<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------- --------
Commission file number 1-9961
----------
TOYOTA MOTOR CREDIT CORPORATION
- ---------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 95-3775816
- ---------------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
19001 S. Western Avenue
Torrance, California 90509
- ---------------------------------------- -----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 787-1310
-----------------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of July 31, 1999, the number of outstanding shares of capital
stock, par value $10,000 per share, of the registrant was 91,500, all of which
shares were held by Toyota Motor Sales, U.S.A., Inc.
-1-
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in Millions)
<TABLE>
<CAPTION>
June 30, September 30, June 30,
1999 1998 1998
------------ ------------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
ASSETS
------
Cash and cash equivalents................. $ 184 $ 156 $ 152
Investments in marketable securities...... 439 435 379
Finance receivables, net.................. 13,508 11,521 11,390
Investments in operating leases, net...... 8,795 9,765 9,775
Receivable from Parent and Affiliate...... 207 512 83
Other receivables......................... 218 304 144
Deferred charges.......................... 133 167 179
Other assets.............................. 223 266 260
Income taxes receivable................... - 99 8
------- ------- -------
Total Assets..................... $23,707 $23,225 $22,370
======= ======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
Notes and loans payable................... $17,565 $17,597 $16,932
Accrued interest.......................... 122 176 145
Accounts payable and accrued expenses..... 1,432 995 1,291
Deposits.................................. 213 240 240
Income taxes payable...................... 77 - -
Deferred income........................... 606 607 555
Deferred income taxes..................... 1,350 1,379 1,020
------- ------- -------
Total Liabilities................... 21,365 20,994 20,183
------- ------- -------
Commitments and Contingencies
Shareholder's Equity:
Capital stock, $l0,000 par value
(100,000 shares authorized; 91,500
issued and outstanding)............. 915 915 915
Retained earnings...................... 1,405 1,303 1,258
Accumulated other comprehensive
income.............................. 22 13 14
------- ------- -------
Total Shareholder's Equity.......... 2,342 2,231 2,187
------- ------- -------
Total Liabilities and
Shareholder's Equity............. $23,707 $23,225 $22,370
======= ======= =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
-2-
<PAGE>
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Dollars in Millions)
<TABLE>
<CAPTION> Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
1999 1998 1999 1998
------ ------ ------ ------
(Unaudited)
<S> <C> <C> <C> <C>
Financing Revenues:
Leasing................................. $ 591 $ 647 $1,810 $1,941
Retail financing........................ 169 138 492 394
Wholesale and other dealer financing.... 28 27 77 73
------ ------ ------ ------
Total financing revenues................... 788 812 2,379 2,408
Depreciation on leases.................. 410 423 1,268 1,259
Interest expense........................ 230 249 690 722
------ ------ ------ ------
Net financing revenues..................... 148 140 421 427
Insurance premiums earned and contract
revenues................................ 31 28 89 80
Investment and other income................ 18 13 62 39
------ ----- ------ ------
Net financing revenues and other revenues.. 197 181 572 546
------ ------ ------ ------
Expenses:
Operating and administrative............ 94 81 272 228
Provision for credit losses............. 20 31 79 108
Insurance losses and loss adjustment
expenses............................. 15 14 45 39
------ ------ ------ ------
Total expenses............................. 129 126 396 375
------ ------ ------ ------
Income before income taxes................. 68 55 176 171
Provision for income taxes................. 29 23 74 72
------ ------ ------ ------
Net Income................................. $ 39 $ 32 $ 102 $ 99
====== ====== ====== ======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
-3-
<PAGE>
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
(Dollars in Millions)
<TABLE>
<CAPTION>
Accumulated
Other
Capital Retained Comprehensive
Stock Earnings Income Total
------- -------- ------------- -------
<S> <C> <C> <C> <C>
Balance at September 30, 1997.... $ 915 $ 1,159 $ 7 $2,081
------ ------- ---------- ------
Net income for the nine months
ended June 30, 1998........... - 99 - 99
Change in net unrealized gains
on available-for-sale
marketable securities......... - - 7 7
------ -------- ---------- ------
Total Comprehensive Income - 99 7 106
------ -------- ---------- ------
Balance at June 30, 1998......... $ 915 $ 1,258 $ 14 $2,187
====== ======= ========== ======
Balance at September 30, 1998.... $ 915 $ 1,303 $ 13 $2,231
------ ------- ---------- ------
Net income for the nine months
ended June 30, 1999........... - 102 - 102
Change in net unrealized gains
on available-for-sale
marketable securities......... - - 9 9
------ -------- ---------- ------
Total Comprehensive Income - 102 9 111
------ -------- ---------- ------
Balance at June 30, 1999......... $ 915 $ 1,405 $ 22 $2,342
====== ======= ========== ======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
-4-
<PAGE>
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Millions)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
--------------------------
1999 1998
------ ------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 102 $ 99
------ ------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization................... 1,301 1,356
Provision for credit losses..................... 79 108
Gain from sale of finance receivables, net...... (9) (2)
Decrease (increase) in other assets............. 314 (118)
Decrease in accrued interest.................... (54) (68)
(Decrease) increase in deferred income taxes..... (36) 66
Increase in other liabilities................... 121 22
------ ------
Total adjustments..................................... 1,716 1,364
------ ------
Net cash provided by operating activities................ 1,818 1,463
------ ------
Cash flows from investing activities:
Addition to investments in marketable securities...... (551) (523)
Disposition of investments in marketable securities... 561 486
Purchase of finance receivables....................... (14,949) (13,722)
Liquidation of finance receivables.................... 11,836 10,008
Proceeds from sale of finance receivables............. 1,022 663
Addition to investments in operating leases........... (2,613) (3,228)
Disposition of investments in operating leases........ 2,351 2,400
Change in receivable from Parent and Affiliate........ 71 71
------ ------
Net cash used in investing activities.................... (2,272) (3,845)
------ ------
Cash flows from financing activities:
Proceeds from issuance of notes and loans payable..... 4,546 4,776
Payments on notes and loans payable................... (3,689) (3,171)
Net (decrease) increase in commercial paper with
original maturities less than 90 days.............. (375) 752
------ ------
Net cash provided by financing activities................ 482 2,357
------ ------
Net increase (decrease) in cash and cash equivalents..... 28 (25)
Cash and cash equivalents at the beginning of the period. 156 177
------ ------
Cash and cash equivalents at the end of the period....... $ 184 $ 152
====== ======
Supplemental disclosures:
Interest paid......................................... $ 762 $ 765
Income taxes paid..................................... $ 17 $ 5
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
-5-
<PAGE>
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Interim Financial Data
- -------------------------------
Information pertaining to the three and nine months ended June 30, 1999 and
1998 is unaudited. In the opinion of management, the unaudited financial
information reflects all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results for the interim
periods presented. The results of operations for the three and nine months
ended June 30, 1999 are not necessarily indicative of those expected for any
other interim period or for a full year. Certain June 1998 accounts have been
reclassified to conform with the June 1999 and September 1998 presentation.
Toyota Credit Argentina S.A. ("TCA") was incorporated in September 1998 and
commenced business operations in December 1998. TCA provides retail and
wholesale financing to authorized Toyota vehicle dealers and their customers
in Argentina. TCA is owned 85% by Toyota Motor Corporation ("TMC") and 15% by
Toyota Motor Credit Corporation ("TMCC" or the "Company"). As of June 30,
1999 TMCC's investment in TCA totaled $2 million and is accounted for using
the cost method.
Banco Toyota do Brasil ("BTB") was incorporated in January 1999 and commenced
business operations in June 1999. BTB provides retail, wholesale and upon
commencement of operations of a related subsidiary, lease financing to
authorized Toyota vehicle dealers and their customers in Brazil. BTB is owned
85% by TMC and 15% by TMCC. As of June 30, 1999 TMCC's investment in BTB
totaled $1 million and is accounted for using the cost method.
