Form 20-F (1a/4)

Toyota Motor Corporation 24 June 2005 Table of Contents As filed with the Securities and Exchange Commission on June 24, 2005 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, 2005 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, 2005 Common Stock 3,268,078,939 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No Indicate by check mark which financial statement item the Registrant has elected to follow: Item 17 Item 18 x -------------------------------------------------------------------------------- Table of Contents TABLE OF CONTENTS page ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 1 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 1 ITEM 3. KEY INFORMATION 1 3.A SELECTED FINANCIAL DATA 1 3.B CAPITALIZATION AND INDEBTEDNESS 4 3.C REASONS FOR THE OFFER AND USE OF PROCEEDS 4 3.D RISK FACTORS 4 ITEM 4. INFORMATION ON THE COMPANY 7 4.A HISTORY AND DEVELOPMENT OF THE COMPANY 7 4.B BUSINESS OVERVIEW 7 4.C ORGANIZATIONAL STRUCTURE 40 4.D PROPERTY, PLANTS AND EQUIPMENT 40 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 42 5.A OPERATING RESULTS 42 5.B LIQUIDITY AND CAPITAL RESOURCES 61 5.C RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES 64 5.D TREND INFORMATION 66 5.E OFF-BALANCE SHEET ARRANGEMENTS 66 5.F TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS 69 5.G SAFE HARBOR 69 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 70 6.A DIRECTORS AND SENIOR MANAGEMENT 70 6.B COMPENSATION OF DIRECTORS AND CORPORATE AUDITORS 74 6.C BOARD PRACTICES 74 6.D EMPLOYEES 76 6.E SHARE OWNERSHIP 77 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 80 7.A MAJOR SHAREHOLDERS 80 7.B RELATED PARTY TRANSACTIONS 81 7.C INTERESTS OF EXPERTS AND COUNSEL 81 ITEM 8. FINANCIAL INFORMATION 82 8.A CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION 82 8.B SIGNIFICANT CHANGES 82 ITEM 9. THE OFFER AND LISTING 83 9.A LISTING DETAILS 83 9.B PLAN OF DISTRIBUTION 83 9.C MARKETS 83 9.D SELLING SHAREHOLDERS 83 9.E DILUTION 83 9.F EXPENSES OF THE ISSUE 83 ITEM 10. ADDITIONAL INFORMATION 84 10.A SHARE CAPITAL 84 -------------------------------------------------------------------------------- Table of Contents page 10.B MEMORANDUM AND ARTICLES OF ASSOCIATION 84 10.C MATERIAL CONTRACTS 91 10.D EXCHANGE CONTROLS 91 10.E TAXATION 92 10.F DIVIDENDS AND PAYING AGENTS 97 10.G STATEMENT BY EXPERTS 97 10.H DOCUMENTS ON DISPLAY 97 10.I SUBSIDIARY INFORMATION 97 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 98 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 99 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 100 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 100 ITEM 15. CONTROLS AND PROCEDURES 100 15.A DISCLOSURES CONTROLS AND PROCEDURES 100 15.B (RESERVED) 100 15.C (RESERVED) 100 15.D (RESERVED) 100 ITEM 16. (RESERVED) 100 16.A AUDIT COMMITTEE FINANCIAL EXPERT 100 16.B CODE OF ETHICS 101 16.C PRINCIPAL ACCOUNTANT FEES AND SERVICES 101 16.D (RESERVED) 102 16.E PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS 103 ITEM 17. FINANCIAL STATEMENTS 104 ITEM 18. FINANCIAL STATEMENTS 104 ITEM 19. EXHIBITS 105 -------------------------------------------------------------------------------- Table of Contents As used in this annual report, the term 'fiscal' preceding a year means the twelve-month period ended March 31 of the year referred to. All other references to years refer to the applicable calendar year. In parts of this annual report, amounts reported in Japanese yen have been translated into U.S. dollars for the convenience of readers. Unless otherwise noted, the rate used for this translation was Y107.39 = $1.00. This was the approximate exchange rate in Japan on March 31, 2005. 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 and market demand 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, the Australian dollar 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 in the markets in which Toyota operates that affect Toyota's automotive operations, particularly laws, regulations and policies relating to trade, environmental protection, vehicle emissions, vehicle fuel economy and vehicle safety, as well as changes in laws, regulations and government policies that affect Toyota's other operations, including the outcome of future litigation and other legal proceedings; (v) political instability in the markets in which Toyota operates; (vi) Toyota's ability to timely develop and achieve market acceptance of new products; and (vii) fuel shortages or interruptions in transportation systems, labor strikes, work stoppages or other interruptions to, or difficulties in, the employment of labor in the major markets where Toyota purchases materials, components and supplies for the production of its products or where its products are produced, distributed or sold. A discussion of these and other factors which may affect Toyota's actual results, performance, achievements or financial position is contained in ' Operating and Financial Review and Prospects' and 'Information on the Company' and elsewhere in this annual report. -------------------------------------------------------------------------------- Table of Contents PART I ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS Not applicable. ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE Not applicable. ITEM 3. KEY INFORMATION 3.A SELECTED FINANCIAL DATA You should read the U.S. GAAP selected consolidated financial information presented below together with 'Operating and Financial Review and Prospects' and Toyota's consolidated financial statements contained in this annual report. Beginning in fiscal 2004, Toyota discontinued the preparation of annual consolidated financial statements under Japanese GAAP and Toyota currently prepares its annual consolidated financial statements only under U.S. GAAP. U.S. GAAP Selected Financial Data The following selected financial data have been derived from Toyota's consolidated financial statements. These financial statements were prepared in accordance with U.S. GAAP. Year Ended March 31, 2001 2002 2003 2004 2005 2005 (in millions, except share and per share data) Consolidated Statement of Income Data: Automotive (1): Revenues Y 11,591,061 Y 13,067,428 Y 14,311,451 Y 15,973,826 Y 17,113,535 $ 159,359 Operating income 765,557 1,057,948 1,246,925 1,518,954 1,452,535 13,526 Financial Services: Revenues 571,058 698,022 724,898 736,852 781,261 7,275 Operating income 31,693 45,115 30,328 145,998 200,853 1,870 All Other (1): Revenues 1,019,527 728,848 795,217 896,244 1,030,320 9,594 Operating income (loss) (4,578) (2,954) 4,529 15,247 33,743 314 Elimination of intersegment: Revenues (226,409) (303,990) (330,013) (312,162) (373,590) (3,479) Operating income (loss) (1,943) (6,477) (10,136) (13,309) (14,944) (139) Total Company: Revenues 12,955,237 14,190,308 15,501,553 17,294,760 18,551,526 172,749 Operating income 790,729 1,093,632 1,271,646 1,666,890 1,672,187 15,571 Income before income taxes, 1,107,289 972,101 1,226,652 1,765,793 1,754,637 16,339 minority interest and equity in earnings of affiliated companies Net income 674,898 556,567 750,942 1,162,098 1,171,260 10,907 Net income per share: Basic 180.65 152.26 211.32 342.90 355.35 3.31 Diluted 180.65 152.26 211.32 342.86 355.28 3.31 Shares used in computing net 3,735,862 3,655,304 3,553,602 3,389,074 3,296,092 - income per share, basic (in thousands) Shares used in computing net 3,735,941 3,655,306 3,553,624 3,389,377 3,296,754 - income per share, diluted (in thousands) 1 -------------------------------------------------------------------------------- Table of Contents Year Ended March 31, 2001 2002 2003 2004 2005 2005 (in millions) Consolidated Balance Sheet Data (end of period): Total Assets: Automotive Y 7,951,107 Y 9,121,406 Y 9,392,749 Y 10,207,395 Y 11,141,197 $ 103,745 Financial Services 5,531,568 6,910,593 7,392,486 8,138,297 9,487,248 88,344 All other 584,948 650,912 722,604 941,925 1,025,517 9,549 Intersegment Elimination/ 2,952,160 2,622,819 2,645,135 2,752,611 2,681,049 24,966 Unallocated Total company 17,019,783 19,305,730 20,152,974 22,040,228 24,335,011 226,604 Short-term debt, including current 2,183,681 2,984,378 3,118,665 3,314,219 3,532,747 32,896 portion of long-term debt Long-term debt, less current 3,083,344 3,722,706 4,137,528 4,247,266 5,014,925 46,698 portion Shareholders' equity (2) 7,077,411 7,264,112 7,121,000 8,178,567 9,044,950 84,225 Other Data: Capital Expenditures 1,201,406 1,548,593 1,610,229 1,488,541 1,923,240 17,909 -------- (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. (2) Up through fiscal 2001, the results of certain subsidiaries in Europe and other regions were reported in the consolidated financial statements using a December 31 year-end. During fiscal 2002, the year-ends of most of these foreign subsidiaries were changed from December 31 to March 31. As a result, Toyota decreased retained earnings by Y3,061 million to reflect the impact of conforming the year-ends at March 31, 2001. 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. 2 -------------------------------------------------------------------------------- Table of Contents 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, 2000 11.0 0.10 March 31, 2001 14.0 0.11 September 30, 2001 13.0 0.11 March 31, 2002 15.0 0.11 September 30, 2002 16.0 0.13 March 31, 2003 20.0 0.17 September 30, 2003 20.0 0.18 March 31, 2004 25.0 0.24 September 30, 2004 25.0 0.23 March 31, 2005 40.0 0.37 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 Y107.39 = $1.00. This was the approximate exchange rate in Japan on March 31, 2005. 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 June 22, 2005, the noon buying rate was Y108.89 = $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 (of Period month-end rates) (Y per $1.00) 2001 125.54 111.64 125.54 104.19 2002 132.70 125.64 134.77 115.89 2003 118.07 121.10 133.40 115.71 2004 104.18 112.75 120.55 104.18 2005 107.22 107.28 114.30 102.26 2006 (through June 22, 2005) 108.89 107.17 109.58 104.41 Month Ending High Low -------- (Y per $1.00) December 31, 2004 105.59 102.56 January 31, 2005 104.93 102.26 February 28, 2005 105.84 103.70 March 31, 2005 107.49 103.87 April 30, 2005 108.67 104.64 May 31, 2005 108.17 104.41 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 3 -------------------------------------------------------------------------------- Table of Contents likely to affect the market price of the ADSs on the New York Stock Exchange. Toyota will declare any cash dividends on shares in Japanese yen. Exchange rate fluctuations will also affect the U.S. dollar amounts received on conversion of cash dividends. Exchange rate fluctuations can also materially affect Toyota's reported operating results. In particular, a strengthening of the Japanese yen against the U.S. dollar can have a material adverse effect on Toyota's reported operating results. For a further discussion of the effects of currency rate fluctuations on Toyota's operating results, please see 'Operating and Financial Review and Prospects - Operating Results - Overview - Currency Fluctuations'. 3.B CAPITALIZATION AND INDEBTEDNESS Not applicable. 3.C REASONS FOR THE OFFER AND USE OF PROCEEDS Not applicable. 3.D RISK FACTORS Industry and Business Risks The worldwide automobile market is highly competitive. The worldwide automotive market is highly competitive. Toyota faces strong competition from automobile manufacturers in the respective markets in which it operates. Competition is likely to further intensify in light of continuing globalization and consolidation in the worldwide automotive industry. Factors affecting competition include product quality and features, innovation and development time, pricing, reliability, safety, fuel economy, customer service and financing terms. Increased competition may lead to lower vehicle unit sales and increased inventory, which may result in a further downward price pressure and adversely affect Toyota's financial conditions and results of operations. Toyota's ability to maintain its competitiveness will be fundamental to its future success in existing and new markets and its market share. There can be no assurances that Toyota will be able to compete successfully in the future. The worldwide automobile industry is highly volatile. The markets in which Toyota competes have been subject to considerable volatility in demand in each market. Demand for automobile sales depends to a large extent on general, social, political and economic conditions in a given market and the introduction of new vehicles and technologies. As Toyota's revenues are derived from sales in markets worldwide such as Japan, North America and Europe, economic conditions in these countries and regions are particularly important to Toyota. Demand may also be affected by factors directly impacting automobile price or the cost of purchasing and operating automobiles such as sales and financing incentives, prices of raw materials and parts and components, cost of fuel and governmental regulations (including tariffs, import regulation and other taxes). Volatility in demand may lead to lower vehicle unit sales and increased inventory, which may result in a further downward price pressure and adversely affect Toyota's financial conditions and results of operations. Toyota's future success depends on its ability to offer innovative new, price competitive products that meet and satisfy customer demand on a timely basis. Meeting and satisfying customer demand with attractive new vehicles and reducing product development times are critical elements to the success of automobile manufacturers. The timely introduction of new vehicle models, at competitive prices, meeting rapidly changing customer preferences and demands is fundamental to 4 -------------------------------------------------------------------------------- Table of Contents Toyota's success. There is no assurance that Toyota may adequately perceive and identify changing customer preferences and demands with respect to quality, styling, reliability, safety and other features in a timely manner. Even if Toyota succeeds in perceiving and identifying customer preferences and demands, there is no assurance that Toyota will be capable of developing and manufacturing new, price competitive products in a timely manner with its available technology, intellectual property, sources of raw materials and parts and components (including the procurement thereof), production capacity and other factors affecting its productivity. Further, there is no assurance that Toyota will be able to implement capital expenditures at the level and times planned by management. Toyota's inability to develop and offer products that meet customer demand in a timely manner can result in a lower market share and reduced sales volumes and margins, and may adversely affect Toyota's financial conditions and results of operations. Toyota's ability to market and distribute effectively, and Toyota's maintenance of brand image, are integral parts of Toyota's successful sales. Toyota's success in the sale of automobiles depends on its ability to market and distribute effectively based on distribution networks and sales techniques catered to its customers as well as its ability to maintain and further cultivate its brand image across the markets in which it operates. There is no assurance that Toyota will be able to develop sales techniques and distribution networks that effectively adapt to customer preferences or changes in the regulatory environment in the major markets in which it operates. Nor is there assurance that Toyota will be able to cultivate and protect its brand image. Toyota's inability to maintain well developed sales techniques and distribution networks or brand image may result in decreased sales and market share and may adversely affect its financial conditions and results of operations. The worldwide financial services industry is highly competitive. The worldwide financial services industry is highly competitive. The market for automobile financing has grown as more consumers are financing their purchases, primarily in North America and Europe. Increased competition in automobile financing may lead to decreased margins. A decline in Toyota's vehicle unit sales, an increase in residual value risk due to lower used vehicle price and increased funding costs are factors which may impact Toyota's financial services operations. A negative impact on Toyota's financial services operations may adversely affect its financial conditions and results of operations. Political, Regulatory and Economic Risks Toyota's operations are subject to currency and interest rate fluctuations. Toyota is sensitive to fluctuations in foreign currency exchange rates and is principally exposed to fluctuations in the value of the Japanese yen, the U.S. dollar and the euro and, to a lesser extent, the Australian dollar and 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 affect Toyota's pricing of products sold and materials purchased in foreign currencies. In particular, a strengthening of the Japanese yen against the U.S. dollar can have a material adverse effect on Toyota's operating results. Toyota believes that its use of certain derivative financial instruments and increased localized production of its products have reduced, but not eliminated, the effects of interest rate and foreign currency exchange rate fluctuations, which in some years can be significant. Nonetheless, a negative impact resulting from fluctuations in foreign currency exchange rates and changes in interest rates may adversely affect Toyota's financial conditions and results of operations. For a further discussion of currency and interest rate fluctuations and the use of derivative financial instruments, please see 'Operating and Financial Review and Prospects - Operating Results - Overview - Currency Fluctuations,' 'Quantitative and Qualitative Disclosures About Market Risk,' and notes 20 and 21 to Toyota's consolidated financial statements. 