many uncertainties and the outcome is not predictable. It is possible that the matters described above could be decided unfavorably to the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
TMCC has omitted this section pursuant to Instruction I(2) of Form 10-K.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
TMCC is a wholly-owned subsidiary of TFSA and, accordingly, all shares of the Company's stock are owned by TFSA. There is no market for TMCC's stock.
Dividends are declared and paid by the Company as determined by its Board of Directors. During fiscal 2006, the Company’s Board of Directors declared and paid a cash dividend of $115 million to TFSA. During fiscal 2005 and 2004, no dividends were declared or paid.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
During fiscal 2006, the Company's Board of Directors declared and paid a cash dividend of $115 million to TFSA. During fiscal 2002, the Company's Board of Directors declared and paid a cash dividend of $4 million to TFSA. No dividends were declared or paid in any other period presented.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Toyota Motor Credit Corporation (“TMCC”) and its consolidated subsidiaries, collectively referred to herein as the “Company”, is wholly-owned by Toyota Financial Services Americas Corporation (“TFSA”), a California corporation which is a wholly-owned subsidiary of Toyota Financial Services Corporation (“TFSC”), a Japanese corporation. TFSC, in turn, is a wholly-owned subsidiary of Toyota Motor Corporation (“TMC”), a Japanese corporation. TFSC manages TMC’s worldwide finance operations. TMCC is marketed under the brands of Toyota Financial Services and Lexus Financial Services.
The Company generates revenue, income, and cash flows by providing retail financing, leasing, wholesale financing, and certain other financial products and services to vehicle and industrial equipment dealers and their customers. The Company also generates revenue through marketing, underwriting, and administering claims related to covering certain risks of vehicle dealers and their customers. The Company supports growth in earning assets through funding obtained in the capital markets as well as funds provided by investing and operating activities.
The Company’s financial results are affected by a variety of economic and industry factors, including but not limited to, new and used vehicle markets, new vehicle incentives, consumer behavior, employment growth, the Company’s ability to respond to changes in interest rates with respect to both contract pricing and funding, and the level of competitive pressure. Changes in these factors can influence the demand for new and used vehicles, the number of contracts that default and the loss per occurrence, the realizability of residual values on the Company’s lease earning assets, and the Company’s gross margins on new contract volume. Additionally, the Company’s funding programs and related costs are influenced by changes in the capital markets and prevailing interest rates, which may affect the Company’s ability to obtain cost effective funding to support earning asset growth.
The Company measures the performance of its finance operations using the following metrics: new contract volume, market share related to Toyota and Lexus vehicle sales, return on assets, financial leverage, financing margins, and operating efficiency. The Company measures the performance of its insurance operations on the basis of agreement volume, the number of agreements in force, investment portfolio return and loss ratio.
The Company’s primary competitors are other financial institutions including national and regional commercial banks, credit unions, savings and loan associations, finance companies and, to a lesser extent, other automobile manufacturers’ affiliated finance companies that actively seek to purchase retail consumer contracts through Toyota and Lexus independent dealerships (“dealerships”). The Company strives to achieve, among others, the following goals:
Exceptional Customer Service: The Company’s relationships with its Toyota and Lexus vehicle dealers and industrial equipment dealers and their customers are a competitive advantage for the Company. The Company seeks to provide exceptional service to dealers and their customers by focusing its dealer sales and services offices (“DSSOs”) network and resources on encouraging the dealerships to continuously improve the quality of service provided by their finance and insurance representatives, and to increase customer loyalty to their dealerships and the Toyota and Lexus brands. By providing consistent and reliable support, training, and resources to its dealer network, the Company continues to develop its dealer relationships. The Company works closely with Toyota Motor Sales, U.S.A., Inc. (“TMS”), Toyota Material Handling, U.S.A., Inc. (“TMHU”) and Hino Diesel Trucks, U.S.A., Inc, (“HINO”) to offer special retail, lease, dealer financing and insurance programs, in addition to marketing programs targeted towards the retention of repeat customers. The Company also focuses on improving the quality of service provided to existing vehicle retail and lease customers through its customer service centers (“CSCs”).
Enhanced Risk Based Pricing: The Company prices and structures its retail and lease contracts to compensate for the credit risk it assumes. The goal of this strategy is to maximize profitability and better match contract rates with a broad range of risk levels. To achieve this goal, the Company evaluates its existing portfolio to identify key opportunities to target and expand additional volume. The Company delivers timely information to DSSOs and dealerships to assist them in benefiting from market opportunities. The Company seeks to further refine its strategy and methodology for risk based pricing.
Liquidity Strategy: The Company’s liquidity strategy is to maintain the capacity to fund assets and repay liabilities in a timely and cost-effective manner under adverse market conditions. This capacity primarily arises from the Company’s high credit rating, its ability to raise funds in the global capital markets and its ability to generate liquidity from its balance sheet. This strategy has led the Company to develop a borrowing base that is diversified by market and geographic distribution and type of security, among other factors, as well as programs to prepare assets for sale and securitization.
Fiscal 2006 Operating Summary
The Company experienced record contract volume on its retail and lease contracts in fiscal 2006 which resulted in significant increases in earning assets. The increase in contract volume and earning assets, coupled with the higher yields on the Company’s earning assets portfolio, led to higher financing revenues. However, the Company experienced increased funding costs on its growing debt portfolio due to rising interest rates, resulting in an increase in interest expense. This increase in funding costs, combined with competitive pressures which limited the Company’s ability to raise contract rates at the same pace as interest rates on its debt portfolio, resulted in a reduction in net financing revenues. Depreciation on operating leases continued to increase in line with increased operating lease volume and revenue. The increase in interest expense exceeded the increase in financing revenues, resulting in lower net financing revenues.
The Company increased its volume of new contracts acquired primarily from Toyota and Lexus vehicle dealers to 1,120,000 contracts in fiscal 2006, compared to 1,021,000 contracts in the prior year. Much of this growth in volume resulted from increased sales levels of Toyota and Lexus vehicles in the U.S. TMS sold 2.3 million units in fiscal 2006 compared to 2.1 million units in the prior year. In addition, the increase was due to higher lease contract volume, the continued availability of subvention and the Company’s continued emphasis on developing dealer relationships. The Company’s market share of new Toyota and Lexus vehicles remained relatively level, increasing slightly from 45.5% during fiscal 2005 to 45.6% during fiscal 2006. Earning assets increased $7.942 billion, or 17%, to $54.891 billion due to new contract volume exceeding liquidations during the year.
Overall interest expense increased $832 million or 124% due to higher market interest rates and outstanding debt balances. The increase in interest expense on debt was partially offset by the Company’s receipt of higher floating rate amounts on its pay-fixed swaps.
Provision for credit losses increased $75 million, or 33% primarily due to the growth in earning assets and the broader range of credit quality within the retail portfolio, partially offset by improvements in the credit quality of the operating lease portfolio. Aggregate balances 60 or more days past due as a percentage of gross earning assets increased from 0.28% at March 31, 2005 to 0.43% at March 31, 2006, primarily due to the higher risk associated with the increased retail contract volume acquired in prior years, which reflected longer term contracts and a broader range of credit quality.
The Company continues its progress on its multi-year initiative to replace its major legacy transaction systems (“technology initiative”). The purpose of the technology initiative is to implement simplified, streamlined technology solutions that improve service delivery to its customers, enhance the quality and speed of information management, and support the Company’s future business. Management believes it has properly aligned its resources internally and is in a strategic position to ensure successful transition and completion of its technology initiative.
Overall, the Company increased its capital position by $551 million bringing total equity to $4.795 billion at March 31, 2006. The Company’s debt-to-equity position changed from 9.84 to 10.16 at March 31, 2005 and 2006, respectively.
Fiscal 2006 Compared to Fiscal 2005
FINANCIAL CONDITION
Net Earning Assets and Vehicle Contract Volume
The composition of the Company’s net earning assets is summarized below:
Certain prior period amounts have been reclassified to conform to the current period presentation.
Terms range from 24 months to 60 months.
Terms range from 24 months to 72 months.
Includes wholesale and other loan arrangements in which the Company participates as part of a syndicate of lenders.
The composition of the Company’s vehicle contract volume and market share is summarized below:
1 Represents subvened new and used contract volume as a percentage of total contract volume for vehicle retail and lease contracts.
2 Represents the percentage of total domestic TMS sales of new Toyota and Lexus vehicles financed by TMCC, excluding fleet sales and
sales of a private Toyota distributor.
Retail Earning Assets and Contract Volume
Retail earning assets increased as the volume of new vehicles financed exceeded existing portfolio liquidations. Vehicle retail contract volume increased due in large part to the Company’s emphasis on developing dealer relationships, partially offset by a decrease in the availability of TMS subvention on new retail contracts. Retail market share of TMS sales declined due to competitive pricing pressure and the decrease in the availability of subvention on retail contracts in line with the increase in subvention on lease contracts. The Company expects retail contract volume to continue to move in line with Toyota and Lexus vehicle sales and the availability of subvention on retail contracts.
Lease Earning Assets and Contract Volume
The increase in total lease earning assets, comprised of investments in operating leases and direct finance leases, resulted primarily from the growth in lease contract volume. The increase in investments in operating leases was partially offset by the continued decrease in direct finance leases due to the classification of new vehicle leases as operating leases. In fiscal 2004, the Company determined that the lease terms offered on vehicles under new leases no longer met the criteria required for accounting treatment as direct finance leases. Accordingly, substantially all new leases are classified as operating leases rather than direct finance leases. The level of direct finance leases will continue to decline as the direct finance lease portfolio liquidates. Vehicle lease contract volume and market share increased due to higher Toyota and Lexus vehicle sales and higher lease subvention contract volume, in line with the Company’s emphasis on leasing in the last two fiscal years. Leasing generally becomes more attractive to customers in a rising interest rate environment because the difference between monthly payments under a lease contract and a retail installment contract typically widens as interest rates rise. During the last two fiscal years, the Company has emphasized growing lease volume in light of interest rate increases, in line with industry trends. Management monitors the appropriate mix between lease and retail contract volume on a periodic basis and considers industry trends, prevailing interest rates and other economic factors. The Company does not expect vehicle lease contract volume to continue increasing at the same pace as in fiscal 2006, but rather to continue to move in line with Toyota and Lexus vehicle sales, the availability of subvention programs, and changes in the interest rate environment.
Dealer Financing Earning Assets
Dealer financing increased primarily due to continued growth in the number of vehicle dealers receiving wholesale financing and the Company’s emphasis on developing dealer relationships. Many of the Toyota and Lexus dealerships serviced by the Company share common ownership, or are otherwise affiliated, with non-Toyota/Lexus dealerships. The Company believes that providing single-source financing for affiliated dealers with multiple franchises both within and outside of the Toyota and Lexus dealer franchise network will support continued earning assets growth.
RESULTS OF OPERATIONS
Net Financing Revenues
Represents the combined yield on direct finance leases, retail finance receivables, and dealer financing, gross of interest expense. Excludes return on assets on investments in operating leases, net.
The increase in operating lease revenue was primarily attributable to the Company’s emphasis on leasing volume in the past two fiscal years. Retail financing revenues increased primarily due to the continued growth in vehicle retail finance receivables and an increase in corresponding portfolio yield. Dealer financing revenues increased primarily due to a higher average balance outstanding on dealer financing earning assets and an increase in the yield on dealer financing.
The increase in the overall finance receivables portfolio yield resulted primarily from the increase in retail and dealer financing yields. However, the Company experienced increased funding costs on its growing debt portfolio due to rising interest rates. This increase in funding costs, combined with competitive pressures which limited the Company’s ability to raise contract rates at the same pace as interest rates on its debt portfolio, resulted in a reduction in net financing revenues.
Depreciation on operating leases increased in line with the increase in operating lease earning assets.
Refer to the “Results of Operations- Interest Expense” section of this MD&A for further discussion regarding increased funding costs and the “Results of Operations- Residual Value Risk” section of this MD&A for further discussion regarding the increase in depreciation on operating leases.
Residual Value Risk
The Company is exposed to risk of loss on the disposition of leased vehicles and industrial equipment to the extent that sales proceeds are not sufficient to cover the carrying value of the leased asset at termination. Substantially all of the Company’s residual value risk relates to its vehicle lease portfolio. To date, the Company has not incurred material losses related to declines in contractual residual values on its industrial equipment portfolios.