These financial statements should be read in conjunction with the consolidated
financial statements, significant accounting policies and other notes to the
consolidated financial statements included in TMCC's 1998 Annual Report to the
Securities and Exchange Commission ("SEC")on Form 10-K.
-6-
<PAGE>
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Finance Receivables
- ----------------------------
Finance receivables, net consisted of the following:
<TABLE>
<CAPTION>
June 30, September 30, June 30,
1999 1998 1998
-------- ------------- --------
(Dollars in Millions)
<S> <C> <C> <C>
Retail................................... $ 9,579 $ 8,395 $ 7,582
Finance leases........................... 3,361 2,856 3,380
Wholesale and other dealer loans......... 1,511 1,099 1,359
------- ------- -------
14,451 12,350 12,321
Unearned income.......................... (795) (709) (798)
Allowance for credit losses.............. (148) (120) (133)
------- ------- -------
Finance receivables, net.............. $13,508 $11,521 $11,390
======= ======= =======
</TABLE>
Finance leases included estimated unguaranteed residual values of
$715 million, $679 million and $802 million at June 30, 1999, September 30,
1998 and June 30, 1998, respectively.
The aggregate balances related to finance receivables 60 or more days past due
totaled $19 million, $16 million and $16 million at June 30, 1999,
September 30, 1998 and June 30, 1998, respectively.
Note 3 - Investments in Operating Leases
- ----------------------------------------
Investments in operating leases, net consisted of the following:
<TABLE>
<CAPTION>
June 30, September 30, June 30,
1999 1998 1998
-------- ------------- --------
(Dollars in Millions)
<S> <C> <C> <C>
Vehicles................................. $10,606 $11,809 $11,919
Equipment and other...................... 524 442 410
------- ------- -------
11,130 12,251 12,329
Accumulated depreciation................. (2,255) (2,386) (2,454)
Allowance for credit losses ............. (80) (100) (100)
------- ------- -------
Investments in operating leases, net..... $ 8,795 $ 9,765 $ 9,775
======= ======= =======
</TABLE>
-7-
<PAGE>
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Notes and Loans Payable
- --------------------------------
Notes and loans payable consisted of the following:
<TABLE>
<CAPTION>
June 30, September 30, June 30,
1999 1998 1998
-------- ------------- --------
(Dollars in Millions)
<S> <C> <C> <C>
Commercial paper, net.................... $ 1,765 $ 2,546 $ 2,382
------- ------- -------
Other senior debt, due in the years
ending September 30,:
1998.................................. - - 664
1999.................................. 885 1,943 1,736
2000.................................. 2,948 2,521 2,424
2001.................................. 3,188 2,678 2,245
2002.................................. 2,471 2,689 2,578
2003.................................. 1,739 1,884 1,855
Thereafter............................ 4,480 3,223 2,925
------- ------- -------
15,711 14,938 14,427
Unamortized premium...................... 89 113 123
------- ------- -------
Total other senior debt............... 15,800 15,051 14,550
------- ------- -------
Notes and loans payable............ $17,565 $17,597 $16,932
======= ======= =======
</TABLE>
Short-term borrowings include commercial paper and certain medium-term notes
("MTNs"). The weighted average remaining term and weighted average interest
rate of commercial paper was 14 days and 4.99%, respectively, at June 30, 1999.
Short-term MTNs with original terms of one year or less, included in other
senior debt, were $544 million at June 30, 1999. The weighted average interest
rate on these short-term MTNs was 5.01% at June 30, 1999, including the effect
of interest rate swap agreements.
The weighted average interest rate on other senior debt was 5.13% at June 30,
1999, including the effect of derivative financial instruments. This rate has
been calculated using rates in effect at June 30, 1999, substantially all of
which are floating rates that reset periodically. Approximately 40% of other
senior debt at June 30, 1999 had floating interest rates that were covered by
option-based products. The weighted average strike rate on these option-based
products was 5.81% at June 30, 1999. TMCC manages interest rate risk via
continuous adjustment of the mix of fixed and floating rate debt through use of
interest rate swap agreements and option-based products.
Included in notes and loans payable at June 30, 1999 were unsecured notes
denominated in various foreign currencies; concurrent with the issuance of
these notes, TMCC entered into cross currency interest rate swap agreements to
convert these obligations at maturity into U.S. dollar obligations which in
aggregate total a principal amount of $7.7 billion. TMCC's foreign currency
debt was translated into U.S. dollars in the financial statements at the
various foreign currency spot exchange rates in effect at June 30, 1999. The
receivables or payables arising as a result of the differences between the
June 30, 1999 foreign currency spot exchange rates and the contract rates
applicable to the cross currency interest rate swap agreements are classified
in other receivables or accounts payable and accrued expenses, respectively,
and in aggregate reflect a net payable position of $1.0 billion at June 30,
1999.
-8-
<PAGE>
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Sale of Retail Receivables and Interests in Lease Finance Receivables
- ------------------------------------------------------------------------------
TMCC maintains programs to sell retail receivables and interests in lease
finance receivables through Toyota Motor Credit Receivables Corporation
("TMCRC") and Toyota Leasing, Inc. ("TLI"), limited purpose subsidiaries.
During the nine months ended June 30, 1999, TMCC sold interests in lease
finance receivables totaling $782 million, as described below.
TMCC holds an undivided trust interest ("UTI") in leases held in a titling
trust established by TMCC. In December 1998, TMCC identified certain leases
included in the UTI to be allocated to a separate portfolio represented by a
Special Unit of Beneficial Interest ("SUBI") totaling $782 million. TMCC then
sold the SUBI to TLI which in turn contributed substantially all of the SUBI to
a trust. TMCC continues to act as servicer for all assets represented by the
UTI and the SUBI and is paid a servicing fee. TLI retains subordinated
interests in the excess cash flows of these transactions, certain cash deposits
and other related amounts which are held as restricted assets subject to
limited recourse provisions. None of the lease assets represented by the SUBI
or the restricted assets are available to satisfy any obligations of TMCC.
The pretax gain resulting from the sale of interests in lease finance
receivables totaled approximately $5 million for the nine months ended June 30,
1999, after providing an allowance for estimated credit and residual value
losses. Principal collections related to the lease receivables sold in the
December 1998 and previous transactions were used to allocate additional
vehicle lease contracts to the SUBI resulting in gains of approximately
$5 million for the three months ended June 30, 1999 and $6 million and
$2 million for the nine months ended June 30, 1999 and 1998, respectively.
During the quarter ended June 30, 1999, TMCC exercised its option to purchase
the outstanding receivables sold in the July 1996 retail transaction resulting
in a $2 million loss. In addition, in July 1999, TMCC sold retail receivables
totaling $962 million.
Note 6 - Related Party Transactions
- -----------------------------------
TMCC has an arrangement to borrow from and invest funds with Toyota Motor
Sales, U.S.A., Inc. ("TMS" or "Parent") at short term market rates. For the
nine months ended June 30, 1999 and 1998, the highest amounts of funds,
included in Receivable from Parent and Affiliate, invested with TMS were
$2.0 billion and $273 million, respectively. Interest earned on these
investments totaled $4 million and $1 million for the three months ended
June 30, 1999 and 1998, respectively, and $29 million and $3 million for the
nine months ended June 30, 1999 and 1998, respectively.
In April 1999, Toyota Credit Canada Inc. ("TCCI"), an affiliate of the Company,
re-paid $201 million in intercompany loans. Interest charged on these loans
reflected market rates and totaled $8 million for the nine months ended
June 30, 1999.
Note 7 - Commitments and Contingent Liabilities
- -----------------------------------------------
As of June 30, 1999, TMCC has guaranteed payments of principal, interest and
premiums, if any, on $128 million principal amount of bonds issued in
connection with the manufacturing facilities of certain of its affiliates.
