20-F

Toyota Motor Corporation 23 August 2002 As filed with the Securities and Exchange Commission on August 23, 2002 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, 2002 ( ) 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, 2002 Common Stock 3,605,864,612 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 page ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE. Item 3. KEY INFORMATION 3.A Selected Financial Data 3.B Capitalization and Indebtedness 3.C Reasons for the offer and use of proceeds 3.D Risk factors ITEM 4. INFORMATION ON THE COMPANY 4.A HISTORY AND DEVELOPMENT OF THE COMPANY 4.B BUSINESS OVERVIEW 4.c organizational structure 4.D PROPERTY, PLANTS AND EQUIPMENT. ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 5.A OPERATING RESULTS 5.B Liquidity and Capital Resources 5.c RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES 5.d TREND INFORMATION ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 6.a directors and senior management 6.b COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS 6.C BOARD PRACTICES 6.D EMPLOYEES 6.E SHARE OWNERSHIP ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 7.a MAJOR SHAREHOLDERS 7.B RELATED PARTY TRANSACTIONS 7.c interests of experts and counsel Item 8. Financial Information 8.A CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION 8.B SIGNIFICANT CHANGES Item 9. The Offer and Listing 9.A LISTING DETAILS 9.B PLAN OF DISTRIBUTION 9.C MARKETS 9.D SELLING SHAREHOLDERS 9.E DILUTION 9.F EXPENSES OF THE ISSUE ITEM 10. ADDITIONAL INFORMATION 10.A SHARE CAPITAL 10.B MEMORANDUM AND ARTICLES OF ASSOCIATION 10.C MATERIAL CONTRACTS 10.D EXCHANGE CONTROLS 10.E TAXATION 10.F DIVIDENDS AND PAYING AGENTS 10.G STATEMENT BY EXPERTS 10.H DOCUMENTS ON DISPLAY 10.I SUBSIDIARY INFORMATION ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS ITEM 15. (RESERVED) ITEM 16. (RESERVED) ITEM 17. FINANCIAL STATEMENTS ITEM 18. FINANCIAL STATEMENTS ITEM 19. EXHIBITS 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 Y133.25 = $1.00. This was the approximate exchange rate in Japan on March 31, 2002. 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. 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. Japanese GAAP Selected Financial Data The statement of income data set forth below for each of the five fiscal years ended March 31, 2002, and the balance sheet data as of the end of each of the five fiscal years ended March 31, 2002, 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 the statement of cash flows, valuation of securities, accounting for income taxes, 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. Year Ended March 31, 1998(1) 1999(2) 2000(4)(5)(7) 2001(8)(9)(10) 2002 2002 (in millions, except share and per share data) Consolidated Statement of Income Data Automotive: Revenues.................................... Y10,558,610 Y11,198,411 Y11,279,673 Y11,940,004 Y13,909,926 $104,390 Operating income.......................... 742,532 730,774 681,485 812,610 1,078,098 8,091 Financial Services: Revenues........................................ 526,363 586,195 528,714 564,524 693,386 5,203 Operating income.......................... 34,473 46,359 36,196 31,098 68,658 515 All Other (3): Revenues........................................ 777,570 1,184,220 1,290,178 1,165,509 819,470 6,150 Operating income.......................... 2,605 26,825 31,985 (1,966) (897) (7) Elimination of intersegment: Revenues........................................ (184,146) (219,817) (219,004) (245,613) (316,484) (2,375) Operating income.......................... 188 (29,013) 26,316 28,390 (22,388) (168) Total Company: Revenues........................................ 11,678,397 12,749,009 12,879,561 13,424,424 15,106,298 113,368 Operating income.......................... 779,798 774,945 775,982 870,132 1,123,471 8,431 Income before income taxes and 828,791 771,886 750,502 864,129 1,113,525 8,357 minority interests...................... Net income.................................... 454,350 356,180 406,798 471,296 615,825 4,622 Net income per share: Basic.......................................... 119.44 94.22 109.96 127.88 170.69 1.28 Diluted....................................... 118.77 94.22 109.96 127.88 170.69 1.28 Shares used in computing net income 3,804,045 3,780,357 3,699,625 3,685,399 3,607,780 --- per share, basic (in thousands).... Shares used in computing net income 3,825,937 3,780,357 3,699,625 3,685,399 3,607,783 --- per share, diluted (in thousands). Year Ended March 31, 1998(1) 1999(2) 2000(4)(6)(7) 2001(9)(10) 2002 2002 (in millions) Consolidated Balance Sheet Data (end of period): Total Assets: Automotive............................................. Y6,432,673 Y7,094,263 Y7,812,480 Y8,305,599 Y9,458,096 $70,980 Financial Services..................................... 4,173,710 4,333,631 4,736,866 5,666,584 7,069,278 53,053 All other (3)............................................ 814,020 866,687 1,068,910 836,574 778,651 5,843 Unallocated.............................................. 2,433,952 2,458,731 2,850,799 2,710,671 2,582,912 19,384 Total company........................................ 13,854,355 14,753,312 16,469,055 17,519,428 19,888,937 149,260 Short-term debt, including current portion 1,523,098 1,755,095 2,192,655 2,218,375 3,077,849 23,098 of long-term debt..................................... Long-term debt, less current portion............ 2,784,395 2,938,719 2,856,374 3,046,933 3,626,687 27,217 Shareholders' equity..................................... 6,021,896 6,175,937 6,796,666 7,114,567 7,325,072 54,972 Other Data: Capital Expenditures................................ 1,346,702 1,545,236 1,305,745 1,262,482 1,508,771 11,323 (1) In fiscal 1998, the financial statement presentation for parts sales to suppliers and revenue from technical support fees was changed. Certain parts are sold to suppliers at a small margin for use in the assembly and production of Toyota vehicles. These parts are subsequently repurchased by Toyota in the finished product and Toyota is otherwise required to repurchase all parts sold to its suppliers. Toyota believes that the substance of these transactions is the transfer of goods within the production process and not the culmination of the earnings process. As such, the presentation of the financial statements has been changed to reflect these transactions on a net basis and sales and cost of sales are only recognized when the finished products are sold to external customers. Prior restatements to reflect this change in policy are not permitted under Japanese GAAP. In addition, revenue from technical support fees was reclassified from non-operating income to be included in net sales in the automotive segment. The net effect of these changes in presentation was to decrease net sales in the automotive segment by Y1,147,623 million and in the all other segment by Y745 million, and to increase operating income in the automotive segment by Y14,469 million and in the all other segment by Y128 million. On a consolidated basis, the net effect of these changes was to decrease net revenues by Y1,148,512 million and to increase operating income by Y14,453 million. These changes had no effect on net income or shareholders' equity. (2) 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. (3) Total assets for the all other segment as of March 31, 1998 increased significantly because of the consolidation of IDO Corporation at the end of fiscal 1998. Similarly, revenues and operating income for the all other segment increased significantly in fiscal 1999 because of the consolidation of IDO's results for the full fiscal year. (4) 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 Y19,558 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. (5) 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. (6) Starting in fiscal 2000, certain software was capitalized as an intangible fixed asset, which amounted to Y42,657 million. (7) 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. (8) 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. (9) 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. (10) 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. 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, 1998 1999 2000 2001 2002 2002 (in millions, except share and per share data) Consolidated Statement of Income Data: Automotive (1): Revenues........................................ Y10,443,502 Y11,139,140 Y11,098,864 Y11,723,043 Y13,193,994 $99,017 Operating income.......................... 807,001 686,954 638,990 765,557 1 ,057,948 7,939 Financial Services: Revenues........................................ 533,409 594,678 534,154 571,058 698,022 5,238 Operating income.......................... 45,487 38,347 31,667 31,693 45,115 339 All Other (1)(2): Revenues........................................ 773,725 1,174,225 1,207,787 1,069,378 728,848 5,469 Operating income (loss)................. (23,993) 28,977 26,453 (4,578) (2,954) (22) Elimination of intersegment: Revenues........................................ (184,268) (220,622) (191,028) (226,409) (303,990) (2,281) Operating income (loss)................. 530 (3,870) 1,451 (1,943) (6,477) (49) Total Company: Revenues........................................ 11,566,368 12,687,421 12,649,777 13,137,070 14,316,874 107,443 Operating income.......................... 829,025 750,408 698,561 790,729 1,093,632 8,207 Income before income taxes, minority interest and 873,065 875,674 880,680 1,107,289 972,101 7,295 equity in earnings of affiliated companies. Net income.................................... 436,935 451,646 481,936 674,898 556,567 4,177 Net income per share: Basic.......................................... 114.86 119.47 128.27 180.65 152.26 1.14 Diluted....................................... 114.26 119.47 128.27 180.65 152.26 1.14 Shares used in computing net income 3,804,045 3,780,357 3,757,276 3,735,862 3,655,304 --- per share, basic (in thousands).... Shares used in computing net income 3,825,937 3,780,357 3,757,317 3,735,941 3,655,306 --- per share, diluted (in thousands). Year Ended March 31, 1998 1999 2000 2001 2002 2002 (in millions) Consolidated Balance Sheet Data (end of period): Total Assets: Automotive............................................ Y6,933,539 Y7,424,177 Y7,557,700 Y7,951,107 Y9,121,406 $68,454 Financial Services.................................... 4,215,154 4,481,106 4,752,270 5,531,568 6,910,593 51,862 All other 880,206 931,988 1,089,532 584,948 650,912 4,885 ............................................... Unallocated............................................. 2,793,244 3,041,914 3,041,458 2,952,160 2,622,819 19,683 Total company....................................... 14,822,143 15,879,185 16,440,960 17,019,783 19,305,730 144,884 Short-term debt, including current portion of long-term 1,607,083 1,784,081 2,171,490 2,183,681 2,984,378 22,396 debt.................................... Long-term debt, less current portion........... 2,802,224 2,997,725 2,913,759 3,083,344 3,722,706 27,938 Shareholders' equity.................................... 6,544,937 6,655,283 6,912,140 7,077,411 7,264,112 54,515 Other Data: Capital Expenditures............................... 