5 -------------------------------------------------------------------------------- Table of Contents The automotive industry is subject to various governmental regulations and legal proceedings. The worldwide automotive industry is subject to various governmental laws and regulations including those related to vehicle safety and environmental matters such as emission levels, fuel economy, noise and pollution. Many governments also regulate local content, impose tariffs and other trade barriers, taxes and levies, and enact price or exchange controls. Toyota has incurred, and expects to incur in the future, significant costs in complying with these regulations. New legislation or changes in existing legislation may also subject Toyota to additional expense in the future. Toyota is also subject to a number of pending legal proceedings. A negative outcome in one or more of these pending legal proceedings could adversely affect Toyota's future financial conditions and results of operations. For a further discussion of government regulations, please see 'Information on the Company - Business Overview - Governmental Regulation, Environmental and Safety Standards' and for legal proceedings, please see 'Information on the Company - Business Overview - Legal Proceedings.' Toyota may be adversely affected by political instabilities, fuel shortages or interruptions in transportation systems, natural calamities, wars, terrorism and labor strikes. Toyota is subject to various risks associated with conducting business worldwide. These risks include political and economic instability, natural calamities, fuel shortages, interruption in transportation systems, wars, terrorisms, labor strikes and work stoppages. The occurrence of any of these events in the major markets in which Toyota purchases materials, components and supplies for the manufacture of its products or in which its products are produced, distributed or sold, may result in disruptions and delays in the operations of Toyota's business. Significant or prolonged disruptions and delays in Toyota's business operations may result to adversely affect Toyota's financial conditions and results of operations. 6 -------------------------------------------------------------------------------- Table of Contents ITEM 4. INFORMATION ON THE COMPANY 4.A HISTORY AND DEVELOPMENT OF THE COMPANY Toyota Motor Corporation is a limited liability, joint-stock company incorporated under the Commercial Code of Japan. Toyota commenced operations in 1933 as the automobile division of Toyota Industries Corporation (formerly, Toyoda Automatic Loom Works, Ltd.). Toyota became a separate company on August 28, 1937. As of March 31, 2005, Toyota operated through 524 consolidated subsidiaries and 222 affiliated companies, of which 56 companies were 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, 2002 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 7.40 million vehicles in fiscal 2005 on a consolidated basis. Toyota had net revenues of Y18.6 trillion and net income of Y1.171 trillion in fiscal 2005. Toyota's business segments are automotive operations, financial services operations and all other operations. The following table sets for the Toyota's net revenues from external customers in each of its business segments for each of the past three fiscal years. Yen in millions Year Ended March 31, 2003 2004 2005 Automotive Y 14,300,799 Y 15,963,100 Y 17,098,415 Financial Services 707,527 716,727 760,664 All Other 493,227 614,933 692,447 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's financial services also provide retail leasing through the purchase of lease contracts originated by Toyota dealers. 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% of ownership interest in KDDI Corporation, a full service telecommunications provider in Japan. Toyota's other operations business segment includes the design and manufacture of prefabricated housing and information technology related businesses, including certain intelligent transport systems and an e-commerce marketplace called Gazoo.com. 7 -------------------------------------------------------------------------------- Table of Contents Toyota sells its vehicles in approximately 170 countries and regions. Toyota's primary markets for its automobiles are Japan, North America and Europe. The following table sets forth Toyota's net revenues from external customers in each of its geographical markets for each of the past three fiscal years. Yen in millions Year Ended March 31, 2003 2004 2005 Japan Y 6,621,054 Y 7,167,704 Y 7,408,136 North America 5,929,803 5,910,422 6,187,624 Europe 1,514,683 2,018,969 2,305,450 All Other Markets 1,436,013 2,197,665 2,650,316 During fiscal 2005, 32% of Toyota's automobile unit sales on a consolidated basis were in Japan; 31% were in North America and 13% were in Europe. The remaining 24% of unit sales were in other markets, including 11% in East and Southeast Asian countries other than Japan. The Worldwide Automotive Market Toyota estimates that annual worldwide vehicle sales totaled approximately 63 million units in 2004. Automobile sales are affected by a number of factors including: â€¢ social, political and economic conditions, â€¢ introduction of new vehicles and technologies, and â€¢ costs incurred by customers of purchasing and operating automobiles. These factors can cause consumer demand to vary substantially from year to year in different geographic markets and for individual categories of automobiles. In 2004, North America, Europe and Japan represented the world's top three automotive markets. Worldwide market share, based on total automobile unit sales on a retail basis in each market, was 32% for North America, 33% for Europe and 9% for Japan. In North America, new vehicle sales maintained a high level of 20.1 million units primarily attributable to the continuation of sales promotion incentives. In Europe, new vehicle sales increased slightly from the previous year to 20.8 million units due to the economic recovery. In Japan, consumer demand for passenger cars remain at a low level due to weak consumer spending. Commercial vehicles sales in Japan decreased slightly following a rise in replacement demand due to stricter gas emissions regulations in 2003. As a result, total vehicle unit sales (including mini-vehicles) in Japan in 2004 remained at approximately the same level as the previous year at 5.85 million units. In East and Southeast Asia, the economic recovery is resulting in growing demand for new vehicles in many countries. As a result, unit sales in East and Southeast Asian markets (excluding Japan, China and Hong Kong) in 2004 increased by 5% to 3.46 million units. In China (including Hong Kong), while the growth of the market is not as precipitous as before, sales expanded by nearly 0.7 million units to 5.27 million units in 2004. The worldwide automotive industry is affected significantly by government regulation aimed at reducing harmful effects on the environment, enhancing vehicle safety and improving fuel economy. These regulations have added to the cost of vehicles. Many governments also regulate local content and impose tariffs and other trade barriers and price or exchange controls as a means of creating jobs, protecting domestic producers or influencing their balance of payments. Changes in regulatory requirements and other government-imposed restrictions can limit an automaker's operations. These regulations can also make the repatriation of profits to an automaker's home country difficult. 8 -------------------------------------------------------------------------------- Table of Contents 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 General Motors Corporation of a 21% equity interest in Fuji Heavy Industries Ltd. in April 2000, â€¢ the acquisition by Ford Motor Company of the Land Rover business from BMW AG in June 2000, â€¢ the acquisition by DaimlerChrysler AG of a 10% equity interest in Hyundai Motor Company in September 2000. The disposition of the foregoing equity interest by DaimlerChrysler AG was announced in May 2004, â€¢ the acquisition by Renault S.A. of a 70% equity interest in Samsung Motors Incorporated in September 2000, â€¢ the acquisition by DaimlerChrysler AG of a 34% equity interest in Mitsubishi Motors Corp. in October 2000, followed by the acquisition of an additional 3% equity interest in June 2001, â€¢ the increased equity investment by General Motors Corporation in Suzuki Motor Corporation from 10% to 20% in November 2000, â€¢ the acquisition by Renault S.A. of a 20% equity interest in Volvo AB by June 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 May 2002, â€¢ General Motors Corporation and the Daewoo Motor Creditors Committee established a joint venture, GM Daewoo, in October 2002. General Motors Corporation holds a 42% stake, Suzuki Motor Corporation a 15% stake and Shanghai Automotive Industry Corp. a 10% stake, respectively, and Daewoo's creditors own the remaining 33% in the joint venture, and â€¢ DaimlerChrysler AG acquired a 43% interest in Mitsubishi Fuso Truck and Bus Corporation in March 2003, followed by an acquisition of an additional 22% interest in March 2004. 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. 9 -------------------------------------------------------------------------------- Table of Contents Toyota's Strategy Toyota believes that its preeminence in the Japanese automotive industry, its growth in the United States and Europe and its overall position as the world's third largest automobile producer have resulted from the following factors: â€¢ its timely introduction of new products that meet consumer demands and incorporate superior design and environmental and safety technologies, â€¢ its continuing focus on high quality and low-cost manufacturing, â€¢ its commitment to investment in research and development and its sales and production infrastructure, and â€¢ its financial strength, which enables Toyota to achieve the above objectives. Toyota's corporate goal is to continue to be a market leader in the automotive industry and grow, while enhancing profitability and shareholder returns. Toyota's strategy to achieve this goal consists of the following elements: Localize Global Operations with Targeted Regional Strategies Toyota believes that a global competitor in the worldwide automotive industry needs to supply each market in which it competes with products that are targeted carefully to local demand. Toyota also believes that a local sales, marketing and manufacturing presence is necessary to fully exploit a market's potential. Localization better 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 striving for a market share (excluding mini-vehicles) of at least 40% every year. Toyota, excluding Daihatsu and Hino, held a domestic market share (excluding mini-vehicles) on a retail basis of 42.3% in fiscal 2003, 42.9% in fiscal 2004 and 44.5% in fiscal 2005. Amid the continued market downturn and despite increased competition from its domestic competitors, Toyota maintained its market share of over 44% in fiscal 2005 due to the active introduction of new car models such as, the Passo, the Isis and the Mark X. In the highly competitive Japanese market, Toyota is repositioning its retail channels under a new product and retail strategy in order to respond effectively to evolving consumer preferences and structural changes in the market. Under this new strategy, Toyota reorganized and strengthened its retail network in Japan to better cater to customer demand patterns. Specifically, Toyota combined the 'Netz' and 'Vista' sales channels into a new 'Netz' channel in May 2004 and is planning to launch the Lexus brand in Japan in August 2005. â€¢ Capitalize on Success in North America. Toyota's North American unit sales continued to be strong in fiscal 2005, supported by an increase in consumer spending in the United States. Toyota's North American unit sales on a consolidated basis grew from 2.10 million units in fiscal 2004 to 2.27 million units in fiscal 2005. In fiscal 2005, Toyota's North American unit sales represented 31% of its total global unit sales on a consolidated basis. Toyota attributes its continuing success in the North American market to successful new product introductions such as Camry and Lexus RX330/Hybrid and strong sales of core models such as the Corolla, Camry, Highlander and Lexus RX330 and ES300. These product introductions in the past included the Matrix in 2002, the Lexus GX470 and the Scion xA and the Scion xB (marketed in Japan as the ist and the bB, respectively), which target younger drivers, in 2003 and the Scion tC in 2004. Toyota has also undertaken regular model changes and updates of major models in order to meet changing market demand. For example, Toyota recently completed a full model 10 -------------------------------------------------------------------------------- Table of Contents change of the Prius, the Lexus RX330 and the Tacoma. In 2004, light trucks accounted for approximately 47% of Toyota's vehicle unit sales in the United States, while passenger vehicles accounted for approximately 53%. Further, in 2004, Toyota brand vehicles accounted for approximately 81%, Lexus brand vehicles accounted for approximately 14% and Scion brand vehicles accounted for approximately 5% of the vehicle unit sales in the United States, respectively. 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 May 2003, Toyota's manufacturing facility in the state of Alabama commenced operation of V8 engine production with the annual capacity of 120,000 units. Toyota also opened new plants in Mexico in September and December 2004, which produces truck beds for the Tacoma pickup trucks and assembles Tacoma pickup trucks respectively. An annual production capacity for the Tacoma's truck bed is 180,000 units and that for the assembly of Tacoma pickup trucks is 30,000 units. In 2004, 1.46 million vehicles, or approximately 64% of Toyota vehicles manufactured for the sales in North America, were produced in North America. Toyota plans to continue to grow its North American business and, after the opening of its new Texas plant, expects to increase its local annual production capacity to 1.65 million vehicles by 2006. â€¢ Continue Growth in Europe. Toyota's European unit sales on a consolidated basis grew to approximately 980,000 vehicles in fiscal 2005, an increase of approximately 9.0% compared to fiscal 2004 levels, while the overall European automotive market in 2004 remained at the same level as the previous year. 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 2005, Toyota continued to expand its cost-cutting efforts in production, development, and sales and marketing. The success of the Yaris, Corolla and RAV4 and the remodeled Avensis, which was introduced in 2003, has been a major factor behind Toyota's growth in the European market. Sales of the Yaris, which in 2001 became the first Toyota model to pass the 200,000 mark in Europe, reached 233,000 units in 2004. 