Effective July 1999, TMCC authorized the guarantee of up to $50 million of the
debt of TCA, of which $30 million has been guaranteed as of July 31, 1999.
-9-
<PAGE>
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Segment Information
- ----------------------------
Financial results for the Company's operating segments are summarized below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ --------------------
1999 1998 1999 1998
------- ------- -------- --------
(Dollars in Millions)
<S> <C> <C> <C> <C>
Assets:
Financing operations.............. $ 23,296 $ 22,012 $ 23,296 $ 22,012
Insurance operations.............. 680 558 680 558
Eliminations/reclassifications.... (269) (200) (269) (200)
-------- -------- -------- --------
Total assets.................... $ 23,707 $ 22,370 $ 23,707 $ 22,370
======== ======== ======== ========
Gross revenues:
Financing operations.............. $ 803 $ 821 $ 2,426 $ 2,433
Insurance operations.............. 34 32 104 94
-------- -------- -------- --------
Total gross revenues............ $ 837 $ 853 $ 2,530 $ 2,527
======== ======== ======== ========
Net income:
Financing operations.............. $ 36 $ 27 $ 87 $ 84
Insurance operations.............. 3 5 15 15
-------- -------- -------- --------
Total net income................ $ 39 $ 32 $ 102 $ 99
======== ======== ======== ========
</TABLE>
-10-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Income
- ----------
The following table summarizes TMCC's net income by operating segment for the
three and nine months ended June 30, 1999 and June 30, 1998:
<TABLE>
<CAPTION> Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
(Dollars in Millions)
Net income:
Financing operations................ $36 $27 $ 87 $ 84
Insurance operations................ 3 5 15 15
--- --- ---- ---
Total net income................. $39 $32 $102 $99
=== === ==== ===
</TABLE>
Net income from financing operations increased 33% for the quarter ended
June 30, 1999, as compared with the same period in fiscal 1998 primarily due
to lower interest expense, lower depreciation on leases, lower provision for
credit losses and increased investment and other income, offset by lower
financing revenues and higher operating and administrative expenses.
Net income from financing operations increased 4% for the nine months ended
June 30, 1999, as compared with the same period in fiscal 1999 primarily due
to lower interest expense, lower provision for credit losses and increased
investment and other income, substantially offset by higher operating and
administrative expenses, lower financing revenues and increased depreciation
on leases.
Net income from insurance operations decreased 40% for the quarter ended
June 30, 1999, as compared with the same period in fiscal 1998, primarily due
to decreased gains on sales of investments.
-11-
<PAGE>
Earning Assets
- --------------
The composition of TMCC's net earning assets (excluding retail receivables and
interests in lease finance receivables sold through securitization
transactions), as of the balance sheet dates reported herein and TMCC's
vehicle lease and retail contract volume and finance penetration for the three
and nine months ended June 30, 1999 and June 30, 1998 are summarized below:
<TABLE>
<CAPTION>
June 30, September 30, June 30,
1999 1998 1998
--------- ------------- ---------
(Dollars in Millions)
<S> <C> <C> <C>
Vehicle lease
Investment in operating leases, net..... $ 8,513 $ 9,559 $ 9,591
Finance leases, net..................... 2,731 2,313 2,739
------ ------- -------
Total vehicle leases..................... 11,244 11,872 12,330
Vehicle retail finance receivables, net.. 8,909 7,834 7,024
Vehicle wholesale and other receivables.. 2,378 1,800 2,044
Allowance for credit losses.............. (228) (220) (233)
------ ------- -------
Total net earning assets................. $22,303 $21,286 $21,165
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total contract volume:
Vehicle lease......................... 65,000 87,000 176,000 222,000
Vehicle retail........................ 92,000 78,000 220,000 188,000
------- ------- ------- -------
Total.................................... 157,000 165,000 396,000 410,000
======= ======= ======= =======
TMS sponsored contract volume:
Vehicle lease......................... 20,000 52,000 37,000 77,000
Vehicle retail........................ 12,000 28,000 26,000 41,000
------- ------- ------- -------
Total.................................... 32,000 80,000 63,000 118,000
======= ======= ======= =======
Finance penetration (excluding fleet):
Vehicle lease......................... 17.4% 25.9% 17.4% 25.4%
Vehicle retail........................ 16.6% 16.6% 14.7% 14.1%
----- ----- ----- ----
Total.................................... 34.0% 42.5% 32.1% 39.5%
===== ===== ===== =====
</TABLE>
-12-
<PAGE>
TMCC's net earning assets increased to $22.3 billion at June 30, 1999 from
$21.3 billion at September 30, 1998 and $21.2 billion at June 30, 1998. Asset
growth from the prior year reflects primarily increased retail and wholesale
earning assets, partially offset by a decline in lease earning assets
primarily due to the sale of $1.9 billion of interests in lease finance
receivables through lease securitization transactions. The increase in net
earning assets for the nine months ended June 30, 1999 reflects primarily
increased retail and wholesale earning assets, partially offset by a decline
in lease earning assets primarily due to the sale of $782 million of interests
in lease finance receivables. The allowance for credit losses increased
slightly from September 30, 1998 reflecting asset growth and is deemed
adequate to cover expected losses based on current and historical credit loss
experience, portfolio composition and other factors.
In October 1996, TMCC created Toyota Lease Trust, a Delaware business trust
(the "Titling Trust"), to act as a lessor and to hold title to leased vehicles
in specified states. TMCC holds an undivided trust interest in lease
contracts owned by the Titling Trust, and such lease contracts are included in
TMCC's lease assets, until such time as the beneficial interests in such
contracts are transferred in connection with a securitization transaction.
Substantially all leases owned by the Titling Trust are classified as finance
receivables due to certain residual value insurance arrangements in place with
respect to such leases, while leases of similar nature originated outside of
the Titling Trust are classified as operating leases. The continued
acquisition of leases by the Titling Trust has changed the composition of
earning assets resulting in an increased mix of finance receivables relative
to operating lease assets due to the classification differences described
above.
TMCC's lease contract volume decreased for the quarter and nine months ended
June 30, 1999, as compared with the same periods in fiscal 1998 reflecting
lower finance penetration due to changes in lease programs and the residual
value setting policy, as well as lower levels of programs sponsored by TMS.
TMCC's retail contract volume increased for the quarter and nine months ended
June 30, 1999, as compared with the same periods in fiscal 1998 primarily due
to higher finance penetration on strong sales of Toyota and Lexus vehicles.
-13-
<PAGE>
Net Financing Revenues and Other Revenues
- -----------------------------------------
TMCC's net financing revenues increased 6% for the quarter ended June 30,
1999, as compared with the same period in fiscal 1998 primarily due to
increased retail revenue, lower interest expense and lower depreciation on
leases, described below under Depreciation on Leases, substantially offset by
lower lease revenues. Net financing revenues decreased 1% for the nine months
ended June 30, 1999, as compared with the same period in fiscal 1998 primarily
due to lower lease revenues, substantially offset by increased retail revenues
and lower interest expense. TMCC's continued use of the Titling Trust to
purchase leases has caused a shift in the composition of earning assets from
operating leases to finance receivables, as discussed earlier, and resulted in
increased revenues from finance leases (until such interests in leases were
sold in securitization transactions) and reduced operating lease revenues and
depreciation on operating leases.
Insurance premiums earned and contract revenues increased 11% for the quarter
and nine months ended June 30, 1999, as compared with the same periods in
fiscal 1998 due to higher underwriting revenues associated with in-force
agreements.