1,479,676 1,731,297 1,376,704 1,201,406 1,548,593 11,622 (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 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 will be accounted for as a marketable equity security investment and the merged entity's financial results will not otherwise be reflected in Toyota's own financial results beginning on October 1, 2000. 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, 1997............................................. 10.0 0.08 March 31, 1998............................................. 13.0 0.09 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 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 Y133.25= $1.00. This was the approximate exchange rate in Japan on March 31, 2002. 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 August 20, 2002, this noon buying rate was Y118.84 = $1.00. The average exchange rate for the periods shown is the average of the month-end rates during the period. Fiscal Year Ending March 31, At End Average High Low of Period (of month-end rates) (Y per $1.00) 1998............................................................... 133.29 123.57 133.99 111.42 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 (through August 20, 2002)............... 118.84 122.79 133.32 115.71 Month Ending High Low (Y per $1.00) February 28, 2002.................................................................................134.77 132.26 March 31, 2002.................................................................................133.46 127.07 April 30, 2002.................................................................................133.32 128.13 May 31, 2002.................................................................................128.66 123.08 June 30, 2002.................................................................................125.64 119.38 July 31, 2002.................................................................................120.19 115.71 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. 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. 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 Toyoda Automatic Loom Works, Ltd. Toyota became a separate company in 1937. Today, Toyota operates through 470 consolidated subsidiaries and 231 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, 1999 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 5.54 million vehicles in fiscal 2002. Toyota had net revenues of Y14.3 trillion and net income of Y556.6 billion in fiscal 2002. 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. Toyota established in July 2000 a finance holding company to strengthen its financial services business and to expand into credit card and related businesses. 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 formed out of the merger of IDO Corporation, a cellular services provider and former subsidiary of Toyota, DDI Corporation and KDD Corporation on October 1, 2000. 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 160 countries and regions. Toyota's primary markets for its automobiles are Japan, North America and Europe. During fiscal 2002, approximately 40% of Toyota's automobile unit sales were in Japan; 32% were in North America and 13% were in Europe. The remaining 15% of unit sales were in other markets, including approximately 4% in East and Southeast Asian countries other than Japan. The Worldwide Automotive Market Toyota estimates that annual worldwide vehicle sales exceeded 57 million units in 2001. Automobile sales are affected by a number of factors including: â€¢ social, political and economic conditions, â€¢ the introduction of new vehicles and technologies, 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 2001, 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 35% for North America, 34% for Europe and 10% for Japan. In North America, new vehicle sales decreased by 1.3% to 20.1 million units due to the general economic slowdown in the United States beginning in the second half of 2000, which deepened during the second half of 2001. In Europe, despite the global economic slowdown, new vehicle sales remained basically flat at 19.6 million units. In Japan, adverse economic conditions kept consumer demand at a low level. As a result, total vehicle unit sales (including mini-vehicles) in Japan decreased by 2.6% to 5.8 million units in the twelve-month period ended March 31, 2002. Japan, however, remains the second largest national market for automobiles. Demand for new vehicles throughout East and Southeast Asia continued to grow during 2001, although at a much slower pace than in 2000. As a result, unit sales in East and Southeast Asian markets (excluding Japan, China and Hong Kong) in 2001 increased by 1.5% to 3.0 million units. 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. For example, the Chinese Government imposed new tariffs on imports of Japanese automobiles beginning June 2001. These tariffs were subsequently lifted in December 2001. 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 Corporation of a 10% equity interest in Hyundai Motor Co., Ltd. announced in June 2000, â€¢ the acquisition by Renault S.A. of a 70% equity interest in Samsung Motors Incorporated in September 2000, â€¢ the acquisition by DaimlerChrysler Corporation 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 focus on the manufacture of high quality and affordable products, â€¢ its commitment to research and development, â€¢ its timely introduction of new products that meet consumer demands and incorporate superior design and environmental and safety technologies, and â€¢ its financial strength. 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 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 held a domestic market share (excluding mini-vehicles) on a retail basis of 42.2% in fiscal 2000, 43.1% in fiscal 2001 and 42.2% in fiscal 2002. Despite the continued market downturn and increased competition from its domestic competitors, Toyota was able to maintain its market share above 40% in fiscal 2002 by actively introducing new and remodeled cars. This was also attributable to the strong sales of various models, including the Corolla, which was the best-selling domestic passenger car for the 33rd straight year, the Vitz and the Estima. Moreover, Toyota is pro-active in its use of information technology to enhance customer loyalty and its brand image. For example, Toyota has been striving to improve communication with customers through initiatives like its Gazoo.com website. â€¢ Capitalize on Success in North America. Toyota's North American unit sales continued to increase steadily in fiscal 2001 and fiscal 2002 despite the general economic slowdown in the United States beginning in the second half of 2000. Toyota's North American unit sales grew from 1.69 million units in fiscal 2000 to 1.78 million units in fiscal 2002. In fiscal 2002, Toyota's North American unit sales represented more than 32% of its total global unit sales. Toyota attributes its continuing success in the North American market to successful new product introductions. Recent product introductions include the introduction in the autumn of 2000 of the remodeled Lexus LS430 luxury sedan, the remodeled RAV4 compact sport-utility vehicle and the new Sequoia large-size sport-utility vehicle, as well as the introduction of a remodeled Lexus IS300 mid-size sport sedan in June 2000. Toyota also introduced a new mid-size sport-utility vehicle, the Highlander, in January 2001. Relatively high margin light trucks now account for approximately 40% of Toyota's vehicle unit sales in the United States, while passenger vehicles account for approximately 47% 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 2001, 59% of Toyota vehicles sold in North America were produced in North America. In July 2002, the total number of Toyota vehicles produced in North America since local production began in September 1986 surpassed 10 million vehicles. Toyota plans to continue to grow its North American business and expects to increase its local annual production capacity to 1.45 million vehicles by 2003. â€¢ Continue Growth in Europe. Toyota's European unit sales grew to 727,192 vehicles in fiscal 2002, an increase of approximately 5.2% compared to fiscal 2001 levels, despite relatively flat sales during 2001 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 2002 Toyota expanded its cost-cutting efforts in production, development, and sales and marketing. Toyota has achieved growth in the mid-size and compact segments of the European market during fiscal 2001 and 2002 due to an increase in sales of the RAV4. The successful introduction of the Yaris to the European market in early 1999 has also been a major factor behind this growth, as sales of the Yaris reached 211,000 units in 2001, making it the first Toyota model to pass the 200,000 mark in Europe. 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 which produces the Yaris commenced operations in January 2001 and produced approximately 62,000 units in 2001. Production capacity at this facility has already reached 150,000 units and is expected to reach 180,000 units in 2003. 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. 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 2001, Toyota and its unconsolidated affiliates produced in Europe (excluding production in Turkey) approximately 36% 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 offer substantial growth opportunities despite the substantially lower growth rates in total automobile sales that the region experienced in 2001 compared to 2000 due to the general economic slowdown. Toyota 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 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 new markets. Toyota Kirloskar Motor Ltd. in India commenced production of the Qualis, a multi-purpose vehicle aimed exclusively at the Indian market, in December 1999 and commenced sales in January 2000. In China, Toyota's joint venture agreement to produce passenger vehicles was approved in May 2000 by the Chinese government. The joint venture company was established in June 2000 and is expected to commence production in October 2002 of a new subcompact car using the same platform as the Yaris and the Echo (marketed in Japan as the Platz). Toyota expects annual production through this joint venture to reach approximately 30,000 units. In April 2001, the Coaster small bus, the first vehicle produced in China to bear the Toyota name, was introduced to the Chinese market by Sichuan Toyota Motor Co., Ltd. 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, 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. Toyota currently also sells the Coaster, a hybrid mini-bus which is sold on a 'made-to-order' basis, and introduced a hybrid version of the Estima minivan in June 2001, as well as a hybrid version of the Crown sedan in August 2001. In addition, Toyota expects to begin limited sales of a fuel cell hybrid vehicle in Japan and the United States around the end of 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, and â€¢ increasing the focus on global purchasing opportunities, standardization and modularization to optimize purchasing from suppliers. 