Management periodically reviews the estimated realizable value of leased assets to assess the appropriateness of the carrying value of the lease residuals. For operating leases, the impact of estimated declines in contractual residual values is recorded over time in depreciation expense in the Consolidated Statement of Income and is discussed in the “Results of Operations- Residual Value Risk” section of this MD&A. For direct finance leases, the impact of estimated declines in contractual residual values is recorded at the time of assessment as a reduction of direct finance lease revenues in the Consolidated Statement of Income.
Factors Affecting Exposure to Residual Value Risk
The primary factors affecting the Company’s exposure to residual value risk are the levels at which contractual residual values are established at lease inception, projected market values, and the resulting impact on vehicle lease return rates and loss severity. The evaluation of these factors involves significant assumptions, complex analysis, and management judgment. Refer to the “Critical Accounting Estimates” section of this MD&A for further discussion of the estimates involved in the determination of residual values.
Contractual Residual Values at Lease Inception
The contractual residual value established at lease inception represents an estimate of the end of term market value of a leased vehicle. Contractual residual values are determined at lease inception by examining external industry data and the Company’s own residual experience. Factors considered in this evaluation include, but are not limited to, economic conditions, new vehicle pricing, new vehicle incentive programs, new vehicle sales, product attributes of popular vehicles, the mix of used vehicle supply, the level of current used vehicle values, and fuel prices. These factors are evaluated in the context of their historical trends to anticipate potential changes in the relationship among those factors in the future.
End of Term Market Values
To the extent the estimated end of term market value of a leased vehicle declines from the contractual residual value established at lease inception, the residual value of the leased vehicle is adjusted downward so that the carrying value at lease end will approximate the estimated end of term market value. These adjustments are made over time for operating leases and at the time of assessment for direct finance leases. Factors considered in this assessment are the same as those considered in the evaluation of contractual residual values at lease inception discussed above.
Vehicle Lease Return Rate
The vehicle lease return rate represents the number of end of term leased vehicles returned to the Company for sale as a percentage of lease contracts that were originally scheduled to mature in the same period. When the market value of a leased vehicle at contract maturity is less than its contractual residual value, there is a higher probability that the vehicle will be returned to the Company. In addition, a higher market supply of certain models of used vehicles generally results in a lower relative level of demand for those vehicles, resulting in a higher probability that the vehicle will be returned to the Company. A higher rate of vehicle returns exposes the Company to greater risk of loss at lease termination.
Loss Severity
Loss severity is the extent to which the end of term market value of a lease is less than its carrying value at lease end. Although the Company employs a rigorous process to establish accurate contractual residual values at lease inception and adjusts the residual value downward throughout the life of the lease as conditions warrant, the Company may still incur losses to the extent the end of term market value of a lease is less than its carrying value at lease end.
Vehicle Remarketing
At the end of the lease contract, lease customers have the option to purchase the vehicle at the contractual residual value or return the vehicle to the vehicle dealer. If the vehicle is returned to the vehicle dealer, the vehicle dealer has the option of purchasing the vehicle or returning it to the Company. The Company has developed remarketing strategies to maximize proceeds and minimize disposition costs on used vehicles sold at lease termination. The Company uses various channels to sell vehicles returned at lease end, including the following:
Dealer Direct
The goal of the Dealer Direct program (“Dealer Direct”) is to increase vehicle dealer purchases of off-lease vehicles thereby reducing the disposition costs of such vehicles. Through Dealer Direct, the vehicle dealer accepting the lease return (the “grounding vehicle dealer”) has the option to purchase the vehicle at the contractual residual value, purchase the vehicle at an assessed market value, or return the vehicle to the Company. During fiscal 2006, 31% of returned vehicles were sold to the grounding vehicle dealer, compared to 28% sold during fiscal 2005. Vehicles not purchased by the grounding vehicle dealer are made available to all Toyota and Lexus vehicle dealers through the Dealer Direct online auction. During fiscal 2006, 10% of returned vehicles were sold through the Dealer Direct online auction to franchise vehicle dealers, compared to 12% sold during fiscal 2005. The disposition costs of vehicles sold through the Dealer Direct online auction are lower than the costs of those sold through auction sites. The average holding period of a vehicle sold through Dealer Direct was approximately seven days, as compared to approximately thirty days for vehicles sold through other means.
Auction
Vehicles not purchased through Dealer Direct are sold through vehicle auction sites throughout the country. During fiscal 2006, approximately 59% of returned vehicles were sold through auction, compared to approximately 60% of returned vehicles sold during fiscal 2005. Where necessary, the Company reconditions used vehicles prior to sale in order to enhance the values of the vehicles at auction. Additionally, the Company redistributes vehicles geographically should certain model concentrations potentially affect sales prices at auction.
The following table summarizes the Company’s scheduled maturities related to its leased vehicle portfolio and vehicle sales at lease termination by period:
The decrease in scheduled maturities resulted from lower levels of lease originations in prior years due to the Company’s emphasis on retail financing programs during those periods. The decrease in vehicles sold at lease termination resulted from a decrease in scheduled lease maturities and lower return rates. Lower return rates were due to a narrowing spread between contractual residual values and end of lease market values, and a higher percentage of longer-term lease contract maturities acquired in prior years. Longer term lease contracts typically have a lower return rate.
Depreciation on Operating Leases
The following table provides information related to the Company’s depreciation on operating leases:
The Company records depreciation expense on the portion of its lease portfolio classified as operating leases. Depreciation expense is recorded over the original contract life and is based upon the depreciable basis of the leased vehicle. Depreciable basis is the difference between a leased vehicle’s original book value and its contractual residual value established at lease inception. Quarterly adjustments to depreciation expense are recorded on a straight-line basis over the remaining life of the lease when the end of term market value is estimated to be less than the carrying value. Refer to the “Results of Operations- Residual Value Risk” section of this MD&A for a discussion regarding the Company’s exposure to residual value risk on its lease portfolio. Refer to the “Critical Accounting Estimates” section of this MD&A for a further discussion of the estimates involved in the determination of residual values.
Depreciation expense on operating leases increased due to an increase in the average number of operating lease vehicles outstanding, partially offset by a decrease in adjustments to depreciation expense recorded to bring contractual residual values in line with projected end of term market values. The strength of the used vehicle market and the enhancements made by the Company to refine its process for projecting end of term market values and return rates were both key drivers in reducing the level of adjustments made to depreciation expense. Used vehicle prices stabilized in fiscal 2006 after two years of strengthening. This rebound followed several years of declining used vehicle prices resulting primarily from the increased industry-wide use of incentives on new vehicles, a slowdown of the U.S. economy and other economic factors. The stabilization of the used vehicle market was evidenced by the moderate improvement in the Manheim Used Vehicle Value Index, a statistical index based on historical auction sales data, which increased from approximately 112.2 (as a percentage of January used car prices) at March 2005 to approximately 114.9 at March 2006. Management expects the used vehicle market to remain stable, although it could be negatively impacted by the use of incentives by automobile manufacturers. The increased focus on leasing volume during the last two fiscal years has resulted in higher depreciation expense on operating leases, and management expects this focus to result in a higher volume of scheduled maturities in the years following fiscal 2007. Refer to the “Financial Condition- Net Earning Assets and Vehicle Contract Volume” section of this MD&A for further discussion regarding changes in the Company’s emphasis on leasing.
Credit Risk
The Company is exposed to credit risk on its earning assets. Credit risk is the risk of loss arising from the failure by the customer or dealer to meet the terms of any contract with the Company or otherwise fail to perform as agreed. The Company’s level of credit risk on its retail and lease portfolio is influenced primarily by two factors: the total number of contracts that default (“frequency of occurrence”) and the amount of loss per occurrence (“loss severity”), which in turn are influenced by various economic factors, the used vehicle market, purchase quality mix, contract term length, and operational changes (as discussed below). The Company’s level of credit risk on its dealer financing portfolio is influenced primarily by the financial strength of dealers within its portfolio, dealer concentration, collateral quality, and economic factors.
In the past, most of the Company’s credit losses were related to its retail finance receivables and lease earning assets. The Company is exposed to credit losses on its dealer financing portfolio, but default rates for those receivables have been substantially lower than those for retail finance receivables and lease earning assets. To date, the Company has not incurred material credit losses on its dealer financing portfolio.
Factors Affecting Retail and Lease Portfolio Credit Risk
Economic Factors
General economic conditions such as unemployment rates, bankruptcy rates, consumer debt levels, fuel prices, consumer credit performance, interest rates, and inflation can influence both the frequency of occurrence and loss severity.
Used Vehicle Market
Changes in used vehicle prices directly affect the proceeds from sales of repossessed vehicles and, accordingly, the level of loss severity experienced by the Company. The supply of and demand for used vehicles, interest rates, inflation, the level of manufacturer incentives on new vehicles and general economic outlook are some of the factors affecting the used vehicle market.
Purchase Quality Mix
A change in the mix of contracts acquired at various risk levels may change the amount of credit risk the Company assumes. An increase in the number of contracts acquired with lower credit quality (as measured by scores that establish a consumer’s creditworthiness based on present financial condition, experience and past credit history) can increase the amount of credit risk. Conversely, an increase in the number of contracts with higher credit quality acquired can lower credit risk. An increase in the mix of contracts with lower credit quality can also increase operational risk unless appropriate controls and procedures are established. The Company strives to price contracts in order to achieve an appropriate risk adjusted return on investment.
Contract Term Length
The average original contract term of retail and lease vehicle contracts influences credit losses. Longer term contracts (those having original terms of 48, 60 or 72 months) generally experience a higher rate of default and thus affect the frequency of occurrence and loss severity.
Operational Changes
Operational changes and ongoing implementation of new information and transaction systems are designed to have a positive effect on the Company’s operations, including customer service improvements in the management of delinquencies and credit losses, through the implementation of processes and tools that create greater operational efficiency and effectiveness. In fiscal 2006, the CSCs extended their hours of operations and implemented enhanced customer collections training and strategies. These improvements were made to enhance servicing and to improve the overall management of delinquency and charge-off levels.
Factors Affecting Dealer Financing Portfolio Credit Risk
The financial strength of dealers to which the Company extends credit directly influences credit risk. Lending to dealers with lower quality credit characteristics increases the risk of loss assumed by the Company. Extending a substantial amount of financing or commitments to a specific dealer or group of dealers creates a concentration of credit risk, particularly when the financing is unsecured or not fully secured by realizable assets. Collateral quality influences credit risk in that lower quality collateral increases the risk that, in the event of dealer default, the value of the collateral will be less than the amount owed to the Company.
Allowance for Credit Losses and Credit Loss Experience
The Company maintains an allowance for credit losses to cover probable losses resulting from the non-performance of its customers. The determination of the allowance involves significant assumptions, complex analysis, and management judgment. Refer to the “Critical Accounting Estimates” section of this MD&A for further discussion of the estimates involved in determining the allowance. The following tables provide information related to the Company’s allowance for credit losses and credit loss experience:
Net of recoveries of $79 million, $69 million and $59 million in years ended March 31, 2006, 2005, and 2004, respectively.
Net charge-offs as a percentage of average gross earning assets remained consistent from the prior year, resulting from decreases in the frequency of occurrence, partially offset by the increases in loss severity. Frequency of occurrence as a percentage of average outstanding contracts decreased from 2.28% to 1.80% and loss severity increased by 10.9%. The improvement in the frequency of occurrence is attributed to favorable economic conditions, as evidenced by improvements in the unemployment rate, and lower industry delinquency rates. Refer to the “Results of Operations- Residual Value Risk” section of this MD&A for further discussion of the used vehicle market. The increase in loss severity was primarily due to an increase in longer term contracts. These contracts generally experience higher loss severity.
The increase in 60-day delinquencies on the overall portfolio was primarily due to the higher risk associated with the increased retail contract volume acquired in fiscal 2004 and 2005, which reflected longer term contracts and a broader range of credit quality.
The overall allowance for credit losses increased primarily due to the growth in earning assets, broader range of credit quality within the retail portfolio and to a lesser extent, Hurricanes Katrina and Rita. These increases were partially offset by improvements in the credit quality of the operating lease portfolio. The impact of Hurricanes Katrina and Rita did not have a material adverse effect on the Company’s earning assets in fiscal 2006.