The following table summarizes TMCC's investment and other income for the
three and nine months ended June 30, 1999 and June 30, 1998:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in Millions)
<S> <C> <C> <C> <C>
Servicing fee income................... $ 9 $ 7 $28 $18
Investment income...................... 6 6 25 19
Gains on assets sold................... 3 - 9 2
---- ---- ---- ----
Investment and other income......... $18 $13 $62 $39
==== ==== ==== ====
</TABLE>
Servicing fee income increased 29% and 56% for the quarter and nine months
ended June 30, 1999, respectively, as compared with the same periods in fiscal
1998 due to growth in the combined balance of sold interests in lease finance
and sold retail receivables.
Investment income increased 32% for the nine months ended June 30, 1999, as
compared with the same period in fiscal 1998 primarily due to increased gains
on sales of investments and interest income.
Gains on assets sold increased by $3 million and $7 million for the quarter
and nine months ended June 30, 1999, respectively, as compared with the same
periods in fiscal 1998 reflecting the sale of interests in lease finance
receivables, as described in Note 5 of the Notes to the Consolidated Financial
Statements. Gains recognized on asset-backed securitization transactions
generally accelerate the recognition of income on lease and retail contracts,
net of servicing fees and other related deferrals, into the period the assets
are sold. Numerous factors can affect the timing and amounts of these gains,
such as the type and amount of assets sold, the structure of the sale, key
assumptions used and current financial market conditions.
-14-
<PAGE>
Depreciation on Leases
- ----------------------
The following table sets forth the items included in TMCC's depreciation on
leases for the three and nine months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION> Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -------------------
1999 1998 1999 1998
---- ---- ------ ------
<S> <C> <C> <C> <C>
(Dollars in Millions)
Straight-line depreciation on operating leases... $338 $371 $1,050 $1,133
Provision for residual value losses.............. 72 80 218 179
Parent support for certain vehicle disposition
losses........................................ - (28) - (53)
---- ---- ------ ------
Total depreciation on leases.................. $410 $423 $1,268 $1,259
==== ==== ====== ======
</TABLE>
Straight-line depreciation expense decreased 9% and 7% for the quarter and
nine months ended June 30, 1999, respectively, as compared with the same
periods in fiscal 1998 corresponding with a decline in average operating lease
assets. As discussed earlier, the acquisition of leases by the Titling Trust
has increased the ratio of lease finance receivables relative to operating
lease assets, which results in reduced operating lease revenues and
depreciation expense.
TMCC is subject to residual value risk in connection with its lease portfolio.
TMCC's residual value exposure is a function of the number of off-lease
vehicles returned for disposition and any shortfall between the net
disposition proceeds and the estimated unguaranteed residual values on
returned vehicles. If the market value of a leased vehicle at contract
termination is less than its contract residual value, the vehicle is more
likely to be returned to TMCC. A higher rate of vehicle returns exposes TMCC
to a higher risk of aggregate losses.
Total unguaranteed residual values related to TMCC's vehicle lease portfolio
declined from approximately $7.8 billion at September 30, 1998 to $7.0 billion
at June 30, 1999 reflecting the acquisition of residual value insurance on an
increasing number of leases in connection with the lease securitization
program as well as sales of interests in lease finance receivables. TMCC
maintains an allowance for estimated losses on lease vehicles returned to the
Company for disposition at lease termination. The level of allowance required
to cover future vehicle disposition losses is based upon projected vehicle
return rates and projected residual value losses derived from market
information on used vehicle sales, historical factors, including lease return
trends, and general economic factors.
-15-
<PAGE>
The decrease in the provision for residual value losses for the quarter ended
June 30, 1999 as compared with the same period in fiscal 1998 reflects
management's estimate that current reserve levels are considered adequate to
cover expected losses at vehicle disposition as of June 30, 1999. The
increase in the provision for residual value losses for the nine months ended
June 30, 1999 as compared with the same period in fiscal 1998 reflects higher
off-lease vehicle return rates and a larger supply of vehicles coming off-
lease resulting in higher total losses although the loss per vehicle has
declined during the same period. The number of returned leased vehicles sold
by TMCC during a specified period as a percentage of the number of lease
contracts that as of their origination dates were scheduled to terminate
("full term return ratio") was 47% in the first nine months of fiscal 1999 as
compared to 39% for the same period in fiscal 1998. Losses at vehicle
disposition increased $5 million and $38 million for the quarter and nine
months ended June 30, 1999, respectively, as compared with the same periods in
fiscal 1998. TMCC believes that the increase in vehicle returns and losses is
due in part to the impact of competitive pricing in the new vehicle market
which has put continued pressure on late model Toyota and Lexus used vehicle
prices. TMCC expects the large supply of vehicles coming off-lease to
continue for at least the remainder of the fiscal year and that the full term
return ratio will remain at or near current levels.
The Company has taken action to reduce vehicle disposition losses by
developing strategies to increase dealer and lessee purchases of off-lease
vehicles, expand marketing of off-lease vehicles through the internet and
maximize proceeds on vehicles sold through auction. In addition, TMCC
implemented a new residual value setting policy for new model year 1999 Toyota
vehicles that separately calculates the residual value applicable to the base
vehicle and the residual value applicable to certain specified optional
accessories and optional equipment.
Under an arrangement with TMS, TMCC received Parent support for vehicle
disposition losses in the last three quarters of fiscal 1998. During the
first nine months of fiscal 1999, the Company did not receive any Parent
support for vehicle disposition losses. There are currently no plans for
additional Parent support for vehicle disposition losses.
TMCC's lease portfolio includes contracts with original terms ranging from 12
to 60 months; the average original contract term in TMCC's lease portfolio was
39 months and 38 months at June 30, 1999 and 1998, respectively.
Interest Expense
- ----------------
Interest expense decreased 8% and 4% for the quarter and nine months ended
June 30, 1999, respectively, as compared with the same periods in fiscal 1998
primarily due to lower average cost of borrowings, partially offset by an
increase in average debt outstanding. The weighted average cost of borrowings
was 5.30% and 5.87% for the nine months ended June 30, 1999 and 1998,
respectively.
Operating and Administrative Expenses
- -------------------------------------
Operating and administrative expenses increased 16% and 19% for the quarter
and nine months ended June 30, 1999, respectively, as compared with the same
periods in fiscal 1998 reflecting primarily additional personnel and operating
costs required to support TMCC's growing customer base and expanded customer
service activities as well as costs in connection with technology upgrades and
software modifications to address year 2000 issues.
-16-
<PAGE>
Provision for Credit Losses
- ---------------------------
TMCC's provision for credit losses decreased 35% and 27% for the quarter and
nine months ended June 30, 1999, respectively, as compared with the same
periods in fiscal 1998 reflecting improved credit loss experience and
management's estimate that current reserve levels are adequate based on
current credit loss levels, portfolio composition and other factors. TMCC has
not significantly altered its underwriting standards during the first nine
months of fiscal 1999 as compared with the same period in fiscal 1998.
Allowances for credit losses are evaluated periodically, considering
historical loss experience and other factors, and are considered adequate to
cover expected credit losses as of June 30, 1999.
Net credit loss experience, excluding net losses on receivables sold subject to
limited recourse provisions, for the three and nine months ended June 30, 1999
and 1998, was as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
1999 1998 1999 1998
----- ----- ----- -----
(Dollars in Millions)
<S> <C> <C> <C> <C>
Gross Credit Losses............. $ 23 $ 30 $ 79 $ 92
Recoveries...................... (4) (4) (13) (11)
----- ----- ----- -----
Net Credit Losses............... $ 19 $ 26 $ 66 $ 81
===== ===== ===== =====
Annualized Net Credit Losses
as a % of Average Earning
Assets....................... .35% .50% .41% .54%
</TABLE>
The allowance for credit losses and the allowance for credit losses as a
percent of earning assets as of the balance sheet dates reported herein are
summarized below:
<TABLE>
<CAPTION>
June 30, September 30, June 30,
1999 1998 1998
-------- ------------- --------
(Dollars in Millions)
<S> <C> <C> <C>
Allowance for Credit Losses..... $228 $220 $233
Allowance for Credit Losses
as a % of Earning Assets..... 1.01% 1.02% 1.09%
</TABLE>
-17-
<PAGE>
Liquidity and Capital Resources
- -------------------------------
The Company requires, in the normal course of business, substantial funding to
support the level of its earning assets. Significant reliance is placed on the
Company's ability to obtain debt funding in the capital markets in addition to
funding provided by earning asset liquidations and cash provided by operating
activities as well as transactions through the Company's asset-backed
securities programs. Debt issuances have generally been in the form of
commercial paper, domestic and euro MTNs and bonds.
