USGAAP Annual Report 1

Toyota Motor Corporation 31 July 2003 Table of Contents As filed with the Securities and Exchange Commission on July 31, 2003 -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 ---------------- FORM 20-F ---------------- (Mark One) REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934 x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: March 31, 2003 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 1-14948 ---------------- TOYOTA JIDOSHA KABUSHIKI KAISHA (Exact Name of Registrant as Specified in its Charter) ---------------- TOYOTA MOTOR CORPORATION (Translation of Registrant's Name Into English) ---------------- Japan (Jurisdiction of Incorporation or Organization) 1 Toyota-cho, Toyota City Aichi Prefecture 471-8571 Japan +81 565 28-2121 (Address of Principal Executive Offices) ---------------- Securities registered or to be registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange On Which Registered ------------ ------------------------------- Common Stock The New York Stock Exchange Securities registered or to be registered pursuant to Section 12(g) of the Act: none Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: none Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report: Title of Each Class Amount outstanding as of March 31, 2003 ------------ ---------------------------- Common Stock 3,451,617,645 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No Indicate by check mark which financial statement item the Registrant has elected to follow: Item 17 Item 18 x -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Table of Contents TABLE OF CONTENTS page ---- ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 1 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 1 ITEM 3. KEY INFORMATION 1 3.A SELECTED FINANCIAL DATA 1 3.B CAPITALIZATION AND INDEBTEDNESS 6 3.C REASONS FOR THE OFFER AND USE OF PROCEEDS 6 3.D RISK FACTORS 6 ITEM 4. INFORMATION ON THE COMPANY 7 4.A HISTORY AND DEVELOPMENT OF THE COMPANY 7 4.B BUSINESS OVERVIEW 7 4.C ORGANIZATIONAL STRUCTURE 37 4.D PROPERTY, PLANTS AND EQUIPMENT 38 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 40 5.A OPERATING RESULTS 40 5.B LIQUIDITY AND CAPITAL RESOURCES 59 5.C RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES 62 5.D TREND INFORMATION 63 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 64 6.A DIRECTORS AND SENIOR MANAGEMENT 64 6.B COMPENSATION OF DIRECTORS AND CORPORATE AUDITORS 68 6.C BOARD PRACTICES 68 6.D EMPLOYEES 69 6.E SHARE OWNERSHIP 70 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 72 7.A MAJOR SHAREHOLDERS 72 7.B RELATED PARTY TRANSACTIONS 73 7.C INTERESTS OF EXPERTS AND COUNSEL 74 ITEM 8. FINANCIAL INFORMATION 75 8.A CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION 75 8.B SIGNIFICANT CHANGES 75 ITEM 9. THE OFFER AND LISTING 76 9.A LISTING DETAILS 76 9.B PLAN OF DISTRIBUTION 77 9.C MARKETS 77 9.D SELLING SHAREHOLDERS 77 9.E DILUTION 77 9.F EXPENSES OF THE ISSUE 77 ITEM 10. ADDITIONAL INFORMATION 78 10.A SHARE CAPITAL 78 10.B MEMORANDUM AND ARTICLES OF ASSOCIATION 78 10.C MATERIAL CONTRACTS 83 10.D EXCHANGE CONTROLS 83 10.E TAXATION 84 10.F DIVIDENDS AND PAYING AGENTS 89 10.G STATEMENT BY EXPERTS 89 10.H DOCUMENTS ON DISPLAY 89 10.I SUBSIDIARY INFORMATION 89 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 90 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 91 -------------------------------------------------------------------------------- Table of Contents page ---- ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 92 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 92 ITEM 15. CONTROLS AND PROCEDURES 92 ITEM 16A. (RESERVED) 92 ITEM 16B. CODE OF ETHICS 92 ITEM 16C. (RESERVED) 92 ITEM 17. FINANCIAL STATEMENTS 93 ITEM 18. FINANCIAL STATEMENTS 93 ITEM 19. EXHIBITS 94 -------------------------------------------------------------------------------- Table of Contents As used in this annual report, the term 'fiscal' preceding a year means the twelve-month period ended March 31 of the year referred to. All other references to years refer to the applicable calendar year. In parts of this annual report, amounts reported in Japanese yen have been translated into U.S. dollars for the convenience of readers. Unless otherwise noted, the rate used for this translation was Y120.20 = $1.00. This was the approximate exchange rate in Japan on March 31, 2003. Cautionary Statement with Respect to Forward-Looking Statements This annual report contains forward-looking statements that reflect Toyota's plans and expectations. These forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors that may cause Toyota's actual results, performance, achievements or financial position to be materially different from any future results, performance, achievements or financial position expressed or implied by these forward-looking statements. These factors include: (i) changes in economic conditions affecting, and the competitive environment in, the automotive markets in Japan, North America, Europe and other markets in which Toyota operates; (ii) fluctuations in currency exchange rates, particularly with respect to the value of the Japanese yen, the U.S. dollar, the euro and the British pound; (iii) Toyota's ability to realize production efficiencies and to implement capital expenditures at the levels and times planned by management; (iv) changes in the laws, regulations and government policies affecting Toyota's automotive operations, particularly laws, regulations and policies relating to environmental protection, vehicle emissions, vehicle fuel economy and vehicle safety, as well as changes in laws, regulations and government policies affecting Toyota's other operations, including the outcome of future litigation and other legal proceedings; (v) political instability in the markets in which Toyota operates; (vi) Toyota's ability to timely develop and achieve market acceptance of new products; and (vii) fuel shortages or interruptions in transportation systems, labor strikes, work stoppages or other interruptions to, or difficulties in, the employment of labor in the major markets where Toyota purchases materials, components and supplies for the production of its products or where its products are produced, distributed or sold. A discussion of these and other factors which may affect Toyota's actual results, performance, achievements or financial position is contained in ' Operating and Financial Review and Prospects' and 'Information on the Company' and elsewhere in this annual report. -------------------------------------------------------------------------------- Table of Contents PART I ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS Not applicable. ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE Not applicable. ITEM 3. KEY INFORMATION 3.A SELECTED FINANCIAL DATA You should read the U.S. GAAP selected consolidated financial information presented below together with 'Operating and Financial Review and Prospects' and Toyota's consolidated financial statements contained in this annual report. Toyota has announced that, beginning in the fiscal year ended March 31, 2004, it will discontinue the preparation of annual consolidated financial statements under Japanese GAAP and prepare its annual consolidated financial statements only under U.S. GAAP. U.S. GAAP Selected Financial Data The following selected financial data have been derived from Toyota's consolidated financial statements. These financial statements were prepared in accordance with U.S. GAAP. Year Ended March 31, --------------------------------------------------------------------------------------------------------------------- 1999 2000 2001 2002 2003 2003 --------------------------------------------------------------------------------------------------------------------- (in millions, except share and per share data) Consolidated Statement of Income Data: Automotive (1): Revenues Y 10,974,527 Y 10,943,642 Y 11,591,061 Y 13,067,428 Y 14,311,451 $ 119,064 Operating income 686,954 638,990 765,557 1,057,948 1,246,925 10,374 Financial Services: Revenues 594,678 534,154 571,058 698,022 724,898 6,031 Operating income 38,347 31,667 31,693 45,115 30,328 252 All Other (1)(2): Revenues 1,115,066 1,134,481 1,019,527 728,848 795,217 6,616 Operating income 28,977 26,453 (4,578) (2,954) 4,529 38 (loss) Elimination of intersegment: Revenues (220,622) (191,028) (226,409) (303,990) (330,013) (2,746) Operating income (3,870) 1,451 (1,943) (6,477) (10,136) (85) (loss) Total Company: Revenues 12,463,649 12,421,249 12,955,237 14,190,308 15,501,553 128,965 Operating income 750,408 698,561 790,729 1,093,632 1,271,646 10,579 Income before income 875,674 880,680 1,107,289 972,101 1,226,652 10,205 taxes, minority interest and equity in earnings of affiliated companies Net income 451,646 481,936 674,898 556,567 750,942 6,247 Net income per share: Basic 119.47 128.27 180.65 152.26 211.32 1.76 Diluted 119.47 128.27 180.65 152.26 211.32 1.76 Shares used in 3,780,357 3,757,276 3,735,862 3,655,304 3,553,602 - computing net income per share, basic (in thousands) Shares used in 3,780,357 3,757,317 3,735,941 3,655,306 3,553,624 - computing net income per share, diluted (in thousands) 1 ----------------------------------------------------------------------------------------------------------------------- Table of Contents Year Ended March 31, ------------------------------------------------------------------------------------------------------------------------ 1999 2000 2001 2002 2003 2003 ------------------------------------------------------------------------------------------------------------------------ (in millions) Consolidated Balance Sheet Data (end of period): Total Assets: Automotive Y 7,424,177 Y 7,557,700 Y 7,951,107 Y 9,121,406 Y 9,392,749 $ 78,143 Financial Services 4,481,106 4,752,270 5,531,568 6,910,593 7,392,486 61,501 All other 931,988 1,089,532 584,948 650,912 722,604 6,012 Unallocated 3,041,914 3,041,458 2,952,160 2,622,819 2,645,135 22,006 Total company 15,879,185 16,440,960 17,019,783 19,305,730 20,152,974 167,662 Short-term debt, including 1,784,081 2,171,490 2,183,681 2,984,378 3,118,665 25,946 current portion of long-term debt Long-term debt, less 2,997,725 2,913,759 3,083,344 3,722,706 4,137,528 34,422 current portion Shareholders' equity (3) 6,655,283 6,912,140 7,077,411 7,264,112 7,121,000 59,243 Other Data: Capital Expenditures 1,731,297 1,376,704 1,201,406 1,548,593 1,610,229 13,396 (1) In August 2001, Toyota increased its ownership interest in Hino Motors, Ltd. by 13.6% to 50.2%. As a result, revenues and operating income for the automotive and all other segments in fiscal 2002 reflect the consolidation of the results of Hino from the acquisition date. Previously, Hino was accounted for using the equity method. See note 5 of Toyota's consolidated financial statements for a presentation of the unaudited pro forma results of operations of Toyota for fiscal 2001 and 2002, as if the additional ownership interest in Hino had been acquired as of April 1, 2000. (2) Revenues and operating income for the all other segment in fiscal 1999 and fiscal 2000 reflect the consolidation of the results of IDO Corporation for the full fiscal year. IDO merged with DDI Corporation and KDD Corporation on October 1, 2000. Toyota's current ownership in the merged entity is 11.7%. As a result, the investment in the merged entity is accounted for as a marketable equity security investment and the merged entity's financial results are not otherwise reflected in Toyota's own financial results beginning on October 1, 2000. (3) Up through fiscal 2001, the results of certain subsidiaries in Europe and other regions were reported in the consolidated financial statements using a December 31 year-end. During fiscal 2002, the year-ends of most of these foreign subsidiaries were changed from December 31 to March 31. As a result, Toyota decreased retained earnings by Y3,061 million to reflect the impact of conforming the year-ends at March 31, 2001. Japanese GAAP Selected Financial Data The statement of income data set forth below for each of the five fiscal years ended March 31, 2003, and the balance sheet data as of the end of each of the five fiscal years ended March 31, 2003, have been derived from Toyota's consolidated financial statements that were prepared in accordance with Japanese GAAP and were included in its Japanese Securities Reports filed with the director of the Kanto Local Finance Bureau. There are differences between Japanese GAAP and U.S. GAAP primarily related to valuation of securities, translation of foreign currency financial statements, accrued compensated absences, employee retirement and severance benefits and comprehensive income. Under Japanese GAAP, a restatement of prior year financial statements reflecting the effect of a change in accounting policies is not permitted. 2 ----------------------------------------------------------------------------------------------------------------------- Table of Contents Year Ended March 31, ----------------------------------------------------------------------------------------------------------------------- 1999(1) 2000(3)(4)(6) 2001(7)(8)(9) 2002 2003(10)(11) 2003 (in millions, except share and per share data) Consolidated Statement of Income Data Automotive: Revenues Y 11,198,411 Y 11,279,673 Y 11,940,004 Y 13,909,926 Y 14,801,278 $ 123,139 Operating income 730,774 681,485 812,610 1,078,098 1,332,361 11,084 Financial Services: Revenues 586,195 528,714 564,524 693,386 720,007 5,990 Operating income 46,359 36,196 31,098 68,658 28,521 237 All Other (2): Revenues 1,184,220 1,290,178 1,165,509 819,470 871,953 7,254 Operating income 26,825 31,985 (1,966) (897) 14,383 120 Elimination of intersegment: Revenues (219,817) (219,004) (245,613) (316,484) (338,948) (2,820) Operating income (29,013) 26,316 28,390 (22,388) (11,585) (96) Total Company: Revenues 12,749,009 12,879,561 13,424,424 15,106,298 16,054,290 133,563 Operating income 774,945 775,982 870,132 1,123,471 1,363,680 11,345 Income before income 771,886 750,502 864,129 1,113,525 1,649,319 13,721 taxes and minority interests Net income 356,180 406,798 471,296 615,825 944,671 7,859 Net income per share: Basic 94.22 109.96 127.88 170.69 272.76 2.27 Diluted 94.22 109.96 127.88 170.69 272.74 2.27 Shares used in 3,780,357 3,699,625 3,685,399 3,607,780 3,454,705 - computing net income per share, basic (in thousands) Shares used in 3,780,357 3,699,625 3,685,399 3,607,783 3,454,726 - computing net income per share, diluted (in thousands) ------------------------------------------------------------------------------------------------------------------------ Year Ended March 31, 1999(1) 2000(3)(5)(6) 2001(8)(9) 2002 2003(10)(11) 2003 ------------------------------------------------------------------------------------------------------------------------ (in millions) Consolidated Balance Sheet Data (end of period): Total Assets: Automotive Y 7,094,263 Y 7,812,480 Y 8,305,599 Y 9,458,096 Y 9,617,993 $ 80,017 Financial Services 4,333,631 4,736,866 5,666,584 7,069,278 7,657,145 63,703 All other (2) 866,687 1,068,910 836,574 778,651 857,739 7,136 Unallocated 2,458,731 2,850,799 2,710,671 2,582,912 2,609,509 21,710 Total company 14,753,312 16,469,055 17,519,428 19,888,937 20,742,386 172,566 Short-term debt, including 1,755,095 2,192,655 2,218,375 3,077,849 3,170,892 26,380 current portion of long-term debt Long-term debt, less 2,938,719 2,856,374 3,046,933 3,626,687 4,094,112 34,061 current portion Shareholders' equity (10) 6,175,937 6,796,666 7,114,567 7,325,072 7,460,268 62,065 Other Data: Capital Expenditures 1,545,236 1,305,745 1,262,482 1,508,771 1,537,158 12,788 3 ----------------------------------------------------------------------------------------------------------------------- Table of Contents (1) In fiscal 1999, certain reclassifications were made regarding enterprise taxes and amortization of goodwill as well as earnings of affiliated companies. The net effect of these reclassifications and accounting change was to increase operating income in the automotive segment by Y45,152 million, in the financial services segment by Y629 million and in the all other segment by Y15,108 million. On a consolidated basis, the net effect of these reclassifications and change was to increase operating income by Y60,889 million and income before income taxes and minority interests by Y65,571 million. These changes had no effect on net income or shareholders' equity. (2) Revenues and operating income for the all other segment in fiscal 1999 and fiscal 2000 reflect the consolidation of the results of IDO Corporation for the full fiscal year. IDO merged with DDI Corporation and KDD Corporation on October 1, 2000. Toyota's current ownership in the merged entity is 11.7%. As a result, the investment in the merged entity is accounted for as a marketable equity security investment and the merged entity's financial results are not otherwise reflected in Toyota's own financial results beginning on October 1, 2000. (3) With the adoption of tax effect accounting starting from fiscal 2000, assets in the automotive segment increased by Y546,979 million, assets in the financial segment by Y64,120 million, and assets in the all other segment by Y 19,558 million in comparison with the former accounting method. On a consolidated basis, the new method also increased net income by Y26,312 million, total assets by Y747,049 million and shareholders' equity by Y411,793 million. (4) In order to unify the accounting policies of the parent and its subsidiaries in fiscal 2000, the amount that would be required to be paid if all the employees were to terminate their employment involuntarily at the end of the current year is used for allowance for retirement and severance benefits for domestic consolidated subsidiaries, and the difference between the balance at the end of the current year and that of the previous year is accrued as retirement and severance benefit costs. The effect of this change was to reduce operating income in the automotive segment by Y10,002 million, in the financial services segment by Y0 million and in the all other segment by Y1,012 million, while on a consolidated basis to reduce operating income by Y11,014 million, income before income taxes and minority interests by Y57,571 million, and net income by Y33,805 million. (5) Starting in fiscal 2000, certain software was capitalized as an intangible fixed asset, which amounted to Y42,657 million. (6) Starting in fiscal 2000, the control standard and the influence standard were introduced as factors in determining consolidated subsidiaries and equity-method affiliates. In this connection, revenues and operating income in each segment, as well as revenues, operating income, income before income taxes and minority interests, and net income across segments increased in comparison with the former method. Assets and liabilities have also increased as a result. (7) Starting in fiscal 2001, the new accounting standard, 'Accounting Standards for Retirement Benefits' has been applied. As a result, operating income in the automotive segment, financial services segment and all other segment decreased by Y19,603 million, Y11 million and Y24 million, respectively. On a consolidated basis, operating income and income before income taxes and minority interests decreased by Y19,638 million and Y127,783 million, respectively. (8) Starting in fiscal 2001, the new accounting standard, 'Accounting Standards for Financial Instruments' has been applied. As a result, total assets in the automotive segment, financial services segment and all other segment increased by Y203,269 million, Y64,738 million and Y19,726 million, respectively. On a consolidated basis, the effect of this adoption was to increase total assets by Y533,395 million and to increase income before income taxes and minority interests by Y1,396 million. (9) Starting in fiscal 2001, the revised accounting standard for transactions denominated in foreign currencies (based on the 'Opinion Letter on the Revision of Accounting Standards for Transactions Denominated in Foreign Currencies', Financial Accounting Council, October 22, 1999) has been applied. Based on this revised standard, translation adjustments, which were previously included under assets in fiscal 2000, are presented under shareholders' equity. As a result, on a consolidated basis, income before income taxes and minority interest decreased by Y263 million. 