With respect to the operating lease portfolio, subvened leases typically exhibit stronger credit quality characteristics when compared to those of non-subvened leases as TMS subvention programs typically involve higher credit quality customers. The levels of delinquencies and credit losses have benefited from increased subvention levels. After taking into account the levels of delinquencies and credit losses in the portfolio, management reduced the allowance for credit losses related to the operating lease portfolio.
Although the Company’s net-charge offs as a percentage of average gross earning assets have trended favorably, the Company experienced an increase in 60-day delinquencies. Such increases generally result in an increase in net charge-offs. In addition, the Company’s recent contract volume reflects growth in longer term retail contracts, as well as growth in retail receivables with a broader range of credit quality. These factors increase the level of credit risk assumed by the Company. If the above factors continue in fiscal 2007, delinquencies and net charge-offs as percentage of the earning assets portfolio may increase.
Selected Insurance Operations Results
The general financial condition and operating expenses of the insurance segment are included in the foregoing discussion of the overall financial condition and results of operations of the Company. Certain revenues and expenses specific to the Company’s insurance operations are discussed below.
Insurance Premiums Earned and Contract Revenues
Contract revenues and premiums earned from insurance operations are affected by sales volume as well as the level, age, and mix of agreements in force. Agreements in force represent active insurance policies written and contracts issued. Contract revenues and earned premiums represent revenues from the agreements in force. Commission and fee revenues represent revenues from services provided to insurers and insureds, including certain affiliates of the Company.
Contract revenues and earned premiums increased primarily due to increased contract volume and agreements in force and prior year contract rate increases. Commissions and fees increased primarily due to the increases in agreement volume and contract rates.
Insurance Losses and Loss Adjustment Expenses
Insurance losses and loss adjustment expenses incurred are a function of the number of covered risks, the frequency and severity of claims associated with the agreements in force, and the level of risk retained by the insurance operations. Insurance losses include amounts paid and accrued for reported losses, estimates of losses incurred but not reported, and any related claim adjustment expenses. Refer to Note 2 - Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements for further discussion regarding the Company’s exposure to risks surrounding the reserve estimates.
Insurance losses and loss adjustment expenses increased primarily due to an increase in the number of agreements in force and in the average loss per claim, partially offset by a decrease in the percentage of risk based contracts in force incurring a loss.
Derivative Instruments
Business Use of Derivative Instruments
The Company’s assets consist primarily of U.S. dollar denominated fixed rate receivables. The Company’s liabilities consist primarily of fixed and floating rate debt which is issued in the global capital markets. In order to maintain a conservative liquidity profile, the life of the Company’s debt is typically longer than that of the Company’s assets. Upon the issuance of fixed rate debt, the Company generally elects to enter into pay-float interest rate swaps. The terms of pay-float swap agreements corresponds to the terms of the debt. The interest rate risk arising from the mismatch in the re-pricing of assets relative to liabilities is managed via pay-fixed swaps and purchased interest rate caps which are executed on a portfolio basis. The Company’s pay-fixed swap agreements are primarily two to three years in tenor from origination. The currency exposure related to non-U.S. dollar denominated debt is economically hedged at issuance, using cross currency interest rate swaps, currency basis swaps, or a combination of interest rate swaps coupled with currency basis swaps to convert non-U.S. dollar denominated debt to U.S. dollar denominated payments.
The Company’s use of derivatives is limited to the management of interest rate and foreign exchange risks. The Company is not a derivatives dealer and does not actively trade in and out of derivative positions for speculative purposes.
Accounting for Derivative Instruments
All derivative instruments are recorded on the balance sheet at fair value, taking into consideration the effects of legally enforceable master netting agreements that allow the Company to net settle positive and negative positions and offset cash collateral held with the same counterparty on a net basis. Changes in the fair value of the derivatives are recorded in interest expense in the Consolidated Statement of Income.
The Company categorizes derivatives as those designated for hedge accounting (“hedge accounting derivatives”) and those that are not designated for hedge accounting (“non-hedge accounting derivatives”). The Company elects at inception whether to designate a derivative as a hedge accounting derivative. That designation may change based on management’s intentions and changing circumstances. Hedge accounting derivatives are comprised of pay-float interest rate swaps and cross currency interest rate swaps. Non-hedge accounting derivatives are comprised of pay-fixed interest rate swaps, de-designated pay-float interest rate swaps, pay-float interest rate swaps for which hedge accounting has not been elected, interest rate caps, and currency basis swaps. De-designation of hedge accounting derivatives is further discussed below.
In order to qualify for hedge accounting, a derivative must be considered highly effective at reducing the risk associated with the exposure being hedged. When the Company designates a derivative in a hedging relationship, the Company documents the risk management objective and strategy. This documentation includes the identification of the hedging instrument, the hedged item and the risk exposure, and how the Company will assess effectiveness prospectively and retrospectively. The Company assesses the extent to which a hedging instrument is effective at achieving offsetting changes in fair value at least quarterly. The Company recognizes changes in the fair value of derivatives designated in fair value hedging relationships (including foreign currency fair value hedging relationships) in interest expense in the Consolidated Statement of Income along with the fair value changes of the hedged item attributable to the hedged risk. For certain types of hedge relationships that meet stringent criteria, the Company applies the shortcut method, which provides an assumption of zero ineffectiveness that results in equal and offsetting changes in fair value in the Consolidated Statement of Income for both the hedged debt and the hedge accounting derivative.
When the shortcut method is not applied, any ineffective portion of the derivative that is designated as a fair value hedge is recognized as a component of interest expense in the Consolidated Statement of Income. If the Company elects not to designate a derivative instrument in a hedging relationship, or the relationship does not qualify for hedge accounting treatment, the full change in the fair value of the derivative instrument is recognized as a component of interest expense in the Consolidated Statement of Income with no offsetting adjustment for the economically hedged item.
The Company reviews the effectiveness of its hedging relationships quarterly to determine whether the relationships have been and continue to be effective. The Company uses regression analysis to assess the effectiveness of its hedges. When the Company determines that a hedging relationship has not been effective, hedge accounting is no longer applied. If hedge accounting is discontinued, the Company continues to carry the derivative instrument as a component of other assets or other liabilities in the Consolidated Balance Sheet at its fair value with changes in fair value reported as interest expense in the Consolidated Statement of Income. Additionally, for discontinued fair value hedges, the Company ceases to adjust the hedged item for changes in fair value and amortizes the cumulative fair value adjustments recognized in prior periods over the remaining term of the debt.
The Company will also discontinue the use of hedge accounting if a derivative is sold, terminated or exercised, or if management determines that designating a derivative under hedge accounting is no longer appropriate (“de-designated derivatives”). De-designated derivatives are included within the category of non-hedge accounting derivatives.
One of the Company’s goals is to manage the interest rate risk arising from the differences in timing between the re-pricing of assets relative to liabilities. The Company uses non-hedge accounting derivatives, specifically pay-fixed interest rate swaps and interest rate caps, to manage this exposure. The use of these non-hedge accounting derivatives to mitigate interest rate risk has historically resulted in significant volatility in the net result from non-hedge accounting. This volatility arises from the accounting treatment of these non-hedge accounting derivatives, which requires that changes in their fair value be reflected in the Consolidated Statement of Income. The Company addresses this volatility by de-designating certain pay-float interest rate swaps (previously treated as hedge accounting derivatives) that have offsetting economic characteristics to the non-hedge accounting derivatives or by electing not to designate certain pay-float interest rate swaps in a hedging transaction. The Company employs analytical measures such as duration and Value at Risk to identify whether to de-designate a hedge accounting derivative or to not elect hedge accounting.
De-designating hedge accounting derivatives or not electing hedge accounting typically reduces volatility in the net result from non-hedge accounting because the combined changes in the fair value of these derivatives with those of other non-hedge accounting derivatives result in a natural offset in the Statement of Consolidated Income. The hedged item associated with the derivative previously treated as a hedge accounting derivative ceases to be adjusted for changes in fair value upon de-designation. To the extent the Company can more closely match the accounting treatment to the underlying economics of the derivatives portfolio by de-designating or by not electing hedge accounting, the transaction is identified and treated as a non-hedge accounting derivative and volatility is typically reduced. There may be interest rate scenarios where volatility may increase as a result of discontinuing hedge accounting. However, the Company considers the likelihood of such scenarios occurring to be remote.
Management’s expectation is that the combination of the changes in fair values of de-designated derivatives with those of non-hedge accounting derivatives will continue to reduce volatility on a quarterly basis. Management does not engage in de-designation with a view as to the favorable or unfavorable impact on the results of operations. De-designation has resulted in lower losses in the net result from non-hedge accounting in certain quarters and in lower gains in the net result from non-hedge accounting in other quarters. These decreases represent reductions in volatility in the net result from non-hedge accounting. The Company estimates that the impact of de-designation on the results of operations was a reduction in the volatility in net result from non-hedge accounting of approximately $46 million, $22 million, $10 million and $2 million for the quarters ended June 30, September 30, December 31, 2005, and March 31, 2006, respectively, and approximately $179 million, $78 million, $38 million, and $51 million for the quarters ended June 30, September 30, December 31, 2004, and March 31, 2005, respectively. Management evaluates the reduction of volatility on a quarterly basis only, and does not aggregate or net these quarterly reductions for the twelve month period.
Derivative Assets and Liabilities
The following table summarizes the Company’s derivative assets and liabilities, which are included in other assets and other liabilities in the Consolidated Balance Sheet:
1 Represents cash received under reciprocal collateral arrangements that the Company has entered into with certain derivative counterparties as described in Item 7A.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholder of
Toyota Motor Credit Corporation:
In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, shareholder’s equity and cash flows present fairly, in all material respects, the financial position of Toyota Motor Credit Corporation and its subsidiaries at March 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2006 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/S/ PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
June 12,
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Dollars in millions)
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
(Dollars in millions)
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
Supplemental disclosures:
1 Non-cash investing activities in connection with the fiscal 2004 securitization of finance receivables are discussed in further detail in Note 7 - Sale of Receivables
2 Non-cash investing and financing activities in connection with the fiscal 2005 distribution of net assets to TFSA are discussed in further detail in Note 1 - Nature of Operations
See Accompanying Notes to Consolidated Financial Statements.
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Nature of Operations
Toyota Motor Credit Corporation (“TMCC”) was incorporated in California in 1982 and commenced operations in 1983. TMCC and its consolidated subsidiaries, collectively referred to herein as the “Company”, are wholly-owned by Toyota Financial Services Americas Corporation (“TFSA”), a California corporation, which is a wholly-owned subsidiary of Toyota Financial Services Corporation (“TFSC”), a Japanese corporation. TFSC, in turn, is a wholly-owned subsidiary of Toyota Motor Corporation (“TMC”), a Japanese corporation. TFSC manages TMC’s worldwide finance operations. TMCC is marketed under the brands of Toyota Financial Services and Lexus Financial Services. The Company's business is substantially dependent upon the sale of Toyota and Lexus vehicles by Toyota Motor Sales, U.S.A., Inc. (“TMS”).
The Company provides a variety of finance and insurance products to authorized Toyota and Lexus vehicle dealers and, to a lesser extent, other domestic and import franchise dealers (collectively referred to as “vehicle dealers”) and their customers in the United States (excluding Hawaii) (“U.S.”) and Puerto Rico. The Company also provides finance products to commercial and industrial equipment dealers (“industrial equipment dealers”) and their customers. The Company’s products fall primarily into the following finance and insurance product categories:
·
Finance - The Company provides a broad range of finance products including retail financing, leasing, and dealer financing to vehicle and industrial equipment dealers and their customers.
·
Insurance - Through Toyota Motor Insurance Services, Inc. (“TMIS”), a wholly-owned subsidiary, the Company provides marketing, underwriting, and claims administration related to covering certain risks of vehicle dealers and their customers. The Company also provides coverage and related administrative services to certain affiliates.
The Company’s primary finance and insurance operations are located in the U.S. and Puerto Rico with earning assets principally sourced through Toyota and Lexus vehicle dealers. The Company also holds minority interests of $1 million in Toyota Credit Argentina S.A. and Toyota Compania Financiera de Argentina S.A., both TFSA majority-owned subsidiaries in Argentina.