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 will help strengthen the overall competitiveness of Toyota's financial business, allow better risk management and streamline related decision-making processes. Toyota plans to expand its network of financial services during the next several years to cover more than 30 countries as compared to the 22 countries currently covered. 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 was launched in 1998 and has now 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 261 million shares of its common stock at a total cost of approximately Y927 billion. As a result, Toyota's total outstanding shares were reduced to 3,605,864,612 shares as of March 31, 2002. Toyota repurchased and retired 60,530,000 shares in the aggregate pursuant to the resolutions of its ordinary general meetings of shareholders in fiscal 1997 and 1998. Pursuant to newly enacted legislation, from 1997 to 2002 Toyota's articles of incorporation authorized Toyota to repurchase and retire up to 370 million shares using its retained earnings by resolution of its board of directors, subject to certain limitations and restrictions. Out of such 370 million shares, approximately 200 million shares had been repurchased, of which approximately 160 million shares had been retired, as of March 31, 2002. In May 2002, Toyota retired 40 million shares out of 44 million shares it was then holding as treasury stock. As a result of the abolishment of the relevant legislation in June 2002 Toyota's articles of incorporation was amended to remove the authorization for share repurchases. Currently, 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 2002, during the one-year period until the next ordinary general meeting of shareholders, Toyota may repurchase and retire up to 170 million shares or up to the number of shares equivalent to Y600 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, 1998 1999 2000 2001 2002 Approximate number of shares repurchased.................................. 31 million 44 million1 11 million 65 million 77 million Approximate amount paid............................ Y106 billion Y134 billion Y45 billion Y264 billion Y278 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. Automotive Operations Toyota's revenues from its automotive operations were Y13.2 trillion in fiscal 2002, Y11.7 trillion in fiscal 2001 and Y11.1 trillion in fiscal 2000. 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 was remodeled in August 2000 for the Japanese market. The Yaris, marketed as the Vitz in Japan, is Toyota's new generation 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 fiscal 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 to the Japanese market in May 2002. 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 494,000 mini-vehicles and 80,000 automobiles during fiscal 2002. Daihatsu's largest markets are Japan and Europe. Japan accounted for approximately 87% and Europe accounted for approximately 5% of Daihatsu's unit sales during fiscal 2002. Hybrid In December 1997, Toyota introduced the Prius in Japan. The Prius is the world's first mass-produced hybrid car. It runs on a continuous variable combination of gasoline and electric power. This combination 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. Prius has achieved a level of market acceptance that has resulted in an increase in monthly production from 1,000 units at the time it was first introduced to the current level of 3,000 units. In May 2000, Toyota introduced a new version of the Prius. 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 also introduced a hybrid version of the Estima minivan in June 2001 and a hybrid version of the Crown luxury sedan in August 2001. Toyota also expects to begin limited sales of a fuel cell hybrid vehicle in Japan and the United States around the end of 2002. As of March 31, 2002, Toyota has sold over 100,000 hybrid vehicle units. By introducing hybrid versions in different product lines and otherwise increasing sales of hybrid vehicles, Toyota hopes to increase its production of hybrid vehicles to 300,000 per year by 2005. Mid-Size Toyota's mid-size models include the Camry, which was the best selling car in the United States for four years in a row from 1997 to 2000. The Camry line includes the Camry Solara sport coupe. In 2001, Camry sales in the United States were approximately 388,000 units (including 42,000 Solaras). Toyota introduced a remodeled version of the Camry to the United States in September 2001. In April 2000, Toyota launched a successor model to the Avalon luxury sedan, which was renamed the Pronard in Japan. 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. The Avensis is Toyota's flagship mid-size car for European markets, where it is available as a four-door sedan, a five-door liftback or a station wagon. 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 second consecutive title of best-selling luxury brand by selling over 220,800 vehicles in 2001. 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 remodeled IS300 and IS200 mid-size sport sedans, marketed in Japan as the Altezza; and the LX470 and RX300 luxury sports-utility vehicles, the latter marketed in Japan as the Harrier. Toyota's best-selling full-size luxury car in Japan is the Crown, which underwent a full model change in September 1999. A hybrid version of the Crown 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. In September 2001, Toyota introduced the Altezza Gita (sold in North America as the Lexus IS300 Sport Cross) to the Japanese and North American markets. 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, also known 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. Under the Lexus brand, Toyota also offers the LX470 and the RX300 sport-utility vehicles, the latter marketed in Japan as the Harrier. The LX470, the Land Cruiser, the Tundra and the Sequoia are equipped with a V-8 engine. 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 Siena, which is sold in North America; the Previa, which underwent a model change in January 2000 and is sold in Japan as the Estima; the Picnic, which was remodeled in 2001 and is sold in Japan as the Ipsum; the Gaia, which is sold only in Japan; the Sparky and the Hiace; and the Noah and the Voxy, both released in Japan in November 2001. 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 2002, 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 2002 include the Verossa mid-size sedan, the Brevis compact luxury sedan, hybrid versions of the Estima minivan and the Crown luxury sedan, the Will VS wagon, and the Altezza Gita luxury wagon, sold in North America as the Lexus IS300 Sport Cross. During fiscal 2002, remodeled cars sold in Japan included the Mark II Blit premium sporty wagon, the Ipsum, Noah and Voxy minivans, the Corolla Spacio compact car, the Soarer luxury sports coupe, the Windom luxury sedan, mid-size sedans such as the Camry, the Premio and the Allion and one version of the Dyna and Toyoace small trucks. In May 2002, Toyota introduced the Alphard minivan and the ist subcompact car to the Japanese market. In July 2002, Toyota introduced commercial van and wagon versions of the Succeed and Probox to the Japanese market. Toyota plans to release a remodeled version of the Avensis in Europe in 2003. Toyota also expects to begin limited sales of a fuel cell hybrid vehicle in Japan and the United States around the end of 2002. Markets, Sales and Competition Toyota's primary markets are Japan, North America and Europe. The following table sets forth Toyota's vehicle unit sales by geographic market for the periods shown. 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, 1998 1999 2000 2001 2002 Units % Units % Units % Units % Units % Market Japan............... 1,907,059 42.8% 1,929,279 41.1% 2,177,524 42.0% 2,322,838 42.0% 2,217,002 40.0% North America... 1,293,121 29.0 1,485,095 31.6 1,689,483 32.6 1,733,569 31.4 1,780,133 32.1 Europe............. 500,668 11.2 557,506 11.9 633,879 12.2 691,135 12.5 727,192 13.1 Other Regions... 755,496 17.0 723,267 15.4 681,888 13.2 779,321 14.1 818,395 14.8 Total.................. 4,456,344 100.0% 4,695,147 100.0% 5,182,774 100.0% 5,526,863 100.0% 5,542,722 100.0% The following table sets forth Toyota's 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, 1998 1999 2000 2001 2002 Japan: (sales in thousands of units) Total market sales 4,749 4,215 3,981 4,121 3,981 Toyota sales (retail basis) 1,862 1,688 1,682 1,774 1,678 Toyota market share 39.2% 40.1% 42.2% 43.1% 42.2% Calendar Year Ended December 31, 1997 1998 1999 2000 2001 North America: (sales in thousands of units) Total market sales 17,524 18,168 19,767 20,375 20,110 Toyota sales (retail basis) 1,357 1,516 1,631 1,766 1,894 Toyota market share 7.7% 8.3% 8.3% 8.7% 9.4% Europe: Total market sales 17,791 18,902 20,076 19,610 19,631 Toyota sales (retail basis) 471 541 592 656 666 Toyota market share 2.6% 2.9% 2.9% 3.4% 3.4% 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. For more than 40 years, Toyota has been the largest automobile manufacturer in Japan. In each year since fiscal 1999, Toyota 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 market share (excluding mini-vehicles) was 42.2% in fiscal 2002. Toyota's market share (including mini-vehicles) was 38.9% in fiscal 2001 and 38.2% in fiscal 2002. 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 Since 1990, Toyota has sold in North America more than one million Toyota vehicles annually, including 1,780,133 vehicles in fiscal 2002. The United States is the largest portion of the North American market for Toyota, representing 92% of its total retail unit sales in the region. In 2001, 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 10.0% in 2001, 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. Europe European sales of Toyota vehicles in fiscal 2002 reached an all-time high for the fifth year in a row, with total sales of 727,192 vehicles, up 5.2% from fiscal 2001. In 2001, Toyota had a market share in Europe of 3.4%. 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 an increase in sales of the RAV4. 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) achieved 2.96 million units in 2000 and increased by approximately 1.5% to 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. This information excludes unit sales by Daihatsu. Toyota Sales (in thousands of vehicles) Asia (excluding China and China and Hong Kong Hong Kong) 1999................................................................... 239 14 2000................................................................... 316 24 2001................................................................... 