Commercial paper issuances are used to meet short-term funding needs.
Commercial paper outstanding under TMCC's commercial paper program ranged from
approximately $1.1 billion to $2.9 billion during the first nine months of
fiscal 1999, with an average outstanding balance of $1.8 billion. For
additional liquidity purposes, TMCC maintains syndicated bank credit facilities
with certain banks which aggregated $3.0 billion at June 30, 1999. No loans
were outstanding under any of these bank credit facilities during the first
nine months of fiscal 1999. TMCC also maintains uncommitted, unsecured lines
of credit with banks totaling $175 million, of which $100 million is maintained
along with TMS. At June 30, 1999, TMCC had issued approximately $12 million in
letters of credit.
Long-term funding requirements are met through the issuance of a variety of
debt securities underwritten in both the United States and international
capital markets. Domestic and euro MTNs and bonds have provided TMCC with
significant sources of funding. During the first nine months of fiscal 1999,
TMCC issued approximately $2.8 billion of domestic and euro MTNs and bonds all
of which had original maturities of one year or more.
The original maturities of all MTNs and bonds outstanding at June 30, 1999
ranged from one to eleven years. As of June 30, 1999, TMCC had total MTNs and
bonds outstanding of $15.5 billion, of which $6.7 billion was denominated in
foreign currencies.
TMCC anticipates continued use of MTNs and bonds in both the United States and
international capital markets. The Company maintains a shelf registration with
the SEC providing for the issuance of MTNs and other debt securities. At
July 31, 1999, approximately $1.9 billion was available for issuance under this
registration statement. The maximum aggregate principal amount authorized to
be outstanding at any time under TMCC's euro MTN program is $16.0 billion.
Approximately $6.0 billion was available for issuance under the euro MTN
program as of July 31, 1999 of which the Company has committed to issue
approximately $457 million. The United States and euro MTN programs may be
expanded from time to time to allow for the continued use of these sources of
funding. In addition, TMCC may issue bonds in the domestic and international
capital market that are not issued under its euro MTN programs.
Additionally, TMCC uses its asset-backed securitization programs to generate
funds for investment in earning assets. During the nine months ended June 30,
1999, TMCC sold interests in lease finance receivables totaling $782 million as
described in Note 5 of the Notes to the Consolidated Financial Statements.
During the nine months ended June 30, 1999, the number and principal amount of
leases purchased by the Toyota Lease Trust in connection with TMCC's lease
securitization program comprised a significant and increasing percentage of
what otherwise would have been TMCC's lease portfolio. However, until leases
are included in a securitization transaction, they continue to be classified as
finance receivables on TMCC's balance sheet. In addition, TMCC maintains a
shelf registration statement with the SEC relating to the issuance of asset-
backed notes secured by, and certificates representing interests in, retail
receivables. In July 1999, TMCC sold retail receivables totaling $962 million
in connection with securities issued under the shelf registration statement.
As of July 31, 1999, $1.5 billion remained available for issuance under the
registration statement.
-18-
<PAGE>
TMCC's ratio of earnings to fixed charges has remained relatively stable at
1.25 for the first nine months of fiscal 1999 compared to 1.24 for the first
nine months of fiscal 1998.
Cash flows provided by operating, investing and financing activities have been
used primarily to support earning asset growth. During the first nine months
of fiscal 1999, cash used to purchase additional finance receivables and
investments in operating leases, totaling $17.5 billion, was partially provided
by the liquidation and sale of earning assets totaling $15.2 billion.
Investing activities resulted in a net cash use of $2.3 billion during the
first nine months of fiscal 1999, as the purchase of additional earning assets
exceeded cash provided by the liquidation and sale of earning assets.
Investing activities were also supported by net cash provided by operating and
financing activities totaling $1.8 billion and $482 million, respectively,
during the first nine months of fiscal 1999. The Company believes that cash
provided by operating and investing activities as well as access to domestic
and international capital markets, the issuance of commercial paper and asset-
backed securitization transactions will provide sufficient liquidity to meet
its future funding requirements.
-19-
<PAGE>
Year 2000 Date Conversion
- -------------------------
The year 2000 issue concerns the inability of computer systems and related
applications to function properly in the year 2000 and beyond. As a wholly-
owned subsidiary of TMS, TMCC is participating in TMS' comprehensive action
plan to identify and address year 2000 issues. As part of the year 2000
action plan, TMCC is identifying and evaluating potential year 2000 problems
and is implementing changes designed to yield year 2000 compliance in its
information technology systems, including mainframe, distributed and desktop
computer systems, networks and telecommunications (collectively, "IT systems")
and its non-information technology systems, including security and HVAC
systems, automated access readers and other machinery and equipment
(collectively, "embedded systems"). An additional component of the year 2000
action plan involves TMCC's communications with its external business partners
for the purpose of assessing and reducing the risk that TMCC's operations
could be adversely affected by such third parties' noncompliance with year
2000 issues.
Phases
The year 2000 action plan consists of four phases, some of which are being
conducted concurrently:
Inventory and Assessment: During this phase an inventory is taken of all
software and/or hardware components of significant applications or systems.
Software and hardware that is no longer in use or is planned to be replaced
before the year 2000, is identified and removed from the scope of the project.
Once the inventory is completed and verified, a preliminary determination of
whether the software or hardware is likely to have year 2000 date issues is
made either by manual review, vendor inquiry or by use of software tools
designed to search for date impacts. Once the assessment is completed, a
business critical prioritized plan is developed for remediation, testing, and
implementing the remediated hardware or software in the remaining phases.
Remediation: During this phase, software for which TMS or TMCC owns the
source code will be scanned and corrected. In most instances, TMCC will use
the "windowing" approach to fix source code which uses program logic to
correct year 2000 date issues. In some cases, it will be necessary to expand
the year field from two to four digits where the year 2000 date issue can not
be solved with the "windowing" method. Software for which TMS or TMCC does
not own the source code will be remediated by obtaining the year 2000 ready
version of the software from the vendor. For hardware and operating system
software, the year 2000 ready component will also be obtained from the vendor.
Testing: The testing phase focuses mainly on remediated hardware and software
that supports business critical functions. Test plans and test cases are
expected to be developed and performed for each application. For software
modified by TMCC, tests will be designed to demonstrate that application
functionality has not changed as a result of the remediation.
Implementation: During this phase, the remediated hardware and software
components will be implemented in the production environment. At this time,
policies and procedures will be implemented to ensure that additional
modifications to remediated and tested hardware and/or software are year 2000
compliant.
-20-
<PAGE>
State of Readiness
The Company has identified the following six areas for specific review and
remediation in connection with its year 2000 compliance efforts:
Critical Business Systems Applications: Includes distributed and mainframe
applications used in operations such as retail and lease financing, customer
account processing, collections, insurance operations and accounting systems.
TMCC has completed the inventory and remediation of these systems. Certain
business critical applications have been tested and implemented back into
production. Testing, validation and implementation of the remaining business
critical applications is expected to continue through the third quarter of
calendar year 1999.
Desktop Systems: Includes commercial off-the-shelf software as well as custom
developed applications. TMCC has substantially completed the inventory and
assessment of these systems and related software applications. Remediation
and testing of business critical custom developed systems is underway with
implementation expected by the third quarter of calendar year 1999.