During fiscal 2005, the Company transferred substantially all of its interests in Toyota Services de Mexico, S.A. de C.V. (“TSM”) and Toyota Services de Venezuela, C.A. (“TSV”), and its minority interest in Banco Toyota do Brazil, S.A. (“BTB”), to TFSA. The transfer of the $17 million carrying value, net of the $6 million cumulative translation adjustment, of the Company’s interests in these entities was accounted for as a distribution of assets and, accordingly, a reduction of shareholder’s equity. Included in the distribution of assets was a net non-cash decrease in the Company’s assets and liabilities of $133 million and $130, respectively. Due to the immaterial size of the Mexican and Venezuelan operations and the Brazilian holdings relative to the Company’s consolidated financial condition and results of operations, the related assets, liabilities, and results of operations prior to the transfer are included with the results of ongoing operations in the Consolidated Balance Sheet and Consolidated Statement of Income
As of March 31, 2006, approximately 23% of managed vehicle retail and lease assets were located in California, 9% in Texas, 7% in New York, and 6% in New Jersey. In addition, at March 31, 2006, the 25 largest aggregate outstanding vehicle and industrial equipment dealer receivables totaled $2.452 billion.
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of TMCC and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated.
Cash and Cash Equivalents
Cash equivalents, consisting primarily of money market instruments and debt securities, represent highly liquid investments with original maturities of three months or less.
Investments in Marketable Securities
Investments in marketable securities consist of fixed income and equity securities and interests retained in the sale of receivables. The Company’s accounting policies related to the valuation of interests retained in the sale of receivables are discussed under “Sale of Receivables and Valuation of Retained Interests” within this footnote.
Fixed income and equity securities are designated as available-for-sale and carried at fair value using quoted market prices with unrealized gains or losses included in accumulated other comprehensive income, net of applicable taxes. The Company uses the specific identification method to determine realized gains and losses related to its investment portfolio. Realized investment gains and losses are reflected in investment and other income in the Consolidated Statement of Income. Premiums and discounts on investments are amortized to investment income using the effective interest method.
The Company evaluates fixed income and equity securities for other-than-temporary impairment by identifying securities that have declines in fair market value that meet the Company’s predetermined dollar and percentage thresholds. Consideration is given to, among other factors, the length of time the security has remained below amortized cost, the financial condition and prospects of the investee, changes in the investee’s economic or technical environment, and changes in the investee’s debt rating. If the decline is considered to be other-than-temporary, the cost basis of the security is written down to fair value and the write down is reflected in investment and other income in the Consolidated Statement of Income. Declines in fair value below amortized cost experienced for twelve consecutive months are considered other-than-temporary regardless of dollar amount.
Retail Receivables and Dealer Financing
Revenues associated with retail receivables and dealer financing are recognized so as to approximate a level rate of return over the contract term. Incremental direct costs incurred in connection with the acquisition of retail receivables and dealer financing, including incentive and rate participation payments made to vehicle dealers and incremental direct costs, are capitalized and amortized so as to approximate a level rate of return over the term of the related contracts. Retail receivables are reported at their
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies (Continued)
outstanding balance, including accrued interest and incremental direct costs, net of unearned income.
Unearned income includes deferred income on affiliate sponsored special rate program (“subvention”) payments received from affiliates. The Company intends to hold substantially all of its retail receivables to maturity.
Direct Finance Leases
At lease inception, the Company records the aggregate future minimum lease payments, contractual residual value of the leased vehicle, and unearned income. Unearned income includes deferred subvention payments received from affiliates. Revenue is recognized over the lease term so as to approximate a level rate of return on the outstanding net investment. Incremental direct costs and fees paid or received in connection with the acquisition of direct finance leases, including incentive and rate participation payments made to vehicle dealers, incremental direct costs, and acquisition fees collected from customers, are capitalized and amortized so as to approximate a level rate of return over the term of the related contracts.
Investments in Operating Leases
Investments in operating leases are recorded at cost and depreciated on a straight-line basis over the lease term to the estimated residual value. Operating lease revenue is recorded to income on a straight-line basis over the term of the lease. Incremental direct costs and fees paid or received in connection with the acquisition of vehicle leases, including incentive and rate participation payments made to vehicle dealers, incremental direct costs, and acquisition fees collected from customers, are capitalized and amortized on a straight-line basis over the term of the related contracts. Investments in operating leases are recorded net of deferred subvention payments received from affiliates and deferred acquisition fees collected from customers. Operating lease revenue is recorded net of sales taxes collected from customers.
Determination of Residual Values
Substantially all of the Company’s residual value risk relates to its vehicle lease portfolio. To date, the Company has not incurred material losses related to declines in contractual residual values on its industrial equipment portfolio.
The contractual residual values of lease earning assets are estimated at lease inception by examining external industry data and the Company’s own historical residual experience. Factors considered in this evaluation include, but are not limited to, economic conditions, new vehicle pricing, new vehicle incentive programs, new vehicle sales, product attributes of popular vehicles, the mix of used vehicle supply, the level of current used vehicle values and fuel prices. During the term of the lease, management evaluates the adequacy of its estimate of the residual value and makes downward adjustments to the carrying value to the extent the market value at lease maturity is estimated to be less than the carrying value and when such decline is considered to be other-than-temporary. For operating leases, adjustments are made on a straight-line basis over the remaining terms of the leases and are included in depreciation on operating leases expense in the Consolidated Statement of Income. For direct finance leases, adjustments are made at the time of assessment and are included as a reduction to direct finance lease revenues in the Consolidated Statement of Income.
The Company periodically evaluates the carrying value of operating leases for impairment. Operating lease assets are considered impaired when the expected undiscounted future cash flows over the
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies (Continued)
remaining lease term are less than book value.
The Company uses various channels to sell vehicles returned at lease end. The Company does not
re-lease returned vehicles.
Substantially all of the Company’s residual value risk relates to its vehicle lease portfolio. To date, the Company has not incurred material losses related to declines in contractual residual values on its industrial equipment portfolio.
Allowance for Credit Losses
The Company maintains an allowance for credit losses to cover probable losses on its earning assets resulting from the failure of customers or dealers to make required payments. Management evaluates the allowance at least quarterly, considering a variety of factors and assumptions to determine whether the allowance is considered adequate to cover probable losses. The allowance for credit losses is management’s best estimate of the amount of probable credit losses in the Company’s existing portfolio.
Increases to the allowance for credit losses are accompanied by corresponding charges to the provision for credit losses. Except where applicable law requires otherwise, account balances are charged off when payments due are no longer expected to be received or the account is 150 days contractually delinquent, whichever occurs first. Related collateral, if recoverable, is repossessed and sold. Any shortfalls between proceeds received from the sale of repossessed collateral and the amounts due from customers are charged against the allowance. The allowance related to the Company’s earning assets is included in finance receivables, net and investment in operating leases, net in the Consolidated Balance Sheet. The related provision expense is included in the provision for credit losses in the Consolidated Statement of Income. Charge-offs are presented net of amounts recovered on previously charged off accounts.
Derivative Instruments
All derivative instruments are recorded on the balance sheet at fair value, taking into consideration the effects of legally enforceable master netting agreements that allow the Company to net settle positive and negative positions and offset cash collateral held with the same counterparty on a net basis. Changes in the fair value of the derivatives are recorded in interest expense in the Consolidated Statement of Income.
The Company categorizes derivatives as those designated for hedge accounting (“hedge accounting derivatives”) and those that are not designated for hedge accounting (“non-hedge accounting derivatives”). The Company elects at inception whether to designate a derivative as a hedge accounting derivative. That designation may change based on management’s intentions and changing circumstances.
Hedge accounting derivatives are comprised of pay-float interest rate swaps and cross currency interest rate swaps. Non-hedge accounting derivatives are comprised of pay-fixed interest rate swaps, de-designated pay-float interest rate swaps, pay-float interest rate swaps for which hedge accounting has not been elected, interest rate caps, and currency basis swaps. De-designation of hedge accounting derivatives is further discussed below.
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies (Continued)
In order to qualify for hedge accounting, a derivative must be considered highly effective at reducing the risk associated with the exposure being hedged. When the Company designates a derivative in a hedging relationship, the Company documents the risk management objective and strategy. This documentation includes the identification of the hedging instrument, the hedged item and the risk exposure, and how the Company will assess effectiveness prospectively and retrospectively. The Company assesses the extent to which a hedging instrument is effective at achieving offsetting changes in fair value at least quarterly. The Company recognizes changes in the fair value of derivatives designated in fair value hedging relationships (including foreign currency fair value hedging relationships) in interest expense in the Consolidated Statement of Income along with the fair value changes of the hedged item attributable to the hedged risk. For certain types of hedge relationships that meet stringent criteria, the Company applies the shortcut method, which provides an assumption of zero ineffectiveness that results in equal and offsetting changes in fair value in the Consolidated Statement of Income for both the hedged debt and the hedge accounting derivative.
When the shortcut method is not applied, any ineffective portion of the derivative that is designated as a fair value hedge is recognized as a component of interest expense in the Consolidated Statement of Income. If the Company elects not to designate a derivative instrument in a hedging relationship, or the relationship does not qualify for hedge accounting treatment, the full change in the fair value of the derivative instrument is recognized as a component of interest expense in the Consolidated Statement of Income with no offsetting adjustment for the economically hedged item.
The Company reviews the effectiveness of its hedging relationships quarterly to determine whether the relationships have been and continue to be effective. The Company uses regression analysis to assess the effectiveness of its hedges. When the Company determines that a hedging relationship has not been effective, hedge accounting is no longer applied. If hedge accounting is discontinued, the Company continues to carry the derivative instrument as a component of other assets or other liabilities in the Consolidated Balance Sheet at its fair value with changes in fair value reported as interest expense in the Consolidated Statement of Income. Additionally, for discontinued fair value hedges, the Company ceases to adjust the hedged item for changes in fair value and amortizes the cumulative fair value adjustments recognized in prior periods over the remaining term of the debt.
The Company will also discontinue the use of hedge accounting if a derivative is sold, terminated or exercised, or if management determines that designating a derivative under hedge accounting is no longer appropriate (“de-designated derivatives”). De-designated derivatives are included within the category of non-hedge accounting derivatives.
Foreign Currency Transactions
Certain transactions entered into by the Company, primarily related to debt, are denominated in foreign currencies. These transactions are fully hedged at issuance. During periods when the debt and the related derivatives do not qualify for hedge accounting, these transactions are translated into U.S. dollars using the applicable exchange rate at the transaction date and retranslated at each balance sheet date using the exchange rate in effect at that date. Gains and losses related to foreign currency transactions, primarily debt, are included in interest expense in the Consolidated Statement of Income.
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies (Continued)
Insurance Premiums Earned and Contract Revenues
Revenues from providing coverage under various contractual agreements are recognized over the term of the coverage in relation to the timing and level of anticipated claims and administrative expenses. Revenues from insurance premiums, net of premiums ceded to reinsurers, are earned over the terms of the respective policies in proportion to the estimated loss development. Management relies on historical loss experience as a basis for establishing earnings factors used to recognize revenue over the term of the contract or policy.
The portion of premiums and service revenues written applicable to the unexpired terms of the policies is recorded as unearned premiums or unearned service revenue. Policies and contracts sold are usually in force from 3 to 84 months. Certain costs of acquiring new business, consisting primarily of commissions and premium taxes, are deferred and amortized over the term of the related policies on the same basis as revenues are earned.
Commissions and fees from services provided are recognized over the term of the coverage in relation to the timing of services performed. The effect of subsequent cancellations is recorded as an offset to earned premiums, contract revenues, and commissions and fees, accordingly.
Insurance Losses and Loss Adjustment Expenses
Insurance losses include amounts paid and accrued for loss events that are known and have been recorded as claims, estimates of losses incurred but not reported that are based on actuarial estimates and historical loss development patterns, and loss adjustment expenses that are expected to be incurred in connection with settling and paying these claims.
Accruals for unpaid losses and losses incurred but not reported are included in other liabilities in the Consolidated Balance Sheet. Estimated liabilities are reviewed regularly and the Company recognizes any differences in the periods they are determined. If anticipated losses, loss adjustment expenses, unamortized acquisition costs and maintenance costs exceed the recorded unearned premium or deferred income reserve, a premium deficiency is recognized by first charging any unamortized acquisition costs to expense and then by recording a liability for any excess deficiency.