310 32 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 9.8% in 1999, 10.7% in 2000 and 10.3% in 2001. Toyota currently sells vehicles in Indonesia, Malaysia, the Philippines, Singapore, Thailand, Taiwan and Vietnam, with a leading position in Indonesia and Thailand. In May 1996, Toyota established a joint venture with Tianjin Automobile Industrial (Group) Co., Ltd. to produce automotive engines in China. Since that time, Toyota has entered into a total of three joint ventures with Tianjin Automobile. In addition, Toyota established a wholly owned subsidiary in China in 1997 to produce forged automotive parts. In May 2000, China's Ministry of Foreign Trade and Economic Cooperation approved Toyota's plan to establish a joint venture company with Tianjin Automobile to build subcompact passenger cars using the same platform as the Yaris. Toyota expects the joint venture to begin production of new models, at an annual rate of 30,000 vehicles, from October 2002. When the Chinese government imposed new tariffs on Japanese automobiles in June 2001, the volume of vehicles made in Japan and exported to China by Toyota decreased significantly at that time. The tariffs were subsequently lifted in December 2001, leading to a significant recovery in Toyota's exports to China. In addition, Toyota commenced production in India of Qualis, a multi-purpose vehicle aimed exclusively at the Indian market, in December 1999 and commenced sales in January 2000. In April 2001, the Coaster small bus, the first vehicle produced in China to bear the Toyota name, was introduced to the Chinese market by Sichuan Toyota Motor Co., Ltd. East and Southeast Asia (excluding Hong Kong and China) accounted for 8.7% of Toyota's overseas unit sales in 2001 (not including unit sales by Daihatsu outside Japan), a decrease of 0.6% from 9.3% in 2000. Production Toyota and its affiliates produce automobiles and related components through more than 50 manufacturing organizations in 25 countries around the world. Toyota's major manufacturing facilities include plants in Japan, the United States, Canada, the United Kingdom, France, Turkey, Indonesia, Thailand, Taiwan, Australia, South Africa, Brazil and Argentina. Toyota commenced operations of its Poland manufacturing plant for transmissions in April 2002. Daihatsu brand vehicles are produced at six factories in Japan and seven manufacturing organizations in seven other countries, including Indonesia and Malaysia. 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 1994, 49% of vehicles sold overseas were produced outside Japan, whereas in 2001, 54% of Toyota automobiles sold overseas were manufactured in overseas plants by Toyota and its unconsolidated affiliates. In 2001, 59% of Toyota vehicles sold in North America were produced in North America. Of the vehicles sold in Europe in 2001, 36% were produced in Europe, an increase from 26% in 2000. This increase is largely due to increased sales of the Yaris, which is produced at a production facility in France. In fiscal 2002, Toyota produced approximately 4.0 million vehicles in Japan and approximately 1.3 million vehicles overseas. 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, 1998 1999 2000 2001 2002 Units 4,233,371 4,458,406 5,002,731 5,275,213 5,305,803 Produced 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 jidoka with its ability to stop work immediately when problems arise in the production process to prevent the production of defective items. To achieve this, Toyota designs its equipment to detect abnormalities and to stop whenever abnormalities occur. Toyota also equips its machine operators with the ability 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 cornerstone of Toyota's automobile production, the system has been expanded for use in Toyota's parts production, distribution and customer service activities. Toyota has begun to equip its large automotive plants in industrialized nations with a new generation of multipurpose equipment. Toyota has also taken steps which have allowed it to achieve greater flexibility at its smaller plants in developing countries. These steps include modifying body designs to allow for the assembly of a greater variety of models and an increase in the sharing of parts among vehicle models. 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, 2002, 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, 2002, Daihatsu's sales distribution network consisted of 66 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 is taking steps to promote the competitiveness of its dealer showrooms and to increase the efficiency of its sales activities. Sales of Toyota vehicles in Japan are conducted through five sales channels --- 'Toyota,' 'Toyopet,' 'Corolla,' 'Netz' and 'Vista'. The following table provides information for each channel as of March 31, 2002. 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 websites, including Gazoo.com. 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 160 countries and regions. Daihatsu vehicles are sold through approximately 110 dealers operating approximately 2,300 sales outlets in more than 140 countries and 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. 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€¢ systems that automatically recognize a curve in the road and shift to lower gears in synchronization with the driver's operation of the accelerator based on information provided by a car navigation system, and â€¢ monitors that assist drivers that have difficulty in backing up and parallel parking. 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. The current plan of the Japanese government calls for collection systems to be installed in 900 sites, or about 70% of all toll collection sites in Japan, by 2003. 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. 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 in automated platoons on dedicated system roads in their main service areas, but can 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 has also developed a short-range personal transit system, which consists of a fleet of small electric vehicles based in central locations, such as train stations, that can be utilized by area residents. 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. 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 Y698 billion in fiscal 2002, Y571 billion in fiscal 2001 and Y534 billion in fiscal 2000. 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 during the next several years to cover more than 30 countries as compared to the 22 countries currently covered. Toyota Motor Credit Corporation is Toyota's principal financial services subsidiary in the United States. Toyota also provides financial services in 21 other countries through various financial services subsidiaries, including: â€¢ Toyota Finance Corporation in Japan, â€¢ Toyota Credit Canada Inc. in Canada, 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 provides retail leasing and retail financing services. 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 Y4.7 trillion at March 31, 2002, representing an increase of approximately 27% as compared to the amount outstanding as of March 31, 2001. The majority of Toyota's financial services are provided in North America. As of March 31, 2002, approximately 74% of Toyota's finance receivables were derived from financing operations in North America, 14% from Japan, 7% from Europe and 5% from other areas. Approximately 37% of Toyota's sales in the United States during 2001 included a financing or lease arrangement with Toyota, compared to approximately 32% of 2000 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, 2000, 2001 and 2002. As of March 31, 2000 2001 2002 2002 Finance Receivables (in millions) Retail Y1,794,380 Y1,900,537 Y2,723,834 $20,442 Finance leases 799,868 1,223,340 1,391,924 10,446 Wholesale and other dealer loans 643,773 895,968 952,260 7,146 3,238,021 4,019,845 5,068,018 38,034 Unearned income (222,280) (279,538) (323,897) (2,431) Allowance for credit losses (31,723) (38,292) (52,170) (392) Finance receivables, net 2,984,018 3,702,015 4,691,951 35,211 Less - Current portion (1,189,257) (1,633,247) (2,020,491) (15,163) Noncurrent finance receivables, net Y1,794,761 Y2,068,768 Y2,671,460 $20,048 Operating Leases Vehicles Y1,385,835 Y1,492,901 Y1,556,297 $11,680 Equipment and other 29,328 41,167 38,747 291 Less - Allowance for credit losses (7,957) (8,904) (10,883) (82) 1,407,206 1,525,164 1,584,161 11,889 Less - Accumulated depreciation (331,519) (372,369) (356,243) (2,674) Vehicles and equipment on operating leases, net Y1,075,687 Y1,152,795 Y1,227,918 $9,215 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 new program contributed to increased contract yields and increased credit losses during fiscal 2002. 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. Taking advantage of deregulation in the insurance sector, Toyota increased its ownership interest in its affiliate, Chiyoda Fire & Marine Insurance Co., Ltd., from 37.1% to 44.7% in September 1998 and from 44.7% to 49.9% in March 2001, and further strengthened its close relationship with Chiyoda to develop attractive consumer insurance products for Toyota's automotive customers. In April 2001, Chiyoda and Dai-Tokyo Fire & Marine Insurance Co., Ltd. merged to form Aioi Insurance Co., Ltd. At the time of the merger, Toyota also held a 19.3% interest in Dai-Tokyo. Toyota's current ownership interest in Aioi is approximately 33.4%. Toyota expects to maintain a strong relationship with Aioi. 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, 2002, Toyota had 2.4 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 Y728 billion in fiscal 2002, representing approximately 5.1% of Toyota's total revenue for fiscal 2002, Y1.1 trillion in fiscal 2001 and Y1.2 trillion in fiscal 2000. 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 approximately a 60% interest in the joint venture. In April 1998, Toyota established 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 websites, including Gazoo, 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 is proceeding with plans to launch 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 Toyota vehicles, Gazoo has been expanded to provide a wide range of products and services. 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. 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. U.S. Federal Standards The federal Clean Air Act imposes emission control standards on passenger cars, light-duty trucks and heavy-duty vehicles. Under current standards, manufacturers are obligated to recall vehicles that fail to meet these standards for ten years or 100,000 miles, whichever occurs first. The current standards apply to passenger cars and light-duty trucks produced in model years through 2003. 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. Toyota is involved in a law suit with the Environmental Protection Agency 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'. This program initially 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 2003, but retained a 10% mandate beginning in model year 2003 that increases for future model years. 