4 ----------------------------------------------------------------------------------------------------------------------- Table of Contents (10) In conjunction with the implementation of 'Accounting Standards for Treasury Stock and the Withdrawal of Legal Reserve' (Financial Accounting Standards No. 1) effective from April 1, 2002, Toyota Motor Corporation and its domestic subsidiaries have adopted this statement for fiscal 2003. The adoption of the new standard had no material impact on the results for fiscal 2003. In connection with the amendment of the Regulations Concerning the Terminology, Forms and Preparation Methods of Consolidated Financial Statements, shareholders' equity in the consolidated balance sheet for fiscal 2003 has been prepared in accordance with the amended regulations. (11) In conjunction with the implementation of 'Accounting Standard for Earnings Per Share' (Financial Accounting Standards No. 2) and 'Implementation Guidance of Accounting Standard for Earnings Per Share' (Implementation Guidance of Financial Accounting Standards No. 4) for the fiscal year beginning on and after April 1, 2002, Toyota adopted these statements for fiscal 2003. Dividends Toyota normally pays cash dividends twice per year. Toyota's board of directors recommends the dividend to be paid following the end of each fiscal year. This recommended dividend must then be approved by shareholders at the ordinary general meeting of shareholders held in June of each year. Immediately following approval of the dividend at the shareholders' meeting, Toyota pays the dividend to holders of record as of the preceding March 31. In addition to these year-end dividends, Toyota may pay interim dividends in the form of cash distributions from its retained earnings to its shareholders of record as of September 30 in each year by resolution of its board of directors and without shareholder approval. Toyota normally pays the interim dividend in late November. The following table sets forth the dividends paid by Toyota for each of the periods shown. The periods shown are the six months ended on that date. The U.S. dollar equivalents for the dividends shown are based on the noon buying rate for Japanese yen on the last date of each period set forth below. Dividend per Share ------------------- Period Ended Yen Dollars ------------ ---- ------- September 30, 1998 10.0 0.08 March 31, 1999 13.0 0.11 September 30, 1999 11.0 0.10 March 31, 2000 13.0 0.13 September 30, 2000 11.0 0.10 March 31, 2001 14.0 0.11 September 30, 2001 13.0 0.11 March 31, 2002 15.0 0.11 September 30, 2002 16.0 0.13 March 31, 2003 20.0 0.17 The payment and the amount of any future dividends are subject to the level of Toyota's future earnings, its financial condition and other factors, including statutory restrictions on the payment of dividends. Exchange Rates In parts of this annual report, yen amounts have been translated into U.S. dollars for the convenience of investors. Unless otherwise noted, the rate used for the translations was Y120.20= $1.00. This was the approximate exchange rate in Japan on March 31, 2003. The following table sets forth information regarding the noon buying rates for Japanese yen in New York City as announced for customs purposes by the Federal Reserve Bank of New York expressed in Japanese yen per $1.00 during the periods shown. On July 28, 2003, this noon buying rate was Y119.42 = $1.00. The average exchange rate for the periods shown is the average of the month-end rates during the period. 5 -------------------------------------------------------------------------------- Table of Contents Average Fiscal Year Ending March 31, At End (of --------------------------- of month-end Period rates) High Low ------- --------- ------- ------ (Y per $1.00) 1999 118.43 128.10 147.14 108.83 2000 102.73 110.02 124.45 101.53 2001 125.54 111.64 125.54 104.19 2002 132.70 125.64 134.77 115.89 2003 118.07 121.10 133.40 115.71 2004 (through July 28, 2003) 119.42 119.47 120.55 115.94 Month Ending High Low --------- ------- ------- (Y per $1.00) January 31, 2003 120.18 117.80 February 28, 2003 121.30 117.14 March 31, 2003 121.42 116.47 April 30, 2003 120.55 118.25 May 31, 2003 119.50 115.94 June 30, 2003 119.87 117.46 Fluctuations in the exchange rate between the Japanese yen and the U.S. dollar will affect the U.S. dollar equivalent of the price of the shares on the Japanese stock exchanges. As a result, exchange rate fluctuations are likely to affect the market price of the ADSs on the New York Stock Exchange. Toyota will declare any cash dividends on shares in Japanese yen. Exchange rate fluctuations will also affect the U.S. dollar amounts received on conversion of cash dividends. Exchange rate fluctuations can also materially affect Toyota's reported operating results. In particular, a strengthening of the Japanese yen against the U.S. dollar can have a material adverse effect on Toyota's reported operating results. For a further discussion of the effects of currency rate fluctuations on Toyota's operating results, please see 'Operating and Financial Review and Prospects - Operating Results - Overview -Currency Fluctuations'. 3.B CAPITALIZATION AND INDEBTEDNESS Not applicable. 3.C REASONS FOR THE OFFER AND USE OF PROCEEDS Not applicable. 3.D RISK FACTORS A description of factors affecting Toyota's business, financial condition and results of operations from time to time is contained in 'Operating and Financial Review and Prospects', 'Cautionary Statement with Respect to Forward-Looking Statements', 'Information on the Company' and elsewhere in this annual report. 6 --------------------------------------------------------------------------------------------------------------------- Table of Contents ITEM 4. INFORMATION ON THE COMPANY 4.A HISTORY AND DEVELOPMENT OF THE COMPANY Toyota Motor Corporation is a limited liability, joint-stock company incorporated under the Commercial Code of Japan. Toyota commenced operations in 1933 as the automobile division of Toyota Industries Corporation (formerly, Toyoda Automatic Loom Works, Ltd.). Toyota became a separate company in 1937. Today, Toyota operates through 500 consolidated subsidiaries and 225 affiliated companies of which 58 companies are accounted for through the equity method. See '- Business Overview - Capital Expenditures and Divestitures' for a description of Toyota's principal capital expenditures and divestitures since April 1, 2000 and information concerning Toyota's principal capital expenditures and divestitures currently in progress. Toyota's principal executive offices are located at 1 Toyota-cho, Toyota City, Aichi Prefecture 471-8571, Japan. Toyota's telephone number in Japan is 81-565-28-2121. 4.B BUSINESS OVERVIEW General Toyota is the largest producer of automobiles in Japan and the third largest automobile producer in the world in terms of both vehicles produced and vehicles sold. Toyota sold 6.1 million vehicles in fiscal 2003. Toyota had net revenues of Y15.5 trillion and net income of Y750.9 billion in fiscal 2003. Toyota's business segments are automotive operations, financial services operations and all other operations. Toyota's automotive operations include the design, manufacture, assembly and sale of passenger cars, recreational and sport-utility vehicles, minivans and trucks and related parts and accessories. Toyota's financial services business consists primarily of providing financing to dealers and their customers for the purchase or lease of Toyota vehicles. Related to Toyota's automotive operations is its development of intelligent transport systems. Intelligent transport systems are a variety of information technology-based systems encompassing car multimedia systems, on-board intelligent systems, advanced transportation systems and transportation infrastructure and logistics systems. These systems combine automotive, information and telecommunications technologies. An important element of Toyota's work in intelligent transport systems is its research collaboration with telecommunication and information services providers. Toyota currently holds an 11.7% interest in KDDI Corporation, a full service telecommunications provider in Japan. Toyota's other operations business segment includes its information technology related businesses, including certain intelligent transport systems and an e-commerce marketplace called Gazoo.com, and the design and manufacture of prefabricated housing. Toyota sells its vehicles in more than 140 countries, and other regions. Toyota's primary markets for its automobiles are Japan, North America and Europe. During fiscal 2003, approximately 36% of Toyota's automobile unit sales were in Japan; 32% were in North America and 13% were in Europe. The remaining 19% of unit sales were in other markets, including approximately 8% in East and Southeast Asian countries other than Japan. The Worldwide Automotive Market Toyota estimates that annual worldwide vehicle sales totaled approximately 58 million units in 2002. Automobile sales are affected by a number of factors including: â€¢ social, political and economic conditions, â€¢ the introduction of new vehicles and technologies, 7 --------------------------------------------------------------------------------------------------------------------- Table of Contents â€¢ the cost of purchasing and operating automobiles, and â€¢ the availability and cost of credit and fuel. These factors can cause consumer demand to vary substantially from year to year in different geographic markets and for individual categories of automobiles. In 2002, North America, Europe and Japan represented the world's top three automotive markets. Worldwide market share, based on total automobile unit sales in each market, was 34% for North America, 33% for Europe and 10% for Japan. In North America, despite increased use of sales incentives, new vehicle sales decreased slightly to 19.9 million units due to the continuing general economic slowdown in the United States. In Europe, due to the global economic slowdown, new vehicle sales decreased slightly to 19.1 million units. In Japan, adverse economic conditions continued to keep consumer demand at a low level. As a result, total vehicle unit sales (including mini-vehicles) in Japan decreased by 2.0% to 5.8 million units in 2002. Japan, however, remains the second largest national market for automobiles. Backed by a slight economic recovery in the region, demand for new vehicles throughout East and Southeast Asia continued to grow during 2002. As a result, unit sales in East and Southeast Asian markets (excluding Japan, China and Hong Kong) in 2002 increased by 14% to 3.4 million units. Additionally, the growing Chinese market expanded by nearly 1.0 million units in 2002, making it the world's fourth largest national automotive market. The worldwide automotive industry is affected significantly by government regulation aimed at reducing harmful effects on the environment, enhancing vehicle safety and improving fuel economy. These regulations have added to the cost of vehicles. Many governments also regulate local content and impose tariffs and other trade barriers and price or exchange controls as a means of creating jobs, protecting domestic producers or influencing their balance of payments. Changes in regulatory requirements and other government-imposed restrictions can limit an automaker's operations. These regulations can also make the repatriation of profits to an automaker's home country difficult. The development of the worldwide automotive market includes the continuing globalization of automotive operations. Manufacturers seek to achieve globalization by localizing the design and manufacture of automobiles and their components in the markets in which they are sold. By expanding production capabilities beyond their home markets, automotive manufacturers are able to reduce their exposure to fluctuations in foreign exchange rates and lessen their exposure to trade restrictions and tariffs. Recent transactions have resulted in consolidation within the worldwide automotive industry. These transactions include: â€¢ the acquisition by Ford Motor Company of the passenger car business of Volvo AB in March 1999, â€¢ the acquisition by Renault S.A. of a 37% equity interest in Nissan Motor Co., Ltd. in March 1999, followed by the acquisition of an additional 8% equity interest in March 2002, â€¢ the acquisition by General Motors Corporation of a 20% equity interest in Fiat S.p.A. in March 2000, â€¢ the acquisition by Volkswagen AG of a 19% equity interest in Scania AB in March 2000, â€¢ the acquisition by General Motors Corporation of a 21% equity interest in Fuji Heavy Industries Ltd. in April 2000, â€¢ the acquisition by Ford Motor Company of the Land Rover business from BMW AG in June 2000, â€¢ the acquisition by DaimlerChrysler AG of a 10% equity interest in Hyundai Motor Company announced in June 2000, â€¢ the acquisition by Renault S.A. of a 70% equity interest in Samsung Motors Incorporated in September 2000, 8 --------------------------------------------------------------------------------------------------------------------- Table of Contents â€¢ the acquisition by DaimlerChrysler AG of a 34% equity interest in Mitsubishi Motors Corp. in October 2000, followed by the acquisition of an additional 3% equity interest in June 2001, â€¢ the increased equity investment by General Motors Corporation in Suzuki Motor Corporation from 10% to 20% in November 2000, â€¢ the acquisition by Renault S.A. of a 15% equity interest in Volvo AB in January 2001, â€¢ the acquisition by Nissan Motor Co., Ltd. of a 13.5% equity interest in Renault S.A. in March 2002, followed by the acquisition of an additional 1.5% equity interest in April 2002, and â€¢ the execution of definitive documentation regarding the establishment of a joint venture between General Motors Corporation and the Daewoo Motor Creditors Committee in April 2002. General Motors Corporation will hold a 67% stake in the joint venture (General Motors Corporation will hold a 42% and the GM Group a 25% stake, respectively) and Daewoo's creditors will own the remaining 33%. The reasons for these consolidation transactions vary, but include responses to global overcapacity in the production of automobiles, the need to reduce costs and create efficiencies by increasing the number of automobiles produced using common vehicle platforms and by sharing research and development expenses for environmental and other technology, the desire to expand a company's global presence through increased size and the desire to expand into particular segments or geographic markets. Toyota believes that it has the resources, strategies and technologies in place to compete effectively in the industry as an independent company. In addition, Toyota believes that its research and development initiatives, particularly the development of environmentally friendly new vehicle technologies and intelligent transport systems, provide it with a strategic advantage as a global competitor. Toyota's ability to compete in the consolidating global automotive industry will depend in part on Toyota's successful implementation of its business strategy. This is subject to a number of factors, some of which are not in Toyota's control. These factors are discussed in 'Operating and Financial Review and Prospects' and elsewhere in this annual report. Toyota's Strategy Toyota believes that its preeminence in the Japanese automotive industry, its growth in the United States and Europe and its overall position as the world's third largest automobile producer have resulted from the following factors: â€¢ its timely introduction of new products that meet consumer demands and incorporate superior design and environmental and safety technologies, â€¢ its continuing focus on high quality and low-cost manufacturing, â€¢ its commitment to investment in research and development and its sales and production infrastructure, and â€¢ its financial strength, which enables Toyota to achieve the above objectives. Toyota's corporate goal is to continue to be a market leader in the automotive industry and grow, while enhancing profitability and shareholder returns. Toyota's strategy to achieve this goal consists of the following elements: Localize Global Operations with Targeted Regional Strategies Toyota believes that a global competitor in the worldwide automotive industry needs to supply each market in which it competes with products that are targeted carefully to local demand. Toyota also believes that a local sales, marketing and manufacturing presence is necessary to fully exploit a market's potential. Localization better 9 --------------------------------------------------------------------------------------------------------------------- Table of Contents allows Toyota to design, manufacture and offer products within each market that respond to market changes and satisfy local tastes and preferences. A localized manufacturing presence also allows Toyota to make a social contribution to the communities in which it has a local presence. Finally, localization helps Toyota hedge against fluctuations in foreign exchange rates. To be a leader in each major market in which it competes, Toyota is pursuing the following targeted regional strategies: â€¢ Maintain Preeminence in Japan. Toyota is committed to maintaining its market leadership in Japan by consistently achieving a market share (excluding mini-vehicles) of at least 40% per year. Toyota, excluding Daihatsu and Hino, held a domestic market share (excluding mini-vehicles) on a retail basis of 43.1% in fiscal 2001, 42.2% in fiscal 2002 and 42.3% in fiscal 2003. Despite the continued market downturn and increased competition from its domestic competitors, Toyota was able to maintain its market share above 40% in fiscal 2003 due to the active introduction of remodeled and new cars, such as the ist and the Alphard, and increased marketing efforts. This was also attributable to the strong sales of various existing models, including the Corolla. Moreover, Toyota is pro-active in its use of information technology to enhance customer loyalty and its brand image. For example, Toyota has continued to