Reinsurance
The Company purchases on an annual basis excess of loss reinsurance to protect against the impact of large, irregularly occurring losses. Reinsurance reduces the magnitude of sudden unpredictable changes in net income. The amounts recoverable from reinsurers are estimated in a manner consistent with the reinsured policy and include recoverable amounts for paid and unpaid losses. Amounts recoverable from reinsurers on unpaid losses, including incurred but not reported losses, and amounts paid to reinsurers relating to the unexpired portion of reinsurance contracts are included in other assets in the Consolidated Balance Sheet. Ceded insurance-related expenses are recorded as a reduction to insurance losses and loss adjustment expenses in the Consolidated Statement of Income. Amounts recoverable from reinsurers are recorded as a receivable but are not collectible until the losses are paid.
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies (Continued)
Income Taxes
The Company uses the liability method of accounting for income taxes under which deferred tax assets and liabilities are adjusted to reflect changes in tax rates and laws in the period such changes are enacted resulting in adjustments to the current fiscal year’s provision for income taxes.
TMCC files a consolidated federal income tax return with its domestic parent and subsidiaries. TMCC files either separate or consolidated/combined state income tax returns with Toyota Motor North America (“TMA”) or other domestic parent and subsidiaries of TMCC. State income tax expense is generally recognized as if TMCC and its domestic subsidiaries filed their tax returns on a stand-alone basis. In those states where TMCC and its domestic subsidiaries join in the filing of consolidated or combined income tax returns, TMCC and its domestic subsidiaries are allocated their share of the total income tax expense based on combined allocation/apportionment factors and separate company income or loss. Based on the state tax sharing agreement with TMA, TMCC and its domestic subsidiaries pay for their share of the combined income tax expense and are reimbursed for the benefit of any of their tax losses utilized in the combined state income tax returns.
Sale of Receivables and Valuation of Retained Interests
The Company’s securitization transactions are completed using qualified special purpose entities (“QSPE”), also referred to as securitization trusts, and are usually structured to obtain sale accounting. Sale accounting treatment requires that gains or losses on finance receivables sold are recognized in the period in which the sale occurs. The recorded gains or losses on sold receivables depend on the carrying amount and the fair value of such receivables, less the fair value of retained obligations, if any, at the sale date. The carrying amount is allocated between the sold receivables and the subordinated retained interests described below based on their relative fair values at the sale date. Gains or losses on sold receivables are included in investment and other income in the Consolidated Statement of Income.
The Company retains senior and subordinated interests in the securitizations, which are included in investments in marketable securities and other assets in the Consolidated Balance Sheet. Senior interests in the securitizations represent senior securities purchased by the Company. Subordinated interests include interest only strips and subordinated securities, which provide credit enhancement to the senior securities. These subordinated retained interests are paid after the required distributions are made to senior securities. The subordinated retained interests do not have a readily available market value. Therefore, the fair value of the retained interests is calculated by discounting forecasted cash flows using management’s estimates of key economic assumptions. All key assumptions used in the valuation of the retained interests are periodically reviewed and are revised as deemed appropriate.
The Company recognizes income from retained interests over the life of the respective underlying retained interest using the effective yield method. The yield represents the excess of all forecasted cash flows over the initial amount recorded as the retained interest at the sale date. As adjustments to forecasted cash flows are made, the Company adjusts the rate at which income is earned prospectively. If changes in the forecasted cash flows result in an other-than-temporary decline in the fair value of the retained interests, then an impairment loss is recognized to the extent that the fair value is less than the carrying amount. Such losses, when incurred, are included in investment and other income in the Consolidated Statement of Income. Otherwise, any difference in the carrying amount and the fair value of the retained interest is recognized as an unrealized gain or loss, net of income taxes, and is included in accumulated other comprehensive income in the Consolidated Balance Sheet.
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies (Continued)
New Accounting Standards
In June 2005, the Emerging Issues Task Force (“EITF”) ratified its consensus on Issue No. 05-6, “Determining the Amortization Period for Leasehold Improvements Purchased after Lease Inception or Acquired in a Business Combination” (“EITF 05-6”). EITF 05-6 addresses the amortization period for leasehold improvements acquired in a business combination or purchased after the inception of a lease. EITF 05-6 is effective for periods beginning after June 29, 2005. The implementation of EITF 05-6 did not have a material impact on the Company’s consolidated financial statements.
In July 2005, the Financial Accounting Standards Board (“FASB”) issued an exposure draft of a proposed interpretation, "Accounting for Uncertain Tax Positions". The proposed interpretation clarifies the accounting for uncertain tax positions in accordance with FASB Statement No. 109, "Accounting for Income Taxes". The proposed interpretation requires that a tax position meet a "more likely than not" recognition threshold and a “best estimate” measurement attribute for the benefit of the uncertain tax position to be recognized in the financial statements. A tax position that fails to meet the more likely than not recognition threshold will result in either the reduction of a current or deferred tax asset or receivable, or the recording of a current or deferred tax liability. The proposed interpretation also provides guidance on measurement, derecognition of tax benefits, classification, interim period accounting disclosure, and transition requirements in accounting for uncertain tax positions. The targeted effective date of the proposed interpretation is as of the beginning of the first fiscal year ending after December 15, 2006. The Company is assessing the impact of adopting the new pronouncement in its proposed form and is currently unable to estimate its impact, if any, on the Company's consolidated financial statements.
In November 2005, the FASB issued FASB Staff Position No. FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FSP FAS 115-1 and 124-1”). FSP FAS 115-1 and 124-1 addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss, includes accounting considerations subsequent to the recognition of an other-than-temporary impairment, and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The effective date of FSP FAS 115-1 and 124-1 is for periods beginning after December 31, 2005. The implementation of the FSP did not have a material impact on the Company’s consolidated financial statements.
In December 2005, the FASB issued FASB Staff Position No. SOP 94-6-1, “Terms of Loan Products That May Give Rise to a Concentration of Credit Risk” (“FSP SOP 94-6-1”). FSP SOP 94-6-1 addresses disclosure requirements for entities that originate, hold, guarantee, service, or invest in loan products whose terms may give rise to a concentration of credit risk. The effective date of FSP SOP 94-6-1 is for interim and annual periods ending after December 19, 2005. The implementation of the FSP did not have a material impact on the Company’s consolidated financial statements.
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies (Continued)
In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155, “Accounting for Certain Hybrid Instruments” (“FAS 155”), which permits, but does not require, fair value accounting for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurcation in accordance with FASB Statement No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”). The statement also subjects beneficial interests issued by securitization vehicles to the requirements of FAS 133. The statement is effective as of April 1, 2007, with earlier adoption permitted. The Company plans to early adopt the statement and does not expect that FAS 155 will have a material impact on the Company’s consolidated financial statements.
In March 2006, the FASB issued Statement of Financial Accounting Standards No. 156, “Accounting for Servicing of Financial Assets” (“FAS 156”), which amends FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, with respect to the accounting for separately recognized servicing assets and servicing liabilities. This statement is effective as of April 1, 2007, with earlier adoption permitted. The Company is assessing the impact of adopting FAS 156 and is currently unable to estimate its impact, if any, on the Company’s consolidated financial statements.
In March 2006, the EITF reached a tentative consensus on Issue No. 06-3, “How Sales Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross Versus Net Presentation)” (“EITF 06-3”). EITF 06-3 addresses income statement classification and disclosure requirements of externally-imposed taxes on revenue-producing transactions. EITF 06-3 is effective for periods beginning after December 15, 2006. The implementation of EITF 06-3 did not have a material impact on the Company’s consolidated financial statements.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation.
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Investments in Marketable Securities
The amortized cost and estimated fair value of investments in marketable securities and related unrealized gains and losses are as follows:
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Investments in Marketable Securities (Continued)
At March 31, 2006 and 2005, there were no marketable securities in the Company’s available-for-sale portfolio with material unrealized losses that have been in an unrealized loss position for more than a year.
The cash flow information presented above relates to the Company’s investment portfolio of its insurance operations. Cash flows related to interests retained in securitization transactions are discussed in Note 7 - Sale of Receivables.
Realized losses incurred in fiscal 2006 and 2005 include $3 million and $4 million, respectively, in impairment losses. No impairment losses were incurred in fiscal 2004.
The contractual maturities of investments in marketable securities at March 31, 2006 are as follows:
In accordance with statutory requirements, the Company had on deposit with state insurance authorities U.S. debt securities with amortized cost and fair value of $4 million at March 31, 2006 and 2005.
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Finance Receivables, Net
Finance receivables, net consisted of the following:
The net investment in direct finance leases included in finance receivables, net consisted of the following:
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Finance Receivables, Net (Continued)
Minimum lease payments on direct finance leases and contractual maturities on retail receivables and dealer financing are as follows:
A significant portion of the Company’s finance receivables has historically been repaid prior to contractual maturity dates; contractual maturities as shown above should not be considered as necessarily indicative of future cash collections.
Note 5 - Investments in Operating Leases, Net
Investments in operating leases, net consisted of the following:
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Investments in Operating Leases, Net (Continued)
Future minimum lease rentals on operating leases are as follows:
A significant portion of the Company’s operating lease contracts has historically been terminated prior to maturity; future minimum rentals as shown above should not be considered as necessarily indicative of future cash collections.
Note 6 - Allowance for Credit Losses
The following table provides information related to the Company’s allowance for credit losses on finance receivables and investments in operating leases:
Net of recoveries of $79 million, $69 million and $59 million in years ended March 31, 2006, 2005 and 2004, respectively.
1Substantially all retail, direct finance lease, and operating lease receivables do not involve recourse to the dealer in the event of customer default.
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Sale of Receivables
The Company retains servicing rights and earns a contractual servicing fee of 1% per annum on the total monthly outstanding principal balance of its securitized retail receivables. In a subordinated capacity, the Company retains interest-only strips and subordinated securities in these securitizations. The retained interests are held as restricted assets. Investors in the securitizations have no recourse to the Company beyond the Company’s retained subordinated interests, any cash reserve funds, and any amounts drawn on the revolving liquidity notes discussed in Note 15 - Commitments and Contingencies. The Company’s exposure to these retained interests exists until the associated securities are paid in full. Investors do not have recourse to other assets held by TMCC for failure of obligors on the receivables to pay when due.
Cash Flows from Securitizations
The following table summarizes gains on retail finance receivables sold during fiscal 2004 and certain cash flows received from, and paid to, the retail securitization trusts outstanding during fiscal 2006, 2005, and 2004. No securitizations were executed during fiscal 2006 and 2005.
1 In connection with the securitization transaction, the Company retained securities of $556 million in fiscal 2004 which were classified as
marketable securities in the Consolidated Balance Sheet. The transaction represents a non-cash increase in marketable securities and a non-cash
decrease in finance receivables.
Balance represents optional clean-up calls. The Company exercised its right to repurchase finance receivables from securitization trusts
as provided for in the terms of the Company's securitization agreements.
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Sale of Receivables (Continued)
Key Economic Assumptions
Key economic assumptions used in estimating the fair value of retained interests at the sale dates of the securitization transactions completed during fiscal 2006, 2005 and 2004 were as follows:
Expected cumulative static pool losses over the life of the securitizations are calculated by taking actual life to date losses plus projected losses and dividing the sum by the original balance of each pool of assets at the time of the original sale. At March 31, 2006, expected cumulative static pool credit losses for the retail finance receivables securitized in fiscal 2004 were 0.41%. No securitizations were executed during fiscal 2006 and 2005.
Sensitivity Analysis
The key economic assumptions and the sensitivity of the current fair value of the retained interests to an immediate 10% and 20% adverse change in those assumptions used at March 31, 2006 are presented below:
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Sale of Receivables (Continued)
These hypothetical scenarios do not reflect expected market conditions and should not be used as a prediction of future performance. As the figures indicate, changes in the fair value may not be linear. In addition, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption. Actual changes in one factor may result in changes in another, which might magnify or counteract the sensitivities. Actual cash flows may differ from the above analysis.
Managed Receivables
Outstanding balances, delinquency amounts and net credit losses for managed receivables, which include both owned and securitized receivables, are summarized as follows:
Certain prior period amounts have been reclassified to conform to the current period presentation.
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Derivatives and Hedging Activities
The following table summarizes the components of interest expense:
The following table summarizes the components of the net result from non-hedge accounting, which is included in interest expense.