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. Currently, Toyota's battery-powered RAV4-EV compact sport-utility qualifies as a zero-emission vehicle under the current standards. Toyota's delivery of 322 units of RAV4-EVs by April 1999 allowed it to become the first automotive manufacturer to meet the 'zero-emission vehicles' requirement of the California Air Resources Board. In January 2001, the California Air Resources Board voted to approve modifications to the 'zero-emission vehicles' requirement. The modified requirement provides incentives for continued technology development, but reduces the number of zero-emission vehicles required in the near-term and the total cost of the program to manufacturers. It also sets forth the requirements that advanced technology vehicles such as hybrid cars and alternative fuel vehicles must meet to be recognized as 'partial zero emission vehicles'. Toyota continues to work to develop additional advanced technologies and alternative fuel technologies which would 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 January 2005, 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 and Maine have adopted California's Low Emission Vehicle Program, effective with model year 2001 or before. Maryland and New Jersey have laws requiring the adoption of California standards if certain triggers are met. Massachusetts and New York have also decided to adopt California's zero emission vehicle requirement from the 2005 model year. Although the zero emission vehicle requirement of these two states has an alternative compliance plan from the 2004 model year, Toyota has decided not to comply with the alternative plan. Vermont intends to consider the latest version of the zero-emission vehicle mandate once it becomes finalized in California, and also intends to explore regional strategies with Massachusetts and New York. 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 currently applicable in the United States. 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 heavy 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 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. 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. 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. By 2010, the fuel economy standards applicable to gasoline-fueled vehicles will be tightened, and by 2005, the standards applicable to diesel-fueled vehicles will be tightened. Toyota is now developing gasoline-fueled and diesel-fueled vehicles that will meet these tightened standards. 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. The CAFE standards may increase in the near future, as both the House of Representatives and the Senate have passed separate bills instructing the National Highway Traffic Safety Administration to establish new fuel economy standards for upcoming model years. 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. But 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 current CAFE standards for both passenger cars and light-duty trucks, the enactment of 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 has announced that the United States will not ratify the protocol. However, the United States is 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 also 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 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 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. 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. Vehicle safety regulations in Canada are similar to those in the United States. Vehicles sold in Europe are subject to separate vehicle safety regulations established by the European Union and by individual countries. Countries in South America and Asia have also established vehicle safety regulations. 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 35% 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. 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 advanced safety features. To expand the frontiers of safety technology in automobiles, Toyota completed in 1995 its first prototype Advanced Safety Vehicle, the ASV-1. In 2000, Toyota created a successor prototype, the ASV-2. The ASV-2 incorporates emerging technologies, such as an autonomous safety support system that uses CCD stereo cameras to recognize obstacles in the traffic lane and an infrastructure-harmonized safety support system to warn the driver of pedestrian crossings. Toyota continues to work toward the commercialization of Advanced Safety Vehicles. Environmental Matters 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 May 2002, the Soil Pollution Countermeasures Law was promulgated in Japan. Although the exact enforcement date of this law has not yet been determined, it will become effective within nine months from its promulgation date. Under the Soil Pollution Countermeasures Law, the relevant authority may order the owner, manager or occupant of contaminated land to remove such contamination or take other necessary measures. In addition, the Law Concerning the Recycling, etc. of End-of-Life Vehicles was promulgated in July 2002. Under the Law Concerning the Recycling, etc. 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. 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 defines strategies needed to attain the new standards. Toyota expects a growing pressure in the next several years to further reduce emissions from motor vehicles and manufacturing facilities. 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 are additionally responsible for vehicles put on the market before July 1, 2002; â€¢ manufacturers may not use certain hazardous materials in vehicles to be sold after July 2003; and â€¢ 95% of parts of vehicles sold as of a specified date to be determined in a future directive must be re-usable and recoverable. 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. Toyota has provided for its estimated liability related to covered vehicles in existence at March 31, 2002. However, 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 eliminated and dealers could no longer be required by manufacturers to perform repair work. Toyota believes that its operations are in substantial compliance with regulatory requirements concerning its facilities and products in each of the markets in which it operates. Toyota continuously monitors these requirements and adjusts operations and products to ensure that it remains in compliance with all of these requirements. All of Toyota's domestic factories and major overseas production facilities have earned ISO 14001 certifications on environmental management systems of the International Organization for Standardization. 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 the Prius hybrid vehicle, the RAV4-EV electric vehicle 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. 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 2002, except for Denso Corporation, an affiliate of Toyota, which supplied approximately 10% of Toyota's purchases during fiscal 2002. Toyota plans to continue purchases based on the same principle and does not anticipate any difficulty in obtaining supplies in the foreseeable future. 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 located in the United States. 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 and divestitures completed between April 1, 1999 and June 30, 2002, the approximate total costs of, or proceeds from, such activity, and the location and method of financing of such activity. Total Cost Location Method of Description of Activity or Proceeds Financing Expansion of a plant in Indiana to increase its annual $500 million U.S.A. internal funds production capacity for the Sequoia and the Tundra from 100,000 units to 150,000 units Construction of a plant for the production of the Yaris, $646 million France internal funds with an initial production capacity of 150,000 units per year Expansion of the production of engines for Yaris to increase $214 million United Kingdom internal funds production capacity by 150,000 units per year Expansion of an engine plant in West Virginia to add $200 million U.S.A. internal funds automatic transmissions to its production Purchase of additional equity interests in Daihatsu Motor $278 million Japan internal funds Co., Ltd. to raise Toyota's interest from 34.5% to 51.3% Purchase of additional equity interests in Hino Motors, Ltd. $497 million Japan internal funds to raise Toyota's interest from 36.7% to 50.2% Completion of a transmission manufacturing plant in Poland $57 million Poland internal funds with an annual production capacity of 250,000 units. Expansion of a Corolla manufacturing plant to increase $300 million Brazil internal funds annual production capacity by 42,000 units. and loans Set forth below is information with respect to Toyota's material plans to construct, expand or improve its facilities. Indiana Plant. Toyota commenced expansion of a manufacturing plant in Indiana in September 2000. This expansion will double the plant's annual production capacity from 150,000 to 300,000 units by supplementing the plant's current annual production capacity of 150,000 units of the Tundra and the Sequoia with 150,000 units of the Sienna. The expansion is expected to be completed in early 2003. The total cost for this expansion is expected to be approximately $800 million. These construction costs have been, and will be, financed through internal funds. Alabama Plant. Toyota commenced construction of an engine manufacturing plant in Alabama in June 2001. This plant will have an annual production capacity of 120,000 engines for the Tundra. The plant is expected to commence operations in the summer of 2003. The total cost for this plant is expected to be approximately $220 million. These construction costs have been, and will be, financed through internal funds. Canada Plant. Toyota commenced expansion of a manufacturing plant in Canada in 2001. This expansion will increase total capacity from 200,000 to 220,000 units. In addition, a portion of the plant will be converted from the production of the Camry Solara to the production of the Lexus RX300, 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. 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 expansion 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 expansion is expected to be completed in late 2004. The total cost for the expansion is expected to be approximately 300 million euros. 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 it is difficult and it would require unreasonable effort to allocate expenditures to the past and the future when different types of expenditures are being incurred as work-in-progress. Seasonality Toyota has historically experienced slight seasonal fluctuations in 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 and August of each year, with approximately 6 to 8% of annual unit sales generated during each of those months. Legal Proceedings 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. The case has been in the discovery stage since that time. The deadline for completing discovery was extended at the government's motion to August 2002, then further extended to November 2002. Toyota believes that it has valid defenses to the federal claim and intends to vigorously defend that action. Because litigation is subject to many uncertainties, it is not feasible for Toyota to predict the outcome of that action if fully litigated. Although the final judgment could have a material effect on Toyota's consolidated operating results and cash flows for a particular reporting period, Toyota does not expect that this matter should have a material effect on its consolidated financial position. 