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 204,000 units in 2004. Annual production capacity at this facility reached 210,000 units in May 2004. Toyota also expects to increase the annual production capacity of its plants in the United Kingdom, which produce the Corolla hatchback models and the Avensis, from the current 220,000 units to 285,000 units in 2005. Together with the increased annual production capacity at the Turkey plant, which manufactures the Corolla, in March 2004 from 100,000 units to 150,000 units, and those of the French and United Kingdom facilities, Toyota's total annual production capacity in Europe is expected to increase from 580,000 units in 2004 to 745,000 units in 2005. In addition, the Czech Republic plant, which is a joint venture with PSA Peugeot Citroen, is expected to commence operations in 2005 with an annual production capacity of 300,000 units, of which 100,000 units will be for the Toyota brand. In March 2005, Toyota started the production of a new 2.2-litre diesel engine in Poland, which is used in the Avensis manufactured in the United Kingdom, with an annual production capacity of 180,000 units. In another move to expand European production capacity, Toyota built a transmission manufacturing plant in Poland, which commenced production in 2002. Toyota also plans to support its growth in Europe by strengthening its sales network. In April 2002, a Europe-based holding company, Toyota Motor Europe S.A./N.V., was established in Belgium to coordinate Toyota's European manufacturing and marketing activities and has since served to further enhance coordination between Toyota's local production and marketing operations throughout Europe. Toyota has achieved annual unit sales in Europe of 962,000 vehicles in 2004, and local production reached approximately 57% of Toyota vehicles manufactured for sales in Europe. â€¢ Maintain Commitment to East and Southeast Asia. Although the automobile markets in East and Southeast Asia were depressed following the Asian currency crisis in 1997, the markets have generally continued to recover. The market in 2004 maintained the same level of 2003, the year in which the market recovered to the peak level in 1996. Toyota believes that the markets in East and Southeast Asia 11 -------------------------------------------------------------------------------- Table of Contents continue to offer substantial growth opportunities. Toyota believes one factor behind its success in these markets is strong sales of core models such as the Hilux, the Corolla and the VIOS, a new subcompact car using the same platform as the Yaris and the Echo (marketed in Japan as the Platz). Toyota also made substantial investments in these markets earlier than its major global competitors and 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 by improving product lines offered in the region and increasing local procurement to decrease its exposure to foreign currency exchange fluctuations. For example, at its Thailand plant, Toyota commenced production of the VIOS at the end of 2002 and, in order to strengthen its product line, commenced production of the Wish at the end of 2003. Toyota's IMV Project, which was launched in 2004, aspires to produce an optimal production and supply network on a worldwide scale. The manufacture of vehicle models based on the IMV Project began in Thailand, Indonesia, India, Philippines and Malaysia in fiscal 2005. In the near term, Toyota will continue to operate its plants in the region and export products to meet the growing demand in Southeast Asia as well as the demand in other regions. Furthermore, Toyota is actively expanding its business in India and China through local production and sales. Toyota Kirloskar Private Motor Ltd. in India commenced sales of the Qualis, a multi-purpose vehicle aimed exclusively at the Indian market, in January 2000. Local production and sales of the Corolla in India commenced in early 2003. In China, Sichuan Toyota Motor Co., Ltd. released the Coaster small bus, the first Toyota vehicle bearing the Toyota name, in April 2001. Tianjin FAW Toyota Motor Co., Ltd. Toyota's joint venture with Tianjin FAW Xiali Corporation, Ltd., commenced sales in November 2002 of the VIOS. In April 2003, Toyota and China FAW Group Corporation agreed to jointly produce four different Toyota-brand vehicle models in China. Under the agreement, production of the Corolla started at the first plant of Tianjin FAW Toyota Motor Co., Ltd. with an annual production capacity of 30,000 in February 2004; production of Land Cruiser vehicles started at the Chang Chun Plant of China FAW Group Corporation with an annual production capacity of 10,000 in October 2003; production of the Land Cruiser Prado started at Sichuan Toyota Motor Co., Ltd. with an annual production capacity of 5,000 in September 2003; and production of the Crown luxury car started production at the second plant of Tianjin FAW Toyota Motor Co., Ltd. with an annual production capacity of 150,000 in March 2005. In March 2004, Toyota and China FAW Group Corporation established a joint venture, FAW Toyota Changchun Engine Co., Ltd., which plant commenced the production of V6 engines in December 2004 with an annual production capacity of 130,000 units. Further in September 2004, Toyota and China FAW Group Corporation executed a basic agreement to cooperate in the promotion and development of hybrid vehicles in China and are discussing to commence the assembly of the Prius in China during 2005. In February 2004, Toyota and Guangzhou Automobile Group Co., Ltd. established a joint venture, Guangqi Toyota Engine Co., Ltd., which plant is expected to commence the production of engine parts and gasoline engines in 2005. Further in September 2004, Toyota and Guangzhou Automobile Group Co., Ltd. established a joint venture, Guangzhou Toyota Motor Co., Ltd., which plant is expected to commence the production of the Camry in mid-2006 with an annual production capacity of 100,000. 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, 12 -------------------------------------------------------------------------------- Table of Contents â€¢ the development of automobiles powered by fuel cells and other non-traditional fuel technologies, â€¢ the reduction of emissions and improvement of fuel economy in conventional automobiles, and â€¢ the increased recycling of manufacturing materials. An example of Toyota's leadership in environmental technologies was the introduction of the Prius to the Japanese market in December 1997. The Prius is the world's first mass-produced hybrid car that runs on a combination of gasoline and electric power. Toyota introduced a new version of the Prius in May 2000, and introduced a completely remodeled version in September 2003 featuring Toyota's new-generation hybrid system, which combines decreased environmental impact with increased power and performance. In March 2005, Toyota introduced the hybrid versions of the RX400h, the Lexus brand sports-utility vehicle (marketed in Japan as the Harrier) in North America, Europe and Japan and the Highlander sport-utility vehicle (marketed in Japan as the Kluger V and L) in North America and Japan. Toyota plans to introduce the hybrid version of the Lexus brand premium sedan, the GS450h, in North America, Europe and Japan in the first half of 2006. Toyota currently also sells hybrid versions of the Estima and Alphard minivans, the Crown sedan and the Dyna and the Toyoace trucks. In addition, Toyota began limited sales of a fuel cell hybrid vehicle in Japan and the United States in December 2002. Fuel cell hybrid vehicles are hybrid cars that use fuel cells to generate the electricity that drives the motor. Toyota also promotes the development of advanced technologies through alliances with other major manufacturers. For instance, Toyota is broadening its research and development efforts through an alliance with General Motors Corporation for the development of advanced environmental technologies and an alliance with Exxon Mobil Corporation for the development of fuel compatible with future power sources. Toyota has also formed a collaborative relationship with Volkswagen in areas such as recycling and navigation technologies. In addition, Toyota has entered into an alliance with PSA Peugeot Citroen for the development and production of low-cost, fuel-efficient and environment-friendly vehicles. â€¢ Improve Efficiency. Toyota plans to improve returns and enhance operating efficiencies by continuing to pursue aggressive cost reduction programs, including: â€¢ improving product development and production efficiencies through the re-integration and improvement of vehicle platforms and power trains, â€¢ producing higher volumes of successful vehicle models and discontinuing vehicle models not producing sufficient sales volumes, â€¢ streamlining production systems, â€¢ continuing collaborative research and development projects that help optimize use of capital and other resources, â€¢ improving the efficiency of domestic and international distribution, â€¢ increasing the focus on global purchasing opportunities, standardization and modularization to optimize purchasing from suppliers, and â€¢ applying advanced information technologies to improve efficiency throughout the product development and production processes. Toyota is improving production efficiency further by installing more versatile equipment and systems, modifying vehicle body designs to allow for a greater variety of models on each production line and sharing more parts among vehicles. â€¢ Expand Finance Operations. Toyota's financial services include loans and leasing programs for customers and dealers. Toyota believes that its ability to provide financing to its customers is an important value-added service. In July 2000, Toyota established a wholly owned subsidiary, Toyota Financial Services Corporation, to oversee the management of Toyota's finance companies worldwide. Toyota believes that Toyota Financial Services Corporation helps strengthen the overall competitiveness of Toyota's financial business, improve risk management and streamline related decision-making processes. Toyota plans to expand its network of financial services, which currently covers 30 countries and regions, in accordance with its strategy of developing auto-related financing businesses in significant markets. 13 -------------------------------------------------------------------------------- Table of Contents Diversify into Automotive-Related Business Sectors The creation of automobiles and an automobile based society in which people can live in ease, safety and comfort in the coming age of a society that utilizes an intelligent transport system and an ubiquitous-network is one of Toyota's objectives. Toyota is striving to realize this objective by simultaneously focusing on the two visions of 'Zero-nize' and 'Maxi-mize' at a high level. ' Zero-nize' symbolizes our continuing efforts in reducing the negative effects of automobiles such as traffic accidents, traffic congestion and environmental impact, while 'Maxi-mize' symbolizes our efforts in the maximization of fulfillment through the fun, excitement and comfort that people continue to seek in automobiles. Toyota has commenced and is working towards realizing both of these visions. However, further advancement of 'Zero-nize' and 'Maxi-mize' requires the active deployment of the intelligent transport system. Toyota is proceeding with the development and commercialization of the intelligent transport system from two perspectives, which are, increasing vehicle functionality and enhancing transport systems. 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 600 million shares of its common stock at a total cost of approximately Y2,046 billion. As a result, Toyota's total outstanding shares were reduced to 3,268,078,939 shares (excluding treasury shares) as of March 31, 2005. Moreover, Toyota subsequently repurchased, under the share repurchase program approved at its ordinary general meeting of shareholders on June 23, 2004, 16 million shares of its common stock at a total cost of approximately Y62 billion before its ordinary general meeting of shareholders in June 2005. Toyota may repurchase its shares by using retained earnings by resolution of its ordinary general meetings of shareholders or its board of directors, subject to certain limitations and restrictions. Pursuant to the resolutions of its ordinary general meeting of shareholders in June 2005, during the one-year period until the next ordinary general meeting of shareholders, Toyota may repurchase up to 65 million shares or up to the number of shares equivalent to Y250 billion in cost of repurchase. In addition, Toyota may repurchase additional shares by resolution of its board of directors pursuant to the Articles of Incorporation. 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, 2001 2002 2003 2004 2005 Approximate number of shares repurchased 65 77 155 121 63 million million million million million Approximate amount paid Y 264 Y 278 Y 453 Y 399 Y 266 billion billion billion billion billion The amount of any share repurchases are subject to the level of Toyota's future earnings, its financial condition and other factors. For further discussion, please see 'Purchases of Equity Securities by the Issuer and Affiliated Purchasers.' Automotive Operations Toyota's revenues from its automotive operations were Y17.1 trillion in fiscal 2005, Y16.0 trillion in fiscal 2004 and Y14.3 trillion in fiscal 2003. 14 -------------------------------------------------------------------------------- Table of Contents 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 and sells mini-vehicles and compact cars. Hino Motors, Ltd., which became Toyota's subsidiary in August 2001, produces and sells commercial vehicles. Toyota also manufactures automotive parts, components and accessories for its own use and for sale to others. Vehicle Models Toyota's product line includes subcompact and compact cars, mini-vehicles, hybrid, mid-size, luxury, sports and specialty cars, recreational and sport-utility vehicles, pickup trucks, minivans and trucks. Subcompact and Compact Toyota's subcompact and compact cars include the four-door Corolla sedan, which is one of Toyota's best selling models. The Yaris, marketed as the Vitz in Japan, is a subcompact car designed to include features that are particularly attractive to European consumers, such as better car performance and comfort as compared to other compact cars available on the market, with small car fuel economy and low emissions. The Vitz is currently available in Japan as a hatchback in five-door models and underwent a model change in February 2005. In early 2002, Toyota introduced a remodeled Corolla to the European market and the Corolla and the Matrix to North America. Toyota also introduced the ist and the WiLL Cypha compact cars to the Japanese market in May 2002 and October 2002, respectively. In early 2003, Toyota began introducing the VIOS to China and other Asian markets. Further, Toyota introduced a remodeled Raum in Japan in May 2003 and introduced the Scion xA and the Scion xB (marketed in Japan as the ist and the bB, respectively) in the United States in June 2003. In June 2004, Toyota commenced the sale of the Passo (sold by Daihatsu as the Boon), the smallest passenger vehicle under the Toyota brand, jointly developed with Daihatsu, a subsidiary of Toyota. Mini-Vehicles Mini-vehicles are manufactured and sold by Daihatsu. Daihatsu 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 580,000 mini-vehicles and 120,000 automobiles on a consolidated basis during fiscal 2005. Daihatsu's largest market is Japan, which accounted for approximately 78% of Daihatsu's unit sales during fiscal 2005. Hybrid The Prius is the world's first mass-produced hybrid car. It runs on an optimal combination of gasoline and electric power. This system allows it to travel twice as far as conventional vehicles of comparable size and performance on the same amount of gasoline. In addition, the hybrid design of the Prius results in the output of 75% less pollution than the maximum amount allowed by Japanese environmental regulations. Toyota views the Prius as the cornerstone of its emphasis on designing and producing environmentally friendly automobiles. In 2003, Toyota introduced in Japan, the United States, Europe and other markets, a fully remodeled Prius, which combines decreased environmental impact by higher fuel efficiency and ultra-low emissions with increased power and performance. Toyota introduced hybrid versions of the RX400h, a Lexus brand sports-utility vehicle (marketed in Japan as the Harrier), in North America, Europe and Japan, and the Highlander sport-utility vehicle (marketed in Japan as the Kluger V and L) in North America and Japan in March 2005. Toyota plans to introduce the Prius in China in the second half of 2005 and the hybrid version of the Camry in North America in 2006. Toyota also plans to introduce the hybrid version of the Lexus brand premium sedan, the GS450h, in North America, Europe and Japan in the first half of 2006. As of March 31, 2005, Toyota has sold over 360,000 hybrid vehicle units. Toyota also began limited sales of a fuel cell hybrid vehicle in Japan and the United States in December 2002. In June 2005, Toyota's new fuel cell hybrid passenger vehicle became the first vehicle in Japan 15 -------------------------------------------------------------------------------- Table of Contents to acquire vehicle type certification under the Road Vehicles Act, as amended and enacted on March 31, 2005, by Japan's Ministry of Land, Infrastructure and Tranport (MLIT). Leases for the vehicle are expected to begin on July 1, 2005. Toyota aims to continue its efforts to offer a diverse lineup of hybrid vehicles, enhance engine power while improving fuel efficiency, and to otherwise work towards increasing the sales of hybrid vehicles. Mid-Size Toyota's mid-size models include the Camry, which has been the best selling passenger car in the United States for seven of the past eight years and also for the last three consecutive years. The Camry line includes the Camry Solara sport coupe, which was fully remodeled in 2003. Camry sales in the United States for 2004 was approximately 427,000 units (including approximately 49,600 Solaras). Toyota's Japanese mid-size cars also include the Mark II, which was succeeded by the new model, Mark X, in November 2004, the Premio, the Allion and the Caldina station wagon. In September 2002, Toyota introduced a remodeled version of the Caldina station wagon to the Japanese market. In March 2003, Toyota introduced in Europe a remodeled version of the Avensis, its flagship mid-size car for European markets, which was also subsequently introduced in Japan in October 2003. 