Replacement of non-compliant off-the-shelf software applications is expected
by the third quarter of calendar year 1999.
Technical Infrastructure: Includes mainframe, distributed and PC systems,
networks, and telecommunications. TMCC has completed the inventory and
assessment phases of its technical infrastructure. Testing of business
critical components has begun and implementation is expected by the third
quarter of calendar year 1999.
Embedded Systems: Includes non-information technology systems described
above. TMCC has completed the inventory, assessment and implementation phases
for embedded systems at its owned facilities. With respect to embedded
systems located at facilities leased by TMCC, TMCC is presently in the
assessment phase and has contacted the property managers and/or owners
regarding the year 2000 status of the facilities. TMCC is establishing
contingency plans for coping with problems that may arise from embedded
systems in leased facilities that are not year 2000 compliant.
External Compliance: Includes financial institutions, dealers, suppliers,
trustees, underwriters and affiliates ("business partners"). Critical
business partners have been identified and prioritized. Letters and surveys
have been sent to business partners to assess the risk associated with those
business partners' failure to remediate their own year 2000 issues. TMCC has
completed the assessment phase of critical business partners. Testing of
business critical systems with external business partners will continue
through calendar year 1999.
Non-Critical Systems: Includes systems and applications from the above-listed
areas which have been prioritized as non-critical. Such systems and
applications will be reviewed on an ongoing basis and assessed for year 2000
compliance throughout calendar year 1999.
-21-
<PAGE>
TMS has contacted its affiliates and others involved in the manufacture of
Toyota and Lexus vehicles and equipment to determine the status of year 2000
product compliance, and based on information received to date, TMCC is not
aware of any year 2000 problems that would affect the operational safety of
these products.
Year 2000 Costs
Costs associated with the year 2000 systems and software modifications are
generally expensed as incurred. TMS is allocating a portion of its year 2000
costs to TMCC. TMCC's total cost (including allocated costs from TMS) for the
year 2000 issue is estimated not to exceed $20 million. The estimated total
cost to be incurred by TMCC in connection with its year 2000 compliance
efforts is not expected to have a material adverse effect on the Company's
results of operations, liquidity or capital resources. As a result of the
application of resources to year 2000 compliance efforts, certain information
technology projects previously scheduled to be initiated or implemented in
fiscal 1999 may be deferred. Such deferral is not expected to have a material
adverse effect on the Company's results of operations, liquidity or capital
resources.
Year 2000 Risks
The most reasonably likely worst case scenario with respect to the year 2000
issue is the failure of a business partner, particularly another financial
institution, to be year 2000 compliant. Although TMCC does not currently
anticipate that it will experience significant business disruptions as a
result of year 2000 problems, there remains uncertainty in this area. The
failure to achieve year 2000 compliance by energy and water utilities,
governmental agencies or other private or public suppliers of general
infrastructure could present substantial difficulties to TMCC's business
operations in the affected geographic areas. The inability of TMCC, its
external business partners or the public and private suppliers of general
infrastructure to identify and timely resolve year 2000 problems could result
in a significant adverse effect on the Company's operations and financial
results, including an inability to collect receivables, pay obligations,
process new business, raise capital and occupy facilities.
Year 2000 Contingency Plan
The Company is currently developing a contingency plan to address problems
resulting from year 2000 noncompliance. TMCC's contingency planning will
focus on identifying systems of TMCC and its business partners that TMCC
believes would be the most likely to experience year 2000 problems. The
contingency plan is expected to include arrangements with back-up vendors,
suppliers and other resources to permit operations to be conducted temporarily
on a manual basis. Completion of the contingency plan is expected by the
third quarter of calendar year 1999, although continuing revisions will be
made on an ongoing basis throughout the year as circumstances change and
additional information becomes available.
-22-
<PAGE>
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
The foregoing Management's Discussion and Analysis contain various "forward
looking statements" within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, which represent the Company's expectations or beliefs concerning
future events, including the following: that residual value reserve levels are
considered adequate to cover expected losses at vehicle disposition; that TMCC
expects the large supply of vehicles coming off-lease to continue for at least
the remainder of the fiscal year and that the full term return ratio will
remain at or near current levels; that allowances for credit losses are
considered adequate to cover expected credit losses; the Company's continued
use of MTNs and bonds in both the United States and the international capital
markets; that cash provided by operating and investing activities as well as
access to domestic and international capital markets, the issuance of
commercial paper and asset-backed securitization transactions will provide
sufficient liquidity to meet the Company's future funding requirements; that
the Company's action plan for year 2000 compliance efforts will be carried out
as described under Item 2 - "Year 2000 Date Conversion - Phases and - State of
Readiness"; that the Company expects to complete its year 2000 compliance
efforts on its critical systems on a timely basis; that the total estimated
cost in connection with the year 2000 issue is not expected to exceed
$20 million and is not expected to have a material adverse effect on the
Company's results of operations, liquidity or capital resources; that deferral
of certain information technology projects is not expected to have a material
adverse effect on the Company's results of operations, liquidity or capital
resources; that the risk to the Company with respect to year 2000 issues is as
described under Item 2 - "Year 2000 Date Conversion - Year 2000 Risks"; that
the Company's contingency plan to address year 2000 issues will be as described
under Item 2 - "Year 2000 Date Conversion - Year 2000 Contingency Plan" and
completion of the Company's contingency plan relating to the year 2000 issue is
expected by the third quarter of calendar year 1999; that TMCC does not
anticipate non-performance by any of its counterparties; that TMCC believes
that the new value-at-risk methodology will result in a more accurate
measurement of the interest rate risk in the portfolio.
The Company cautions that these statements are further qualified by important
factors that could cause actual results to differ materially from those in the
forward looking statements, including, without limitation, the following:
decline in demand for Toyota and Lexus products; the effect of economic
conditions; a decline in the market acceptability of leasing; the effect of
competitive pricing on interest margins; increases in prevailing interest
rates; changes in pricing due to the appreciation of the Japanese yen against
the United States dollar; the effect of governmental actions; the effect of
competitive pressures on the used car market and residual values and other
factors that could cause an increase in vehicle returns and disposition losses;
the continuation of, and if continued, the level and type of special programs
offered by TMS; the ability of the Company to successfully access the United
States and international capital markets; unanticipated problems or delays in
the completion by the Company of its year 2000 action plan; failure of TMCC's
business partners to timely resolve their year 2000 issues ; the failure of the
Company to develop and implement an adequate contingency plan relating to year
2000 issues; increased costs associated with the Company's debt funding
efforts; and the ability of the Company's counterparties to perform under
interest rate and cross currency swap agreements. Results actually achieved
thus may differ materially from expected results included in these statements.
-23-
<PAGE>
New Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", effective
for fiscal years beginning after June 15, 1999. SFAS No. 133 requires
companies to record derivatives on the balance sheet as assets and liabilities,
measured at fair value. Gains and losses resulting from changes in the values
of those derivatives would be accounted for as either components of earnings or
accumulated other comprehensive income depending on the use of the derivative
and whether it qualifies for hedge accounting. In June 1999, the FASB issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133", which defers the
effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000.
The Company has not determined the impact that adoption of this standard will
have on its consolidated financial statements. The Company plans to adopt SFAS
No. 133 by October 1, 2000, as required.
-24-
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As discussed more fully in TMCC's 1998 Annual Report on Form 10-K, TMCC uses a
variety of interest rate and currency derivative financial instruments to
manage interest rate and currency exchange exposures. TMCC does not use these
instruments for trading purposes. Derivative financial instruments used by
TMCC involve, to varying degrees, elements of credit risk in the event a
counterparty should default and market risk as the instruments are subject to
rate and price fluctuations.