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, 2002, Toyota Motor Corporation has 292 Japanese subsidiaries and 178 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 50.20 Toyota Motor Kyushu, Inc. Japan 100.00 Daihatsu Motor Co., Ltd. Japan 51.34 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, Inc. United States 100.00 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 N.V. Toyota Motor Europe Marketing & Engineering S.A. Belgium 100.00 Toyota Motor Manufacturing France S.A.S. France 100.00 Toyota Deutschland G.m.b.H. Germany 100.00 Toyota (GB) PLC United Kingdom 100.00 Toyota Motor Europe Manufacturing S.A. Belgium 100.00 Toyota Motor Manufacturing (UK) Ltd. United Kingdom 100.00 Toyota Kreditbank G.m.b.H. Germany 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 4.D PROPERTY, PLANTS AND EQUIPMENT As of March 31, 2002, Toyota owned 65 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. The following table sets forth information, as of March 31, 2002, with respect to Toyota's principal manufacturing 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 Location Floor Space Principal Products or Functions Subsidiary Name (square meters) Japan Honsha Plant Toyota City, Aichi 440,000 Chassis (Trucks, Buses), sport-utility Pref. vehicles (Land Cruiser) Motomachi Plant Toyota City, Aichi 820,000 Passenger cars (Crown, Progres, Mark II, Pref. Prius) Kamigo Plant Toyota City, Aichi 550,000 Engines Pref. Takaoka Plant Toyota City, Aichi 700,000 Passenger cars (Corolla, Allex, Vitz, Pref. Platz, FunCargo, bB) Miyoshi Plant Miyoshi-cho, Aichi 170,000 Chassis parts Pref. Tsutsumi Plant Toyota City, Aichi 600,000 Passenger cars (ES300, Vista, Camry, Pref. Caldina, Mark II, Opa, Allion, Premio) Myochi Plant Miyoshi-cho, Aichi 270,000 Engines, chassis parts Pref. Shimoyama Plant Miyoshi-cho, Aichi 230,000 Engines, exhaust emission control devices Pref. Kinu-ura Plant Hekinan City, Aichi 360,000 Transmission, drive train parts Pref. Tahara Plant Tahara-cho, Aichi Pref. 1,140,000 Trucks, sport-utility vehicles (Hilux, Land Cruiser, RAV4), passenger cars (LS430, Crown, GS300/430, Ipsum) Teiho Plant Toyota City, Aichi 110,000 Machinery, dies for casting and forging, Pref. plastic molds Hirose Plant Toyota City, Aichi 90,000 Research, development and production of Pref. electronic parts and components Toyota Motor Kyushu, Inc. Miyata-cho, Fukuoka 250,000 Trucks, passenger cars (ES300), Pref. sport-utility vehicles (RX300, Kluger V) Toyota Motor Hokkaido, Tomakomai City, 150,000 Transmissions, drive train parts, aluminum Inc. Hokkaido wheels Toyota Motor Tohoku, Co., Taiwa-cho, Miyagi Pref. 18,000 Mechanical and electronic parts Ltd. Outside Japan North America Toyota Motor Manufacturing Kentucky, U.S.A. 750,000 Passenger cars (Avalon, Camry, Sienna), engines Kentucky, Inc. Toyota Motor Manufacturing Indiana, U.S.A. 150,000 Pickup trucks (Tundra, Sequoia) Indiana, Inc. Toyota Motor Manufacturing West Virginia, U.S.A. 100,000 Engines West Virginia, Inc. TABC, Inc. California, U.S.A. 40,000 Truck beds, catalytic converters, stamped parts Canadian Autoparts Toyota British Columbia, 19,000 Aluminum wheels Inc. Canada Toyota Motor Manufacturing Ontario, Canada 250,000 Passenger cars (Corolla, Camry Solara), Canada Inc. engines Europe Toyota Motor Manufacturing Valenciennes, France 130,000 Passenger cars (Yaris) France S.A.S Toyota Motor Manufacturing Burnaston and Deeside, 210,000 Passenger cars (Avensis, Corolla), engines (UK) Limited UK Toyota Motor Manufacturing Walbrzych, Dolnoslaskie 15,500 Transmissions Poland Sp.zo.o Province, Poland Other Regions Toyota Argentina S.A. Buenos Aires, Argentina 30,000 Trucks (Hilux), engines Toyota de Brazil S.A. Sao Paulo, Brazil 32,000 Passenger cars (Corolla), sport-utility Industria y Comercio vehicles (Bandeirante) Toyota Motor Corporation Victoria, Australia 242,000 Passenger cars (Avalon, Camry, Corolla), Australia Limited engines Tianjin Toyota Forging Tianjin, China 6,000 Auto parts forging Co., Ltd. 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 a result, it is difficult and it would require unreasonable effort to track the exact productive capacity and the extent of utilization of each of its manufacturing facilities. Toyota believes that its manufacturing facilities are generally all operating within normal operating capacity and not substantially below capacity. As of March 31, 2002, property, plant and equipment having a net book value of approximately Y127,230 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. 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. 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. ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 5.A OPERATING RESULTS All financial information discussed in this section is derived from Toyota's consolidated financial statements that appear elsewhere in this annual report on Form 20-F. These financial statements have been prepared in conformity with accounting principles generally accepted in the United States. Overview Toyota's business segments are automotive operations, financial services operations and all other operations. Automotive operations is Toyota's most significant segment, accounting for approximately 90% of Toyota's total revenues before the elimination of intersegment revenues and 96% of Toyota's operating income before the elimination of intersegment revenues and costs for the year ended March 31, 2002. Toyota's primary markets based on vehicle unit sales for the year ended March 31, 2002 were: Japan (40%), North America (32%) and Europe (13%). Automotive Market Environment The worldwide automotive market is highly competitive and cyclical. Demand for automobiles in each market can vary substantially from year to year. Demand depends to a large extent on general economic conditions in a given market, the cost of purchasing and operating automobiles and the availability and cost of credit and fuel. Toyota's vehicle unit sales in Japan decreased during fiscal 2002 resulting primarily from an overall industry decline in the Japan market and increased competition from other domestic manufacturers. This decrease followed increases in Toyota's vehicle unit sales in this market during fiscal 2000 and 2001 resulting from the active introduction of new models that met customer needs and the strong sales efforts of domestic dealers. Toyota's vehicle unit sales in North America and Europe increased steadily during fiscal 2002, 2001 and 2000, reflecting strong demand for Toyota vehicles in both these regions. Toyota vehicle unit sales increased in these markets during fiscal 2002 despite a general slowdown in global economic growth, particularly in the United States, beginning in the second half of 2000. In the aggregate, Toyota's vehicle unit sales in all other markets increased during fiscal 2002, following an increase during fiscal 2001 and a decrease during fiscal 2000. Toyota's share of total vehicle unit sales in each market is influenced by the quality, price, design, performance, safety, reliability, economy and utility of its vehicles compared with those offered by other manufacturers. The timely introduction of new or modified vehicle models is also an important factor in satisfying customer demand. Toyota's ability to satisfy changing customer preferences can affect its revenues and earnings significantly. The profitability of Toyota's automotive operations is affected by many factors. These factors include: â€¢ vehicle unit sales volumes, â€¢ the mix of vehicle models and options sold, â€¢ the levels of price discounts and other sales incentives and marketing costs, â€¢ the cost of customer warranty claims and other customer satisfaction actions, â€¢ the cost of research and development and other fixed costs, â€¢ the ability to control costs, â€¢ the efficient use of production capacity, and â€¢ changes in the value of the Japanese yen and other currencies in which Toyota does business. Changes in laws, regulations, policies and other governmental actions can also materially impact the profitability of Toyota's automotive operations. These laws, regulations and policies include those affecting environmental matters and vehicle safety, fuel economy and emissions that add significantly to the cost of vehicles. The European Union has approved a directive that requires manufacturers to be financially responsible for taking back end-of-life vehicles and dismantling and recycling these vehicles. You should read '- Legislation Regarding End-of-life Vehicles' and 'Information on the Company - Business Overview - Governmental Regulation, Environmental and Safety Standards' for a discussion of these laws, regulations and policies. In addition, you should read 'Information on the Company - Business Overview - Legal Proceedings' for a discussion of legal proceedings involving Toyota and the California Air Resources Board and the U.S. Environmental Protection Agency. Many governments also regulate local content, impose tariffs and other trade barriers and enact price or exchange controls which can limit an automaker's operations and can make the repatriation of profits to an automaker's home country difficult. Changes in these laws, regulations, policies and other governmental actions may affect the production, licensing, distribution or sale of Toyota's products, cost of products or applicable tax rates. The worldwide automotive industry is in a period of globalization and consolidation, which may continue for the foreseeable future. As a result, the competitive environment in which Toyota operates is likely to intensify. Toyota believes it has the resources, strategies and technologies in place to compete effectively in the industry as an independent company for the foreseeable future. In August 2001, Toyota acquired an additional ownership interest in Hino Motors, Ltd. for Y66.3 billion in cash. As a result, Toyota's ownership interests in Hino increased by 13.6% to 50.2% and Toyota's consolidated financial statements include the accounts of Hino from the acquisition date. Previously Hino was accounted for using the equity method. Hino is primarily engaged in the design, manufacturing and sale of trucks, buses and related parts. Financial Services Operations The worldwide financial services market is highly competitive. The market for automobile financing has grown as more consumers are financing their purchases, particularly in North America and Europe. Toyota faces increasing competition in its financial services operations from financial institutions including banks, savings institutions and leasing companies. These leasing companies include those affiliated with other automobile manufacturers, in particular those of the major U.S. producers. As competition increases, spreads earned on financing transactions may decrease and market share may also decline as customers obtain financing for Toyota vehicles from alternative sources. Toyota's portfolio of finance receivables and investment in vehicles and equipment on operating leases continued to increase during fiscal 2002 resulting primarily from the continued expansion of its financial services operations in North America. Toyota's financial services operations 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. Toyota intends to continue to expand its network of finance subsidiaries to bring its financial services business to more countries. During fiscal 2001, Toyota established