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Derivatives and Hedging Activities (Continued)
The following table summarizes the Company’s derivative assets and liabilities, which are included in other assets and other liabilities in the Consolidated Balance Sheet:
1 Represents cash received under reciprocal collateral arrangements that the Company has entered into with certain derivative counterparties as described in Note 8 - Derivatives and
Hedging Activities of the Notes to Consolidated Financial Statements.
Counterparty Credit Risk
The Company enters into reciprocal collateral arrangements with certain counterparties to mitigate its exposure to the credit risk associated with the respective counterparty. A valuation of the Company’s position with the respective counterparty is performed monthly. If the market value of the Company’s net derivatives position with the counterparty exceeds a specified threshold, the counterparty is required to transfer cash collateral in excess of the threshold to the Company. Conversely, if the market value of the counterparty's net derivatives position with the Company exceeds a specified threshold, the Company is required to transfer cash collateral in excess of the threshold to the counterparty. The Company’s International Swaps and Derivatives Association (“ISDA”) Master Agreements with counterparties contain legal right of offset provisions, and therefore the collateral amounts are netted against derivative assets, which are included in other assets in the Consolidated Balance Sheet. At March 31, 2006, the Company held a net $251 million in collateral from counterparties, which is included in cash and cash equivalents in the Consolidated Balance Sheet. The Company is not required to hold the collateral in a segregated account.
Counterparty credit risk of derivative instruments is represented by the fair value of contracts with a positive fair value at March 31, 2006, reduced by the effects of master netting agreements and collateral. At March 31, 2006, substantially all of the Company's derivative instruments were executed with commercial banks and investment banking firms assigned investment grade ratings of "A" or better by nationally recognized statistical rating organizations. The Company has not experienced a counterparty default and does not currently anticipate non-performance by any of its counterparties. The Company has no reserves related to counterparty non-performance as of March 31, 2006. In addition, many of the Company’s ISDA Master Agreements with counterparties contain reciprocal ratings triggers providing either party with an option to terminate the agreement and related transactions at market in the event of a ratings downgrade below a specified threshold.
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Derivatives and Hedging Activities (Continued)
A summary of the net counterparty credit exposure by credit rating (net of collateral held) is presented below:
Note 9 - Other Assets and Other Liabilities
Other assets and other liabilities consisted of the following:
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 - Debt
Debt and the related weighted average contractual interest rates are summarized as follows:
1 Represents the effects of foreign currency transaction gains and losses on debt denominated in foreign currencies, fair value adjustments to debt in hedge accounting relationships, and the unamortized fair
value adjustments on the hedged item for terminated fair value hedge accounting relationships.
Included in debt are unsecured notes denominated in various foreign currencies valued at $12.530 billion and $11.182 billion at March 31, 2006 and 2005, 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 in the same notional amount to convert non-U.S. dollar debt to U.S. dollar denominated payments.
The Company’s notes and loans payable and carrying value adjustment at March 31, 2006 include $9.735 billion in variable rate debt with indexed contractual interest rates ranging from 2.61% to 5.67% and $26.811 billion in fixed rate debt with contractual interest rates ranging from 0.55% to 9.75%.
Included in debt is commercial paper with an average remaining maturity of thirty days at March 31, 2006. Notes and loans payable mature on various dates through fiscal 2036.
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 - Debt (Continued)
Scheduled maturities of the Company’s debt portfolio are summarized below:
Interest payments on debt, including net settlements on interest rate swaps, were $1.388 billion, $842 million, and $668 million in fiscal 2006, 2005, and 2004, respectively.
Note 11 - 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:
During fiscal 2006, the Company renewed its 364-day syndicated bank credit facilities and renewed and increased its 5-year syndicated bank credit facilities from $4.200 billion to $5.800 billion.
Of the total credit facilities, $2 million of the uncommitted letters of credit facilities was used at March 31, 2006 and 2005. No amounts were drawn on the committed facilities at March 31, 2006 and 2005.
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 - Fair Value of Financial Instruments
The fair value of financial instruments at March 31, 2006 and 2005 was estimated using the valuation methodologies described below. Considerable judgment was employed in interpreting market data to develop estimates of fair value; accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange. The use of different market assumptions or valuation methodologies could have a material effect on the estimated fair value amounts.
The carrying amounts and estimated fair values of the Company's financial instruments are as follows:
The fair value estimates presented herein are based on information available as of March 31, 2006 and 2005. The methods and assumptions used to estimate the fair value of financial instruments are summarized as follows:
Cash and Cash Equivalents
The carrying amount of cash and cash equivalents approximates fair value due to the short maturity of these investments.
Investments in Marketable Securities
The fair value of marketable securities was estimated using quoted market prices or discounted cash flow analysis.
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 - Fair Value of Financial Instruments (Continued)
Finance Receivables, Net
The carrying amounts of $6.811 billion and $6.604 billion of variable rate finance receivables at March 31, 2006 and 2005, respectively, approximate fair value as these receivables re-price at prevailing market rates. The carrying amounts and fair values of finance receivables, net above excludes $1.126 billion and $1.917 billion of direct finance leases, net at March 31, 2006 and 2005, respectively, which are not considered financial instruments. The fair value of fixed rate finance receivables at March 31, 2006 and 2005 was estimated by discounting expected cash flows using the blended rates of finance receivables originated during the quarters ended March 31, 2006 and 2005, respectively. Although the fair value of finance receivables at March 31, 2006 was less than the carrying amount, management expects to collect all amounts due according to the contractual terms of the finance receivable agreements, less the related allowance for credit losses, based on the Company’s intent to hold the finance receivables to maturity.
Derivative Assets and Liabilities
The estimated fair value of the Company's derivative assets and liabilities was derived by discounting expected cash flows using quoted market exchange rates, quoted market interest rates, or quoted market prices, as of March 31, 2006 and 2005 as applicable to each instrument. Derivative assets and liabilities are recorded in other assets and other liabilities, respectively, in the Consolidated Balance Sheet.
Debt
The fair value of debt was estimated by discounting expected cash flows using the interest rates at which debt of similar credit quality and maturity would be issued as of March 31, 2006 and 2005. The Company also utilizes quoted market exchange rates, quoted market interest rates, or quoted market prices, when appropriate, in developing cash flows. The carrying amount of commercial paper was assumed to approximate fair value due to the short maturity of these instruments.
Note 13 - Pension and Other Benefit Plans
Employees of TMCC, TCPR, and TMCC’s insurance subsidiaries are generally eligible to participate in the TMS pension plan commencing on the first day of the month following hire and are vested after 5 years of continuous employment. Benefits payable under this non-contributory defined benefit pension plan are based upon the employees' years of credited service, the highest-paid 60 consecutive months' compensation, and the highest average fiscal year bonus over a period of 60 consecutive months, reduced by a percentage of social security benefits.
Employees of TMCC, TCPR, and TMCC’s insurance subsidiaries are also eligible to participate in the Toyota Savings Plan sponsored by TMS. Participants may elect to contribute up to 30% of their base pay on a pre-tax basis. The Company matches 66-2/3 cents for each dollar the participant contributes, up to 6% of base pay. Participants are vested 25% each year with respect to the Company’s contributions and are fully vested after four years.
In addition, employees of TMCC, TCPR, and TMCC’s insurance subsidiaries are generally eligible to participate in various health and life and other post-retirement benefits sponsored by TMS. In order to be eligible for these benefits, the employee must retire from the Company with at least ten years of service and in some cases be at least 55 years of age.
The Company’s employee benefits expense was $61 million, $54 million, and $43 million for the years
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 - Pension and Other Benefit Plans (Continued)
ended March 31, 2006, 2005, and 2004, respectively.
Note 14 - Provision for Income Taxes
The provision for income taxes consisted of the following:
A reconciliation between the U.S. federal statutory tax rate and the effective tax rate follows:
1 Includes deferred tax benefit due to reduced effective state tax rate and new hybrid credit for the year ended March 31, 2006.
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 - Provision for Income Taxes (Continued)
The deferred federal and state income tax liabilities are as follows:
The Company's deferred tax liabilities and assets consisted of the following:
TMCC and its domestic subsidiaries fully utilized federal tax net operating loss carryforwards of $631 million for fiscal 2005. At March 31, 2006, TMCC and its domestic subsidiaries have a deferred tax asset of $15 million for state tax net operating loss carryforwards which expire in fiscal 2006 through 2024. In addition, at March 31, 2006, TMCC and its domestic subsidiaries have a deferred federal tax asset for foreign tax credits totaling $20 million, which is reduced by a $13 million valuation allowance.
Cash paid for income taxes was $659 million, $32 million, and $57 million in fiscal 2006, 2005, and 2004, respectively.
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 - Provision for Income Taxes (Continued)
At March 31, 2006, TMCC and its domestic subsidiaries had a receivable of $2 million from TMS for their share of the income tax in those states where the Company filed consolidated/combined returns with TMA or other domestic parent and subsidiaries of TMCC for the fiscal year ended March 31, 2006. No such amounts were outstanding for the March 31, 2004 state tax returns between TMCC and its affiliates at March 31, 2005.
Note 15 - 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 are summarized in the table below:
Excludes $6.588 billion and $6.219 billion of wholesale financing lines not considered to be contractual commitments at March 31, 2006 and 2005, respectively, of which $4.262 billion and $3.954 billion were outstanding at March 31, 2006 and 2005, respectively.
Includes $75 million and $82 million in facilities lease commitments with affiliates at March 31, 2006 and 2005, respectively.
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 - Commitments and Contingencies (Continued)
Commitments
The Company provides fixed and variable rate credit facilities to vehicle and industrial equipment dealers. These credit facilities are typically 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 vehicle or industrial equipment dealer or a 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 to reflect the credit risks assumed in entering into the credit facility. Amounts drawn under these facilities are reviewed for collectibility quarterly, in conjunction with the Company’s evaluation of the allowance for credit losses. The Company also provides financing to various multi-franchise dealer organizations, referred to as dealer groups, often as part of a lending consortium, for wholesale, working capital, real estate, and business acquisitions. Of the total credit facilities available to vehicle and industrial equipment dealers, $2.393 billion and $2.511 billion were outstanding at March 31, 2006 and 2005, respectively, and were recorded in finance receivables, net in the Consolidated Balance Sheet.
TCPR has extended a $90 million revolving line of credit to Toyota de Puerto Rico Corp. (“TDPR”), a wholly-owned subsidiary of TMS. The revolving line of credit has a one-year renewable term, with interest due monthly. Any loans outstanding under the revolving line of credit are not guaranteed by TMS and are unsecured. During fiscal 2006, the agreement was amended and revised to increase the maximum commitment to $110 million. Amounts outstanding with TDPR at March 31, 2006 and 2005 were $47 million and $10 million, respectively.
In addition, TMCC has 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. Any amounts drawn by TFSA are accounted for as a distribution of assets, and, accordingly, a reduction of shareholder’s equity. During fiscal 2006 and 2005, $24 million and $60 million, respectively, was drawn by TFSA under the credit agreement. No such amounts were drawn prior to fiscal 2005. TFSA repaid the total amount drawn under the credit agreement in fiscal 2006.
The Company is party to a 15-year lease agreement with TMS for the Company’s headquarters location in the TMS headquarters complex in Torrance, California. At March 31, 2006, 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 2007 - $6 million; 2008 - $6 million; 2009 - $6 million; 2010 - $6 million; 2011 - $6 million; and thereafter - $42 million.
Guarantees and Other Contingencies
TMCC has guaranteed certain bond obligations relating to two affiliates totaling $148 million of principal and interest that were issued by Putnam County, West Virginia and Gibson County, Indiana. The bonds mature in the following fiscal years: 2028 - $20 million; 2029 - $50 million; 2030 - $38 million; 2031 - $30 million; and 2032 - $10 million. TMCC would be required to perform under the guarantees in the event of failure by the affiliates to fulfill their obligations; bankruptcy involving the affiliates or TMCC; or failure to observe any covenant, condition, or agreement under the guarantees by the affiliates, bond issuers, or TMCC.
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 - Commitments and Contingencies (Continued)
These guarantees include provisions whereby TMCC is entitled to reimbursement by the affiliates for amounts paid. TMCC receives an annual fee of $102,000 for guaranteeing such payments. TMCC has not been required to perform under any of these affiliate bond guarantees as of March 31, 2006 and 2005. The fair value of these guarantees as of March 31, 2006 and 2005 was approximately $1 million. Because these are affiliate guarantees, TMCC is not required to recognize a liability for the fair value of the guarantees.