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 the title of best-selling luxury brand for the fifth consecutive year by selling approximately 288,000 vehicles in 2004. Lexus models include the full-size LS430 sedan, which is sold as the Celsior in Japan and was remodeled in August 2000; the smaller GS300 and GS430 sedans and the ES300 sedan, sold as the Aristo and the Windom in Japan; the IS300 and IS200 mid-size sport sedans, marketed in Japan as the Altezza; the IS300 Sport Cross, which is sold in Japan as the Altezza Gita; luxury sport-utility vehicles such as the GX470, which was introduced to the United States in December 2002 and is marketed in Japan as the Land Cruiser Prado, and the RX330, which is marketed in Japan as the Harrier and which was completely remodeled and introduced to Japan and to the United States in February 2003 and March 2003, respectively; and the SC430, sold as the Soarer in Japan, and LX470, sold as the Land Cruiser Cygnus in Japan. Toyota expects to commence sales of its luxury automobiles in Japan under the Lexus brand in August 2005. Toyota's best-selling full-size luxury car in Japan is the Crown, which was remodeled in December 2003. In Japan, Toyota also sells the Progres and the Brevis, compact luxury models, as well as the Century limousine. 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. In June 2004, Toyota introduced in the United States the Scion tC, a sport car model targeted to the younger market. Recreational and Sport-Utility Vehicles and Pickup Trucks Toyota sells a variety of sport-utility vehicles and pickup trucks, including the Tacoma and Tundra pickup trucks. Toyota sport-utility vehicles available in North America include the Sequoia; the 4Runner, which was completely remodeled and introduced to the United States in October 2002 and is marketed as the Hilux-Surf in Japan; the RAV4; the Highlander, which is available in Japan under the model name Kluger V and L; and the Land Cruiser. The Tacoma, the Tundra and the Sequoia are built in the United States. Toyota also offers sport-utility vehicles under the Lexus brand, including the LX470, the GX470, the RX400, and the remodeled RX330. The LX470, the Land Cruiser, the Tundra, the Sequoia, 4Runner (marketed as the Hilux-Surf in Japan), Prado and the GX470 sold in North America are equipped with V-8 engines. Toyota introduced the remodeled Harrier to the Japanese market in February 2003. Local production in Canada of the RX400 began in September 2003. Toyota's pickup truck, the Hilux, has been the best selling model of all Toyota cars sold in Thailand. 16 -------------------------------------------------------------------------------- Table of Contents Minivans Toyota offers several basic models for the global minivan market. Its largest minivan, the Alphard, was released in May 2002. Toyota's other minivan models include the Sienna, which underwent a model change in March 2003 and is sold in North America; the Previa, which is sold in Japan as the Estima; the European market's Avensis Verso, which was remodeled in 2001 and is sold in Japan as the Ipsum; the Hiace and Regius Ace, both remodeled in August 2004; the Noah and the Voxy, both released in Japan in November 2001; the Wish, which was released in Japan in January 2003; the Sienta, which was released in Japan in September 2003; and the Isis, which was released in Japan in September 2004. In May 2004, Toyota introduced to the European market the remodeled Corolla Verso, which is sold in Japan as the Funcargo. Trucks and Buses Toyota's product line-up includes trucks (including vans) up to a load capacity of four tons and micro-buses, which are sold in Japan and in the overseas markets. Trucks and buses are also manufactured and sold by Hino, a subsidiary of Toyota. 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 four tons. Hino held the largest share of the Japanese medium truck market in fiscal year 2005, primarily due to the success of its Ranger model. Hino's bus line-up includes large to medium buses used primarily as tour buses and public buses, small buses and micro-buses. Toyota and Hino maintain a large share of the small bus (including micro-buses) segment in Japan. Product Development New cars introduced in Japan during fiscal 2005 include the Passo (sold by Daihatsu as the Boon), the Porte, the Isis, the Mark X, the Harrier Hybrid and the Kluger Hybrid. During fiscal 2005, remodeled cars sold in Japan included the Crown Majesta, the Vitz, the Hiace and the Regius Ace. New cars introduced outside Japan during fiscal 2005 and thereafter include, the Aygo in Europe in February 2005, the Crown in China in February 2005 and the Scion tC in the United States in June 2004. Remodeled cars sold outside of Japan during fiscal 2005 include the Tacoma in the United States in September 2004 and the Avalon and the Lexus GS430/300 in the United States in January 2005. Toyota also began limited sales of a fuel cell hybrid vehicle in Japan and the United States in December 2002. Toyota also released a remodeled version of the Avensis in Europe in March 2003 and in Japan in October 2003. The IMV product lineup includes the Hilux Vigo released in Thailand in August 2004, the Kijang Innova in Indonesia in September 2004, the Innova in Thailand, the Philippines and India in January, February and March 2005, respectively, the Fortuner in Thailand in January 2005, and the Hilux in Argentina and South Africa in March and April 2005, respectively. Markets, Sales and Competition Toyota's primary markets are Japan, North America and Europe. The following table sets forth Toyota's consolidated vehicle unit sales by geographic market for the periods shown. The vehicle unit sales below reflect vehicles sales made by Toyota to unconsolidated entities (and recognized as sales under Toyota's revenue recognition policy), including sales to unconsolidated distributors and dealers. Vehicles sold by Daihatsu are included in vehicle unit sales numbers set forth below. 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 Mexico, Puerto Rico and Hawaii. Year Ended March 31, 2001 2002 2003 2004 2005 Units % Units % Units % Units % Units % Market Japan 2,322,838 42.0 % 2,217,002 40.0 % 2,217,770 36.3 % 2,303,078 34.3 % 2,381,325 32.1 % North America 1,733,569 31.4 1,780,133 32.1 1,981,912 32.4 2,102,681 31.3 2,271,139 30.7 Europe 691,135 12.5 727,192 13.1 775,952 12.7 898,201 13.4 978,963 13.2 Other Regions 779,321 14.1 818,395 14.8 1,137,644 18.6 1,415,403 21.0 1,776,951 24.0 Total 5,526,863 100.0 % 5,542,722 100.0 % 6,113,278 100.0 % 6,719,363 100.0 % 7,408,378 100.0 % 17 -------------------------------------------------------------------------------- Table of Contents The following table sets forth Toyota's vehicle unit sales and market share in Japan, North America and Europe on a retail basis for the periods shown. Each market's total sales and Toyota's sales represent new vehicle registrations in the relevant year. All information on Japan 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 Mexico, Puerto Rico and Hawaii. Fiscal Year Ended March 31, (sales in thousands of units) 2001 2002 2003 2004 2005 Japan: Total market sales 4,121 3,981 4,045 4,030 3,940 Toyota sales (retail basis) 1,774 1,678 1,710 1,729 1,755 Toyota market share 43.1 % 42.2 % 42.3 % 42.9 % 44.5 % Calendar Year Ended December 31, (sales in thousands of units) 2000 2001 2002 2003 2004 North America: Total market sales 20,377 20,113 19,956 19,695 20,092 Toyota sales (retail basis) 1,766 1,894 1,941 2,072 2,292 Toyota market share 8.7 % 9.4 % 9.7 % 10.5 % 11.4 % Europe: Total market sales 20,423 20,002 19,496 19,707 20,826 Toyota sales (retail basis) 684 684 779 866 962 Toyota market share 3.3 % 3.4 % 4.0 % 4.4 % 4.6 % Japan The automobile market in Japan has become saturated and its growth has become stagnant over the past several years. Despite this trend, Toyota believes that Japan continues to be the most important market for Toyota's automotive products. In Japan, the automotive industry is highly competitive. The Japanese automotive industry includes five major domestic producers, five specialized domestic producers and a growing volume of imports from major United States and European manufacturers. The prolonged economic slump in the Japanese economy has also shifted consumer preference towards more affordable automobiles such as compact and subcompact vehicles and towards utility vehicles such as mini-vans. For more than 40 years, Toyota has been the largest automobile manufacturer in Japan. In each year since fiscal 1999, Toyota, excluding Daihatsu and Hino, has achieved a market share (excluding mini-vehicles) of over 40%, reflecting in part the success of the Vitz subcompact car and the introduction of new model mini-vans and sedans. Toyota's (excluding Daihatsu and Hino) share of the domestic market excluding mini-vehicles was 44.5% in fiscal 2005. Toyota's (including Daihatsu and Hino) share of the market including mini-vehicles was 41.1% in fiscal 2005. Toyota is taking steps to further increase its market leadership in Japan by actively introducing products in key market segments, including the introduction of the Lexus brand vehicles expected in August 2005. North America Toyota's consolidated vehicle unit sales in North America was 2,271,139 in fiscal 2005. The United States is the largest portion of the North American market for Toyota, representing approximately 90% of its total retail unit sales in the region. In 2004, Toyota's retail unit sales in North America showed continued strength, achieving for two consecutive years unit sales in excess of two million vehicles, reflecting the introduction of new products and the market success of its light trucks. Toyota's market share in the United States was 12.2% in 2004, 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. 18 -------------------------------------------------------------------------------- Table of Contents Europe European sales of Toyota vehicles in fiscal 2005 reached an all-time high for the eighth year in a row, with total sales of 978,963 vehicles on a consolidated basis, up 9.0% from fiscal 2004. In 2004, Toyota had a market share in Europe of 4.6% and achieved annual retail unit sales of approximately 962,000 vehicles. 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, the RAV4, the fully remodeled Avensis in 2003 and the remodeled Corolla Verso in the first half of 2004. Toyota's principal European markets are the United Kingdom, Italy and Germany. Toyota's principal competitors in Europe are Renault, Volkswagen, Opel, Ford and Peugeot. East and Southeast Asia The market in the East and Southeast Asia region (excluding China and Hong Kong) was 3.46 million units in 2004, an increase of approximately 4.6% from 3.31 million units in 2003. The market in the East and Southeast Asia region (including China and Hong Kong) grew to 8.72 million units in 2004, an increase of approximately 10% from 7.89 million units in 2003. Toyota believes that the long-term potential of the East and Southeast Asian market is good and remains committed to its operations in the region. The following table sets forth Toyota's sales figures in East and Southeast Asia for the periods shown. This information excludes unit sales by Daihatsu and Hino. Toyota Sales (in thousands of vehicles)(Calendar year) Asia China -------------------------------------- (excluding and China Hong and Hong Kong Kong) 2002 393 62 2003 513 107 2004 644 127 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 11.5% in 2002, 15.5% in 2003 and 18.6% in 2004. East and Southeast Asia (excluding Hong Kong and China) accounted for 13.0% of Toyota's overseas unit sales in 2004 (not including unit sales by Daihatsu and Hino outside Japan), an increase of 1.2% from 11.8% in 2003. Production Toyota and its affiliates produce automobiles and related components through more than 50 manufacturing organizations in 27 countries and regions around the world. Toyota's major manufacturing facilities include plants in Japan, the United States, Canada, the United Kingdom, France, Turkey, Indonesia, Thailand, Taiwan, China, Australia, South Africa, Brazil and Argentina. Daihatsu brand vehicles are produced at seven factories in Japan and six manufacturing companies in six other countries, including Indonesia and Malaysia. Hino commenced local production of medium trucks in California for the North American market in fiscal 2005 to strengthen its business operations in North America. 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 2004, approximately 63% of Toyota automobiles manufactured for the sale in overseas markets were manufactured in overseas plants by Toyota and its unconsolidated affiliates. In 2004, 64% of Toyota vehicles manufactured for 19 -------------------------------------------------------------------------------- Table of Contents the sale in North America were produced in North America. Of the vehicles manufactured for the sale in Europe in 2004, 57% were produced in Europe, an increase from 53% in 2003. This increase is largely due to increased sales of the Yaris and the Avensis, which are produced at production facilities in France and the United Kingdom. In fiscal 2005, Toyota produced on a consolidated basis approximately 4.5 million vehicles in Japan and approximately 2.7 million vehicles overseas, compared to approximately 4.3 million vehicles in Japan and 2.2 million vehicles overseas in fiscal 2004. 