a wholly-owned subsidiary, Toyota Financial Services Corporation, to oversee the management of Toyota's finance companies worldwide and to enter into new automobile-related finance areas. Toyota completed the launch in the United States of an expanded tiered pricing program for retail vehicle contracts. The objective of the program is to better match customer risk with contract rates charged to allow profitable purchases of a wider range of risk levels. Implementation of the tiered pricing program has contributed to increased contract yields and increased credit losses during fiscal 2002 in connection with purchases of higher risk contracts. Toyota launched the credit card business in Japan (the new credit card, the TS (3) card) in April 2001 and the issuance of credit cards has been expanded generally since July 2001. At March 31, 2002, Toyota had 2.4 million cardholders. Toyota has continued to originate operating leases to finance new Toyota vehicles. These leasing activities are subject to residual value risk. Residual value risk arises when the lessee of a vehicle does not exercise the option to purchase the vehicle at the end of the lease. The number of vehicles returned at the end of leases has grown in recent years. For example, fewer than 20% of vehicles leased by Toyota Motor Credit Corporation, Toyota's financing subsidiary located in the United States, were returned at the end of the applicable lease period during fiscal 1996, compared to a return rate of approximately 50% during fiscal 2001 and 2002. To avoid a loss on a vehicle returned to Toyota at the end of the lease, Toyota must resell or re-lease the vehicle at or above the residual value of the vehicle. If Toyota is unable to realize the residual value for the vehicle, it will incur a loss at the end of the lease. This loss would offset any earnings on the lease. In recent years, the resale values of returned vehicles have been depressed, primarily because of an increased supply of used vehicles in the market that has depressed market prices. In addition, sales incentives in the automotive industry, particularly in the United States, increased substantially in fiscal 2002, adversely affecting resale values. To the extent that sales incentives remain an integral part of sales promotion (reducing new vehicle prices), resale prices of used vehicles and, correspondingly, the carrying value of Toyota's leased vehicles could be subject to further downward pressure. As a result of the depressed market prices of used vehicles, Toyota has incurred increased losses related to residual values during the past three years. In addition, funding costs can affect the profitability of Toyota's financial services operations. Funding costs are affected by a number of factors, some of which are not in Toyota's control. These factors include general economic conditions, prevailing interest rates and Toyota's financial strength. Funding costs during fiscal 2002 decreased as a result of lower interest rates primarily in the United States. At March 31, 2001, Toyota had a 49.9% ownership interest in The Chiyoda Fire and Marine Insurance Company, which was accounted for using the equity method of accounting, and a 19.3% ownership interest in Dai-Tokyo Fire and Marine Insurance Company Limited, which was accounted for as a marketable security investment. On April 1, 2001, Chiyoda and Dai-Tokyo merged with Dai-Tokyo being the surviving corporation and Dai-Tokyo changed its name to Aioi Insurance Co., Ltd. Toyota's ownership interest in Aioi as a result of the merger was 33.4% and Toyota accounts for its ownership in Aioi using the equity method of accounting. Other Business Operations Toyota's other business operations include 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 was engaged in the telecommunications business through its subsidiary, IDO Corporation. IDO was a provider of cellular services in Japan. On October 1, 2000, IDO merged with two Japanese telecommunication companies and Toyota's ownership interest in DDI Corporation (currently, KDDI Corporation), the surviving entity, became 13.3%. At the date of the transaction, IDO ceased to be a consolidated subsidiary of Toyota and Toyota's 13.3% ownership interest in KDDI was accounted for as a marketable security investment. On April 1, 2001, Toyota sold its industrial equipment business to Toyota Industries Corporation (formerly, Toyoda Automatic Loom Works, Ltd.), an affiliate of Toyota Motor Corporation that is accounted for using the equity method of accounting. Toyota does not expect its other business operations to provide a material contribution to Toyota's consolidated results of operations. Currency Fluctuations Toyota is sensitive to fluctuations in foreign currency exchange rates. In addition to the Japanese yen, Toyota is principally exposed to fluctuations in the value of the U.S. dollar and the euro and to a lesser extent the British pound. Toyota's consolidated financial statements, which are presented in Japanese yen, are affected by foreign currency exchange fluctuations through both translation risk and transaction risk. Changes in foreign currency exchange rates may positively or negatively affect Toyota's revenues, gross margins, operating costs and expenses, operating income, net income and retained earnings. Translation risk is the risk that Toyota's financial statements for a particular period or for a particular date will be affected by changes in the prevailing exchange rates of the currencies in those countries in which Toyota does business against the Japanese yen. Even though the fluctuations of currencies against the Japanese yen can be substantial and, therefore, significantly impact comparisons with prior periods and among various geographic markets, the translation effect is a reporting consideration and does not reflect Toyota's underlying results of operations. Toyota does not hedge against translation risk. Transaction risk is the risk that the currency structure of Toyota's costs and liabilities will deviate from the currency structure of sales proceeds and assets. Transaction risk relates primarily to sales proceeds from Toyota's non- domestic sales produced in Japan and, to a lesser extent, sales proceeds from Toyota's continental European sales produced in the United Kingdom. Toyota believes that the location of its production facilities in different parts of the world has significantly reduced the level of transaction risk. As part of its globalization strategy, Toyota has localized much of its production by constructing production facilities in the major markets in which it sells its vehicles. In 2001, Toyota produced 54% of Toyota's non-domestic sales outside Japan. In North America, 59% of vehicles sold in 2001 were produced locally. In Europe, 36% of vehicles sold in 2001 were produced locally. Local operations permit Toyota to purchase many of the supplies and resources used in the production process in a manner that matches the currencies of local revenues with the currencies of local expenses. Toyota also enters into currency borrowings and other hedging instruments to address a portion of its transaction risk. This has reduced, but not eliminated, the effects of foreign currency exchange rate fluctuations, which in some years can be significant. See note 19 to the consolidated financial statements for additional information regarding the extent of Toyota's use of derivative financial instruments to hedge foreign currency exchange rate risks. Generally, a weakening of the Japanese yen against other currencies has a positive effect on Toyota's revenues, operating income and net income. A strengthening of the Japanese yen against other currencies has the opposite effect. The Japanese yen has generally been weaker against the U.S. dollar during fiscal 2002 and the second half of fiscal 2001 than in the respective corresponding periods in the previous year. The Japanese yen strengthened against the U.S. dollar during fiscal 2000 and the first half fiscal 2001. In addition, the Japanese yen has generally been weaker against the euro during fiscal 2002 than during fiscal 2001, whereas the Japanese yen strengthened against the euro during fiscal 2000 and 2001. Segmentation Toyota's most significant business segment is its automotive operations. Toyota carries out its automotive operations as a global competitor in the worldwide automotive market and uses a worldwide approach to the management of its automotive operations. In doing so, Toyota's management allocates resources to, and assesses the performance of, its automotive operation on a worldwide basis as a single segment. Toyota does not manage any subset of its automotive operations, such as domestic or overseas operations or parts, as separate segments. The management of the automotive operations is aligned on a functional basis with managers having oversight responsibility for the major operating functions within the segment. Management assesses financial and non-financial data such as units of sale, units of production, market share information, vehicle model plans and plant location costs to allocate resources within the automotive operations. Geographical Breakdown The following table sets forth Toyota's revenues from external customers in each of its geographical markets for the past three fiscal years. Year Ended March 31, 2000 2001 2002 (in millions) Japan........................ Y6,280,553 Y6,462,066 Y6,437,931 North America................. 4,517,648 4,802,167 5,548,847 Europe..................... 1,088,095 1,013,967 1,265,509 Other Regions.................. 