In certain securitization structures, a revolving liquidity note (“RLN”) is used in lieu of a deposit to a cash reserve fund. The securitization trust may draw upon the associated RLN to cover any shortfall in interest and principal payments to investors. The Company funds any draws, and the terms of an RLN obligate the securitization trust to repay amounts drawn plus accrued interest. Repayments of principal and interest due under an RLN are subordinate to principal and interest payments on the asset-backed securities and, in some circumstances, to deposits into the related reserve fund. If collections are insufficient to repay amounts outstanding under an RLN, the Company will recognize a loss for the outstanding amounts. The Company must fund the entire amount available under an RLN into the related reserve fund if the Company’s short term unsecured debt ratings are downgraded below P-1 or A-1 by Moody’s or S&P, respectively. Management believes the likelihood of the Company incurring such losses or the Company’s short-term credit rating being downgraded is remote. No amounts were outstanding under any RLN as of March 31, 2006 and 2005. The RLN had no material fair value as of March 31, 2006 and 2005. The Company has not recognized a liability for an RLN as it does not expect to be required to fund any amounts under an 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 March 31, 2006, the Company does not believe it is probable that it will be required to make any material payments in the future. As such, no amounts have been recorded under these indemnifications as of March 31, 2006.
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 - Commitments and Contingencies (Continued)
Receivable Repurchase Obligations
TMCC makes certain representations and warranties to the SPEs, and the SPEs make corresponding representations and warranties to the securitization trusts, relating to the 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 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 that would materially and adversely affect the interest of any securitization trust, or if extensions or modifications to a receivable are made, and TMCC, as the servicer, does not elect to make advances to cover any resulting 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 fiscal 2006 and 2005. The Company does not believe it is probable that it will be required to make any material payments in the future and, as such, no amounts have been recorded under these obligations as of March 31, 2006.
Advancing Requirements
As a servicer of receivables sold through securitizations, TMCC is required to advance delinquent amounts contractually owed by an obligor to the applicable 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 any outstanding advances from collections on all receivables before making other required payments. These provisions are customary in the automotive finance securitization industry. Advances outstanding at March 31, 2006 and 2005 totaled $1 million and $5 million, respectively.
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 and associated costs of defense 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, management of the Company expects that the ultimate liability resulting therefrom will not have a material adverse effect on the Company's consolidated financial statements.
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 - Commitments and Contingencies (Continued)
Fair Lending Class Actions
An alleged class action in the U.S. District Court - Central District of California, Baltimore v. Toyota Motor Credit Corporation filed in November 2000 claims that the Company’s pricing practices discriminate against African-Americans and Hispanics. Two additional cases pending in the state courts in California, (Herra v. Toyota Motor Credit Corporation and Gonzales v. Toyota Motor Credit Corporation) filed in the Superior Court of California Alameda County in April 2003 and in the Superior Court of the State of California in August 2003, respectively, contain similar allegations claiming discrimination against minorities. The cases have been brought by various individuals. Injunctive relief is being sought in all three cases and the cases also include a claim for actual damages in an unspecified amount. The parties have reached an agreement to settle these cases. The settlement is pending approval by the court. Under the settlement, TMCC agreed to stop purchasing contracts with markups greater than amounts approved under the settlement and to include disclosures on its contracts that explain that the finance charge may be negotiable and that the dealer may keep part of the finance charge. TMCC also agreed to: (i) offer 850,000 pre-approved offers of credit (that cannot be marked up) to African-American and Hispanic consumers; (ii) contribute $750,000 to non-profit entities for consumer education purposes with a focus on minorities; (iii) pay $95,000 in damages; (iv) pay up to $10,600,000 in attorneys’ fees and costs; and (v) on submission of a valid claim, provide eligible class members with either a certificate of credit applicable to their next financing with TMCC in amounts ranging from $50 to $400 or a check in amounts ranging from $25 to $225, depending upon the amount of their payment over the applicable buy rate or, in certain circumstances, the time their contracts were assigned to TMCC. TMCC is fully reserved for this settlement.
There are also non-class action cases making similar claims in other jurisdictions. The Company believes that it has strong defenses to these claims.
New Jersey Consumer Fraud Action
An action in the New Jersey Superior Court, Jorge v Toyota Motor Insurance Services (“TMIS”), filed in November 2002 claims that the TMIS Gold Plan Vehicle Service Agreement (“VSA”) is unconscionable on its face and violates the New Jersey Consumer Fraud Act. In September 2004, the case was certified as a class action consisting of all New Jersey consumers who purchased a TMIS Gold Plan VSA. The plaintiffs are seeking injunctive relief as well as actual damages and treble damages in an unspecified amount. In May 2005, the New Jersey Supreme Court issued a ruling granting TMIS' motion for leave to appeal the trial court's denial of TMIS' motion for summary judgment. A hearing before the Court of Appeals in this case was held on April 26, 2006 and TMIS is waiting for a written decision on this matter. The Company believes it has strong defenses to these claims. It is the Company’s opinion that this matter is not likely to create a material liability for damages.
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 - Related Party Transactions
The tables below summarize amounts included in the Company’s Consolidated Balance Sheet and Statement of Income under various related party agreements or relationships:
This line item represents the balance drawn by TFSA under its credit agreement with TMCC. This amount was reclassified to intercompany receivables during fiscal 2006, the period in which TFSA settled its outstanding balance.
During fiscal 2006, the Company’s Board of Directors declared and paid a cash dividend of $115 million to TFSA. No dividends were declared or paid in fiscal 2005.
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 - Related Party Transactions (Continued)
Subvention Receivable from Affiliates, Deferred Subvention Income from Affiliates, and Manufacturer’s Subvention Support and Other Revenues
Subvention receivables represent amounts due from TMS and other affiliates and Toyota Material Handling, U.S.A., Inc. (“TMHU”) in support of retail, lease and industrial equipment subvention programs offered by TMCC. Deferred subvention income represents the unearned portion of amounts received from these transactions, and manufacturers’ subvention support and other revenues primarily represent the earned portion of such amounts.
Finance Receivables with Affiliates
Finance receivables with affiliates represent loans outstanding under the revolving line of credit to TDPR discussed in Note 15 - Commitments and Contingencies. Effective in fiscal 2006, the agreement for the revolving line of credit from TCPR to TDPR was amended and revised to increase the maximum commitment amount to $110 million.
In fiscal 2006, the Company entered into a Master Auto Carrier Lease Agreement with Toyota Logistics Services (“TLS”). TMCC provides auto transport truck financing to TLS.
Notes Receivable under Home Loan Program
Under a program available to certain levels of management of the Company, certain officers, directors, and other members of management of the Company have received mortgage loans from the Company secured by residential real property. The table above includes amounts receivable under this program from executive officers and directors, all of which relate to loans made prior to July 30, 2002.
Intercompany Receivables and Payables
Amounts represent balances due to and from TMS, TFSC, and other affiliates arising from various transactions between the Company and such affiliates. The nature of such transactions is discussed throughout this footnote.
Reductions of Retained Earnings for Advance to TFSA under Credit Agreement and Distribution of Net Assets to TFSA
Amounts represent reductions of retained earnings in connection with advances to TFSA under the reciprocal credit agreement discussed in Note 15 - Commitments and Contingencies and the transfer of the Company’s interests in TSM, TSV and BTB to TFSA discussed in Note 1 - Nature of Operations.
Affiliate Insurance Premiums and Commissions Revenues
TMIS provides administrative services and various levels and types of insurance coverage to TMS, including the warranty coverage for TMS’ certified pre-owned vehicle program and various umbrella liability policies. TMIS, through its wholly-owned subsidiary, provides umbrella liability insurance to TMS and affiliates covering certain dollar value layers of risk above various primary or self-insured retentions. On all layers in which the Company has provided coverage, 99% of the risk has been ceded to various reinsurers.
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 - Related Party Transactions (Continued)
Shared Services Charges and Other Amounts
TMS and TMCC entered into a Shared Services Agreement covering certain technological and administrative services, such as information systems support, facilities, insurance coverage and corporate services provided by each entity to the other after the ownership of TMCC was transferred to TFSA. Included under the Shared Services Agreement are rent charges for the Company’s headquarters facility in the TMS headquarters complex in Torrance, California and its Central Customer Service Center, both of which are leased from TMS.
In fiscal 2006, the Master Services Agreement between TMCC and Toyota Financial Services Bank (“TFSB”) was amended and restated to include a number of additional services to be provided to TFSB by TMCC and certain limited services to be provided to TMCC by TFSB.
Employee Benefits Expense
Refer to Note 13 - Pension and Other Benefit Plans for a discussion of the TMS-sponsored pension and savings plans and other employee benefits.
Credit Support Fees Incurred
In connection with the creation of TFSC and the transfer of ownership of TMCC from TMS to TFSA, TMC and TFSC entered into a credit support agreement (the “TMC Credit Support Agreement”). Under the terms of this agreement, TMC has agreed to certain ownership, subsidiary net worth, and debt service provisions in support of TFSC operations. The agreement is not a guarantee by TMC of any securities or obligations of TFSC.
Concurrent with the execution of the TMC Credit Support Agreement, TFSC and TMCC entered into a credit support agreement (the “TFSC Credit Support Agreement”). Under this agreement, TFSC agreed to certain ownership, subsidiary net worth, and debt service provisions similar to those under the TMC Credit Support Agreement. This agreement is not a guarantee by TFSC of any securities or other obligations of TMCC. The TMC Credit Support Agreement and the TFSC Credit Support Agreement are governed by, and construed in accordance with, the laws of Japan.
TCPR is the beneficiary of a credit support agreement with TFSC containing the same provisions as the TFSC Credit Support Agreement described above. This agreement is not a guarantee by TFSC of any securities or other obligations of TCPR.
In connection with the TFSC Credit Support Agreement, TMCC and TFSC are parties to a credit support fee agreement which requires TMCC to pay to TFSC a semi-annual fee equal to 0.06% per annum of the weighted average outstanding amount of TMCC’s bonds and other liabilities or securities entitled to credit support under the TMC and TFSC credit support agreements described above.
TCPR is the beneficiary of a credit support agreement with TFSC containing the same provisions as the TFSC Credit Support Agreement described above but pertaining to TCPR and TCPR bonds, debentures, notes and other investment securities and commercial paper (collectively, "TCPR Securities"). Holders of TCPR Securities have the right to claim directly against TFSC and TMC to perform their respective obligations as described above. This agreement is not a guarantee by TFSC of any securities or other obligations of TCPR. TCPR has agreed to pay TFSC a semi-annual fee equal to 0.06% per annum of the weighted average outstanding amount of TCPR Securities entitled to credit support.
The credit support fee payable is included in intercompany payables.
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 - Related Party Transactions (Continued)
Other Agreements with Affiliates
TMCC and TMS are parties to an Amended and Restated Repurchase Agreement. This agreement states that TMS will arrange for the repurchase of new Toyota and Lexus vehicles financed at wholesale by TMCC at the aggregate cost financed in the event of vehicle dealer default. The Company is also a party to similar agreements with TMHU, HINO and other domestic and import manufacturers. TMHU is the primary distributor of Toyota lift trucks in the U.S. and HINO is the exclusive U.S. distributor of commercial trucks manufactured by Hino Motors Ltd. of Japan. No vehicles were repurchased under these agreements during fiscal 2006.
TMCC has guaranteed the payments of principal and interest with respect to the bonds of manufacturing facilities of certain affiliates. TMCC receives an annual fee of $102,000 for guaranteeing such payments. The nature, business purpose, and amounts of these guarantees are described in Note 15 - Commitments and Contingencies.
TMCC and TMS are parties to a Corporate Guaranty by TMS of certain dealer financing extended by TMCC to a dealer engaged in the business of mobility conversion.
TMCC provides administrative support in the form of shared services to support the formation and ongoing operations of Toyota Financial Services Securities USA Corporation (“TFSS”), an affiliate of TMCC.
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17 - Segment Information
The Company’s reportable segments include finance and insurance operations. Finance operations include retail financing, leasing and dealer financing provided to authorized vehicle dealers and their customers in the U.S. and the Commonwealth of Puerto Rico. Insurance operations are performed by TMIS and its subsidiaries. The principal activities of TMIS include marketing, underwriting, claims administration, and providing certain insurance and contractual coverage to Toyota and Lexus vehicle dealers and their customers. In addition, TMIS insures and reinsures certain TMS and TMCC risks, including limited warranty coverage to TMS on certain pre-owned vehicles, various umbrella liability policies and insurance of vehicle dealers’ inventory financed by TMCC. The finance and insurance operations segment information presented below includes allocated corporate expenses for the respective segments. Other amounts include financing provided to industrial equipment dealers and intersegment eliminations and reclassifications.