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. Vehicles produced by Hino are included in the vehicle production numbers set forth below beginning in October 2001. Year Ended March 31, 2001 2002 2003 2004 2005 Units Produced 5,275,213 5,305,803 5,850,203 6,513,791 7,231,976 Toyota closely monitors its actual units of sale, market share and units of production data and uses this information to allocate resources to existing manufacturing facilities and to plan for future expansions. See '- Capital Expenditures and Divestitures' for a description of Toyota's recent investments in completed plant constructions and for a description of Toyota's current investments in ongoing plant constructions. The Toyota Production System Toyota pioneered the internationally recognized production system known as the ' Toyota Production System'. The Toyota Production System is based on Toyota's own concepts of efficient production and has the following two principal elements: â€¢ just-in-time production, and â€¢ 'jidoka'. The just-in-time method is a production method through which necessary parts and components are manufactured and delivered in just the right quantity at the moment they are needed. This allows Toyota to maintain low levels of inventory while maintaining operating efficiency. Jidoka generally means automation in Japanese. Toyota combines automation with its ability to stop work immediately when problems arise in the production process to prevent the production of defective products. To achieve this, Toyota designs its equipment to detect abnormalities and to stop whenever abnormalities occur. Toyota also authorizes its machine operators and other members of its production team to stop production whenever they note anything suspicious. This permits Toyota to build quality into the production process by avoiding defects and preventing the waste that would result from producing a series of defective items. Toyota believes that the Toyota Production System allows it to achieve mass-production efficiencies over small and large production volumes. This gives Toyota the flexibility to respond to changing consumer demand without significantly increased production costs. While the Toyota Production System remains the basis of Toyota's automobile production, the system has been expanded for use in Toyota's parts production, logistics and customer service activities. In addition to the two principal elements described above, the Toyota Production System seeks to increase manufacturing efficiency and product quality internally through on-site identification and analysis of problems, improving transparency throughout the production process, and resolving problems at the source. As one means 20 -------------------------------------------------------------------------------- Table of Contents of realizing these goals, Toyota has introduced the use of sophisticated information technologies to improve each step of its vehicle development process, from product planning to commencement of mass-production. These technologies are intended to enhance flexibility, simplicity, quality, cost competitiveness, and speed. Specifically, detailed computer simulation of the assembly and test-run of a new vehicle or new vehicle production equipment or system is conducted before a prototype is made. An actual prototype is made only after defects and related issues have been identified and resolved by computer simulation, thereby minimizing the time required for rebuilding prototypes and significantly shortening production lead times. Moreover, this system is used to prepare virtual factories and other visual aids in order to facilitate training and communication at overseas plants and enable the efficient transfer of necessary technology and skills. To improve efficiency in the manufacturing of auto bodies, Toyota has developed a Global Body Line that enables the use of the same general specifications for both small-quantity and mass production lines. This simple and flexible production system offers considerable advantages over previous flexible body manufacturing systems, and has already been implemented in 30 out of Toyota's 37 body production lines worldwide as of March 31, 2005. 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 May 31, 2005, this network consisted of 294 dealers employing approximately 40,000 sales personnel and operating more than 5,000 sales and service outlets. Toyota owns 24 of these dealers and the remainder are independent. In addition, at March 31, 2005, Daihatsu's sales distribution network consisted of 64 dealers employing approximately 5,300 sales personnel and operating approximately 800 sales and service outlets. Daihatsu owns 36 of these dealers and the remainder are independent. Toyota believes that this extensive sales network has been an important factor in its success in the Japanese market. A large number of the cars sold in Japan are purchased from salespersons who visit customers in their homes or offices. In recent years, however, the traditional method of sales through home visits is being replaced by showroom sales. The percentage of automobile purchases through showrooms has been gradually increasing, particularly in the minivan and recreational vehicle segments. Toyota expects this trend to continue, and accordingly plans to review all aspects of its sales activities, including its customer service model at showrooms, with a view toward improving customer satisfaction and operational efficiency. 21 -------------------------------------------------------------------------------- Table of Contents Sales of Toyota vehicles in Japan are conducted through four sales channels - ' Toyota,' 'Toyopet,' 'Corolla' and 'Netz.' In response to continuing structural changes in the Japanese market that reflect the evolving social environment and consumer preferences, Toyota is in the process of redistributing and restructuring its domestic sales network. Specifically, Toyota combined the Netz and Vista sales channels into an expanded Netz channel in May 2004 in order to cater to a growing number of customers with new values. In addition, Toyota plans to introduce the Lexus brand to the Japanese market in August 2005 with a network of approximately 140 dealers in order to enhance its competitiveness in the domestic luxury automobile market. The following table provides information for each channel as of May 31, 2005. Dealers Channel Toyota Independent Sales Market Focus ----- Owned Outlets --------- Toyota 4 46 50 Luxury channel for Toyota brand name vehicles Toyopet 6 46 52 Leading channel for the medium market Corolla 7 67 74 Volume retail channel centering on compact models Netz 7 111 118 Sales channel targeting customers with new values for the 21st century. Outside Japan, Toyota vehicles are marketed through approximately 170 distributors in approximately 170 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 overseas markets, including North America, Europe and Asia. In Eastern Europe, Toyota has a wholly-owned sales subsidiary in Poland and participates in joint venture sales companies in the Czech Republic and Hungary. Toyota vehicles in China are sold through 176 dealers operating 186 sales outlets as of May 2005. Intelligent Transport Systems Toyota is striving to increase vehicle functionality that will increase the attractiveness of vehicles and the excitement of driving. Toyota is also working in various ways to comprehensively realize enhanced transport systems that are aimed to transport people and vehicles in a smooth and efficient manner and to build a safe transportation environment. 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. Features of intelligent transport systems include: Increasing Vehicle Functionality - Information service functions. To Toyota, increasing vehicle functionality means advancing information service functions that integrate vehicles with telecommunication systems and driving assist functions that use communication technologies and sensing technologies to create vehicles with intelligent features. Information service functions add to the basic vehicle function of traveling, turning and stopping. The function of connecting is made possible by the use of communication technologies, which in turn enriches the driving experience and improves the convenience of driving. Examples include the following: â€¢ Advanced car navigation system with functions such as displaying detailed information about the parking level on which the vehicle is traveling and the VICS system that provides real-time information about road traffic including congestion, accidents, traffic restrictions and parking. These car navigation systems will continue to play an important role in providing drivers with various types of information on safety, smooth traveling, comfort and convenience. â€¢ G-BOOK is an information network service that merges the latest in network technologies with car multimedia, preparing for the arrival of the ubiquitous network society. G-BOOK supports the driver and the vehicle anytime, anywhere via a network, for example, by providing various types of information useful for driving as well as a safety and security service that detects unusual conditions in the vehicle. â€¢ Emergency call service (the 'HELPNET'), is a system that either automatically or by manual button control sends necessary information, such as vehicle position and other information to emergency 22 -------------------------------------------------------------------------------- Table of Contents response numbers via a HELPNET operations center when a traffic accident or other emergencies occur. By shortening the time between the occurrence of an emergency and the reporting, it decreases traffic fatalities, reduces the adverse effects of injuries, lessens secondary casualties and alleviates traffic congestion. Increasing Vehicle Functionality - Driving Assist Functions. Toyota's driving assist functions offer functions that assist drivers with a view to lessen the burden of driving, enhance safety and stimulate excitement in their driving. Toyota is proceeding with enhancements and the commercialization of various functions that assist the driver in sensing external information, avoiding danger and making appropriate maneuvers, all in line with the driver's basic driving actions. Examples include the following: â€¢ 'Night View' is a system that supports the driver's vision at night. Even when pedestrians, vehicles and other objects within and beyond the range of the headlights are difficult to see, it displays them more clearly and secures a wider range of vision for the driver. â€¢ 'Lane Keeping Assist System' is a system that uses a camera to detect the white lane markers on the road surface ahead while driving on the highway. While this system does not automatically keep the vehicle within the lane and the driver must still operate the steering wheel, the system assists the driver's operation of the steering wheel by controlling the motorized power steering, in order to help keep the vehicle traveling between the lane markers. â€¢ 'Pre-crash Safety System' is a system that perceives whether a crash is unavoidable and if so, proceeds to activate safety devices at an early stage to reduce any damage caused by collisions. â€¢ 'Intelligent Parking Assist' is the world's first parking assist system that enables the vehicle to be automatically steered when it is being backed into a garage or being parallel-parked. â€¢ 'Radar Cruise Control with Low-Speed Tracking Mode' is a system that enables vehicles to follow vehicles ahead maintaining a distance within a preset speed. The low-speed tracking mode controls the accelerator and the brake to maintain the distance from the vehicle ahead at a speed specified by the driver when the vehicle is traveling at low speed (approximately 30km/h or slower) on a congested highway. If the system determines that it is necessary to stop the vehicle, it issues a warning, notifying the driver of the need to apply the breaks. Should the driver fail to apply the breaks in time, the system automatically stops the vehicle momentarily to maintain the necessary distance from the vehicle ahead. â€¢ 'Vehicle Dynamics Integrated Management' ('VDIM', including VSC functions) is a system that constantly monitors the driver's actions and the vehicle's state and centrally manages the engine, the steering mechanisms and the brakes. By starting control even before the vehicle's control limits are reached, the VDIM assists with the traveling, turning and stopping operations, thus achieving a high level of preventive safety. Enhancing Transport Systems. Enhancing transport systems requires addressing various factors that are pertinent not only to cars but also roads, people and public transport systems in order to ensure the smooth and efficient movement of people and vehicles and to build a safe transportation environment. Although the scope of enhancing transport systems is wide, recent advances in information technology and intelligent transport systems are making various systems that used to be merely concepts into a reality. Examples include the following: â€¢ ETC is a system in which an on-board unit communicates with the gate to pay the toll by having it charged to a credit card when a vehicle passes through the tollgate, thus eliminating the need for the vehicle to stop for payment. This has the effect of alleviating traffic congestion near the tollgate. â€¢ Intelligent Multimode Transit System ('IMTS') is a system that combines the advantages of rail and bus transport to provide a new transportation system for medium level distances and loads. On main roads, the buses run in automated platoons on dedicated roads, while on ordinary roads, each bus is manually driven. 23 -------------------------------------------------------------------------------- Table of Contents Toyota is committed to developing new intelligent transport system products. Toyota believes that intelligent transport systems will become an integral part of its overall automotive operations and enhance the competitiveness of its vehicles. As familiarity with and demand for intelligent transport system products grows, Toyota expects an increasing number of intelligent transport system products to become commercially available and achieve general acceptance each year. Financial Services Toyota's revenues from its financial services operations were Y781 billion in fiscal 2005, Y737 billion in fiscal 2004 and Y725 billion in fiscal 2003. The market for automobile financing has grown as more consumers are financing their purchases, particularly in North America and Europe. Toyota Financial Services Corporation is Toyota's wholly owned subsidiary established in July 2000 which oversees the management of Toyota's finance companies worldwide and the expansion into new automobile related product areas. Toyota plans to expand its network of financial services, which currently covers 30 countries and regions, in accordance with its strategy of further developing its auto-related financing businesses in significant markets. Toyota Motor Credit Corporation is Toyota's principal financial services subsidiary in the United States. Toyota also provides financial services in 29 other countries and regions 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 wide range of financial services, including retail financing, retail leasing, wholesale financing and insurance. Toyota Finance Corporation also provides a range of financial services, including retail financing, retail leasing, credit cards and mortgage loans. Toyota's other finance subsidiaries provide retail financing, retail leasing and wholesale financing. In fiscal 2005, Toyota commenced its financial services operations in China, South Korea and Slovakia. Toyota also established Toyota Financial Savings Bank in the United States in fiscal 2005. Net finance receivables outstanding for all of Toyota's dealer and customer financing operations were Y7.0 trillion at March 31, 2005, representing an increase of approximately 19.4% as compared to the amount outstanding as of March 31, 2004. The majority of Toyota's financial services are provided in North America. As of March 31, 2005, approximately 64% of Toyota's finance receivables were derived from financing operations in North America, 16% from Japan, 10% from Europe and 10% from other areas. Approximately 39% of Toyota's unit sales in the United States during fiscal year 2005 included a financing or lease arrangement with Toyota, the same as that of fiscal year 2004 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 financing and retail leasing include commercial banks, credit unions and other finance companies. Commercial banks and other captive automobile finance companies are competitors of Toyota's wholesale financing activities. Competition for Toyota's insurance operations is primarily from national and regional insurance companies. 24 -------------------------------------------------------------------------------- Table of Contents The following table provides information regarding Toyota's finance receivables and operating leases as of March 31, 2004 and 2005. Yen in millions US dollars in millions March 31 March 31 2004 2005 2005 Finance Receivables Retail Y 3,643,998 Y 4,780,250 $ 44,513 Finance leases 912,622 758,632 7,064 Wholesale and other dealer loans 1,680,907 1,773,440 16,514 6,237,527 7,312,322 68,091 Unearned income (298,153 ) (233,417 ) (2,173 ) Allowance for credit losses (87,462 ) (91,829 ) (855 ) Total finance receivables, net 5,851,912 6,987,076 65,063 Less - Current portion (2,622,939 ) (3,010,135 ) (28,030 ) Noncurrent finance receivables, net Y 3,228,973 Y 3,976,941 $ 37,033 Operating Leases Vehicles Y 1,387,404 Y 1,736,238 $ 16,168 Equipment 106,376 92,459 861 1,493,780 1,828,697 17,029 Less - Accumulated depreciation (375,861 ) (424,609 ) (3,954 ) Vehicles and equipment on operating leases, net Y 1,117,919 Y 1,404,088 $ 13,075 Retail Financing Toyota's finance subsidiaries purchase primarily new and used vehicle installment contracts from Toyota dealers. Approximately half 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 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 has historically sponsored, and continues to sponsor, special lease and retail programs by subsidizing below market lease and retail contract rates. 