763,481 858,870 1,064,587 Results of Operations - Fiscal 2002 Compared with Fiscal 2001 Net Revenues Toyota had net revenues for fiscal 2002 of Y14,316.9 billion, an increase of Y 1,179.8 billion, or 9.0%, compared to the prior year. This increase principally reflects the favorable impact of foreign currency translation rates, the combined impact of sales price increases and changes in sales mix, the impact of the consolidation of Hino during fiscal 2002 and the impact of increased financings. These increases were partially offset by the impact of the disposal of the telecommunications business during fiscal 2001 and the impact of the disposal of the industrial equipment business during fiscal 2002. Eliminating the difference in the yen value used for translation purposes, revenues would have been approximately Y13,502.7 billion during fiscal 2002, a 2.8 % increase compared to the prior year. Toyota's net revenues include sales of products which increased during fiscal 2002 by 8.3 % to Y13,626.2 billion compared to the prior year and financing operations which increased during fiscal 2002 by 24.9% to Y690.7 billion compared to the prior year. Eliminating the difference in the yen value used for translation purposes, revenues from sales of products would have been approximately Y12,876.0 billion, a 2.3 % increase, and revenues from financing operations would have been approximately Y626.7 billion, a 13.3% increase, during fiscal 2002 compared to the prior year. Revenues for fiscal 2002 decreased by 0.4 % in Japan, increased by 15.5 % in North America, increased by 24.8% in Europe and increased by 24.0% in all other markets compared with the prior year. Eliminating the difference in the yen value used for translation purposes, revenues would have decreased by 0.4% in Japan, increased by 2.2% in North America, increased by 12.9% in Europe and increased by17.6% in all other markets compared to the prior year. The following is a discussion of net revenues for each of Toyota's business segments. The net revenue amounts discussed represent amounts before the elimination of intersegment revenues. Automotive Operations Segment Net revenues from Toyota's automotive operations constitute the largest percentage of Toyota's revenues. During fiscal 2002, net revenues for Toyota's automotive operations increased by 12.5% to Y13,194.0 billion from Y11,723.0 billion in the prior year. The increase resulted primarily from the Y748.3 billion favorable impact of foreign currency translations rates, the Y384.9 billion impact of the consolidation of Hino during fiscal 2002 and the Y366.3 billion combined impact of sales price increases and changes in sales mix. Eliminating the difference in the yen value used for translation purposes, automotive operations revenues would have been approximately Y12,445.7 billion during fiscal 2002, a 6.2% increase compared to the prior year. Eliminating the difference in the yen value used for translation purposes and the impact of the consolidation of Hino, automotive operations revenues would have been approximately Y12,060.7 billion during fiscal 2002, a 2.9% increase compared to the prior year. Revenues in Japan were favorably impacted by higher vehicle unit sales to export markets, higher average sales prices on these sales to export markets and the consolidation of Hino during fiscal 2002 that were partially offset by decreased vehicle unit sales in Japan and lower average unit sales prices for sales in Japan resulting from the continuing market shift in Japan to lower priced vehicles. Revenues in North America were favorably impacted by foreign currency translation rates, vehicle unit sales growth and higher average unit sales prices during fiscal 2002. Revenues in Europe were favorably impacted by foreign currency translation rates, higher average unit sales prices and vehicle unit sales growth during fiscal 2002. Revenues in all other markets were favorably impacted by foreign currency translation rates, higher average unit sales prices and vehicle unit sales growth during fiscal 2002. Vehicle unit sales in North America, Europe and all other markets increased during fiscal 2002 compared with the prior year and decreased in Japan. Excluding the impact of the consolidation of Hino, North American, European and all other markets sales reflect vehicle unit sales growth of 2.7%, 5.2% and 3.7%, respectively, compared to the prior year, while vehicle unit sales in Japan decreased by 5.3% compared to the prior year. Overall, excluding the impact of the consolidation of Hino, Toyota had a slight decrease in vehicle unit sales. Financial Services Operations Segment Net revenues for Toyota's financial services operations increased by Y127.0 billion, or 22.2%, to Y698.0 billion during fiscal 2002 compared with the prior year. This increase resulted primarily from the impact of a higher volume of financings and the favorable impact of foreign currency translation rates during fiscal 2002. Eliminating the difference in the yen value used for translation purposes, financial services operations revenues would have been approximately Y 633.0 billion during fiscal 2002, a 10.8% increase compared with the prior year. All Other Operations Segment Net revenues for Toyota's other businesses decreased by Y340.5 billion, or 31.8%, to Y728.8 billion during fiscal 2002 compared with the prior year. This decrease resulted primarily from the Y243.5 billion impact of the disposal of the telecommunications business during fiscal 2001 and the Y241.5 billion impact of the disposal of the industrial equipment business during fiscal 2002. Excluding revenues of the telecommunication business and the industrial equipment business, net revenues for all other business increased by Y144.5 billion, or 24.7%, to Y728.8 billion during fiscal 2002, reflecting the increase in sales of intelligent transportation systems and increases in sales of other businesses. Operating Costs and Expenses Operating costs and expenses increased by Y876.9 billion, or 7.1%, to Y13,223.2 billion during fiscal 2002 compared with the prior year. The increase resulted primarily from the impact on cost of products sold of sales mix changes, the Y 385.7 billion impact of the consolidation of Hino during fiscal 2002, the Y367.2 billion impact of foreign currency translation rates and the Y189.7 billion impact of higher selling, general and administrative expenses during fiscal 2002. These increases were partially offset by the Y260.0 billion impact of cost cutting efforts, the Y231.1 billion impact of the disposal of the telecommunications business during fiscal 2001 and the Y237.4 billion impact of the disposal of the industrial equipment business during fiscal 2002. Continued cost cutting efforts reduced costs and expenses for fiscal 2002 by approximately Y260.0 billion over what would have otherwise been incurred. These cost cutting efforts relate to ongoing value engineering and value analysis activities, the use of common parts that result in a reduction of part types and other manufacturing initiatives designed to reduce the costs of vehicle production. Cost of products sold increased by Y655.9 billion, or 6.4%, to Y10,874.5 billion during fiscal 2002 compared with the prior year. This increase (before the elimination of intersegment amounts) reflects an increase of Y999.8 billion, or 10.5 %, for the automotive operations and a decrease of Y230.3 billion, or 27.7 %, for the all other operations segment. The increase for the automotive operations reflects primarily the impact of sales mix changes, the impact of higher costs resulting from foreign currency translation, the impact of the consolidation of Hino during fiscal 2002 and the impact of increased warranty provisions that were partially offset by the impact of continued cost cutting efforts. The decrease for the all other operations segment reflects the Y127.2 billion impact of the disposal of the telecommunications business during fiscal 2001 and the Y209.1 billion impact of the disposal of the industrial equipment business during fiscal 2002. Cost of products sold as a percentage of revenues from sales of products decreased to 79.8% during fiscal 2002 from 81.2% in the prior year. This reflects the favorable impact of foreign currency rates on revenues related to Toyota's non-domestic sales produced in Japan and the favorable impact of continued cost cutting efforts that were partially offset by the impact of the disposal of the telecommunications business during fiscal 2001, the impact of increased warranty provisions and the impact of the consolidation of Hino during fiscal 2002. Cost of financing operations increased by Y31.9 billion, or 7.5%, to Y459.2 billion during fiscal 2002 compared with the prior year. The increase resulted primarily from the impact of increased residual value losses, the impact of foreign currency translation rates and the impact of a higher volume of financings during fiscal 2002 that were partially offset by lower costs of financing caused by lower interest rates in the United States. The cost of financing operations as a percentage of revenue from financing operations decreased to 66.5% during fiscal 2002 from 77.3% in the prior year. This change was principally the result of the increased revenues of financing caused by the impact of foreign currency translation rates and lower prevailing interest rates in the United States resulting in lower funding costs that were partially offset by the impact of increased residual value losses. Research and development expenses increased to Y589.3 billion during fiscal 2002 from Y475.7 billion in the prior year, as a result of increased activities relating primarily to the development of new models, vehicle safety, new vehicle energy and environmental technologies to promote Toyota's strength in a competitive market for the future and the impact of the consolidation of Hino during fiscal 2002. Selling, general and administrative expenses (after the elimination of intersegment amounts) increased by Y189.2 billion, or 11.1%, to Y1,889.6 billion during fiscal 2002 compared with the prior year. This increase (before the elimination of intersegment amounts) reflects an increase of Y178.8 billion, or 12.4%, for the automotive operations, an increase of Y73.0 billion, or 61.3%, for the financial services operations and a decrease of Y111.9 billion, or 46.0%, for the other operations segment. The increase for the automotive operations consisted primarily of the increase in research and development expenses, the increase in personnel costs principally in North America and Europe, the increase in sales and promotional costs, the impact of foreign currency translation rates and the impact of the consolidation of Hino during fiscal 2002 that were partially offset by continuing cost reduction efforts. The increase for the financial services operations reflects higher provisions for credit losses resulting from the increase in finance receivables, higher provisions for credit losses resulting from the tiered pricing program for retail vehicle contracts which was launched in 2001, the impact of foreign currency translation rates, increased costs for expansion of operations and the impact of restructuring the field operations in the United States. The decrease for the all other operations segment reflects the impact of disposal of the telecommunications business during fiscal 2001 and the impact of disposal of the industrial equipment business during fiscal 2002. Selling, general and administrative expenses as a percentage of revenue increased to 13.2% during fiscal 2002 from 12.9% in the prior year. Selling, general and administrative expenses increased as a percentage of revenue primarily due to increases in the financial service operations. These increases were partially offset in the all other operations segment by the impact of the disposal of the telecommunications business during fiscal 2001 and continuing cost reduction efforts. Selling, general and administrative expenses in the automotive operations as a percentage of segment revenues were 12.3% during fiscal 2002, unchanged from the prior year. Selling, general and administrative expenses in the financial services operations as a percentage of segment revenues were 27.5% during fiscal 2002, compared to 20.8% in the prior year, reflecting higher provisions for credit losses and the impact of restructuring the field operations in the United States. Selling, general and administrative expenses in the all other operations segment as a percentage of segment revenues were 18.0% during fiscal 2002 compared to 22.7% in the prior year, primarily due to the disposal of the telecommunications business during fiscal 2001. This information is provided by RNS The company news service from the London Stock Exchange

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