The accounting policies of the operating segments are the same as those described in Note 2 - Summary of Significant Accounting Policies. Currently, the Company’s finance and insurance segments operate only in the U.S. and the Commonwealth of Puerto Rico. Substantially all of the Company’s finance and insurance segments are located within the U.S.
Financial results for the Company’s operating segments are summarized below:
Includes deferred income taxes which are classified as assets for insurance operations on a stand-alone basis.
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17 - Segment Information (Continued)
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18 - Selected Quarterly Financial Data (Unaudited)
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There is nothing to report with regard to this item.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports filed or submitted under the Securities Exchange Act of 1934, as amended (“Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission (“SEC”) 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 management including its principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure.
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 most recent fiscal quarter covered by this annual report pursuant to Rule 13a-15(b) of the Exchange Act. Based on this evaluation, the CEO and CFO concluded that the disclosure controls and procedures were effective in alerting them on a timely basis to material information required to be included in the Company’s reports filed or submitted under the Exchange Act as of the end of the period covered by this report.
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.
During the quarters ended September 30, 2004 and December 31, 2004, the Company identified certain control deficiencies it considered to be material weaknesses related to the application and accounting for Statement of Financial Accounting Standards No. 133 and Statement of Financial Accounting Standards No. 52. These material weaknesses were discussed in detail in the Company’s prior SEC reports. As a result of its remediation efforts, the Company’s management believes these control deficiencies no longer constitute material weaknesses as of March 31, 2006.
Preparation for Compliance with Section 404 of the Sarbanes Oxley Act of
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. These internal control requirements will be effective for the Company beginning in fiscal 2008.
There was no change in the Company’s internal control over financial reporting during the most recent fiscal quarter covered by this annual report that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
TMCC has omitted certain information in this section pursuant to Instruction I(2) of Form 10-K.
The following table sets forth certain information regarding the directors and executive officers of TMCC as of April 30, 2006.
Name
Age
Position
George E. Borst
Director, President and Chief Executive Officer, TMCC;
Director, President and Chief Operating Officer, TFSA;
Director, TFSC
Tadashi Nagashino
Director, Executive Vice President and
Treasurer, TMCC;
Director, Executive Vice President and Treasurer, TFSA
David Pelliccioni
Director, Group Vice President
and Secretary, TMCC
John F. Stillo
Vice President and Chief Financial Officer, TMCC;
Vice President and Chief Financial Officer, TFSA
Thomas A. Kiel
Corporate Manager and Chief Accounting Officer, TMCC
Hideto Ozaki
Director, TMCC;
Chairman of the Board of Directors and
Chief Executive Officer, TFSA;
Director, President and Chief Executive Officer, TFSC
Yukitoshi Funo
Director, TMCC;
Chairman of the Board and Chief Executive Officer, TMS;
Senior Managing Director, TMC Board of Directors
James Press
Director, TMCC;
President and Chief Operating Officer, TMS;
Managing Officer, TMC
Takeshi Suzuki
Director, TMCC;
Director, TFSC;
Senior Managing Director, TMC Board of Directors
All directors of TMCC are elected annually and hold office until their successors are elected and qualified. Officers are elected annually and serve at the discretion of the Board of Directors.
Mr. Borst was named Director, President, and Chief Executive Officer of TMCC in October 2000. Mr. Borst was named Director, President, and Chief Operating Officer of TFSA in April 2004. Mr. Borst was named director of TFSC in June 2003. From August 2000 to March 2004, Mr. Borst served as Director, Secretary, and Chief Financial Officer of TFSA. Mr. Borst has been employed with TMCC and TMS, in various positions, since 1985.
Mr. Nagashino was named Director, Executive Vice President, and Treasurer of TMCC in January 2003 and Director, Executive Vice President, and Treasurer of TFSA in April 2004. From January 2002 to December 2002, Mr. Nagashino served as General Manager for the Planning Department in the TMC Accounting Division. From January 1997 to December 2001, Mr. Nagashino was Project General Manager for the Secretarial Division of TMC. Mr. Nagashino has been employed with TMC, in various positions worldwide, since 1975.
Mr. Pelliccioni was named Director, Group Vice President - Sales, Marketing and Operations, and Secretary of TMCC in January 2002. From August 2001 to January 2002, Mr. Pelliccioni was Vice President - Sales, Marketing and Operations of TMCC. From May 1999 to August 2001, Mr. Pelliccioni was Vice President - Field Operations of TMCC. Mr. Pelliccioni has been employed with TMCC and TMS, in various positions, since 1988.
Mr. Stillo was named Vice President and Chief Financial Officer of TMCC in 2001. Mr. Stillo was named Vice President and Chief Financial Officer of TFSA in April 2004. From June 2000 to January 2001, Mr. Stillo was Executive Vice President, Investments and Capital Planning at Associates First Capital Corporation.
Mr. Kiel joined TMCC as Corporate Manager and Chief Accounting Officer in 2004. Prior to joining TMCC, Mr. Kiel served as Senior Vice President - Line of Business Risk Finance Executive at Bank of America Corporation from March 2004 to October 2004, and previously served at Bank of America Corporation as Senior Vice President - Corporate Analysis and Reporting from December 2002 to March 2004, Senior Vice President - Accounting Policy from July 2002 to December 2002, and Vice President - Accounting Policy from April 2000 to June 2002.
Mr. Ozaki was named Director of TMCC in October 1999 and Director, President and Chief Executive Officer of TFSC in July 2000. Mr. Ozaki was named Chairman of the Board of Directors and Chief Executive Officer of TFSA in April 2004. From August 2000 to March 2004, he served as Director and President of TFSA. Mr. Ozaki has been employed with TMC, in various positions, since 1968.
Mr. Funo was named Director of TMCC in June 2003. In May 2006, Mr. Funo was named Chairman and Chief Executive Officer of Toyota Motor North America, U.S.A., Inc. (“TMA”). From June 2003 to June 2005, Mr. Funo served as President, Chief Executive Officer and Director of TMS. In 2000, Mr. Funo was named a Director of TMC, a title that was changed to Managing Officer in 2003 and Senior Managing Director of TMC in 2004. Mr. Funo has been employed with TMC, in various positions worldwide, since 1970.
Mr. Press was named Director of TMCC in 1999 and Director of TMS in 1996. In May 2006, Mr. Press was named President of TMA. Prior to this, Mr. Press served as President and Chief Operating Officer of TMS since 2005 and Chief Operating Officer since 2001. In June 2003, Mr. Press was appointed a Managing Officer of TMC. Mr. Press has been employed with TMS, in various positions, since 1970.
Mr. Suzuki was named Director of TMCC in June 2005. From June 2001 to June 2005, he served as Director of TFSA. Mr. Suzuki was named Senior Managing Director of TMC in June 2004. In 2000, he was named a Director of TMC, a title that was changed to Managing Officer in 2003. Mr. Suzuki has been employed with TMC, in various positions, since 1970.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
TMCC has omitted this section pursuant to Instruction I(2) of Form 10-K.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
TMCC has omitted this section pursuant to Instruction I(2) of Form 10-K.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TMCC has omitted this section pursuant to Instruction I(2) of Form 10-K.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table represents aggregate fees billed to the Company by PriceWaterhouseCoopers LLP, the Company’s principal accounting firm.
Audit fees billed for fiscal 2006 and 2005 include the audits of the Company’s consolidated financial statements included in the Company’s Annual Reports on Form 10-K, reviews of the Company’s consolidated financial statements included in the Company’s Quarterly Reports on Form 10-Q and consulting on various accounting standards.
Audit-related fees billed in fiscal 2006 and fiscal 2005 include consulting on various accounting standards, consulting services related to the Sarbanes-Oxley Act of 2002, comfort letters and consents in connection with the Company’s funding transactions.
Tax fees billed in fiscal 2006 and fiscal 2005 include tax reporting software, tax planning services, assistance in connection with tax audits, a tax compliance system license, and tax return preparation services provided to expatriate employees other than key executives of the Company.
Other fees billed in fiscal 2006 and 2005 include translation services performed in connection with the Company’s funding transactions.
Auditor Fees Pre-approval Policy
The Audit Committee has adopted a formal policy concerning approval of audit and non-audit services to be provided by the independent auditor to the Company. The policy requires that all services provided to the Company by PriceWaterhouseCoopers LLP, the Company’s independent auditor, including audit services and permitted audit-related and non-audit services, be pre-approved by the Committee. All the services provided in fiscal 2006 and 2005 were pre-approved by the Audit Committee.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1)Financial Statements
Included in Part II, Item 8., “Financial Statements and Supplementary Data” of this Form 10-K on pages 64 through 105.
(b)Exhibits
See Exhibit Index on page 112.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Torrance, State of California, on the 12th day of June 2006.
TOYOTA MOTOR CREDIT CORPORATION
By /s/ George E. Borst
George E. Borst
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated on the 12th day of June 2006.
Signature
Title
/s/ George E. Borst
George E. Borst
President and Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Tadashi Nagashino
Tadashi Nagashino
Executive Vice President
and Treasurer and Director
/s/ John F. Stillo
John F. Stillo
Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Thomas A. Kiel
Thomas A. Kiel
Corporate Manager and Chief Accounting Officer
(Principal Accounting Officer)
/s/ David Pelliccioni
David Pelliccioni
Director
/s/ Yukitoshi Funo
Yukitoshi Funo
Director
/s/ James Press
James Press
Director
EXHIBIT INDEX
____________________________________
(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 the same numbered Exhibit filed with the Company's Report on Form 10-Q for the quarter ended December 31, 2000, Commission File number 1-9961.
(4)
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.
(5) Incorporated herein by reference to Exhibit 4.1(a), filed with the Company's Registration Statement on Form S-3, File No. 33-52359.
(6)
Incorporated herein by reference to Exhibit 4.1 filed with the Company's Current Report on Form 8-K dated October 16, 1991, Commission File No. 1-9961.
EXHIBIT INDEX
________________________________
(7)
Incorporated herein by reference to Exhibit 4.1(c) filed with the Company's Registration Statement on Form S-3, Commission File No. 333-113680.
(8)
Incorporated herein by reference to Exhibit 4.1 filed with the Company’s Current Report on Form 8-K dated October 5, 2005, Commission File No. 1-9961.
(9)
Incorporated herein by reference to Exhibit 10.2 filed with the Company’s Report on Form 10-K for the year ended March 31, 2005, Commission File No. 1-9961.
(10)
Incorporated herein by reference to Exhibit 10.2 filed with the Company’s Current Report on Form 8-K dated April 4, 2006, Commission File No. 1-9961.
(11)
Incorporated herein by reference to Exhibit 10.1 filed with the Company’s Current Report on Form 8-K dated April 4, 2006, Commission File No. 1-9961.
EXHIBIT INDEX
________________________________
(12)
Incorporated herein by reference to Exhibit 10.9 filed with the Company’s Report on Form 10-K for the year ended September 30, 2000, Commission File No. 1-9961.
(13)
Incorporated herein by reference to Exhibit 10.10 filed with the Company’s Report on Form 10-K for the year ended September 30, 2000, Commission File No. 1-9961.
(14)
Incorporated herein by reference to Exhibit 10.11 filed with the Company’s Report on Form 10-K for the fiscal year ended March 31, 2001, Commission File No. 1-9961.
(15)
Incorporated herein by reference to Exhibit 10.12 filed with the Company’s Report on Form 10-K for the year ended September 30, 2000, Commission File No. 1-9961.
(16)
Incorporated herein by reference to Exhibit 10.13(a), respectively, filed with the Company’s Report on Form 10-K for the fiscal year ended March 31, 2001, Commission File No. 1-9961.
(17)
Incorporated herein by reference to Exhibit 10.13(b) filed with the Company’s Report on Form 10-K for the year ended March 31, 2005, Commission File No. 1-9961.
(18) Incorporated herein by reference to Exhibit 10.6 filed with the Company's Registration Statement on Form S-1, Commission File No. 33-22440.
EXHIBIT INDEX