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. 25 -------------------------------------------------------------------------------- Table of Contents Wholesale Financing Toyota's finance subsidiaries also provide wholesale financing primarily to qualified Toyota vehicle dealers to finance inventories of new Toyota vehicles and used vehicles of Toyota and others. The finance companies acquire security interests in vehicles financed at wholesale. In cases where additional security interests would be required, the finance companies take dealership assets or personal assets, or both, as additional security. If a dealer defaults, the finance companies have the right to liquidate any assets acquired and seek legal remedies. 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 assets 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 and in other countries and regions also engage in vehicle insurance sales. Toyota currently has voting power of approximately 34.8% in Aioi Insurance Co., Ltd, a leading insurance company in Japan. Toyota continues to use its strong relationship with Aioi to develop attractive consumer insurance products for Toyota's automotive customers. Other Financial Services Toyota Finance Corporation launched its credit card business in April 2001, and currently has 4.7 million card holders as of March 31, 2005. Toyota also established Toyota Financial Services Securities Corporation, a subsidiary of Toyota Financial Services Corporation, which commenced operations in April 2001 to coincide with the launch of the credit card business. Through Toyota Financial Services Securities Corporation, Toyota provides financial services primarily for its card holders in Japan, including sales of investment trusts and high grade corporate bonds. 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 Y1,030 billion in fiscal 2005, Y896 billion in fiscal 2004, and Y795 billion in fiscal 2003. The sales to external customers of other operations represented 3.7% of Toyota's net revenues for fiscal 2005. The most significant of Toyota's other operations include pre-fabricated housing, its information technology related businesses, including certain intelligent transport systems and an e-commerce marketplace called Gazoo.com. Substantially all of Toyota's revenues from other operations were derived in Japan. Pre-fabricated Housing Toyota is also engaged in the manufacture and sale of prefabricated housing. Toyota has adapted the core production systems and methodologies used in its automotive operations to this business. In order to strengthen its product planning and sales of its prefabricated housing operations, Toyota spun-off its operations and established a subsidiary, Toyota Housing Corporation, in April 2003. In March 2005, Toyota, together with two institutional investors, agreed to jointly invest in Misawa Home Holdings, Inc. pursuant to their request to assist its rehabilitation. The investment takes the form of a subscription of equity shares in the total amount of 25.8 billion yen, of which 10.4 billion yen is subscribed by Toyota. Going forward, Toyota expects to generate 26 -------------------------------------------------------------------------------- Table of Contents synergies with Misawa in the development, manufacture and sales of housing and to complement one another in terms of sales area and products. Through these activities, Toyota intends to cater to a wide variety of customer needs and to strengthen the housing business of both companies. 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 and KDDI Corporation are further strengthening their business relationship in light of the increasing necessity for developing services that are better adapted to existing telecommunications infrastructure. Toyota currently holds an 11.7% of ownership interest in KDDI. Toyota established Toyota InfoTechnology Center Co., Ltd., a joint venture among its affiliates and KDDI, in January 2001. Toyota InfoTechnology Center, USA., Ltd., a wholly-owned subsidiary of the joint venture, was established in April 2001. This joint venture focuses on research and development of advanced information technologies that address market needs. Toyota believes these technologies will be integral to the further development of information services businesses, including intelligent transport systems, and to the application of information technologies to its financial services businesses. Toyota holds a 65% interest in the joint venture. Toyota also operates a Japanese-language web site, Gazoo.com. The name 'Gazoo' originates from the Japanese word gazo meaning images. Gazoo was established as a membership Internet service linking Toyota, its national dealer network and Gazoo members, and provides information on new and used Toyota automobiles and related services as well as online shopping capabilities. Gazoo has been expanded to offer a wide range of products and services, including information on an increased number of vehicle types offered by Toyota and certain additional service to its credit card members. To further expand its motor vehicle information service, Toyota launched an information service called G-BOOK in Japan in fall 2002 by applying information technology that was developed through Internet information communications services. Toyota has included in its basic services of G-BOOK services such as a theft detection system, location tracking service and operator assistance service to enhance services to its G-BOOK users. This is as a part of Toyota's efforts to offer a lifestyle with automobiles with ease, safety and comfort. Toyota has also licensed its G-BOOK technology to certain other competitors in Japan. In March 2004, Toyota launched its state-of-the-art CRM ('customer relationship management') system called the e-CRB ('customer relationship building') in Thailand. The e-CRB consists of a membership-based website and an operations system for dealers. The e-CRB system offers its customers a variety of services such as providing information of new vehicles, accepting requests for brochures and estimates and notifying customers when it is time for maintenance by keeping track of the vehicles' maintenance history and mileage. Toyota hopes that the e-CRB will serve to facilitate creating a closer and long-lasting relationship with its customers world-wide and is currently considering to gradually expand this service in other countries. 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 it to require significant compliance costs in the future. 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 27 -------------------------------------------------------------------------------- Table of Contents Japanese exhaust emission and noise level standards. In addition, Toyota is progressing with efforts to attain certification as 'ultra low emission vehicles ' for the majority of its automobile models under the Ministry of Land, Infrastructure and Transport's Low Emission Vehicle Approval Standard. Under this standard, ultra low emission vehicles must achieve 75% emission reduction against standards implemented in October 2005 by the Ministry of Land, Infrastructure and Transport. U.S. Federal Standards The federal Clean Air Act directs the Environmental Protection Agency to establish and enforce air quality standards, including emission control standards on passenger cars, light-duty trucks and heavy-duty vehicles. Under current standards applicable to passenger cars and light-duty trucks produced in model years through 2003, manufacturers are obligated to recall vehicles that fail to meet these standards for ten years or 100,000 miles, whichever occurs first. Pursuant to the Clean Air Act, the Environmental Protection Agency determined that it was necessary to tighten standards further and in February 2000 decided to adopt more stringent vehicle emission and fuel economy standards applicable to passenger cars and light-duty trucks produced in model years 2004 and beyond. In the standards adopted for model years 2004 and beyond, manufacturers must guarantee that their vehicles meet the requirements for ten years or 120,000 miles, whichever occurs first. Manufacturers will not be permitted to sell vehicles in the United States that do not meet the new standards. Separate standards for heavy-duty vehicles are also in effect, and are expected to become more stringent. California Standards Under the federal Clean Air Act, the State of California is permitted to establish its own, more stringent, emission control standards. As a result, the California Air Resources Board has established its own emission standards, known as the 'Low Emission Vehicle Program'. In late 1998, the California Air Resources Board adopted additional vehicle emissions standards that must be phased in beginning in the 2004 model year. These new standards treat most light trucks the same as passenger cars and require both types of vehicles to meet the new emissions standards of the Low Emission Vehicle Program. As part of the original Low Emission Vehicle Program, the California Air Resources Board also required that a specified percentage of a manufacturer's passenger cars and trucks sold in California for all model years 1998 and after be 'zero-emission vehicles' (vehicles producing no emissions of regulated pollutants). The California Air Resources Board subsequently eliminated the zero-emission vehicles mandate for model years before 2005, and adopted a zero-emission vehicles requirement for model years 2005 and after. This zero-emission vehicles requirement also sets forth certain requirements that advanced technology vehicles such as hybrid cars and alternative fuel vehicles must meet to be recognized as 'partial zero-emission vehicles'. Toyota's battery- powered RAV4 EV compact sport-utility vehicle qualifies as a zero-emission vehicle and the new 2004 model Prius released in 2003 qualifies as a partial zero-emission vehicle under the new zero-emission vehicles requirement adopted by the California Air Resources Board. Toyota intends to continue to develop additional advanced technologies and alternative fuel technologies which will allow other vehicles using such technologies to qualify as zero-emission vehicles or partial-zero-emission vehicles. In July 2002, the California legislature passed new legislation that requires the California Air Resources Board to develop and adopt, by the end of 2004, regulations that achieve the maximum feasible reduction in greenhouse gas emissions. In September 2004, the California Air Resources Board adopted regulations that would require the reduction of greenhouse gas released from passenger vehicles, light trucks and other noncommercial vehicles from the 2009 model year onward by 20 to 30 percent by the 2016 model year and reported to the California state legislature at the beginning of 2005 that it will adopt and promulgate the regulations. In December 2004, the Alliance of Automobile Manufacturers and the Association of International Automobile Manufacturers, both of which Toyota is a member, filed a lawsuit against the California Air Resources Board seeking injunction against the implementation of the regulation. The lawsuit contends that only the National Highway Traffic Safety Administration, and not states, including California, has the authority to regulate carbon dioxide emissions and fuel economy standards. 28 -------------------------------------------------------------------------------- Table of Contents Other States Other states may adopt California's regulations, including its zero-emission vehicle mandates, by meeting the requirements under the federal Clean Air Act. The states of Massachusetts, New York, Vermont and Maine have adopted California's Low Emission Vehicle Program, effective with model year 2001 or before. The states of Massachusetts, New York, Vermont and New Jersey have also made decisions to adopt California's zero-emission vehicle requirement in the future. Canadian and Mexican Standards Canada has established vehicle emission standards equivalent to the federal standards in the United States, including the heightened requirements that will be applicable to passenger cars and light trucks in model years 2004 and after. Mexico's emission control standards are similar to those applicable in the United States after the 1994 model year. European Standards Current vehicle emission control standards applicable in the European Union are generally no more restrictive than U.S. standards. However, the European Council and the European Parliament have adopted a directive that establishes increasingly stringent emissions standards for passenger vehicles and light commercial vehicles. Under this directive, the standards adopted beginning with year 2000 require manufacturers to recall any vehicles which fail to meet the standards for five years or 80,000 kilometers, whichever occurs first. Toyota introduced vehicles complying with this directive in 1999. Under the standards to be adopted beginning with model year 2005, manufacturers will be obligated to meet the more stringent standards for five years or 100,000 kilometers, whichever occurs first. The Prius complies with this directive. Standards for heavy commercial vehicles have been adopted by the European Council and the European Parliament for model years 2005 and thereafter and for model years 2008 and thereafter. Compliance with new emission control standards will present significant technological challenges to vehicle manufacturers and will likely require significant expenditures. Examples of these challenges include the development of advanced technologies, such as high performance batteries and catalytic converters, as well as the development of alternative fuel technologies. Manufacturers that are unable to develop commercially viable technologies within the time frames established by the new standards will be limited in the number and types of vehicles and engines they are able to sell in their principal markets. Vehicle Fuel Economy Japanese Standards The Law Concerning Rationalization of Energy Usage requires automobile manufacturers to improve their vehicles to meet specified fuel economy standards. Toyota has complied with these regulations in all material respects. The law requires that the actual average fuel economy of gasoline-fueled vehicles for each class based on vehicle weight proposed by each manufacturer complies with the fuel economy standards established thereunder by 2010, and that the actual average fuel economy of diesel-fueled vehicles for each class based on vehicle weight proposed by each manufacturer complies with relevant fuel economy standards by 2005. Toyota is now developing gasoline-fueled and diesel-fueled vehicles that will meet these standards, with the aim of achieving early compliance with these standards for all of its automobiles. Furthermore, Japan has signed the United Nations Framework Convention on Climate Change and has agreed to take steps to restrain the emission of 'greenhouse gases'. Japan ratified the Kyoto Protocol in June 2002, which became effective in February 2005. 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. 