Credit exposure of derivative financial instruments is represented by the fair
value of contracts with a positive fair value at June 30, 1999 reduced by the
effects of master netting agreements. The credit exposure of TMCC's derivative
financial instruments at June 30, 1999 was $28 million on an aggregate notional
amount of $25.3 billion. At June 30, 1999 approximately 89% of TMCC's
derivative financial instruments, based on notional amounts, were with
commercial banks and investment banking firms assigned investment grade ratings
of "AA" or better by national rating agencies. TMCC does not anticipate non-
performance by any of its counterparties.
Changes in interest rates may impact TMCC's future weighted average interest
rate on outstanding debt as a result of floating rate liabilities. As of
June 30, 1999, an interest rate increase of 1% (100 basis points) would raise
TMCC's weighted average interest rate, including the effects of interest rate
swap agreements and option-based products, by .62% from 5.14% to an estimated
5.76% at June 30, 1999. Conversely, an interest rate decrease of 1% (100 basis
points) would lower TMCC's weighted average interest rate, including the
effects of interest rate swap agreements and option-based products, by .54%
from 5.14% to an estimated 4.60% at June 30, 1999.
TMCC uses a value-at-risk methodology, in connection with other management
tools, to assess and manage the interest rate risk of aggregated loan and lease
assets and financial liabilities, including interest rate derivatives and
option-based products. Value-at-risk represents the potential losses for a
portfolio from adverse changes in market factors for a specified period of
time and likelihood of occurrence (i.e. level of confidence). TMCC's value-
at-risk methodology incorporates the impact from adverse changes in market
interest rates but does not incorporate any impact from other market changes,
such as foreign currency exchange rates or commodity prices, which do not
affect the value of TMCC's portfolio. The value-at-risk methodology excludes
changes in fair values related to investments in marketable securities as these
amounts are not significant.
During the quarter ended March 31, 1999, TMCC changed its value-at-risk
methodology. The new methodology makes no assumptions about the distribution
of interest rates; instead it relies on actual interest rate data. Four years
of historical interest rate data is used to build a database of prediction
errors in forward rates for a one month holding period. These prediction
errors are then applied randomly to current forward rates through a Monte
Carlo process to simulate 500 potential future yield curves. The portfolio is
then re-priced with these curves to develop a distribution of future portfolio
values. Options in the portfolio are priced with current market implied
volatilities and the simulated yield curves using the Black Scholes method.
The lowest portfolio value at the 95% confidence interval is compared with the
current portfolio value to derive the value-at-risk number. The previous
method used two years of historical interest rate volatilities, simulated only
100 potential future yield curves using a stratified random sampling
methodology and assumed that changes in interest rates are lognormally
distributed. Since the new model makes no assumptions about the distribution
of interest rates but instead uses the actual historical distribution of
interest rates along with an increased number of simulations, TMCC believes
that the new methodology will result in a more accurate measurement of the
interest rate risk in the portfolio.
-25-
<PAGE>
The value-at-risk and the average value-at-risk of TMCC's portfolio as of
June 30, 1999 and for the nine months ended June 30, 1999, measured as the
potential 30 day loss in fair value from assumed adverse changes in interest
rates under the new and old method are as follows:
<TABLE>
<CAPTION>
Average for the
As of Nine Months Ended
New Method: June 30, 1999 June 30, 1999
----------------- -------------------
<S> <C> <C>
Mean portfolio value..................... $3,550.0 million $3,600.0 million
Value-at-risk............................ $92.7 million $66.7 million
Percentage of the mean portfolio value... 2.6% 1.9%
Confidence level......................... 95.0% 95.0%
Average for the
As of Nine Months Ended
Old Method: June 30, 1999 June 30, 1999
----------------- -------------------
<S> <C> <C>
Mean portfolio value..................... $3,550.0 million $3,600.0 million
Value-at-risk............................ $70.0 million $51.1 million
Percentage of the mean portfolio value... 2.0% 1.4%
Confidence level......................... 95.0% 95.0%
</TABLE>
TMCC's calculated value-at-risk exposure represents an estimate of reasonably
possible net losses that would be recognized on its portfolio of financial
instruments assuming hypothetical movements in future market rates and is not
necessarily indicative of actual results which may occur. It does not
represent the maximum possible loss nor any expected loss that may occur, since
actual future gains and losses will differ from those estimated, based upon
actual fluctuations in market rates, operating exposures, and the timing
thereof, and changes in the composition of TMCC's portfolio of financial
instruments during the year.
A reconciliation of the activity of TMCC's derivative financial instruments for
the nine months ended June 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Nine Months Ended June 30,
------------------------------------------------------------
Cross
Currency
Interest Interest Indexed
Rate Swap Rate Swap Option-based Note Swap
Agreements Agreements Products Agreements
------------ ------------ ------------ ------------
1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ---- ---- ----
(Dollars in Billions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning notional amount....... $9.0 $6.5 $7.3 $6.3 $6.3 $5.6 $0.8 $2.4
Add:
New agreements............... - 3.5 4.0 1.3 1.8 2.1 0.6 0.1
Less:
Terminated agreements........ - - 0.3 - - - - -
Expired agreements........... 0.6 0.9 2.0 1.6 1.4 1.2 0.3 0.4
---- ---- ---- ---- ---- ---- ---- ----
Ending notional amount.......... $8.4 $9.1 $9.0 $6.0 $6.7 $6.5 $1.1 $2.1
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
-26-
<PAGE>
Review by Independent Accountants
With respect to the unaudited consolidated financial information of Toyota
Motor Credit Corporation for the three-month and nine-month periods ended
June 30, 1999 and 1998, PricewaterhouseCoopers LLP ("PricewaterhouseCoopers")
reported that they have applied limited procedures in accordance with
professional standards for a review of such information. However, their
separate report dated August 13, 1999 appearing herein, states that they did
not audit and they do not express an opinion on that unaudited consolidated
financial information. Accordingly, the degree of reliance on their report on
such information should be restricted in light of the limited nature of the
review procedures applied. PricewaterhouseCoopers is not subject to the
liability provisions of Section 11 of the Securities Act of 1933 for their
report on the unaudited consolidated financial information because that report
is not a "report" or a "part" of the registration statement prepared or
certified by PricewaterhouseCoopers within the meaning of Sections 7 and 11 of
the Act.
-27-
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Various claims and actions are pending against TMCC and its subsidiaries with
respect to financing and insurance activities, taxes and other matters arising
from the ordinary course of business. Certain of these actions are or purport
to be class action suits. Management and internal and external counsel perform
periodic reviews of pending claims and actions to determine the probability of
adverse verdicts and resulting amounts of liability. The amounts of liability
on pending claims and actions as of June 30, 1999 were not determinable;
however, in the opinion of management, the ultimate liability resulting
therefrom should not have a material adverse effect on TMCC's consolidated
financial position or results of operations. The foregoing is a forward
looking statement within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Act of 1934, as amended,
which represents the Company's expectations and beliefs concerning future
events. The Company cautions that its discussion of Legal Proceedings is
further qualified by important factors that could cause actual results to
differ materially from those in the forward looking statement, including but
not limited to the discovery of facts not presently known to the Company or
determinations by judges, juries or other finders of fact which do not accord
with the Company's evaluation of the possible liability from existing
litigation.
ITEM 2. CHANGES IN SECURITIES.
There is nothing to report with regard to this item.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
There is nothing to report with regard to this item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
There is nothing to report with regard to this item.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
The exhibits listed on the accompanying Exhibit Index, on page 30,
are filed as part of this report.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the registrant during the
quarter ended June 30, 1999.