work towards improving communication with customers through initiatives like its Gazoo.com website. Toyota is also planning to improve its domestic sales and distribution network by introducing to Japan the Lexus brand, which has been highly successful in the United States, and reorganizing existing sales channels to better target consumer demand patterns. â€¢ Capitalize on Success in North America. Toyota's North American unit sales continued to increase steadily in fiscal 2003 despite the continuing economic slowdown in the United States. Toyota's North American unit sales grew from 1.78 million units in fiscal 2002 to 1.98 million units in fiscal 2003. In fiscal 2003, Toyota's North American unit sales represented 32% of its total global unit sales. Toyota attributes its continuing success in the North American market to successful new product introductions and strong sales of core models such as the Corolla, Highlander and Lexus ES300. These product introductions include the Matrix in February 2002. In 2003, Toyota introduced the Lexus GX470, as well as the Scion xA and Scion xB (marketed in Japan as the ist and the bB, respectively) which are targeted at younger drivers. Toyota has also undertaken regular model changes and updates of major models in order to meet changing market demand. For example, Toyota recently completed a full model change for the 4Runner and Sienna, as well as model changes for the Echo and Tundra. Relatively high margin light trucks now account for approximately 39% of Toyota's vehicle unit sales in the United States, while passenger vehicles account for approximately 48% and Lexus models account for approximately 13%. As a part of its strategy to globalize operations through localization, Toyota has increased its production capacity and upgraded its production facilities in North America over the past few years. In 2002, 1.13 million vehicles, or approximately 58% of Toyota vehicles sold in North America, were produced in North America. Toyota plans to continue to grow its North American business and, after the opening of its new Texas plant, expects to increase its local annual production capacity to 1.65 million vehicles by 2006. â€¢ Continue Growth in Europe. Toyota's European unit sales grew to approximately 776,000 vehicles in fiscal 2003, an increase of approximately 6.7% compared to fiscal 2002 levels, despite a slight decrease in sales during 2002 in the overall European automotive market. Toyota is committed to achieving further growth in Europe by expanding and targeting its model line to European preferences, as well as enhancing cost competitiveness by increasing local production and procurement, thereby decreasing its exposure to currency fluctuations. Furthermore, during fiscal 2003, Toyota continued to expand its cost-cutting efforts in production, development, and sales and marketing. The success of the Yaris, RAV4 and the remodeled Corolla, which was introduced in the second half of 2001, has been a major factor behind Toyota's growth in the European market. Sales of the Yaris, which in 2001 became the first Toyota model to pass the 200,000 mark in Europe, reached 213,000 units in 2002. Toyota believes that the Yaris is strengthening Toyota's position in the European subcompact category and is an important factor in improving Toyota's overall brand image in Europe. Toyota's manufacturing facility in France 10 --------------------------------------------------------------------------------------------------------------------- Table of Contents which produces the Yaris commenced operations in January 2001 and produced approximately 140,000 units in 2002. Production capacity at this facility reached 180,000 units in November 2002. Toyota also plans to support its growth in Europe by strengthening its sales network, particularly in the southern part of the region. In April 2002, a Europe-based holding company, Toyota Motor Europe S.A./N.V., was established to coordinate Toyota's European manufacturing, engineering and marketing activities. In April 2003, Toyota began consolidating its European sales companies under Toyota Motor Europe S.A./N.V. to further enhance coordination between Toyota's local production and marketing operations throughout Europe. Toyota expects to achieve annual unit sales in Europe of 800,000 vehicles by 2005, with local production supporting 50% or more of those sales. In another recent move to expand European capacity, Toyota built a transmission manufacturing plant in Poland which commenced production in 2002. During 2002, Toyota and its unconsolidated affiliates produced in Europe (excluding production in Turkey) approximately 43% of Toyota vehicles sold in that market. â€¢ Maintain Commitment to East and Southeast Asia. Toyota believes that the markets in East and Southeast Asia continue to offer substantial growth opportunities, as total automobile sales in these markets grew by 14% in 2002. Toyota believes one factor behind its success in these markets is strong sales of core models such as the Hilux and Corolla. Toyota also made substantial investments in these markets earlier than its major global competitors. Among these investments were the opening of local production facilities in Thailand, Indonesia, the Philippines, Malaysia, Taiwan, China and Vietnam. In addition, Toyota developed relationships with local suppliers in the region. While competition in East and Southeast Asia is increasing, Toyota believes that its existing local presence in the market provides it with a competitive advantage and expects to benefit from its early entrance into the market as demand for vehicles in the region continues to grow. Toyota plans to further increase its competitiveness as it faces increased competition in the region by improving product lines offered in the region and increasing local procurement to decrease its exposure to foreign currency exchange fluctuations. In the near term, Toyota will continue to operate its plants in the region and export production to meet demand in other regions as well as the growing demand in Southeast Asia. Furthermore, Toyota is actively expanding its business in India and China through local production and sales. Toyota Kirloskar Motor Ltd. in India commenced sales of the Qualis, a multi-purpose vehicle aimed exclusively at the Indian market, in January 2000. Local production and sales of the Corolla in India commenced in early 2003. In China, Sichuan Toyota Motor Co. released the Coaster small bus, the first Toyota vehicle bearing the Toyota name, in April 2001. Tianjin Toyota Motor Co., Toyota's joint venture with Tianjin FAW Xiali Corporation, Ltd., commenced sales in November 2002 of the VIOS, a new subcompact car using the same platform as the Yaris and the Echo (marketed in Japan as the Platz). In April 2003, Toyota and China FAW Group Corporation agreed to jointly produce four different Toyota-brand vehicle models in China. Under the agreement, production of the Crown luxury car is expected to start at the second plant of Tianjin Toyota Motor Co., Ltd. with an annual production capacity of 50,000 in spring of 2005; production of the Corolla is expected to start at the first plant of Tianjin Toyota Motor Co., Ltd. with an annual production capacity of 30,000 in spring of 2004; production of Land Cruiser vehicles is expected to start at the Chang Chun Plant of China FAW Group Corporation with an annual production capacity of 10,000 by the end of 2003; and production of the Land Cruiser Prado is expected to start at Sichuan Toyota Motor Co., Ltd. with an annual production capacity of 5,000 by the end of 2003. Promote Key Initiatives Globally Toyota believes that the following key initiatives are essential for increasing its competitiveness in the global marketplace and for improving its profitability and prospects for continued growth: â€¢ Maintain Leadership in Research and Development. Toyota believes that its long-term success will depend on being a leader in automotive research and development. To that end, Toyota is focusing its research and development on the promotion of environmentally sound technologies, product safety and information technologies. Toyota is committed to building environmentally friendly automobiles and is focusing its initiatives on the following areas: â€¢ the development of hybrid technology, 11 --------------------------------------------------------------------------------------------------------------------- Table of Contents â€¢ the development of automobiles powered by fuel cells and other non-traditional fuel technologies, â€¢ the reduction of emissions and improvement of fuel economy in conventional automobiles, and â€¢ the increased recycling of manufacturing materials. An example of Toyota's leadership in environmental technologies was the introduction of the Prius to the Japanese market in December 1997. The Prius is the world's first mass-produced hybrid car that runs on a combination of gasoline and electric power. Toyota introduced a new version of the Prius in May 2000, and is planning to introduce a completely remodeled version featuring Toyota's new hybrid system, which combines decreased environmental impact with increased power and performance. Toyota also plans to introduce hybrid versions of its sport-utility vehicles. Toyota currently also sells the Coaster, a hybrid mini-bus which is sold on a 'made-to-order' basis, the Estima minivan and the Crown sedan. Toyota also introduced a hybrid version of the Alphard minivan in July 2003. In addition, Toyota began limited sales of a fuel cell hybrid vehicle in Japan and the United States in December 2002. Fuel cell hybrid vehicles are hybrid cars that use fuel cells to generate the electricity that drives the motor. Toyota also promotes the development of advanced technologies through alliances with other major manufacturers. For instance, Toyota is broadening its research and development efforts through an alliance with General Motors Corporation for the development of advanced environmental technologies and an alliance with Exxon Mobil Corporation for the development of fuel compatible with future power sources. Toyota has also formed a collaborative relationship with Volkswagen in areas such as recycling and navigation technologies. In addition, Toyota has entered into an alliance with PSA Peugeot Citroen for the development and production of low-cost, fuel-efficient and environment-friendly vehicles. â€¢ Improve Efficiency. Toyota plans to improve returns and enhance operating efficiencies by continuing to pursue aggressive cost reduction programs, including: â€¢ improving product development and production efficiencies through the re-integration and improvement of vehicle platforms and power trains, â€¢ producing higher volumes of successful vehicle models and discontinuing vehicle models not producing sufficient sales volumes, â€¢ streamlining production systems, â€¢ continuing collaborative research and development projects that help optimize use of capital and other resources, â€¢ improving the efficiency of domestic and international distribution, â€¢ increasing the focus on global purchasing opportunities, standardization and modularization to optimize purchasing from suppliers, and â€¢ applying advanced information technologies to improve efficiency throughout the product development and production processes. Toyota is improving production efficiency further by installing more versatile equipment and systems, modifying vehicle body designs to allow for a greater variety of models on each production line and sharing more parts among vehicles. â€¢ Expand Finance Operations. Toyota's financial services include loans and leasing programs for customers and dealers. Toyota believes that its ability to provide financing to its customers is an important value-added service. In July 2000, Toyota established a wholly owned subsidiary, Toyota Financial Services Corporation, to oversee the management of Toyota's finance companies worldwide. Toyota believes that Toyota Financial Services Corporation helps strengthen the overall competitiveness of Toyota's financial business, improve risk management and streamline related decision-making processes. Toyota plans to expand its network of financial services, which currently covers 27 countries, in accordance with its strategy of developing auto-related financing businesses in significant markets. 12 --------------------------------------------------------------------------------------------------------------------- Table of Contents Diversify into Automotive-Related Business Sectors While Toyota's principal focus will continue to be on the automotive industry, Toyota intends to further develop opportunities in automotive-related businesses where its technological strengths and experience provide a competitive advantage. In particular, Toyota is focusing its efforts on the development of intelligent transport systems that Toyota expects will alleviate traffic problems, stimulate technological progress in the automobile market and add value to vehicles. Toyota believes that the development of intelligent transport systems will be an important way for automobile manufacturers to distinguish themselves in the future. Toyota further believes that the development of intelligent transport systems will complement its core automotive business. Toyota expects that the market for intelligent transport systems will greatly expand in the future and is committed to the development of intelligent transport systems technology. Toyota has also been focusing on expanding its e-commerce marketplace, Gazoo.com, which has grown into one of the leading automotive-related web sites in Japan. Gazoo.com focuses on providing a wide range of customers with access to information on Toyota's products and services, but also functions as a broader e-commerce marketplace that provides content and sales sites within a virtual shopping mall. Maintain Financial Strength Toyota currently enjoys high credit ratings. These ratings reflect, among other factors, its strong financial position. In addition, Toyota currently maintains a substantial level of cash and liquid investments and a conservative debt-to-equity ratio. Toyota believes these factors will permit it to maintain the resources necessary to fund its research and development expenditures, capital expenditures and financing operations even if it experiences short-term fluctuations in earnings. Focus on Shareholder Value Toyota has increasingly focused on the special concerns and expectations of its shareholders in recent years and expects this to continue. As a result, Toyota has undertaken a share repurchase program and has increased cash dividends. Since instituting the first in a series of share repurchase plans in fiscal 1997, Toyota has repurchased approximately 416 million shares of its common stock at a total cost of approximately Y1,381 billion. As a result, Toyota's total outstanding shares were reduced to 3,451,617,645 shares (excluding treasury shares) as of March 31, 2003. Moreover, Toyota subsequently repurchased approximately 15 million shares of its common stock at a total cost of approximately Y46 billion before its ordinary general meeting of shareholders in June 2003. Toyota may repurchase its shares by using retained earnings by resolution of its ordinary general meetings of shareholders, subject to certain limitations and restrictions. Pursuant to the resolutions of its ordinary general meeting of shareholders in 2003, during the one-year period until the next ordinary general meeting of shareholders, Toyota may repurchase up to 150 million shares or up to the number of shares equivalent to Y400 billion in cost of repurchase. The following table shows the number of shares repurchased and the cost of repurchase of those shares for each of the periods indicated: Year Ended March 31, ------------------------------------------------------------------------------------------------------------------------ 1999 2000 2001 2002 2003 ------------------------------------------------------------------------------------------------------------------------ Approximate number of shares repurchased 44 million (1) 11 million 65 million 77 million 155 million Approximate amount paid Y 134 billion Y45 billion Y264 billion Y278 billion Y453 billion 1. Approximately 8.5 million shares were repurchased at a cost of approximately Y26 billion from Daihatsu Motors Co., Ltd., which became Toyota's subsidiary shortly before such repurchase. The amount of any share repurchases are subject to the level of Toyota's future earnings, its financial condition and other factors. 13 Table of Contents Automotive Operations Toyota's revenues from its automotive operations were Y14.3 trillion in fiscal 2003, Y13.1 trillion in fiscal 2002 and Y11.6 trillion in fiscal 2001. Toyota produces and markets a full line of automobiles, including passenger cars, recreational and sport-utility vehicles, minivans and trucks. Toyota's subsidiary, Daihatsu Motor Co., Ltd., produces mini-vehicles and compact cars. Hino Motors, Ltd., which became Toyota's subsidiary in August 2001, produces commercial vehicles. Toyota also manufactures automotive parts, components and accessories for its own use and for sale to others. Vehicle Models Toyota's product line includes subcompact and compact cars, mini-vehicles, hybrid, mid-size, luxury, sports and specialty cars, recreational and sport-utility vehicles, pickup trucks, minivans and trucks. Subcompact and Compact Toyota's subcompact and compact cars include the four-door Corolla sedan, which is one of Toyota's best selling models. The Yaris, marketed as the Vitz in Japan, is a subcompact car designed to include features that are particularly attractive to European consumers, such as better car performance and comfort as compared to other compact cars available on the market, with small car fuel economy and low emissions. The Vitz is currently available in Japan as a hatchback in three- and five-door models. Toyota succeeded in expanding its customer base in this segment during fiscal 2000 by introducing the Echo (marketed in Japan as the Platz) in the United States and Japan and FunCargo, WiLL Vi and bB to the Japanese market, all of which are derived from the same platform as the Vitz. Toyota also introduced in January 2001 the Allex and the Corolla Runx subcompact cars to the Japanese market. Toyota introduced a remodeled Corolla Spacio to the Japanese market in May 2001, and introduced a remodeled Corolla to the European market in early 2002. In February 2002, Toyota introduced the Corolla Matrix to North America. Toyota also introduced the ist and the WiLL Cypha compact cars to the Japanese market in May 2002 and October 2002, respectively. In early 2003, Toyota began introducing the VIOS to China and other Asian markets. In June 2003, Toyota introduced the Scion xA and Scion xB (marketed in Japan as the ist and the bB, respectively) in the United States. Mini-Vehicles Daihatsu, a subsidiary of Toyota, manufactures mini-vehicles, passenger vehicles, commercial vehicles and auto parts. Mini-vehicles are cars, vans or trucks with engine displacements of 660 cubic centimeters or less. Toyota also sells under its name certain automobiles (excluding mini-vehicles) manufactured by Daihatsu. Daihatsu sold approximately 491,000 mini-vehicles and 70,000 automobiles during fiscal 2003. Daihatsu's largest market is Japan. Japan accounted for approximately 85% of Daihatsu's unit sales during fiscal 2003. Hybrid The Prius is the world's first mass-produced hybrid car. It runs on an optimal combination of gasoline and electric power. This system allows it to travel twice as far as conventional vehicles of comparable size and performance on the same amount of gasoline. In addition, the hybrid design of the Prius results in the output of 75% less pollution than the maximum amount allowed by Japanese environmental regulations. Toyota views the Prius as the cornerstone of its emphasis on designing and producing environmentally friendly automobiles. As part of this emphasis, Toyota launched the sale of the Prius in North America and Europe during 2000. Toyota currently sells hybrid versions of the Estima minivan and the Crown luxury sedan, and introduced a hybrid version of the Alphard minivan in July 2003. Toyota also began limited sales of a fuel cell hybrid vehicle in Japan and the United States in December 2002. As of March 31, 2003, Toyota has sold over 140,000 hybrid vehicle units. Toyota aims to continue its efforts to offer a diverse lineup of hybrid vehicles, enhance engine power while improving fuel efficiency, and otherwise promote increased sales of hybrid vehicles. 