29 -------------------------------------------------------------------------------- Table of Contents U.S. Standards The Federal Motor Vehicle Information and Cost Savings Act requires automobile manufacturers to comply with Corporate Average Fuel Economy standards, commonly referred to as the CAFE standards. Under the CAFE standards, a manufacturer is subject to substantial penalties if, in any model year, its vehicles do not meet those standards. The current CAFE standards are 27.5 miles per gallon for passenger cars and 20.7 miles per gallon for light-duty trucks, including mini-vans and sport-utility vehicles. In April 2003, the National Highway Traffic Safety Administration established new CAFE standards for light-duty trucks of 21.0 miles per gallon for 2005 model year vehicles, 21.6 miles per gallon for 2006 model year vehicles and 22.2 miles per gallon for model 2007 vehicles. A manufacturer which meets the CAFE standards earns credits determined by the difference between the actual average fuel economy of its vehicles and the CAFE standards. Credits earned for the three preceding model years and credits projected to be earned for the next three model years can be used to meet CAFE standards in the current model year. Credits earned in respect of passenger cars may not be used for trucks and credits earned in respect of trucks may not be used for passenger cars. Passenger cars are further divided into the two categories 'Domestic' and 'Import', and credits earned in one category may be not applied toward another category. Although Toyota has met the current CAFE standards for both passenger cars and light-duty trucks, the enactment of a more stringent standard in 2003 could have a significant impact on Toyota's ability to offer its automobiles for sale in the United States. Concern over the effect that carbon dioxide emissions may have on global warming has focused attention on the need for reducing fossil energy use, in part by increasing vehicle fuel economy. In November 1998, the United States signed the Kyoto Protocol. This protocol calls for the United States to reduce its carbon dioxide emissions by 7% during the years 2008 to 2012, as measured from the 1990 base year. The United States government currently has not ratified the protocol. However, the United States has been considering ways to achieve the called-for reductions, including more stringent CAFE standards, higher fuel costs and restrictions on fuel usage. In February 2002, the Bush administration released a climate change policy initiative stressing voluntary measures and a cap-and-trade program to stem the growth of greenhouse gas emissions. These actions would be costly to Toyota and could significantly restrict the products it is able to offer in the United States. In addition, the Energy Tax Act of 1978 imposes a 'gas guzzler' tax on automobiles with a fuel economy rating below specified levels. European Standards The European Union has signed the Kyoto Protocol and agreed to reduce carbon dioxide emissions by 8% during the years 2008 to 2012, as measured from the 1990 base year. In early 1999, the European Union entered into a voluntary engagement with the European Automotive Manufacturers Association which establishes an average emissions target of 140 grams of carbon dioxide per kilometer for new cars sold in the European Union in 2008. That target represents an average reduction in passenger vehicle fuel usage of 25%, measured from 1995 levels. In addition, the European Union has reaffirmed its goal of reducing average carbon dioxide emissions from new passenger cars to 120 grams per kilometer by 2012. As a result, automobile manufacturers have agreed to re-examine in 2003 the level of compliance towards the 2008 goal and whether further reductions are possible by 2012. The Japan Automobile Manufacturers Association and the Korean Automobile Manufacturers Association also entered into a similar voluntary engagement with the European Union with the year 2009 as a target year. Vehicle Safety Japanese Standards In March 2005, regulations of compressed hydrogen gas powered fuel cell vehicles were introduced. The regulations involve technology standards such as those relating to collision, prevention of hydrogen leaks and protection from high-voltage. 30 -------------------------------------------------------------------------------- Table of Contents Regulations relating to pedestrian safety are applicable to new models manufactured after September 2005 and vehicles manufactured after September 2010, except for certain types of vehicles, and the installation of seat belt reminders is required for driver's seats of new models manufactured after September 2005 and for all vehicles manufactured after September 2008. In addition, more stringent regulations on driving visibility standards, offset frontal protection and front underrun protection are also expected to be introduced. All Toyota motor vehicles currently sold in Japan meet or exceed applicable Japanese safety standards. U.S. Standards The U.S. National Traffic and Motor Vehicle Safety Act of 1966 requires vehicles and equipment sold in the United States to meet various safety standards issued by the National Highway Traffic Safety Administration. The Safety Act also authorizes the National Highway Traffic Safety Administration to investigate complaints relating to vehicle safety and to order manufacturers to recall and repair vehicles found to have safety-related defects. The cost of these recalls can be substantial depending on the nature of the repair and the number of vehicles affected. In 2000, the National Highway Traffic Safety Administration issued various motor vehicle safety standards, including an interim final rule specifying performance requirements for advanced airbag systems. The rule imposes a new regimen of tests with stringent new injury criteria, and sets forth a compliance phase in schedule mandating that 20% of all vehicles produced by a manufacturer from September 2003, 65% from September 2004, and 100% from September 2005, meet the new safety standard. These standards add to the cost and complexity of designing and producing new motor vehicles and original motor vehicle equipment. Toyota has complied with the first phase of requirements that took place in September 2003. The National Highway Traffic Safety Administration continues to make proposals on subjects such as fuel system crash integrity and universal child restraint anchorages. The Transportation Recall Enhancement, Accountability and Documentation Act was enacted in the United States on November 1, 2000. This Act requires the National Highway Traffic Safety Administration to upgrade federal motor vehicle safety standards relating to tires based on a dynamic vehicle test that takes into account the rollover propensity of vehicles. It also requires the National Highway Traffic Safety Administration to initiate new rules that enhance its authority to gather information potentially relating to motor vehicle defects. This Act substantially increases the National Highway Traffic Safety Administration's authority to impose civil penalties for noncompliance with regulatory requirements and specifies possible criminal penalties for violations of the federal Fraud and False Statements Act. Under this Act, the National Highway Traffic Safety Administration expanded its New Car Assessment Program to implement consumer information programs for vehicle rollover resistance and child restraints and adopted extensive early warning defect reporting requirement in 2002, and will strengthen regulations regarding tire-pressure monitoring systems in 2005. 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 supplemental restraint system (SRS) airbags, anti-lock braking systems, side airbags, curtain shield airbags, vehicle stability control and other safety features. European and Other Standards In Europe, following the White Paper 'European transport policy for 2010: time to decide' adopted in 2001, which declares targeting to halve the number of deaths caused by road accidents by 2010, various groups in different fields are currently conducting research and analyses. In addition, the 'Road Safety Action Programme' adopted by the European Commission in 2003 envisions the reduction in deaths from road accidents by utilizing technological advancement relating to the improvement in vehicle safety. The White Paper and the Action Programme promote the introduction of safety features such as automatic cruise control, speed alert system, intelligent speed limitation devices, alcohol lock, whiplash prevention, collision prevention, universal child 31 -------------------------------------------------------------------------------- Table of Contents restraints (CRS) and seat belt reminders. Depending on the discussions, it is possible that this will have an impact on legislation. Further, based on the White Paper and the Action Programme, regulations relating to indirect vision have been strengthened. The European Union has also passed legislation relating to the safety of not only vehicle passengers but also that of pedestrians. Vehicle safety regulations in Canada are similar to those in the United States. Countries in South America and Asia have also established vehicle safety regulations. Countries that are members of ASEAN are generally believed to follow regulations promulgated by the United Nations and countries in South America are generally believed to follow those of the United Nations or the United States. Environmental Matters Japanese Standards Toyota's automotive operations in Japan are subject to substantial environmental regulation under the Air Pollution Law, the Water Pollution Control Law, the Noise Regulation Law and the Vibration Control Law. Under these laws, if a business entity establishes or alters any facility that is regulated by these laws, the business entity is required to give prior notice to regulators, and if a business entity discharges or causes exhaust, wastewater, noise or vibration from such facility, the business entity is also required to comply with the applicable standards. Toyota is also subject to local regulations, which in some cases impose more stringent obligations than the Japanese central government requirements. Toyota has complied with these regulations in all material respects. Moreover, under the Waste Disposal and Public Cleaning Law, producers of industrial waste must dispose of industrial waste in the way prescribed in the Waste Disposal and Public Cleaning Law. Toyota has also complied with the Waste Disposal and Public Cleaning Law. In February 2003, the Soil Contamination Countermeasures Law became effective in Japan. The Soil Contamination Countermeasures Law stipulates the contamination testing and removal measures that are required when land and facilities used to process hazardous materials are converted to residential areas or other public use. In addition, the Law on Recycling of End-of-Life Vehicles was promulgated in July 2002. Under the Law on Recycling of End-of-Life Vehicles, vehicle manufacturers are required to take back and recycle certain materials of end-of-life vehicles and the provisions concerning such obligations of vehicle manufacturers became effective in January 2005. U.S. Standards Toyota's assembly, manufacturing and other operations in the United States are subject to a wide range of environmental regulation under the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Pollution Prevention Act of 1990 and the Toxic Substances Control Act. Toyota is also subject to a variety of state legislation that parallels, and in some cases imposes more stringent obligations than, federal requirements. These federal and state regulations impose severe restrictions on air- and water-borne discharges of pollution from Toyota facilities, the handling of hazardous materials at Toyota facilities and the disposal of wastes from Toyota operations. Toyota is subject to many similar requirements in its operations in Europe and Canada. Moreover, the Environmental Protection Agency has promulgated more stringent National Ambient Air Quality Standards for Ozone and Particulate Matter, which define strategies needed to attain the new standards. Toyota expects growing pressure in the next several years to further reduce emissions from motor vehicles and manufacturing facilities. European Standards In September 2000, the European Union approved a directive that requires member states to promulgate regulations implementing the following by April 21, 2002: â€¢ manufacturers shall bear all or a significant part of the costs 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, this requirement will also be applicable to vehicles put on the market before July 1, 2002; 32 -------------------------------------------------------------------------------- Table of Contents â€¢ manufacturers may not use certain hazardous materials in vehicles to be sold after July 2003; â€¢ vehicles type-approved and put on the market from three years after the amendment of the directive on type-approval shall be re-usable and/or recyclable to a minimum of 85% by weight per vehicle and shall be re-usable and/or recoverable to a minimum of 95% by weight per vehicle; and â€¢ end-of-life vehicles must meet actual re-use of 80% and re-use as material or energy of 85%, respectively, of vehicle weight by 2006, rising respectively to 85% and 95% by 2015. Currently, there are numerous uncertainties surrounding the form and implementation of the applicable regulations in different European Union member states, particularly regarding manufacturer responsibilities and resultant expenses that may be incurred. All of the member states, other than the ten new member states, have adopted legislation to implement the directive. In addition, Sweden, Denmark and Belgium have existing legislation that partially implements the directive. The ten new member states which joined the European Union in May 2004 are also in the process of adopting legislation to implement the directive. 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 and Toyota expects to introduce vehicles that are in compliance with such measures taken by the member states pursuant to the directive. Based on the legislation that has been enacted to date, Toyota has provided for its estimated liability related to covered vehicles in existence as of March 31, 2005. Depending on the legislation that is yet to be enacted by certain member states and subject to other circumstances, Toyota may be required to provide additional accruals for the expected costs to comply with these regulations. Although Toyota does not expect its compliance with the directive to result in significant cash expenditures, Toyota is continuing to assess the impact of this future legislation on its results of operations, cash flows and financial position. The European Union has also issued directives and made proposals relating to the following subjects on environmental matters: 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. The block exemption on distribution has been amended in that dealers may engage in active sales cross border within the European Union and open additional facilities for sales and services. Additionally, dealers could no longer be required by manufacturers to operate side by side both sales and service facilities. Toyota believes that its operations are materially in compliance with environmental regulatory requirements concerning its facilities and products in each of the markets in which it operates. Toyota continuously monitors these requirements and takes necessary operational measures to ensure that it remains in material compliance with all of these requirements. Toyota believes that environmental regulatory requirements have not had a material adverse effect on its operations. However, compliance with environmental regulations and standards has increased costs and is expected to lead to higher costs in the future. Therefore, Toyota recognizes that effective environmental cost management will become increasingly important. Moreover, innovation and leadership in the area of environmental protection are becoming increasingly important to remain competitive in the market. As a result, Toyota has proceeded with the development and production of environmentally friendly technologies, such as hybrid vehicles, fuel-cell vehicles and high fuel efficiency, low emission engines. 33 -------------------------------------------------------------------------------- Table of Contents In addressing environmental issues, based on an assessment of the environmental impact of its products through their life cycles, Toyota as a manufacturer strives to take 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, electronic parts and other matters Shibetsu Proving Ground Vehicle testing and evaluation United States Toyota Technical Center, U.S.A., Inc. Development of the upper body part for a portion of North American manufactured vehicles, adapting vehicles sold in North America to the market, advanced technology research, external affairs for legal and regulatory affairs, certification Calty Design Research, Inc. Design development, model production and design survey Europe TMEM R&D Group Development of the upper body part for a portion of European manufactured vehicles, market tuning for vehicles sold in Europe, advanced technology research, external affairs for legal and regulatory affairs, certification Toyota Europe Design Development S.A.R.L. Design development, model production and design survey Toyota Motorsport GmbH Development of Formula One race cars Asia Pacific Toyota Technical Center Asia Pacific Thailand Co., Ltd Design of portions of vehicles that are tailored for vehicles sold in Australia and Asia, evaluation Toyota Technical Center Asia Pacific Australia PTY, Ltd Design of portions of vehicles that are tailored for vehicles sold in Australia and Asia 34 -------------------------------------------------------------------------------- Table of Contents 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. No single supplier accounted for more than 5% of Toyota's consolidated purchases of raw materials, parts and equipment during fiscal 2005, except for Denso Corporation, an affiliate of Toyota, which supplied approximately 10% of Toyota's purchases during fiscal 2005. 