-28-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TOYOTA MOTOR CREDIT CORPORATION
-------------------------------
(Registrant)
Date: August 13, 1999 By /S/ MICHAEL DEADERICK
---------------------------------
Michael Deaderick
Group Vice President - Operations
Date: August 13, 1999 By /S/ GREGORY B. WILLIS
-------------------------------
Gregory B. Willis
Vice President
Finance and Administration
(Principal Accounting Officer)
-29-
<PAGE>
EXHIBIT INDEX
Exhibit Method
Number Description of Filing
- ------- ----------- ---------
10.1 Amendment No. 3 to Operating Agreement dated Filed
June 1, 1999 between TMCC, TMS and TMMNA Herewith
12.1 Calculation of Ratio of Earnings to Fixed Charges. Filed
Herewith
15.1 Report of Independent Accountants. Filed
Herewith
15.2 Letter regarding unaudited interim financial Filed
information. Herewith
27.1 Financial Data Schedule. Filed
Herewith
-30-
<PAGE>
EXHIBIT 10.1
AMENDMENT NO. 3 TO OPERATING AGREEMENT
This Amendment No. 3 to Operating Agreement dated June 1, 1999
(the "Amendment") is entered into by and among Toyota Motor Sales, U.S.A.,
Inc., a California corporation ("TMS USA"), Toyota Motor Credit Corporation, a
California corporation ("TMCC"), and Toyota Motor Manufacturing North America,
Inc., a Kentucky corporation ("TMMNA"), with reference to the following facts:
WHEREAS, TMS USA, TMCC and TMMNA are parties to that certain
Operating Agreement dated January 16, 1984, as amended by Amendment No. 1 to
Operating Agreement dated May 14, 1996 and Amendment No. 2 to Operating
Agreement dated December 1, 1997 (as amended, the "Agreement") pursuant to
which TMS USA and TMMNA agreed, among other things, to provide a fixed charge
coverage covenant and to make certain other agreements with TMCC for the
benefit of holders of TMCC's commercial paper; and
WHEREAS, TMS USA, TMCC and TMMNA now desire to amend the Agreement
to provide that the covenants and obligations of TMS USA and TMMNA thereunder
shall also accrue to the benefit of holders of TMCC's extendible commercial
notes (notes with an initial maturity period of 90 days, subject to extension
for an additional 300 days at the option of TMCC).
NOW, THEREFORE, in consideration of the foregoing and the mutual
promises herein contained, the parties hereto agree as follows:
1. Section 11 of the Agreement is hereby amended and restated in
its entirety as follows:
"11. This agreement represents the undertakings of the respective
parties to this agreement and holders of TMCC's commercial paper
notes and extendible commercial notes may rely upon the
representations contained herein."
2. Section 12 of the Agreement is hereby amended and restated in
its entirety as follows:
"12. This agreement will not be amended or terminated at any time
during which TMCC has commercial paper notes or extendible
commercial notes outstanding, unless such amendments apply only to
commercial paper notes and extendible commercial notes issued
after the effective date of any such amendment."
3. Except as specifically set forth herein, all other provisions
of the Agreement shall remain in full force and effect.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be executed and delivered by their respective officers thereunto duly
authorized as of the day and year first above written.
TOYOTA MOTOR SALES, U.S.A., INC.
By: /S/ DOUGLAS M. WEST
-----------------------------
Name: Douglas M. West
Title: Senior Vice President
TOYOTA MOTOR MANUFACTURING NORTH AMERICA, INC.
By: /S/ KAZUO NISHIDA
------------------------------------
Name: Kazuo Nishida
Title: Vice President and Treasurer
TOYOTA MOTOR CREDIT CORPORATION
By: /S/ GEORGE E. BORST
-------------------------------------------------
Name: George E. Borst
Title: Senior Vice President and General Manager
<PAGE>
EXHIBIT 12.1
TOYOTA MOTOR CREDIT CORPORATION
CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in Millions)
<S> <C> <C> <C> <C>
Consolidated income
before income taxes....................... $ 68 $ 55 $176 $171
---- ---- ---- ----
Fixed charges:
Interest.................................. 230 249 690 722
Portion of rent expense
representative of the
interest factor (deemed
to be one-third)....................... 1 1 4 4
---- ---- ---- ----
Total fixed charges.......................... 231 250 694 726
---- ---- ---- ----
Earnings available
for fixed charges......................... $299 $305 $870 $897
==== ==== ==== ====
Ratio of earnings to
fixed charges<F1>......................... 1.29 1.22 1.25 1.24
==== ==== ==== ====
<FN>
- -----------------
<F1> As of June 30, 1999 TMCC has guaranteed payments of principal and interest
on $128 million principal amount of bonds issued in connection with the
manufacturing facilities of certain of its affiliates. In addition, as of
July 31, 1999, TMCC has guaranteed $30 million of TCA's debt. As of June 30,
1999, TMCC has not incurred any fixed charges in connection with such guarantees
and no amount is included in any ratio of earnings to fixed charges.
</FN>
</TABLE>
<PAGE>
EXHIBIT 15.1
Report of Independent Accountants
---------------------------------
To the Board of Directors and Shareholder of
Toyota Motor Credit Corporation
We have reviewed the accompanying consolidated balance sheet and the related
consolidated statements of income and of cash flows of Toyota Motor Credit
Corporation (a wholly owned subsidiary of Toyota Motor Sales, U.S.A., Inc.) and
its subsidiaries as of and for the three-month and nine-month periods ended
June 30, 1999. This financial information is the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial information for it to be in
conformity with generally accepted accounting principles.
We previously audited in accordance with generally accepted auditing standards,
the consolidated balance sheet as of September 30, 1998, and the related
consolidated statements of income, of shareholder's equity and of cash flows
for the year then ended (not presented herein), and in our report dated
October 30, 1998 we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying consolidated balance sheet information as of September 30, 1998,
is fairly stated in all material respects in relation to the consolidated
balance sheet from which it has been derived.
/S/ PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
August 13, 1999
<PAGE>
EXHIBIT 15.2
August 13, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
We are aware that our report dated August 13, 1999 on our review of interim
financial information of Toyota Motor Credit Corporation for the period ended
June 30, 1999 and included in the Company's quarterly report on Form 10-Q for
the quarter then ended is incorporated by reference in its Registration
Statement dated August 7, 1998 as amended by Amendment No. 1 dated August 18,
1998 (No. 333-60913).
Yours very truly,
/S/ PRICEWATERHOUSECOOPERS LLP
[ARTICLE] 5
[LEGEND]
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TOYOTA
MOTOR CREDIT CORPORATION'S JUNE 30, 1999 FINANCIAL STATEMENTS AND
NOTES THERETO AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
[/LEGEND]
[MULTIPLIER] 1,000,000
<TABLE>
<S> <C>
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] SEP-30-1999
[PERIOD-END] JUN-30-1999
[CASH] 184
[SECURITIES] 439
[RECEIVABLES] 22,531<F1>
[ALLOWANCES] 228
[INVENTORY] 0
[CURRENT-ASSETS] 0<F2>
[PP&E] 0
[DEPRECIATION] 0<F3>
[TOTAL-ASSETS] 23,707
[CURRENT-LIABILITIES] 0<F2>
[BONDS] 17,565
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 915
[OTHER-SE] 1,427
[TOTAL-LIABILITY-AND-EQUITY] 23,707
[SALES] 0
[TOTAL-REVENUES] 2,530
[CGS] 0
[TOTAL-COSTS] 1,958<F3>
[OTHER-EXPENSES] 317
[LOSS-PROVISION] 79
[INTEREST-EXPENSE] 0<F3>
[INCOME-PRETAX] 176
[INCOME-TAX] 74
[INCOME-CONTINUING] 102
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 102
[EPS-BASIC] 0
[EPS-DILUTED] 0
<FN>
<F1>Receivables include Investments in Operating Leases net of Accumulated
Depreciation and Finance Receivables net of Unearned Income.
<F2>Toyota Motor Credit Corporation's Balance Sheet is not classified into
Current and Long-Term Assets and Liabilities.
<F3>Total Costs includes Interest Expense and Depreciation on Leases.
</FN>
</TABLE>