14 ------------------------------------------------------------------------------------------------------------------------ Table of Contents Mid-Size Toyota's mid-size models include the Camry, which has been the best selling car in the United States for five of the past six years. The Camry line includes the Camry Solara sport coupe. Toyota introduced a remodeled version of the Camry to the United States in September 2001. Camry sales in the United States for 2002 reached approximately 434,000 units (including approximately 36,000 Solaras), making it the best selling car in the United States once again. Toyota's Japanese mid-size cars also include the Mark II, the Opa, the Premio, the Allion, the Vista and the Caldina station wagon. In July 2001, Toyota introduced the Verossa, its new mid-size sedan, to the Japanese market. Toyota introduced the Mark II Blit to the Japanese market in January 2002. In September 2002, Toyota introduced a remodeled version of the Caldina station wagon to the Japanese market. In March 2003, Toyota introduced a remodeled version of the Avensis, its flagship mid-size car for European markets. Luxury In North America and Europe, Toyota's luxury line consists primarily of vehicles sold under the Lexus brand name. In the United States, Lexus has earned its third consecutive title of best-selling luxury brand by selling over 234,000 vehicles in 2002. Lexus models include the full-size LS430 sedan, which is sold as the Celsior in Japan and was remodeled in August 2000; the smaller GS300 and GS430 sedans and the ES300 sedan, sold as the Aristo and the Windom in Japan; the IS300 and IS200 mid-size sport sedans, marketed in Japan as the Altezza; luxury sport-utility vehicles such as the GX470, which was introduced to the United States in December 2002 and is marketed in Japan as the Land Cruiser Prado; the RX330, which is marketed in Japan as the Harrier and which was completely remodeled and introduced to the United States in March 2003; and the SC430 and LX470. Toyota expects to commence sales of its luxury automobiles in Japan under the Lexus brand in 2005. Toyota's best-selling full-size luxury car in Japan is the Crown, a hybrid version of which was introduced to the Japanese market in August 2001. In Japan, Toyota also sells the Progres and the Brevis, compact luxury models, as well as the Century limousine. The Brevis was introduced to the Japanese market in June 2001. Toyota introduced the Lexus IS300 Sport Cross, which is sold in Japan as the Altezza Gita, to the Japanese and North American markets in August 2001, and to the European market in September 2001. Sports and Specialty Toyota's main sports car model is the Celica. The Celica is a two-door sports coupe with a four-cylinder engine. In Japan and other markets, Toyota sells the Lexus SC430 two-door sports coupe, which is marketed in Japan as the Soarer, as well as the MR2 Spyder, a mid-size sport car model marketed in Japan as the MR-S and in Europe as the MR2. Recreational and Sport-Utility Vehicles and Pickup Trucks Toyota sells a variety of sport-utility vehicles and pickup trucks, including the Tacoma and Tundra pickup trucks. Toyota sport-utility vehicles available in North America include the Sequoia; the 4Runner, which was completely remodeled and introduced to the United States in October 2002 and is marketed as the Hilux-Surf in Japan; the RAV4; the Highlander, which is available in Japan under the model name Kluger V; and the Land Cruiser. The Tacoma, the Tundra and the Sequoia are built in the United States. Toyota also offers sport-utility vehicles under the Lexus brand, including the LX470, the newly introduced GX470, and the remodeled RX330. The LX470, the Land Cruiser, the Tundra and the Sequoia are equipped with V-8 engines. In August 2002, Toyota introduced the Voltz, a compact sport-utility vehicle jointly developed with General Motors, to the Japanese market. Toyota's pickup truck, the Hilux, has been the best selling model of all Toyota cars sold in Thailand. Minivans Toyota offers several basic models for the global minivan market. Its largest minivan, the Alphard, was released in May 2002. Toyota's other minivan models include the Sienna, which underwent a model change in March 2003 and is sold in North America; the Previa, which is sold in Japan as the Estima; the European 15 -------------------------------------------------------------------------------- Table of Contents market's Avensis Verso, which was remodeled in 2001 and is sold in Japan as the Ipsum; the Gaia, which is sold only in Japan; the Hiace; the Noah and the Voxy, both released in Japan in November 2001; and the Wish, which was released in Japan in January 2003. Trucks and Buses Toyota's truck category includes both vans and trucks and covers vehicles up to a load capacity of 3.5 tons. Hino's product line-up includes large trucks with a load capacity of over 10 tons, medium trucks with a load capacity between four and eight tons, and small trucks with a load capacity of between two and five tons. Hino held the largest share of the Japanese medium truck market in fiscal year 2003, primarily due to the success of its Ranger Pro model. Hino's bus line-up includes large to medium buses used primarily as tour buses and public buses, small buses and micro-buses, which are derived from buses and passenger cars. Hino maintains a large share of the small bus (excluding micro-buses) segment in Japan. Product Development New cars introduced in Japan during fiscal 2003 include the van and wagon versions of the Succeed and Probox, as well as the Alphard minivan, ist and WiLL Cypha compact cars, Voltz compact sport-utility vehicle and Wish minivan. During fiscal 2003, remodeled cars sold in Japan included the Cardina station wagon, as well as the Land Cruiser, Harrier and Hilux-Surf sport-utility vehicles. Toyota also began limited sales of a fuel cell hybrid vehicle in Japan and the United States in December 2002. Toyota also released a remodeled version of the Avensis in Europe in March 2003. Toyota released a hybrid version of the Alphard minivan in July 2003. Toyota is planning to introduce a completely remodeled version of the Prius featuring Toyota's new hybrid system, which combines decreased environmental impact with increased power and performance. Markets, Sales and Competition Toyota's primary markets are Japan, North America and Europe. The following table sets forth Toyota's consolidated vehicle unit sales by geographic market for the periods shown. The vehicle unit sales below reflect vehicles sales made by Toyota to unconsolidated entities (and recognized as sales under Toyota's revenue recognition policy), including sales to unconsolidated distributors and dealers. Vehicles sold by Daihatsu are included in vehicle unit sales numbers set forth below beginning in October 1998. Vehicles sold by Hino are included in vehicle unit sales numbers set forth below beginning in October 2001. North America sales information includes sales in Puerto Rico and Hawaii. Year Ended March 31, ------------------------------------------------------------------------------------------------------------------------ 1999 2000 2001 2002 2003 ------------------------------------------------------------------------------------------------------------------------ Units % Units % Units % Units % Units % Market Japan 1,929,279 41.1% 2,177,524 42.0% 2,322,838 42.0% 2,217,002 40.0% 2,217,770 36.3% North America 1,485,095 31.6 1,689,483 32.6 1,733,569 31.4 1,780,133 32.1 1,981,912 32.4 Europe 557,506 11.9 633,879 12.2 691,135 12.5 727,192 13.1 775,952 12.7 Other Regions 723,267 15.4 681,888 13.2 779,321 14.1 818,395 14.8 1,137,644 18.6 ------------------------------------------------------------------------------------------------------------------------ Total 4,695,147 100.0% 5,182,774 100.0% 5,526,863 100.0% 5,542,722 100.0% 6,113,278 100.0% ------------------------------------------------------------------------------------------------------------------------ 16 ------------------------------------------------------------------------------------------------------------------------ Table of Contents The following table sets forth Toyota's vehicle unit sales and market share in Japan, North America and Europe on a retail basis for the periods shown. Each market's total sales and Toyota's sales represent new vehicle registrations in the relevant year. All Japan information excludes mini-vehicles. The sales information contained below excludes unit sales by Daihatsu and Hino, each a consolidated subsidiary of Toyota. North America sales information includes sales in Puerto Rico and Hawaii. Fiscal Year Ended March 31, (sales in thousands of units) 1999 2000 2001 2002 2003 Japan: Total market sales 4,215 3,981 4,121 3,981 4,045 Toyota sales (retail basis) 1,688 1,682 1,774 1,678 1,710 Toyota market share 40.1% 42.2% 43.1% 42.2% 42.3% Calendar Year Ended December 31, (sales in thousands of units) 1998 1999 2000 2001 2002 North America: Total market sales 18,168 19,767 20,375 20,110 19,933 Toyota sales (retail basis) 1,516 1,631 1,766 1,894 1,941 Toyota market share 8.3% 8.3% 8.7% 9.4% 9.7% Europe: Total market sales 18,853 20,076 19,624 19,642 19,127 Toyota sales (retail basis) 541 592 656 666 756 Toyota market share 2.9% 2.9% 3.3% 3.4% 4.0% Japan The automobile market in Japan has suffered from an overall industry decline over the past several years. Despite this trend, Toyota believes that Japan continues to be the most important market for Toyota's automotive products. In Japan, the automotive industry is highly competitive. The Japanese automotive industry includes five major domestic producers, five specialized domestic producers and a growing volume of imports from major United States and European manufacturers. The prolonged economic slump in the Japanese economy has also shifted consumer preference towards more affordable automobiles such as compact and subcompact vehicles. For more than 40 years, Toyota has been the largest automobile manufacturer in Japan. In each year since fiscal 1999, Toyota, excluding Daihatsu and Hino, has achieved a market share (excluding mini-vehicles) of over 40%, reflecting in part the success of the Vitz subcompact car and the successful introduction of additional new model sedans and recreational vehicles. Toyota's (excluding Daihatsu and Hino) share of the domestic market excluding mini-vehicles was 42.3% in fiscal 2003. Toyota's (including Daihatsu and Hino) share of the market including mini-vehicles was 38.5% in fiscal 2003. Toyota is taking steps to further increase its market leadership in Japan through a major sales campaign designed to generate demand and by introducing new models in key market segments. North America Toyota's consolidated vehicle unit sales in North America was 1,981,912 in fiscal 2003. The United States is the largest portion of the North American market for Toyota, representing 90% of its total retail unit sales in the region. In 2002, Toyota's unit sales in North America continued the strength they have shown in recent years, reflecting the market success of its light trucks. Toyota's market share in the United States was 10.4% in 2002, its largest market share ever. Competition in North America, particularly the United States, is intense. Toyota's principal competitors in North America are General Motors, Ford and DaimlerChrysler, with other manufacturers providing competition within specific market segments. 17 ------------------------------------------------------------------------------------------------------------------------ Table of Contents Europe European sales of Toyota vehicles in fiscal 2003 reached an all-time high for the sixth year in a row, with total sales of 775,952 vehicles, up 6.7% from fiscal 2002. In 2002, Toyota had a market share in Europe of 3.9%. Toyota expects to achieve annual retail unit sales in Europe of 800,000 vehicles by 2005. European sales growth is largely attributable to the success of the Yaris, which was launched in April 1999 and is marketed as the Vitz in Japan, as well as strong sales of the RAV4 and the remodeled Corolla introduced in the second half of 2001. Toyota's principal European markets are the United Kingdom, Italy and Germany. Toyota's principal competitors in Europe are Volkswagen, General Motors and Ford. East and Southeast Asia The market in the East and Southeast Asia region (excluding China and Hong Kong) grew to 3.42 million units in 2002, an increase of approximately 14% from 3.0 million units in 2001. Toyota believes that the long-term potential of the East and Southeast Asian market is good and remains committed to its operations in the region. The following table sets forth Toyota's sales figures in East and Southeast Asia for the periods shown. This information excludes unit sales by Daihatsu and Hino. Toyota Sales (in thousands of vehicles) --------------------- Asia (excluding China and Hong Kong) China and Hong Kong ---------- -------- 2000 316 24 2001 310 32 2002 393 62 While competition in East and Southeast Asia is increasing, Toyota believes that its early entry into the market gives it a competitive advantage. Toyota plans to further increase its competitiveness as it faces increased competition in the region by improving product lines offered in the region and increasing local procurement to decrease its exposure to foreign currency exchange fluctuations. Toyota's market share in Asia (excluding China and Hong Kong) was 10.7% in 2000, 10.3% in 2001 and 11.5% in 2002. East and Southeast Asia (excluding Hong Kong and China) accounted for 10.2 % of Toyota's overseas unit sales in 2002 (not including unit sales by Daihatsu and Hino outside Japan), an increase of 1.5% from 8.7% in 2002. Production Toyota and its affiliates produce automobiles and related components through more than 50 manufacturing organizations in 25 countries and regions around the world. Toyota's major manufacturing facilities include plants in Japan, the United States, Canada, the United Kingdom, France, Turkey, Indonesia, Thailand, Taiwan, China, Australia, South Africa, Brazil and Argentina. Toyota commenced operations of its Alabama manufacturing plant for engines in May 2003. Daihatsu brand vehicles are produced at seven factories in Japan and four manufacturing organizations in four other countries, including Indonesia. In the United States, Toyota and General Motors operate a joint venture that assembles passenger cars and trucks. For a listing of Toyota's principal production facilities, see 'Information on the Company - Property, Plants and Equipment'. In recent years Toyota has increased its production capacity outside Japan. This increase in overseas production capacity is integral to Toyota's strategy of globalizing operations through localization. In 2002, approximately 56% of Toyota automobiles sold overseas were manufactured in overseas plants by Toyota and its unconsolidated affiliates. In 2002, 58% of Toyota vehicles sold in North America were produced in North America. Of the vehicles sold in Europe in 2002, 43% were produced in Europe, an increase from 36% in 2001. 18 -------------------------------------------------------------------------------- Table of Contents This increase is largely due to increased sales of the Yaris and Corolla, which are produced at production facilities in France and the U.K. In fiscal 2003, Toyota produced approximately 4.2 million vehicles in Japan and approximately 1.7 million vehicles overseas, compared to approximately 4.0 million vehicles in Japan and 1.3 million vehicles overseas in fiscal 2002. The following table shows the worldwide vehicle unit production by Toyota for the periods shown. These production figures do not include vehicles produced by Toyota's unconsolidated affiliates. The sales unit information elsewhere in this annual report includes sales of vehicles produced by these affiliates. Vehicles produced by Daihatsu are included in vehicle production numbers set forth below beginning in October 1998. Vehicles produced by Hino are included in the vehicle production numbers set forth below beginning in October 2001. Year Ended March 31, ----------- 1999 2000 2001 2002 2003 --------- --------- --------- --------- --------- Units Produced 4,458,406 5,002,731 5,275,213 5,305,803 5,850,203 Toyota closely monitors its actual units of sale, market share and units of production data and uses this information to allocate resources to existing manufacturing facilities and to plan for future expansions. See '- Capital Expenditures and Divestitures' for a description of Toyota's recent investments in completed plant constructions and for a description of Toyota's current investments in ongoing plant constructions. The Toyota Production System Toyota pioneered the internationally recognized production system known as the ' Toyota Production System'. The Toyota Production System is based on Toyota's own concepts of efficient production and has the following two principal elements: â€¢ just-in-time production, and â€¢ 'jidoka'. The just-in-time method is a production method through which necessary parts and components are manufactured and delivered in just the right quantity at the moment they are needed. This allows Toyota to maintain low levels of inventory while maintaining operating efficiency. Jidoka generally means automation in Japanese. Toyota combines automation with its ability to stop work immediately when problems arise in the production process to prevent the production of defective products. To achieve this, Toyota designs its equipment to detect abnormalities and to stop whenever abnormalities occur. Toyota also authorizes its machine operators and other members of its production team to stop production whenever they note anything suspicious. This permits Toyota to build quality into the production process by avoiding defects and preventing the waste that would result from producing a series of defective items. Toyota believes that the Toyota Production System allows it to achieve mass-production efficiencies over small and large production volumes. This gives Toyota the flexibility to respond to changing consumer demand without significantly increased production costs. While the Toyota Production System remains the basis of Toyota's automobile production, the system has been expanded for use in Toyota's parts production, logistics and customer service activities. In addition to the two principal elements described above, the Toyota Production System seeks to increase manufacturing efficiency and product quality internally through on-site identification and analysis of problems, improving transparency throughout the production process, and resolving problems at the source. As one means of realizing these goals, Toyota recently introduced the use of sophisticated information technologies to improve each step of its vehicle development process, from product planning to commencement of mass-production. 