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 currently located in the United States. In 2004, Toyota launched its IMV Project, a global network designed to supply pickup trucks, multipurpose vehicles and major vehicle components to Southeast Asia, Europe, Africa, Oceania, Central and South America and Middle East from production bases in Thailand, Indonesia, South Africa and Argentina. Toyota believes the network will enhance its overall competitiveness by coordinating Toyota's worldwide development, procurement and production activities. Moreover, Toyota has also been rolling out a new global logistical support system in conjunction with the launch of the IMV Project. This new support system will be used to determine the optimum means and routes of transportation, and to coordinate procurement activities in accordance with production status and the availability of delivery vehicles. This system is designed to further Toyota's globalization efforts by establishing an internal standard for worldwide procurement and distribution in order to reduce production lead times and production costs, thereby ensuring timely delivery to customers. Toyota introduced this new global logistical support system in tandem with the launch of the IMV Project in Thailand and Indonesia in August 2004 and plans to further expand this system on a global basis. The recent market condition and market price of some raw materials such as steel has shown an upward tendency. 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. 35 -------------------------------------------------------------------------------- Table of Contents Capital Expenditures and Divestitures Set forth below is a chart of Toyota's principal capital expenditures between April 1, 2002 and March 31, 2005, the approximate total costs of such activity, as well as the location and method of financing of such activity, presented on a 'by subsidiary' basis and as reported in Toyota's annual Japanese securities report filed with the director of the Kanto Local Finance Bureau. Description of Activity Total Cost Location Method of ---------------- (billions of yen) Financing Investment primarily in manufacturing facilities to undertake 914.3 Japan Internal funds model changes by Toyota Motor Corporation Investment primarily in new technology and products by Daihatsu 90.1 Japan Internal funds Motor Co., Ltd. Investment primarily in new technology and products by Hino 81.3 Japan Internal funds Motors, Ltd. Investment primarily in new technology and products by Toyota Auto 44.9 Japan Internal funds Body Co., Ltd. Investment primarily in new technology and products by Toyota 43.6 Japan Internal funds Motor Kyushu, Inc. Investment primarily in new technology and products by Kanto Auto 36.3 Japan Internal funds Works, Ltd. Investment to promote localization by Toyota Motor Manufacturing, 97.5 United Internal funds Indiana, Inc. States Investment to promote localization by Toyota Motor Manufacturing, 79.5 United Internal funds Kentucky, Inc. States Investment to promote localization by Toyota Motor Manufacturing 70.2 Canada Internal funds Canada, Inc. Investment to promote localization by Toyota Motor Thailand Co., 67.7 Thailand Internal funds Ltd. Investment to promote localization by Toyota Motor Manufacturing 55.5 United Internal funds (UK) Limited Kingdom Investment to promote localization by Toyota Motor Manufacturing, 51.0 United Internal funds California Inc. States Investment to promote localization by Toyota Motor Manufacturing 33.4 Poland Internal funds Poland SP.zo.o. Investment to promote localization by Toyota Motor Manufacturing, 30.0 United Internal funds Alabama, Inc. States Investment primarily in leased automobiles by Toyota Motor Credit 1,325.7 United Internal funds Corporation States and borrowings 36 -------------------------------------------------------------------------------- Table of Contents Set forth below is information with respect to Toyota's material plans to construct, expand or improve its facilities between April 2005 and March 2006, presented on a 'by subsidiary' basis and as reported in Toyota's annual Japanese securities report filed with the director of the Kanto Local Finance Bureau. Description of Activity Total Cost Location Method of ---------- (billions of Financing yen) Investment primarily in manufacturing facilities by Toyota Motor 368.5 Japan Internal Corporation funds Investment primarily in manufacturing facilities by Toyota Motor 83.1 Japan Internal Kyushu, Inc. funds Investment primarily in manufacturing facilities by Daihatsu Motor 60.0 Japan Internal Co., Ltd. funds Investment primarily in manufacturing facilities by Toyota Motor 54.7 United Internal Manufacturing, Kentucky, Inc. States funds Investment primarily in manufacturing facilities by Toyota Motor 48.5 Thailand Internal Thailand Co., Ltd. funds Investment primarily in manufacturing facilities by Kanto Auto Works, Ltd. 47.0 Japan Borrowings and Internal funds Set forth below is additional information with respect to Toyota's material plans to construct, expand or improve its facilities, presented on a 'by facility' basis. Texas Plant. Toyota commenced construction of a plant in Texas in October 2003. The plant will be used to produce full-size Tundra pickup trucks, and will have an initial annual production capacity of approximately 150,000 units. The plant is expected to commence operations in 2006. The total cost of this plant is expected to be approximately $800 million. The construction costs are expected to be financial through internal funds. Guangqi Engine Plant. In February 2004, Toyota established Guangqi Toyota Engine Co., Ltd. as a joint venture with Guangzhou Automobile Group Co., Ltd. The joint venture will operate a plant that is expected to commence production of engine parts in early 2005 and gasoline engines in fall 2005. The plant is expected to have an initial annual production capacity of 300,000 engines and is expected to produce 25,000 engines during its first year in 2005, all of which will be exported to Japan. The total cost of this plant is expected to be approximately 2.2 billion yuan. Toyota's share of the construction costs has been to date, and are expected to be in the future for the remaining costs, financed through internal funds and loans. Guangzhou Plant. In September 2004, Toyota established Guangzhou Toyota Motor Co., Ltd., a joint venture with Guangzhou Automobile Group Co., Ltd. The plant operated by the joint venture is expected to commence the production of the Camry in mid-2006 with an initial annual production capacity of 100,000 units. The total cost of this plant is expected to be approximately 3.8 billion yuan. Toyota's share of the construction costs has been to date, and are expected to be in the future for the remaining costs, financed through internal funds and loans. Alabama Plant. Toyota plans to increase production capacity of engines at its Alabama plant. The plant is expected to commence the production of V6 engines for the Tundra and Tacoma pickup trucks by mid-2005 and increase the production capacity of V8 engines from an annual production capacity of 120,000 units to 270,000 units for the Tundra pickup trucks and the Sequoia sports-utility vehicles by the end of 2006. The total cost of this expansion is expected to be approximately $270 million. The construction costs have been to date, and are expected to be in the future for the remaining costs, financed through internal funds. Thailand Plant. In April 2005, Toyota announced the construction of a new automobile manufacturing plant, which will be the third plant in Thailand. The plant is expected to commence the production of the Hilux 37 -------------------------------------------------------------------------------- Table of Contents pickup trucks in the beginning of 2007 with an annual production capacity of 100,000 units. The total cost of this plant is expected to be approximately 15.2 billion bahts. The construction costs are expected to be financed through internal funds. Russia Plant. In April 2005, Toyota announced the construction of the first automobile manufacturing plant in Russia, following a basic agreement reached with the Russian government and the city of St. Petersburg. The construction of the plant commenced in June 2005. The plant is expected to produce the Camry, the core model sold by Toyota in Russia, with an initial annual production capacity of 20,000 units. The total cost of this plant is expected to be approximately 4 billion rubles. Toyota has not decided how it will finance these construction costs. Toyota Motor Kyushu Plant. Toyota plans to construct a second production line at Toyota Kyushu plant to increase its domestic production capacity. The line is expected to commence production in September 2005 with an annual production capacity of 200,000 units. The total cost of this expansion is expected to be approximately Y45 billion. The construction costs are expected to be financed through internal funds. Toyota Motor Kyushu Engine Plant. Toyota plans to construct a new engine plant at Toyota Kyushu for the production of new engines. The plant is expected to commence production in January 2006 with an annual production capacity of 220,000 engines. The total cost of this expansion is expected to be approximately Y28 billion. The construction costs are expected to be financed through internal funds. Toyota Motor Hokkaido Plant. Toyota plans to construct a new plant at Toyota Motor Hokkaido for the production of new transmissions. The plant is expected to commence production at the end of 2005 with an annual production capacity of 480,000 units. The total cost of this expansion is expected to be approximately Y30 billion. The construction costs are expected to be financed through internal funds. Kanto Auto Iwate Plant. Toyota plans to construct a second production line at the Kanto Auto Iwate plant to increase its domestic production capacity. The line is expected to commence production in October 2005 with an annual production capacity of 100,000 units. The total cost of this expansion is expected to be approximately Y18 billion. The construction costs are expected to be financed through internal funds and loans. Toyota does not collect information on the amount of expenditures already paid for each plant under construction because Toyota believes that it is difficult and it would require unreasonable effort to identify and categorize each expenditure item with reasonable accuracy as past and future expenditures. Toyota's construction projects consist of numerous expenditures, each of which is continuously being adjusted and incurred in variable and constantly changing amounts as part of the overall work-in-progress. Seasonality Toyota has historically experienced slight seasonal fluctuations in unit sales. For each of the past three years, Toyota's unit sales levels have been highest in March of each year, with approximately 11% of annual unit sales generated during that month, and for each of the remaining months, its unit sales have generated approximately 7 to 9% of its annual unit sales. Legal Proceedings United States Antitrust Proceedings In February 2003, Toyota, General Motors Corporation, Ford, DaimlerChrysler, Honda, Nissan and BMW and their U.S. and Canadian sales and marketing subsidiaries, the National Automobile Dealers Association and the Canadian Automobile Dealers Association were named as defendants in purported nationwide class actions on behalf of all purchasers of new motor vehicles in the United States since January 1, 2001. Twenty-six similar 38 -------------------------------------------------------------------------------- Table of Contents actions were filed in federal district courts in California, Illinois, New York, Massachusetts, Florida, New Jersey and Pennsylvania. Additionally, 56 parallel class actions were filed in state courts in California, Minnesota, New Mexico, New York, Tennessee, Wisconsin, Arizona, Florida, Iowa, New Jersey and Nebraska on behalf of the same purchasers in these states. As of April 1, 2005, actions filed in federal district courts were consolidated in Maine and actions filed in the state courts of California and New Jersey were also consolidated, respectively. The nearly identical complaints allege that the defendants violated the Sherman Antitrust Act by conspiring among themselves and with their dealers to prevent the sale to United States citizens of vehicles produced for the Canadian market. The complaints allege that new vehicle prices in Canada are 10% to 30% lower than those in the United States and that preventing the sale of these vehicles to United States citizens resulted in United States consumers paying excessive prices for the same type of vehicles. The complaints seek permanent injunctions against the alleged antitrust violations and treble damages in an unspecified amount. In March 2004, the federal district court of Maine (i) dismissed claims against certain Canadian sales and marketing subsidiaries, including Toyota Canada, Inc., for lack of personal jurisdiction but denied or deferred to dismiss claims against certain other Canadian companies, and (ii) dismissed the claim for damages based on the Sherman Antitrust Act but did not bar the plaintiffs from seeking injunctive relief against the alleged antitrust violations. The plaintiffs have submitted an amended compliant adding a claim for damages based on state antitrust laws and Toyota is now responding to the plaintiff's discovery requests. Toyota believes that its actions have been lawful and intends to vigorously defend these cases. 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. 39 -------------------------------------------------------------------------------- Table of Contents 4.C ORGANIZATIONAL STRUCTURE As of March 31, 2005, Toyota Motor Corporation had 297 Japanese subsidiaries and 227 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. Name of Subsidiary Country of Percentage Percentage --------- Incorporation Ownership Voting Interest Interest Tokyo Financial Services Corporation Japan 100.00 100.00 Hino Motors, Ltd. Japan 50.21 50.45 Toyota Motor Kyushu, Inc. Japan 100.00 100.00 Daihatsu Motor Co., Ltd. Japan 51.32 51.56 Toyota Finance Corporation Japan 100.00 100.00 Toyota Auto Body Co., Ltd. Japan 56.08 57.02 Toyota Administa Corporation Japan 100.00 100.00 Tokyo Toyo-Pet Motor Sales Co., Ltd. Japan 100.00 100.00 Kanto Auto Works, Ltd. Japan 50.46 50.64 Toyota Motor Manufacturing North America, Inc. United States 100.00 100.00 Toyota Motor Manufacturing, Kentucky, Inc. United States 100.00 100.00 Toyota Motor North America, Inc. United States 100.00 100.00 Toyota Motor Credit Corporation United States 100.00 100.00 Toyota Motor Manufacturing, Indiana, Inc. United States 100.00 100.00 Toyota Motor Sales, U.S.A., Inc. United States 100.00 100.00 Toyota Motor Manufacturing Canada, Inc. Canada 100.00 100.00 Toyota Credit Canada Inc. Canada 100.00 100.00 Toyota Motor Europe S.A./N.V. Belgium 100.00 100.00 Toyota Motor Engineering & Manufacturing Europe S.A./N.V. Belgium 100.00 100.00 Toyota Motor Marketing Europe S.A./N.V. Belgium 100.00 100.00 Toyota Motor Italia S.p.A. Italy 100.00 100.00 Toyota Kreditbank G.m.b.H. Germany 100.00 100.00 Toyota Deutschland G.m.b.H. Germany 100.00 100.00 Toyota France S.A. France 100.00 100.00 Toyota Motor Finance (Netherlands) B.V. Netherlands 100.00 100.00 Toyota Financial Services (UK) PLC United 100.00 100.00 Kingdom Toyota (GB) PLC United 100.00 100.00 Kingdom Toyota Motor Corporation Australia Ltd. Australia 100.00 100.00 Toyota Finance Australia Ltd. Australia 100.00 100.00 Toyota Motor Asia Pacific Pte Ltd. Singapore 100.00 100.00 Toyota Motor Thailand Co., Ltd. Thailand 86.43 86.43 Toyota South Africa Motors (Pty) Ltd. South Africa 100.00 100.00 4.D PROPERTY, PLANTS AND EQUIPMENT As of March 31, 2005, Toyota and its affiliates produce automobiles and related components through more than 50 manufacturing organizations in 27 countries and regions around the world. The facilities are located principally in Japan, Argentina, Australia, Brazil, Canada, China, India, Malaysia, the Philippines, Thailand, the United States and the United Kingdom. In addition to its manufacturing facilities, Toyota's properties include sales offices and other sales facilities in major cities, repair service facilities, and research and development facilities. 40 -------------------------------------------------------------------------------- This information is provided by RNS The company news service from the London Stock Exchange MORE TO FOLLOW LFFSRVISFIE

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