19 -------------------------------------------------------------------------------- Table of Contents These technologies are intended to enhance flexibility, simplicity, quality, cost competitiveness, and speed. Specifically, detailed computer simulation of the assembly and test-run of a new vehicle or new vehicle production equipment or system is conducted before a prototype is made. An actual prototype is made only after defects and related issues have been identified and resolved by computer simulation, thereby minimizing the time required for rebuilding prototypes and significantly shortening production lead times. Moreover, this system is used to prepare virtual factories and other visual aids in order to facilitate training and communication at overseas plants and enable the efficient transfer of necessary technology and skills. To improve efficiency in the manufacturing of auto bodies, Toyota has developed a Global Body Line that enables the use of the same general specifications for both small-quantity and mass production lines. This simple and flexible production system offers considerable advantages over previous flexible body manufacturing systems, and has already been implemented in 30 out of Toyota's 35 body production lines worldwide as of March 31, 2003. Cost Reduction Toyota continues to focus on reducing costs and improving efficiencies through various measures. One of these measures is the reduction in the number of platforms used in vehicle production. Platforms are the essential structures that form the base of different vehicle models. By using a common platform for the production of a greater number of models, Toyota believes that it will be able to decrease the substantial expenditures required to design and develop multiple platforms. In addition, Toyota believes that it will be able to achieve the scale benefits of producing larger volumes per platform, thereby reducing manufacturing cost per vehicle. In addition to platform reduction, Toyota continues to focus on other methods of increasing the commonality of parts and components used in different models. These steps include reducing model variations and the number of parts used in each model. Toyota is seeking to increase the efficiency of procurement from outside suppliers by making use of a common global database to enable plants in different parts of the world to purchase parts and materials from the most competitive sources. Toyota's ability to achieve these cost reductions is subject to a number of factors, some of which are not in Toyota's control. These factors include the successful implementation of the manufacturing processes described above, as well as the business and financial conditions of Toyota's suppliers and the general economic and political conditions in the markets in which these suppliers operate. Distribution Toyota's automotive sales distribution network is the largest in Japan. As of March 31, 2003, this network consisted of 308 dealers employing approximately 41,000 sales personnel and operating more than 5,000 sales and service outlets. Toyota owns 25 of these dealers and the remainder are independent. In addition, at March 31, 2003, Daihatsu's sales distribution network consisted of 65 dealers employing approximately 5,300 sales personnel and operating approximately 800 sales and service outlets. Daihatsu owns 36 of these dealers. Toyota believes that this extensive sales network has been an important factor in its success in the Japanese market. A large number of the cars sold in Japan are purchased from salespersons who visit customers in their homes or offices. In recent years, however, the traditional method of sales through home visits is being replaced by showroom sales. The percentage of automobile purchases through showrooms has been gradually increasing, particularly in the minivan and recreational vehicle segments. Toyota expects this trend to continue, and accordingly plans to review all aspects of its sales activities, including its customer service model at showrooms, with a view toward improving customer satisfaction and operational efficiency. Sales of Toyota vehicles in Japan are conducted through five sales channels - ' Toyota,' 'Toyopet,' 'Corolla,' 'Netz' and 'Vista'. In response to continuing structural changes in the Japanese market that reflect the evolving social environment and consumer preferences, Toyota plans to redistribute and restructure its domestic sales network as appropriate. Specifically, Toyota plans to introduce the Lexus brand to the Japanese 20 -------------------------------------------------------------------------------- Table of Contents market in 2005 in order to enhance its competitiveness in the domestic luxury automobile market. In addition, Toyota plans to combine the Netz and Vista sales channels into an expanded Netz channel by May 2004 in order to cater to customers with new demand patterns. The following table provides information for each channel as of March 31, 2003. Dealers ------------------------ Channel Toyota Independent Sales Market Focus ------- Owned ----------- Outlets --------------------------------- ------ ------- Toyota 5 45 50 Large and luxury models; corporate and fleet customers Toyopet 6 46 52 Medium and luxury models; family customers Corolla 7 67 74 Compact models; family customers Netz 5 61 66 Newer models; younger and female customers Vista 2 64 66 Models designed for customers seeking to participate in current trends Toyota has also commenced marketing of automobiles through its proprietary websites. Recently, prospective customers have requested information on automobiles through Toyota's websites at an average rate of approximately 30,000 requests per month, with approximately 10% of those users purchasing a Toyota automobile within three months of making a request. Outside Japan, Toyota vehicles are marketed through approximately 170 distributors operating approximately 7,500 authorized sales outlets in more than 140 countries, and other regions. Daihatsu vehicles are sold through approximately 110 dealers operating approximately 2,300 sales outlets in more than 140 countries, and other regions. Toyota operates sales subsidiaries and maintains networks of dealers in each of its principal overseas markets, including North America, Europe and Asia. In Eastern Europe, Toyota has a wholly-owned sales subsidiary in Poland and participates in joint venture sales companies in the Czech Republic and Hungary. Toyota also operates 110 sales outlets in China. Intelligent Transport Systems Toyota is seeking to develop the use of intelligent transport systems in its automotive products. Toyota views the primary purpose of intelligent transport systems as adding value to its vehicles. Intelligent transport systems combine automotive, information and telecommunications technologies in an effort to provide vehicle occupants with an array of information and enhanced safety features. In developing intelligent transport systems, Toyota has engaged in, and expects to continue to engage in, collaborative research and development projects with other companies including telecommunications and information services providers, electronics manufacturers and automobile parts makers. Features of intelligent transport systems include: Car Intelligence. Systems designed to utilize advanced information communications and sensing technology to compensate for human error. Examples of car intelligence features currently available from Toyota include: â€¢ systems that cause a vehicle to maintain an appropriate set speed and distance between vehicles when driving behind another vehicle through the use of laser radar sensors located in the bumper of the vehicle and computerized brake control; â€¢ a pre-crash safety system consisting of pre-crash sensors that use millimeter wave radar to detect an imminent crash, seatbelts that tighten their hold on passengers during the early stage of crash detection and a brake assist system that utilizes power-assisted braking to minimize the speed on impact; and â€¢ a 'night-view' system that uses near-infrared rays to identify road conditions and objects beyond the area covered by an automobile's headlights. 21 -------------------------------------------------------------------------------- Table of Contents Car Multimedia. Interactive systems that integrate automobile and information technology to provide vehicle occupants with real-time information and to enable communication with parties outside the vehicle. Toyota's car navigation systems, which form the centerpiece of Toyota's car multimedia offerings, currently incorporate satellite positioning system technology and digital map databases and are able to receive real-time information about congestion, accidents, parking and other traffic related data. Toyota also has made commercially available car multimedia systems that can automatically or manually through a button control send necessary information, such as vehicle position, in the event of a traffic accident or other emergency to an operation center that transmits the information to the police, an ambulance service or a towing service, as appropriate. Toyota is actively engaged in developing new mobile Internet and data services for use in automobiles. Facilities. In-vehicle and roadside equipment designed to automate interaction between vehicles and social infrastructure. Toyota's representative system in this field is the electronic toll collection system. In March 2003, pursuant to the Japanese government's plan, electronic toll collection systems were installed at 900 sites, or about 70% of all toll collection sites in Japan. Toyota is also working to apply this technology in other areas, such as automatic payment at parking lots and gasoline stations and ID based entry and exit through gates at factories and logistics centers. In addition to the development and sale of in-vehicle equipment, Toyota has received orders for the installation of roadside equipment. Logistics. Systems that communicate positional information to an operating center through wireless transmission to enable efficient management of vehicle dispatches. This system is currently being utilized in the taxi industry, by delivery companies, in the elder care industry and by bus lines. Toyota is actively engaged in developing other logistics systems that meet the needs of other industries based on technology and know how acquired in the course of its automobile operations. Transport. An area-wide traffic system that makes comprehensive use of intelligent transport system technologies. An example of Toyota's efforts in this area is the intelligent multimode transit system, which consists of buses that run on automated platoons on dedicated system roads in their main service areas, but can also be driven on ordinary roads in outlying areas. Toyota believes this system can help reduce the high construction and maintenance costs associated with conventional track systems. Toyota is committed to developing new intelligent transport system products. Toyota believes that intelligent transport systems will become an integral part of its overall automotive operations and enhance the competitiveness of its vehicles. As familiarity with and demand for intelligent transport system products grows, Toyota expects an increasing number of intelligent transport system products to become commercially available and achieve general acceptance each year. Financial Services Toyota's revenues from its financial services operations were Y725 billion in fiscal 2003, Y698 billion in fiscal 2002 and Y571 billion in fiscal 2001. The market for automobile financing has grown as more consumers are financing their purchases, particularly in North America and Europe. In July 2000, Toyota established a wholly owned subsidiary, Toyota Financial Services Corporation, to oversee the management of Toyota's finance companies worldwide and the expansion into new automobile related product areas. Toyota plans to expand its network of financial services, which currently covers 27 countries, in accordance with its strategy of further developing its auto-related financing businesses in significant markets. Toyota Motor Credit Corporation is Toyota's principal financial services subsidiary in the United States. Toyota also provides financial services in 26 other countries through various financial services subsidiaries, including: â€¢ Toyota Finance Corporation in Japan, â€¢ Toyota Credit Canada Inc. in Canada, 22 -------------------------------------------------------------------------------- Table of Contents â€¢ Toyota Finance Australia Ltd. in Australia, â€¢ Toyota Kreditbank GmbH in Germany, and â€¢ Toyota Financial Services (UK) PLC in the United Kingdom. Toyota Motor Credit Corporation provides a full range of financial services, including retail leasing, retail financing, wholesale financing and insurance. Toyota Finance Corporation also provides a range of financial services, including retail leasing, retail financing, credit cards and mortgage loans. Toyota's other finance subsidiaries provide retail leasing, retail financing and wholesale financing. Net finance receivables outstanding for all of Toyota's dealer and customer financing operations were Y5.1 trillion at March 31, 2003, representing an increase of approximately 8% as compared to the amount outstanding as of March 31, 2002. The majority of Toyota's financial services are provided in North America. As of March 31, 2003, approximately 66% of Toyota's finance receivables were derived from financing operations in North America, 18% from Japan, 9% from Europe and 7% from other areas. Approximately 38% of Toyota's unit sales in the United States during fiscal year 2003 included a financing or lease arrangement with Toyota, compared to approximately 37% of fiscal year 2002 sales. Because a significant portion of Toyota's finance business relates to sales of Toyota vehicles, lower vehicle unit sales may result in a reduction in the level of Toyota's finance operations. The worldwide financial services market is highly competitive. Toyota's competitors for retail leasing and retail financing include commercial banks, credit unions, finance companies and other captive automobile finance companies. Commercial banks and other captive automobile finance companies also provide competition for Toyota's wholesale financing activities. Competition for Toyota's insurance operations is primarily from national and regional insurance companies. The following table provides information regarding Toyota's finance receivables and operating leases as of March 31, 2001, 2002 and 2003. As of March 31, ------------------------------------------------------------------------------------------------------------------------ 2001 2002 2003 2003 ------------------------------------------------------------------------------------------------------------------------ (in millions) Finance Receivables Retail Y 1,900,537 Y 2,723,834 Y 3,071,232 $ 25,551 Finance leases 1,223,340 1,391,924 1,129,220 9,394 Wholesale and other dealer loans 895,968 952,260 1,365,047 11,356 ------------ -------------- ------------ ----------- 4,019,845 5,068,018 5,565,499 46,301 Unearned income (279,538) (323,897) (373,663) (3,109) Allowance for credit losses (38,292) (52,170) (116,888) (972) ------------ -------------- ------------ ----------- Finance receivables, net 3,702,015 4,691,951 5,074,948 42,220 Less - Current portion (1,633,247) (2,020,491) (2,505,140) (20,841) ------------ -------------- ------------ ----------- Noncurrent finance receivables, net Y 2,068,768 Y 2,671,460 Y 2,569,808 $ 21,379 ------------ -------------- ------------ ----------- Operating Leases Vehicles Y 1,398,634 Y 1,449,341 Y 1,480,556 $ 12,317 Equipment and other 126,530 134,820 120,504 1,003 ------------ -------------- ------------ ----------- 1,525,164 1,584,161 1,601,060 13,320 Less - Accumulated depreciation (372,369) (356,243) (397,289) (3,305) ------------ -------------- ------------ ----------- Vehicles and equipment on operating Y 1,152,795 Y 1,227,918 Y 1,203,771 $ 10,015 leases, net ------------ -------------- ------------ ----------- 23 -------------------------------------------------------------------------------- Table of Contents Retail Leasing In the area of retail leasing, Toyota's finance subsidiaries purchase primarily new vehicle lease contracts originated by Toyota dealers. Lease contracts purchased must first meet specified credit standards after which the finance company assumes ownership of the leased vehicle. The finance company is generally permitted to take possession of the vehicle upon a default by the lessee. Toyota's finance subsidiaries are responsible for contract collection and administration during the lease period. The residual value is normally estimated at the time the vehicle is first leased. Vehicles returned to the finance subsidiaries at the end of their leases are sold through a network of auction sites as well as through the Internet. In most cases, Toyota's finance subsidiaries require lessees to carry fire, theft, collision and liability insurance on leased vehicles covering the interests of both the finance company and the lessee. Retail Financing Toyota's finance subsidiaries purchase primarily new and used vehicle installment contracts from Toyota dealers. A significant portion of the used vehicle contracts purchased are certified Toyota used vehicle contracts which relate to vehicles purchased by dealers, reconditioned and certified to meet specified Toyota standards. These vehicles are then sold or leased with an extended warranty from Toyota. Installment contracts purchased must first meet specified credit standards. Thereafter, the finance company retains responsibility for contract collection and administration. Toyota's finance subsidiaries acquire security interests in the vehicles financed and can generally repossess vehicles if customers fail to meet their contractual obligations. Almost all retail financings are non-recourse, which relieves the dealers from financial responsibility in the event of repossession. In most cases, Toyota's finance subsidiaries require their retail financing customers to carry fire, theft, collision and liability insurance on financed vehicles covering the interests of both the finance company and the customer. Toyota launched in fiscal 2001 an expanded tiered pricing program for retail vehicle contracts in the United States. The objective of this program is to better match customer risk with contract rates charged to allow profitable purchases of a wider range of risk levels. Implementation of this program contributed to increased contract yields and increased credit losses during fiscal 2003. Toyota has historically sponsored, and continues to sponsor, special lease and retail programs by subsidizing below market lease and retail contract rates. Wholesale Financing Toyota's finance subsidiaries also provide wholesale financing primarily to qualified Toyota vehicle dealers to finance inventories of new and used Toyota vehicles. The finance companies acquire security interests in vehicles financed at wholesale. Substantially all wholesale financing is backed by corporate or individual guarantees from or on behalf of participating dealers. If a dealer defaults, the finance companies have the right to liquidate any assets acquired and seek legal remedies pursuant to the guarantees. Toyota's finance subsidiaries also make term loans to dealers for business acquisitions, facilities refurbishment, real estate purchases and working capital requirements. These loans are typically secured with liens on real estate, other dealership assets and/or personal guarantees of the dealers. Insurance Toyota provides insurance services in the United States through its wholly owned subsidiary, Toyota Motor Insurance Services, Inc. Its principal activities include marketing, underwriting and claims administration. Toyota Motor Insurance Services, Inc. also provides coverage related to vehicle service agreements and contractual liability agreements sold by or through Toyota dealers to customers. In addition, Toyota Motor Insurance Services, Inc. insures and reinsures risks undertaken by Toyota's distributors and finance subsidiaries. Toyota dealerships in Japan also engage in vehicle insurance sales. 24 -------------------------------------------------------------------------------- Table of Contents Toyota currently has an ownership interest of approximately 33.4% in Aioi Insurance Co., Ltd, a leading insurance company in Japan. Toyota continues to use its strong relationship with Aioi to develop attractive consumer insurance products for Toyota's automotive customers. Other Financial Services Toyota also established Toyota Financial Services Securities Corporation as a subsidiary of Toyota Financial Services Corporation. Toyota Financial Services Securities Corporation commenced operations in April 2001 to coincide with the launch of Toyota's credit card business. Through this business, Toyota provides to its card holders in Japan convenient and reliable one-stop financial services. As of March 31, 2003, Toyota had 3.6 million card holders. Other Operations In addition to its automotive operations and financial services operations, Toyota is involved in a number of other non-automotive business activities. Net sales for these activities totaled Y795 billion in fiscal 2003, representing approximately 5.1% of Toyota's total revenue for fiscal 2003, Y729 billion in fiscal 2002 and Y1.0 trillion in fiscal 2001. The most significant of Toyota's other operations are its information technology related businesses, including certain intelligent transport systems and an e-commerce marketplace called Gazoo.com, and pre-fabricated housing. Substantially all of Toyota's revenues from other operations were derived in Japan. Information Technology Toyota is involved in developing information technology related products and services through joint efforts with certain telecommunication and information services providers. Its primary partner in these development efforts is KDDI Corporation, a domestic telecommunications service provider that offers integrated mobile, domestic and international telecommunications services. Toyota currently holds an 11.7% interest in KDDI. Toyota established Toyota InfoTechnology Center Co., Ltd., a joint venture among its affiliates and KDDI, in January 2001. Toyota InfoTechnology Center, USA., Ltd., a wholly-owned subsidiary of the joint venture, was established in April 2001. This joint venture focuses on research and development of advanced information technologies that address market needs. Toyota believes these technologies will be integral to the further development of information services businesses, including intelligent transport systems, and to the application of information technologies to its financial services businesses. Toyota holds a 65% interest in the joint venture. Toyota also operates a Japanese-language web site, Gazoo.com. The name 'Gazoo' originates from the Japanese word gazo meaning images. Gazoo was established as a membership Internet service linking Toyota, its national dealer network, and Gazoo members, and currently provides information on new and used Toyota automobiles and related services. Recently, prospective customers have requested information on automobiles through Toyota's proprietary websites, at an average rate of approximately 30,000 requests per month, with approximately 10% of those users purchasing a Toyota automobile within three months of making a request. To further expand its motor vehicle information service, Toyota launched a new information service called G-Book in fall 2002 by integrating its MONET (Mobile Network) service with Gazoo. In addition to providing information on an increasing range of Toyota vehicles, Gazoo is also being expanded to provide a wider range of products and services, including information on Toyota's various financial products. By collaborating with providers of various products and services, Toyota has transformed Gazoo into an active e-commerce marketplace. Pre-fabricated Housing Toyota is also engaged in the manufacture and sale of prefabricated housing. Toyota has adapted the core production systems and methodologies used in its automotive operations to this business. In order to enhance its prefabricated housing operations, in April 2003 Toyota established a subsidiary, Toyota Housing Corporation, which conducts sales of Toyota's prefabricated housing units. 25 -------------------------------------------------------------------------------- Table of Contents Governmental Regulation, Environmental and Safety Standards Toyota is subject to laws in various jurisdictions regulating the levels of pollutants generated by its plants. In addition, Toyota is subject to regulations relating to the emission levels, fuel economy, noise and safety of its products. Toyota has incurred significant costs in complying with these regulations and expects to incur significant compliance costs in the future. However, Toyota's management views leadership in environmental protection as an increasingly important competitive factor in the marketplace. Vehicle Emissions Japanese Standards The Air Pollution Law of Japan and the Road Transportation Vehicle Law regulate vehicle emissions in Japan. In addition, both the Noise Regulation Law and the Road Transportation Vehicle Law provide for noise reduction standards on automobiles in Japan. Toyota's vehicles manufactured for sale in Japan comply with all Japanese exhaust emission and noise level standards. In addition, Toyota is progressing with efforts to attain certification as 'ultra low emission vehicles' for the majority of its automobile models under the Ministry of Land, Infrastructure and Transport's Low Emission Vehicle Approval Standard. Under this standard, ultra low emission vehicles must achieve 75% emission reduction against standards established in fiscal 2000. U.S. Federal Standards The federal Clean Air Act directs the Environmental Protection Agency to establish and enforce air quality standards, including emission control standards on passenger cars, light-duty trucks and heavy-duty vehicles. Under current standards applicable to passenger cars and light-duty trucks produced in model years through 2003, manufacturers are obligated to recall vehicles that fail to meet these standards for ten years or 100,000 miles, whichever occurs first. Pursuant to the Clean Air Act, the Environmental Protection Agency determined that it was necessary to tighten standards further and in February 2000 decided to adopt more stringent vehicle emission and fuel economy standards applicable to passenger cars and light-duty trucks produced in model years 2004 and beyond. In the standards adopted for model years 2004 and beyond, manufacturers must guarantee that their vehicles meet the requirements for ten years or 120,000 miles, whichever occurs first. Manufacturers will not be permitted to sell vehicles in the United States that do not meet the new standards. Separate standards for heavy-duty vehicles are also in effect, and are expected to become more stringent. Toyota recently reached a settlement in a lawsuit with the Environmental Protection Agency and the U.S. Department of Justice concerning an alleged violation by Toyota of the Clean Air Act. For a description of this law suit, see '-Legal Proceedings'. California Standards Under the federal Clean Air Act, the State of California is permitted to establish its own, more stringent, emission control standards. As a result, the California Air Resources Board has established its own emission standards, known as the 'Low Emission Vehicle Program'. In late 1998, the California Air Resources Board adopted additional vehicle emissions standards that must be phased in beginning in the 2004 model year. These new standards treat most light trucks the same as passenger cars and require both types of vehicles to meet the new emissions standards of the Low Emission Vehicle Program. As part of the original Low Emission Vehicle Program, the California Air Resources Board also required that a specified percentage of a manufacturer's passenger cars and trucks sold in California for all model years 1998 and after be 'zero-emission vehicles' (vehicles producing no emissions of regulated pollutants). The California Air Resources Board subsequently eliminated the zero-emission vehicles mandate for model years before 2005, and adopted a zero-emission vehicles requirement for model years 2005 and after. This zero-emission vehicles requirement also sets forth certain requirements that advanced technology vehicles such as hybrid cars and alternative fuel vehicles must meet to be recognized as 'partial zero-emission vehicles'. Toyota's battery- powered RAV4 EV compact sport-utility vehicle already qualifies as a zero-emission vehicle. The next-generation Prius that Toyota is planning to release is also qualified as a partial zero-emission vehicle under the new zero-emission vehicles requirement 26 -------------------------------------------------------------------------------- Table of Contents adopted by the California Air Resources Board. Toyota intends to continue to develop additional advanced technologies and alternative fuel technologies which will allow other vehicles using such technologies to qualify as zero-emission vehicles or partial-zero-emission vehicles. In July 2002, the California legislature passed new legislation that requires the California Air Resources Board to develop and adopt, by the end of 2004, regulations that achieve the maximum feasible reduction in greenhouse gas emissions. The regulations would apply to passenger vehicles, light trucks and other noncommercial personal vehicles from the 2009 model year onward. Other States Other states may adopt California's regulations, including its zero-emission vehicle mandates, by meeting the requirements under the federal Clean Air Act. The states of Massachusetts, New York, Vermont and Maine have adopted California's Low Emission Vehicle Program, effective with model year 2001 or before. These states are also considering the adoption of California's zero-emission vehicle requirement, which is currently under review. The U.S. automotive industry proposed a National Low Emissions Vehicle program as an alternative to the adoption of California's emission standards by other states. This program requires vehicle manufacturers to sell low emission vehicles within participating jurisdictions beginning with the 1999 model year and nationwide (excluding California) beginning with the 2001 model year. The Environmental Protection Agency has issued a rule under which manufacturers and members of the Ozone Transport Commission, consisting of 12 northeastern states and the District of Columbia, may adopt the National Low Emissions Vehicle program rather than the California program. All manufacturers and the members of the Ozone Transport Commission, except Maine, Massachusetts, New York and Vermont, have chosen to participate in this program. This program will be effective until the federal standards under the Clean Air Act become effective in model year 2004. Canadian and Mexican Standards Canada has established vehicle emission standards equivalent to the federal standards in the United States, including the heightened requirements that will be applicable to passenger cars and light trucks in model years 2004 and after. Mexico's emission control standards are similar to those applicable in the United States after the 1994 model year. European Standards Current vehicle emission control standards applicable in the European Union are generally no more restrictive than U.S. standards. However, the European Council and the European Parliament have adopted a directive that establishes increasingly stringent emissions standards for passenger vehicles and light commercial vehicles. Under this directive, the standards adopted beginning with year 2000 require manufacturers to recall any vehicles which fail to meet the standards for five years or 80,000 kilometers, whichever occurs first. Toyota introduced vehicles complying with this directive in 1999. Under the standards to be adopted beginning with model year 2005, manufacturers will be obligated to meet the more stringent standards for five years or 100,000 kilometers, whichever occurs first. The Prius complies with this directive. Standards for heavy commercial vehicles have been adopted by the European Council and the European Parliament for model years 2005 and 2008 and thereafter. Compliance with new emission control standards will present significant technological challenges to vehicle manufacturers and will likely require significant expenditures. Examples of these challenges include the development of advanced technologies, such as high performance batteries and catalytic converters, as well as the development of alternative fuel technologies. Manufacturers that are unable to develop commercially viable technologies within the time frames established by the new standards will be limited in the number and types of vehicles and engines they are able to sell in their principal markets. 27 -------------------------------------------------------------------------------- Table of Contents Vehicle Fuel Economy Japanese Standards The Law Concerning Rationalization of Energy Usage requires automobile manufacturers to improve their vehicles to meet specified fuel economy standards. Toyota has complied with these regulations in all material respects. The law requires that the actual average fuel economy of gasoline-fueled vehicles proposed by each manufacturer comply with the fuel economy standards established thereunder by 2010, and that the actual average fuel economy of diesel-fueled vehicles proposed by each manufacturer comply with relevant fuel economy standards by 2005. Toyota is now developing gasoline-fueled and diesel-fueled vehicles that will meet these standards, with the aim of achieving early compliance with these standards for all of its automobiles. Furthermore, Japan has signed the United Nations Framework Convention on Climate Change and has agreed to take steps to restrain the emission of 'greenhouse gases'. Japan ratified the Kyoto Protocol in June 2002. This protocol requires Japan to reduce its carbon dioxide emissions by 6% during the years 2008 to 2012 as measured from the 1990 base year if it becomes effective. U.S. Standards The Federal Motor Vehicle Information and Cost Savings Act requires automobile manufacturers to comply with Corporate Average Fuel Economy standards, commonly referred to as the CAFE standards. Under the CAFE standards, a manufacturer is subject to substantial penalties if, in any model year, its vehicles do not meet those standards. The current CAFE standards are 27.5 miles per gallon for passenger cars and 20.7 miles per gallon for light-duty trucks, including mini-vans and sport-utility vehicles. In April 2003, the National Highway Traffic Safety Administration established new CAFE standards for light-duty trucks of 21.0 miles per gallon for 2005 model year vehicles, 21.6 miles per gallon for 2006 model year vehicles and 22.2 miles per gallon for model 2007 vehicles. A manufacturer which meets the CAFE standards earns credits determined by the difference between the actual average fuel economy of its vehicles and the CAFE standards. Credits earned for the three preceding model years and credits projected to be earned for the next three model years can be used to meet CAFE standards in the current model year. Credits earned in respect of passenger cars may not be used for trucks and credits earned in respect of trucks may not be used for passenger cars. Passenger cars are further divided into the two categories 'Domestic' and 'Import', and credits earned in one category may be not applied toward another category. Although Toyota has met the current CAFE standards for both passenger cars and light-duty trucks, the enactment of the new, more stringent standards could have a significant impact on Toyota's ability to offer its automobiles for sale in the United States. Concern over the effect that carbon dioxide emissions may have on global warming has focused attention on the need for reducing fossil energy use, in part by increasing vehicle fuel economy. In November 1998, the United States signed the Kyoto Protocol. This protocol calls for the United States to reduce its carbon dioxide emissions by 7% during the years 2008 to 2012, as measured from the 1990 base year. The United States government currently has not ratified the protocol. However, the United States has been considering ways to achieve the called-for reductions, including more stringent CAFE standards, higher fuel costs and restrictions on fuel usage. In February 2002, the Bush administration released a climate change policy initiative stressing voluntary measures and a cap-and-trade program to stem the growth of greenhouse gas emissions. These actions would be costly to Toyota and could significantly restrict the products it is able to offer in the United States. In addition, the Energy Tax Act of 1978 imposes a 'gas guzzler' tax on automobiles with a fuel economy rating below specified levels. European Standards The European Union has signed the Kyoto Protocol and agreed to reduce carbon dioxide emissions by 8% during the years 2008 to 2012, as measured from the 1990 base year. In early 1999, the European Union entered into a voluntary engagement with the European Automotive Manufacturers Association which establishes an 28 -------------------------------------------------------------------------------- Table of Contents average emissions target of 140 grams of carbon dioxide per kilometer for new cars sold in the European Union in 2008. That target represents an average reduction in passenger vehicle fuel usage of 25%, measured from 1995 levels. In addition, the European Union has reaffirmed its goal of reducing average carbon dioxide emissions from new passenger cars to 120 grams per kilometer by 2012. As a result, automobile manufacturers have agreed to re-examine in 2003 the level of compliance towards the 2008 goal and whether further reductions are possible by 2012. The Japan Automobile Manufacturers Association and the Korean Automobile Manufacturers Association also entered into a similar voluntary engagement with the European Union with the year 2009 as a target year. Vehicle Safety Japanese Standards Japanese safety regulations require manufacturers to equip their vehicles with safety features sufficient to ensure passenger safety for both head-on and side collisions occurring at speeds of up to 50 kilometers per hour. Japanese regulations also require vehicles to provide sufficient braking performance at high speeds. All Toyota motor vehicles currently sold in Japan meet or exceed applicable Japanese safety standards. U.S. Standards The U.S. National Traffic and Motor Vehicle Safety Act of 1966 requires vehicles and equipment sold in the United States to meet various safety standards issued by the National Highway Traffic Safety Administration. The Safety Act also authorizes the National Highway Traffic Safety Administration to investigate complaints relating to vehicle safety and to order manufacturers to recall and repair vehicles found to have safety-related defects. The cost of these recalls can be substantial depending on the nature of the repair and the number of vehicles affected. In 2000, the National Highway Traffic Safety Administration issued various motor vehicle safety standards, including an interim final rule specifying performance requirements for advanced airbag systems. The rule imposes a new regimen of tests with stringent new injury criteria, and sets forth a compliance phase in schedule mandating that 20% of all vehicles produced by a manufacturer from September 2003, 65% from September 2004, and 100% from September 2005, meet the new safety standard. These standards add to the cost and complexity of designing and producing new motor vehicles and original motor vehicle equipment. Toyota expects to comply with the first phase of requirements scheduled to take effect in September 2003. The National Highway Traffic Safety Administration continues to make proposals on subjects such as fuel system crash integrity and universal child restraint anchorages. The Transportation Recall Enhancement, Accountability and Documentation Act was enacted in the United States on November 1, 2000. This Act requires the National Highway Traffic Safety Administration to upgrade federal motor vehicle safety standards relating to tires based on a dynamic vehicle test that takes into account the rollover propensity of vehicles. It also requires the National Highway Traffic Safety Administration to initiate new rules that enhance its authority to gather information potentially relating to motor vehicle defects. This Act substantially increases the National Highway Traffic Safety Administration's authority to impose civil penalties for noncompliance with regulatory requirements and specifies possible criminal penalties for violations of the federal Fraud and False Statements Act. Under this Act, beginning in 2002, the National Highway Traffic Safety Administration must upgrade regulations regarding tire-pressure monitoring systems, expand its New Car Assessment Program to implement consumer information programs for vehicle rollover resistance and child restraints and adopt extensive early warning defect reporting requirements. Toyota actively invests in technologies designed to increase the safety of its vehicles. Toyota is developing technologies to increase the availability of existing safety systems to all segments of the market. These technologies include airbags, anti-lock braking systems and other safety features. 29 -------------------------------------------------------------------------------- Table of Contents European and Other Standards Vehicles sold in Europe are subject to separate vehicle safety regulations established by the European Union and by individual countries. Vehicle safety regulations in Canada are similar to those in the United States. Countries in South America and Asia have also established vehicle safety regulations. Environmental Matters Japanese Standards Toyota's automotive operations in Japan are subject to substantial environmental regulation under the Air Pollution Law, the Water Pollution Control Law, the Noise Regulation Law and the Vibration Control Law. Under these laws, if a business entity establishes or alters any facility that is regulated by these laws, the business entity is required to give prior notice to regulators, and if a business entity discharges or causes exhaust, wastewater, noise or vibration from such facility, the business entity is also required to comply with the applicable standards. Toyota is also subject to local regulations, which in some cases impose more stringent obligations than the Japanese central government requirements. Toyota has complied with these regulations in all material respects. Moreover, under the Waste Disposal and Public Cleaning Law, producers of industrial waste must dispose of industrial waste in the way prescribed in the Waste Disposal and Public Cleaning Law. Toyota has also complied with the Waste Disposal and Public Cleaning Law. In February 2003, the Soil Contamination Countermeasures Law became effective in Japan. The Soil Contamination Countermeasures Law stipulates the contamination testing and removal measures that are required when land and facilities used to process hazardous materials are converted to residential areas or other public use. In addition, the Law on Recycling of End-of-Life Vehicles was promulgated in July 2002. Under the Law on Recycling of End-of-Life Vehicles, vehicle manufacturers are required to take back and recycle certain materials of end-of-life vehicles. Although the exact enforcement date of the provisions concerning such obligations of vehicle manufacturers has not yet been determined, these provisions will become effective within 30 months from the promulgation date of this law. U.S. Standards Toyota's assembly, manufacturing and other operations in the United States are subject to a wide range of environmental regulation under the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Pollution Prevention Act of 1990 and the Toxic Substances Control Act. Toyota is also subject to a variety of state legislation that parallels, and in some cases imposes more stringent obligations than, federal requirements. These federal and state regulations impose severe restrictions on air- and water-borne discharges of pollution from Toyota facilities, the handling of hazardous materials at Toyota facilities and the disposal of wastes from Toyota operations. Toyota is subject to many similar requirements in its operations in Europe and Canada. Moreover, the Environmental Protection Agency has promulgated more stringent National Ambient Air Quality Standards for Ozone and Particulate Matter, which define strategies needed to attain the new standards. Toyota expects growing pressure in the next several years to further reduce emissions from motor vehicles and manufacturing facilities. European Standards In September 2000, the European Union approved a directive that requires member states to promulgate regulations implementing the following by April 21, 2002: â€¢ manufacturers are to be financially responsible for taking back end-of-life vehicles put on the market after July 1, 2002 and dismantling and recycling those vehicles. Beginning January 1, 2007, manufacturers will also be financially responsible for vehicles put on the market before July 1, 2002; 30 -------------------------------------------------------------------------------- Table of Contents â€¢ manufacturers may not use certain hazardous materials in vehicles to be sold after July 2003; â€¢ vehicles approved and put on the market from three years after the amendment of the relevant directive must, upon release, meet re-use and/or recyclability targets of 85% by weight per vehicle, as well as re-use and/ or recoverability targets of 95% by weight per vehicle; and â€¢ end-of-life vehicles must meet actual re-use and recovery targets of 80% and 85%, respectively, of vehicle weight by 2006, rising respectively to 85% and 95% by 2015. Currently, there are numerous uncertainties surrounding the form and implementation of the applicable regulations in different European Union member states, particularly regarding manufacturer responsibilities and resultant expenses that may be incurred. As of June 30, 2003, the following seven member states have adopted legislation to implement the directive: The Netherlands, Germany, Austria, Spain, Luxembourg, Portugal and Italy. In addition, Sweden and Denmark have existing legislation that partially implements the directive. Belgium has partially adopted legislation implementing the directive. Although all member states were required to enact legislation to implement the directive by April 21, 2002, implementation of the directive has been delayed in some countries and is now expected to be substantially finalized during 2003. In addition, under this directive member states must take measures to ensure that car manufacturers, distributors and other auto-related businesses establish adequate used vehicle disposal facilities and to ensure that hazardous materials and recyclable parts are removed from vehicles prior to scrapping. This directive impacts Toyota's vehicles sold in the European Union. Based on the legislation that has been enacted to date, Toyota has provided for its estimated liability related to covered vehicles in existence as of March 31, 2003. Depending on the legislation implemented in the eight member states that have not yet enacted legislation and other circumstances, Toyota may be required to provide additional accruals for the expected costs to comply with these regulations. Although Toyota does not expect its compliance with the directive to result in significant cash expenditures, Toyota is continuing to assess the impact of this future legislation on its results of operations, cash flows and financial position. The European Union has also issued directives and made proposals relating to the following subjects: â€¢ emission standards that include a framework permitting member states to introduce fiscal incentives to promote early compliance; â€¢ reaffirmation of its goal of reducing carbon dioxide emissions; and â€¢ reform of rules governing automotive distribution and service. Current block exemption on distribution would be amended and dealers could no longer be required by manufacturers to perform repair work. Toyota believes that its operations are materially in compliance with environmental regulatory requirements concerning its facilities and products in each of the markets in which it operates. Toyota continuously monitors these requirements and takes necessary operational measures to ensure that it remains in material compliance with all of these requirements. Toyota believes that environmental regulatory requirements have not had a material adverse effect on its operations. However, compliance with environmental regulations and standards has increased costs and is expected to lead to higher costs in the future. Therefore, Toyota recognizes that effective environmental cost management will become increasingly important. Moreover, innovation and leadership in the area of environmental protection are becoming increasingly important to remain competitive in the market. As a result, Toyota has proceeded with the development and production of environmentally friendly technologies, such as hybrid vehicles, fuel-cell vehicles and high fuel efficiency, low emission engines. In addressing environmental issues, based on an assessment of the environmental impact of its products through their life cycles, Toyota as a manufacturer takes all possible measures in each life stage of a product, from development through production and sales, and continues to work toward technological innovations to make efficient use of resources and to reduce the burden on the environment. 31 -------------------------------------------------------------------------------- Table of Contents Research and Development Toyota's research and development activities focus on the environment, vehicle safety, information technology and product development. For a detailed discussion of the company's research and development policies for the last three years, see 'Operating and Financial Review and Prospects - Research and Development, Patents and Licenses'. The following table provides information for Toyota's principal research and development facilities. Facility Principal Activity ------- ---------------- Japan Toyota Technical Center Planning, design, vehicle evaluation, development of prototypes Tokyo Design Research & Laboratory Design research and development of advanced styling designs Higashi-Fuji Technical Center Research and advanced development on powertrains, materials, electronics and other matters Shibetsu Proving Ground Vehicle testing and evaluation United States Toyota Technical Center, U.S.A., Inc. Testing and evaluation of U.S. parts and materials, emissions certification, technical research, development of products for North American market Calty Design Research, Inc. Design development in cooperation with Japanese designers Europe TMEM R&D Group Evaluation of European vehicles and materials, research and investigation of technologies in Europe and support of European projects Toyota Europe Design Development S.A.R.L. Design development, model production and design survey Toyota Motorsport GmbH Development of Formula One race cars The success of Toyota's research and development activities is a key element of Toyota's strategy. The effectiveness of Toyota's research and development activities is subject to a number of factors, some of which are not in Toyota's control. These factors include the introduction of innovations by Toyota's competitors that may reduce the value of Toyota's initiatives and Toyota's ability to convert its research and development into commercially successful technologies and products. Components and Parts, Raw Materials and Sources of Supply Toyota purchases parts, components, raw materials, equipment and other supplies from several competing suppliers located around the world. Toyota works closely with its suppliers to obtain the best supplies. Toyota believes that this policy encourages technological innovation, cost reduction and other competitive measures. As a result, no single supplier accounted for more than 5% of Toyota's consolidated purchases of raw materials, parts and equipment during fiscal 2003, except for Denso Corporation, an affiliate of Toyota, which supplied approximately 10% of Toyota's purchases during fiscal 2003. Toyota plans to continue purchases based on the same principle and does not anticipate any difficulty in obtaining supplies in the foreseeable future. 32 -------------------------------------------------------------------------------- Table of Contents As part of its globalization plan, Toyota is taking steps to increase purchases from both new and existing suppliers outside of Japan. Toyota's largest sources of supply outside Japan are currently located in the United States. In 2004, Toyota expects to launch its IMV Project, a global network designed to supply pickup trucks, multipurpose vehicles and major vehicle components to Southeast Asia, Europe, Africa, Central and South America and other regions from production bases in ASEAN countries, South Africa and Argentina. Toyota believes the network will enhance its overall competitiveness by coordinating Toyota's worldwide development, procurement and production activities. Moreover, Toyota is also planning to introduce a new global logistical support system in several steps in conjunction with the launch of new models. This new support system will be used to determine the optimum means and routes of transportation, and to coordinate procurement activities in accordance with production status and the availability of delivery vehicles. This system is designed to further Toyota's globalization efforts by establishing an internal standard for worldwide procurement and distribution in order to reduce production lead times and production costs, thereby ensuring timely delivery to customers. Historically, the price of principal raw materials used by Toyota to produce its products have not been volatile. Toyota's ability to continue to obtain supplies in an efficient manner is subject to a number of factors, some of which are not in Toyota's control. These factors include the ability of its suppliers to provide a continued source of supplies and the effect on Toyota of competition by other users in obtaining the supplies. Intellectual Property Toyota holds numerous Japanese and foreign trademarks, patents, design patents and utility model registrations. It also has a number of applications pending for Japanese and foreign patents. A utility model registration is a right granted under the laws of certain countries to inventions of less patentability than those which qualify for patents. In general, the effective period for a utility model registration is shorter than that granted for a patent. While Toyota considers all of its intellectual property to be important, it does not consider any one or group of patents, trademarks or utility model registrations to be so important that their expiration or termination would materially affect Toyota's business. Capital Expenditures and Divestitures Set forth below is a chart of Toyota's principal capital expenditures between April 1, 2000 and March 31, 2003, the approximate total costs of such activity, as well as the location and method of financing of such activity, presented on a 'by subsidiary' basis and as reported in Toyota's annual Japanese securities report filed with the director of the Kanto Local Finance Bureau. Total Cost --------- Description of Activity (billions Location Method of ----------------------------------------------------------------- of yen) ------------ Financing --------- ------------ Investment primarily in manufacturing facilities to undertake 771.1 Japan Internal model changes by Toyota Motor Corporation funds Investment primarily in new technology and products by Daihatsu 91.9 Japan Internal Motor Co., Ltd. funds Investment primarily in new technology and products by Toyota 49.3 Japan Internal Motor Kyushu, Inc. funds Investment primarily in new technology and products by Toyota 35.4 Japan Internal Motor Hokkaido, Inc. funds Investment primarily in new technology and products by Hino 22.3 Japan Internal Motors Ltd. funds Investment to promote localization by Toyota Motor Manufacturing, 148.0 United Internal Indiana, Inc. States funds 33 -------------------------------------------------------------------------------- Table of Contents Total Cost --------- Description of Activity (billions Location Method of ------------------------------------------------------------ of yen) ---------------- Financing --------- ---------------- Investment to promote localization by Toyota Motor 132.0 United States Internal funds Manufacturing, Kentucky, Inc. Investment to promote localization by Toyota Motor 95.5 Canada Internal funds Manufacturing, Canada, Inc. Investment to promote localization by Toyota Motor 60.9 United Kingdom Internal funds Manufacturing (UK) Limited Investment to promote localization by Toyota Motor 50.9 France Internal funds Manufacturing France S.A.S. Investment to promote localization by Toyota Motor 24.6 United States Internal funds Manufacturing, Alabama, Inc. Investment primarily in leased automobiles by Toyota Motor 1,032.0 United States Internal funds Credit Corporation and borrowings Investment primarily in facilities for telecommunications 68.8 Japan Internal funds business by IDO Corporation* and borrowings * (See Note 2 to Japanese GAAP selected financial data.) Set forth below is information with respect to Toyota's material plans to construct, expand or improve its facilities between October 2002 and March 2004, presented on a 'by subsidiary' basis and as reported in Toyota's annual Japanese securities report filed with the director of the Kanto Local Finance Bureau. Total Cost --------- Description of Activity (billions Amount Location Method of --------------------------------------------------- of yen) ------------ Financing --------- Paid ----------- (billions of yen) --------- Investment primarily in manufacturing facilities by 457.0 157.3 Japan Internal Toyota Motor Corporation funds Investment primarily in manufacturing facilities by 60.9 24.0 United Internal Toyota Motor Manufacturing, Kentucky, Inc. States funds Investment primarily in manufacturing facilities by 60.5 31.3 Canada Internal Toyota Motor Manufacturing, Canada, Inc. funds Investment primarily in manufacturing facilities by 46.3 16.7 United Internal Toyota Motor Manufacturing, Indiana, Inc. States funds Investment primarily in manufacturing facilities by 37.3 8.3 Japan Internal Daihatsu Motor Co., Ltd. funds Investment primarily in manufacturing facilities by 30.2 7.2 Japan Internal Hino Motors Ltd. funds Set forth below is additional information with respect to Toyota's material plans to construct, expand or improve its facilities, presented on a 'by facility' basis. Canada Plant. Toyota commenced expansion of a manufacturing plant in Canada in 2001. This expansion will increase total annual production capacity from 200,000 to 250,000 units. In addition, a portion of the plant will be converted from the production of the Camry Solara to the production of the Lexus RX330, with an annual production capacity of 60,000 units. The expansion is expected to be completed in the autumn of 2003. The total cost for this expansion is expected to be approximately $450 million. These construction costs have been, and will be, financed through internal funds. 34 -------------------------------------------------------------------------------- Table of Contents Czech Republic Plant. Toyota and PSA Peugeot Citroen commenced construction of a joint plant in the Czech Republic in April 2002. The plant will be used to produce small passenger vehicles, and will have an annual production capacity of approximately 300,000 units. The plant is expected to commence operations in 2005. The total cost of this plant is expected to be approximately 1.5 billion euros. To date, Toyota's portion of these construction costs has been financed through internal funds. Toyota has not decided how it will finance the remaining portion of its construction costs. Poland Plant. Toyota commenced construction of a plant in Poland in August 2002. The expansion will enable the plant to manufacture 250,000 gasoline engines per year and increase the annual production capacity of manual transmissions from 250,000 to 550,000 units. The plant will also be used to produce up to 250,000 manual transmissions for Yaris, Corolla and Avensis models produced in Europe, as well as up to 250,000 engines and 300,000 manual transmissions per year for a new passenger vehicle to be produced in the Czech Republic by Toyota and PSA Peugeot Citroen starting 2005. The expansion is expected to be completed by the end of 2004. The total cost for the expansion is expected to be approximately 400 million euros. To date, these construction costs has been financed through internal funds. Toyota has not decided how it will finance any remaining construction costs. Mexico Plant. Toyota commenced construction of a plant in Mexico in June 2002. The plant will be used initially to produce truck beds for the Tacoma pickup truck, and it will have an annual production capacity of approximately 170,000 truck beds. The plant will also be used to produce approximately 20,000 completed Tacoma pickup trucks per year. The plant is expected to commence operations in August 2004, and it is scheduled to begin producing completed pickup trucks in 2005. The total cost of this plant is expected to be approximately $140 million. These construction costs have been, and are expected to be, financed through internal funds. Texas Plant. Toyota commenced expansion of a plant in Texas in February 2003. The plant will be used to produce full-size Tundra pickup trucks, and will have an initial annual production capacity of approximately 150,000 units. The plant is expected to commence operations in 2006. The total cost of this plant is expected to be approximately $800 million. Toyota has not decided how it will finance these construction costs. Toyota does not collect information on the amount of expenditures already paid for each plant under construction because Toyota believes that it is difficult and it would require unreasonable effort to identify and categorize each expenditure item with reasonable accuracy as past and future expenditures. Toyota's construction projects consist of numerous expenditures, each of which is continuously being adjusted and incurred in variable and constantly changing amounts as part of the overall work-in-progress. Seasonality Toyota has historically experienced slight seasonal fluctuations in unit sales. For each of the past three years, Toyota's unit sales levels have been highest in March of each year, with approximately 10 to 11% of annual unit sales generated during that month. For each of the past three years, Toyota's unit sales levels have been lowest in January of each year, with approximately 6 to 8% of annual unit sales generated during that month. Legal Proceedings United States Antitrust Proceedings In February 2003, Toyota, General Motors Corporation, Ford, DaimlerChrysler, Honda, Nissan and BMW and their U.S. and Canadian sales and marketing subsidiaries, the National Automobile Dealers Association and the Canadian Automobile Dealers Association were named as defendants in purported nationwide class actions on behalf of all purchasers of new motor vehicles in the United States since January 1, 2001. These actions were filed in federal courts in California, Illinois, New York, Massachusetts, Florida, New Jersey and Pennsylvania. 35 -------------------------------------------------------------------------------- Table of Contents Additionally, parallel class actions were filed in state courts in California, Minnesota, New Mexico, New York, Tennessee, Wisconsin, Arizona, Florida and New Jersey on behalf of the same purchasers in these states. As of May 31, 2003, approximately 70 such cases were pending before the various federal and state courts. The nearly identical complaints allege that the defendants violated the Sherman Antitrust Act by conspiring among themselves and with their dealers to prevent the sale to United States citizens of vehicles produced for the Canadian market. The complaints allege that new vehicle prices in Canada are 10% to 30% lower than those in the United States and that preventing the sale of these vehicles to United States citizens resulted in United States consumers paying excessive prices for the same type of vehicles. The complaints seek permanent injunctions against the alleged antitrust violations and treble damages in an unspecified amount. The cases are at a preliminary stage; no defendant has yet answered the complaints and there has been no decision on the certification of the alleged cases. Toyota believes that its actions have been lawful and intends to vigorously defend these cases. On-board Diagnostic System Proceedings On September 2, 1998, the California Air Resources Board issued a recall order against Toyota and its U.S. subsidiary, Toyota Technical Center, U.S.A., Inc., seeking the recall of approximately 337,000 Toyota and Lexus vehicles in the 1996, 1997 and 1998 model years sold in California. The California Air Resources Board claimed that the on-board diagnostic systems installed in these vehicles did not properly detect gas vapor leaks within the vehicles and illuminate warning lights when required by evaporative emissions regulatory requirements. In October 1998, Toyota filed a petition contesting the recall order under California administrative hearing procedures. After a full hearing on the claims, an administrative law judge in February 2000 issued a recommended decision concluding that (i) the Toyota vehicles meet the applicable standard for evaporative emissions monitoring, (ii) Toyota did not timely inform the California Air Resources Board of certain enabling conditions programmed into the operation of the evaporative emissions monitoring system, and (iii) the recall order should be dismissed. In February 2002, Toyota and the California Air Resources Board executed a settlement under which Toyota contributed funds to the state Air Pollution Control Fund and to selected projects proposed by the Air Resources Board staff. In addition, Toyota will extend warranties for the evaporative emission control system of relevant Toyota models from 3 years or 50,000 miles to 14 years or 150,000 miles and will accelerate introduction of near-zero-emission cars. The total estimated cost of the settlement to Toyota has been agreed to be $7.9 million. On July 12, 1999, the U.S. Environmental Protection Agency, represented by the U.S. Department of Justice, filed a federal lawsuit against Toyota's U.S. subsidiary, Toyota Motor Sales U.S.A., Inc., in the United States District Court for the District of Columbia. This lawsuit relates to approximately 2.2 million Toyota and Lexus vehicles in the 1996, 1997 and 1998 model years sold in the United States (including the vehicles subject to the California proceeding). This lawsuit alleges that Toyota violated the U.S. Clean Air Act as a result of similar claims of noncompliance with on-board diagnostic systems as were raised in the California proceeding. The complaint seeks a judgment enjoining Toyota from selling in the United States any new vehicle between the 1996 and 1998 model years that does not conform to the applicable federal regulations and ordering Toyota to take appropriate action to remedy the alleged violations of the Clean Air Act, as well as civil penalties of up to $27,500 for each vehicle allegedly sold in violation of that Act. In November 1999, the Environmental Protection Agency and the Department of Justice named Toyota and its U.S. subsidiary, Toyota Technical Center, U.S.A., Inc. as additional defendants. In March 2003, Toyota and the Environmental Protection Agency and the Department of Justice agreed to a settlement and submitted it to the United States District Court for the District of Columbia. Under the settlement terms, Toyota will contribute funds to certain supplemental environmental projects and make settlement payments to the United States government. In addition, Toyota will extend warranties for the evaporative emission control systems of relevant Toyota models from 3 years or 50,000 miles to 14 years or 150,000 miles and will accelerate the introduction of near-zero-emission cars. The total estimated cost of the settlement to Toyota is currently estimated to be $32.7 million. 36 -------------------------------------------------------------------------------- Table of Contents Other Proceedings Toyota has various other legal actions, governmental proceedings and other claims pending against it, including product liability claims in the United States. Although the claimants in some of these actions seek potentially substantial damages, Toyota cannot currently determine its potential liability or the damages, if any, with respect to these claims. However, based upon information currently available to Toyota, Toyota believes that its losses from these matters, if any, would not have a material adverse effect on Toyota's financial position, operating results or cash flows. 4.C ORGANIZATIONAL STRUCTURE As of March 31, 2003, Toyota Motor Corporation had 304 Japanese subsidiaries and 196 overseas subsidiaries. The following table sets forth for each of Toyota Motor Corporation's principal subsidiaries the country of incorporation and the percentage ownership and the voting interest held by Toyota Motor Corporation. Percentage Ownership Name of Subsidiary Country of Incorporation and Voting Interest -------------------------------------------- -------------------------------------- ---------- Tokyo Toyota Motor Co., Ltd. Japan 100.00 Tokyo Toyo-Pet Motor Sales Co., Ltd. Japan 100.00 Osaka Toyopet Co., Ltd. Japan 100.00 Toyota Tokyo Corolla Co., Ltd. Japan 100.00 Hino Motors, Ltd. Japan 50.41 Toyota Motor Kyushu, Inc. Japan 100.00 Daihatsu Motor Co., Ltd. Japan 51.41 Toyota Motor Hokkaido, Inc. Japan 100.00 Araco Corporation Japan 75.04 Toyota Financial Services Corporation Japan 100.00 Toyota Finance Corporation Japan 100.00 Toyota Motor North America, Inc. United States 100.00 Toyota Motor Sales, U.S.A., Inc. United States 100.00 Toyota Motor Manufacturing North America, United States 100.00 Inc. Toyota Motor Manufacturing, Kentucky, Inc. United States 100.00 Toyota Motor Manufacturing, Indiana, Inc. United States 100.00 Toyota Motor Manufacturing, Canada, Inc. Canada 100.00 Toyota Motor Credit Corporation United States 100.00 Toyota Credit Canada Inc. Canada 100.00 Toyota Motor Europe S.A./N.V. Belgium 100.00 Toyota Motor Marketing Europe S.A./N.V. Belgium 100.00 Toyota Deutschland G.m.b.H. Germany 100.00 Toyota (GB) PLC United Kingdom 100.00 Toyota France S.A. France 100.00 Toyota Motor Italia S.p.A. Italy 100.00 Toyota Motor Engineering & Manufacturing Belgium 100.00 Europe S.A./N.V. Toyota Motor Manufacturing (UK) Ltd. United Kingdom 100.00 Toyota Kreditbank G.m.b.H. Germany 100.00 Toyota Motor Finance (Netherlands) B.V. Netherlands 100.00 Toyota Financial Services (UK) PLC United Kingdom 100.00 Toyota Motor Asia Pacific Pte Ltd. Singapore 100.00 Toyota Motor Corporation Australia Ltd. Australia 100.00 Toyota Motor Thailand Co., Ltd. Thailand 86.43 Toyota Finance Australia Ltd. Australia 100.00 Toyota Leasing (Thailand), Co., Ltd. Thailand 75.87 Toyota South Africa Motors (Pty) Ltd. South Africa 100.00 37 -------------------------------------------------------------------------------- Table of Contents 4.D PROPERTY, PLANTS AND EQUIPMENT As of March 31, 2003, Toyota and its affiliates produced automobiles and related components through 66 manufacturing facilities and organizations, of which 26 were located in Japan. The remaining facilities are located principally in Argentina, Australia, Brazil, Canada, China, India, Malaysia, the Philippines, Thailand, the United States and the United Kingdom. In addition to its manufacturing facilities, Toyota's properties include sales offices and other sales facilities in major cities, repair service facilities, and research and development facilities. The following table sets forth information, as of March 31, 2003, with respect to Toyota's principal facilities and organizations, all of which are owned by Toyota or its subsidiaries. However, small portions, all under 15%, of some facilities are on leased premises. Facility or Subsidiary Name Location Floor Principal Products or ------------------- ------ Space Functions --------------------------- (thousand square meters) --------- Japan Tahara Plant Tahara-cho, Aichi Pref. 1,150 Automobiles Toyota Head Office and Technical Toyota City, Aichi Pref. 1,000 Research and Development Center Motomachi Plant Toyota City, Aichi Pref. 830 Automobiles Kamigo Plant Toyota City, Aichi Pref. 550 Automobile parts Takaoka Plant Toyota City, Aichi Pref. 710 Automobiles Tsutsumi Plant Toyota City, Aichi Pref. 610 Automobiles Myochi Plant Miyoshi-cho, Aichi Pref. 270 Automobile parts Kinu-ura Plant Hekinan City, Aichi Pref. 360 Automobile parts Honsha Plant Toyota City, Aichi Pref. 450 Automobiles Higashi-Fuji Technical Center Susono City, Shizuoka Pref. 230 Research and Development Toyota Motor Kyushu, Inc. Miyata-cho, Fukuoka Pref. 260 Automobiles Daihatsu Motors Co., Ltd. Ikeda City, Osaka, etc. 960 Automobiles Hino Motors, Ltd. Hino City, Tokyo, etc. 890 Automobiles Outside Japan Toyota Motor Manufacturing Kentucky, U.S.A. 700 Automobiles Kentucky, Inc. Toyota Motor Manufacturing Indiana, U.S.A. 320 Automobiles Indiana, Inc. Toyota Motor Sales, U.S.A., Inc. California, U.S.A. 3,900 Sales facilities and Leased Automobiles Toyota Motor Manufacturing Canada Ontario, Canada 280 Automobiles Inc. Toyota Motor Manufacturing (UK) Burnaston and Deeside, UK 300 Automobiles Limited Toyota is constantly engaged in upgrading, modernizing and revamping the operations of its manufacturing facilities, based on its assessment of market needs and prospects. As market conditions and Toyota's business objectives evolve, Toyota adjusts its capacity and utilization by opening, closing, expanding or downsizing production facilities accordingly. As a result, Toyota believes it is difficult and it would require unreasonable 38 -------------------------------------------------------------------------------- Table of Contents effort to track the exact productive capacity and the extent of utilization of each of its manufacturing facilities with a reasonable degree of accuracy. Toyota believes that its manufacturing facilities are generally all operating within normal operating capacity and not substantially below capacity. As of March 31, 2003, property, plant and equipment having a net book value of approximately Y134,033 million was pledged as collateral securing indebtedness incurred by Toyota's consolidated subsidiaries. Toyota believes that there does not exist any material environmental issues that may affect the company's utilization of its assets. Toyota considers all its principal manufacturing facilities and other significant properties to be in good condition and adequate to meet the needs of its operations. See '- Business Overview - Capital Expenditures and Divestitures' for a description of Toyota's material plans to construct, expand or improve facilities. 39 This information is provided by RNS The company news service from the London Stock Exchange

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