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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1999 Commission file number 1-6798
TRANSAMERICA FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-1077235
- -------------------- -----------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
600 Montgomery Street, San Francisco, California 94111
- ------------------------------------------------ ---------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 983-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------------- -----------------------------------------
8 1/2% Notes Maturing at New York Stock Exchange
Holder's Option Annually
on July 1 and due July 1, 2001
7.10% Senior Quarterly
Interest Bonds due 2028 New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None
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.
[X] Yes. [ ] No.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
All of the outstanding shares of the registrant's capital stock are owned by
Transamerica Corporation.
Number of shares of common stock, $10 par value, outstanding as of the close of
business on March 1, 2000: 1,464,285.
The registrant meets the conditions set forth in General Instruction I (1)(a)
and (b) of Form 10-K and is therefore filing this Form with the reduced
disclosure format.
TABLE OF CONTENTS
Page
Part I:
Item 1 Business ..................................................... 3
Item 2 Properties ................................................... 13
Item 3 Legal Proceedings ............................................ 13
Item 4 Submission of Matters to a Vote of Security Holder............ 13
Part II:
Item 5 Market for Registrant's Common Equity
and Related Stockholder Matters .......................... 13
Item 6 Selected Financial Data ...................................... 14
Item 7 Management's Narrative Analysis of Results of Operations ..... 14
Item 7A Quantitative and Qualitative Disclosures About Market Risk ... 14
Item 8 Financial Statements and Supplementary Data .................. 14
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 14
Part III:
Item 10 Directors and Executive Officers of the Registrant ......... 14
Item 11 Executive Compensation ..................................... 14
Item 12 Security Ownership of Certain Beneficial Owners and
Management ............................................. 14
Item 13 Certain Relationships and Related Transactions ............. 14
Part IV:
Item 14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K .................................... 15
Page 3
PART I
ITEM 1. BUSINESS
The Company
Transamerica Finance Corporation is a wholly owned subsidiary of
Transamerica Corporation. Transamerica Corporation ("Transamerica") is a
financial services organization which engages primarily through its subsidiaries
in life insurance, commercial lending, leasing and real estate services.
Transamerica Finance Corporation includes Transamerica's commercial lending and
leasing operations. Unless the context indicates otherwise, the terms "Company"
and "Registrant" as used herein refer to Transamerica Finance Corporation and
its subsidiaries.
On July 21, 1999, Transamerica Corporation which owns all of the
Company's outstanding stock, completed its merger with a subsidiary of AEGON N.
V. (AEGON), a Netherlands based corporation. As a result, Transamerica
Corporation is now a direct subsidiary of AEGON.
On March 1, 2000 AEGON announced that it had completed its strategic
review of the businesses comprising Transamerica Finance Corporation (TFC)
acquired in connection with the purchase of Transamerica Corporation in July
1999 and it has decided to make strategic dispositions of these businesses. The
strategic dispositions under consideration include possible asset or business
unit sales, in whole or in part, as well as joint ventures. AEGON had previously
classified the TFC businesses as non-core. Investment bankers have been retained
to assist AEGON in the process.
Effective January 1, 1998, principally through its indirect subsidiary
Transamerica Distribution Finance Corporation, Transamerica Finance Corporation
completed the acquisition of substantially all of the inventory and retail
finance businesses of Whirlpool Financial Corporation for a total purchase price
of $1.3 billion in cash. A definitive agreement for the acquisition was
originally announced on September 18, 1997. The assets acquired consisted of
approximately $1.1 billion of net receivables and other assets of Whirlpool's
inventory financing, retail financing and international factoring businesses, as
well as Whirlpool Financial National Bank, a credit card bank. Funds for the
purchase of the assets were provided by short term borrowings, cash from
operations and capital contributions from Transamerica.
Effective June 30, 1997, a merger was effected between Transamerica
Finance Corporation and its immediate parent, Transamerica Finance Group, Inc.,
in which Transamerica Finance Corporation was the surviving corporation. Among
other things, the merger resulted in the contribution by Transamerica Finance
Group, Inc. of its investment in the insurance premium finance business along
with several other small subsidiaries to the Company. The transfer was accounted
for as a pooling of interests.
On June 23, 1997, the Company sold its branch-based consumer lending
operation. Gross proceeds from the sale were $3.9 billion, or $1.1 billion after
repayment of associated debt. Net proceeds were used to return capital to
Transamerica. In the fourth quarter of 1997, the consumer lending business was
reclassified as discontinued operations following management's assessment that
the results of the new approach to consumer lending did not meet Transamerica's
criteria for further investment.
Page 4
On October 14, 1996, the Company acquired all of the outstanding shares
of Trans Ocean Ltd., a closely held container leasing company, in exchange for
3.2 million shares ($112.7 million) of Transamerica common stock.
The Company provides funding for its subsidiaries' commercial lending and
leasing operations. Capital is allocated among the operations on the basis of
expected returns, the potential for creating shareholder value and the capital
needs of the operations. The Company's principal assets are finance receivables
and equipment held for lease, which totaled a combined $11.6 billion at December
31, 1999 and $9.3 billion at December 31, 1998. The Company's total notes and
loans payable were $9.5 billion at December 31, 1999 and $7.8 billion at
December 31, 1998. Variable rate debt was $3.9 billion at December 31, 1999
compared to $2.2 billion at December 31, 1998. The ratio of debt to tangible
equity was 6.4:1 at December 31, 1999 and 6.3:1 at December 31, 1998. Tangible
equity is defined as total equity less goodwill plus minority interest.
The Company offers publicly, from time to time, senior or subordinated
debt securities. Public debt issued totaled $3.1 billion in 1999, $1.9 billion
in 1998 and $120 million in 1997. Under a shelf registration statement filed in
December 1998 with the Securities and Exchange Commission the Company may offer
up to $4 billion of senior or subordinated debt securities (which may include
medium term notes) with varying terms, of which $3.1 billion had been issued at
December 31, 1999. For a further discussion regarding borrowing operations and
related use of derivatives, see Note C of Notes To Financial Statements included
in Item 8.
Liquidity is a characteristic of the Company's operations since a
significant portion of the assets consists of short term finance receivables.
Principal cash collections of finance receivables totaled $25.5 billion in 1999,
$21.2 billion in 1998 and $16.9 billion in 1997.
Business Segment Information
See "Note K - Business Segment Information" in the financial statements
included in Item 8 for business segment information.
The Company's business activities are more fully described below.
Commercial Lending
The commercial lending business makes commercial loans through three
operations: distribution finance, business credit and equipment financial
services; the Company also makes consumer loans to facilitate sales by
manufacturers and dealers of consumer durable goods. It has branch lending
offices in the United States, Mexico, Canada, Europe, and Asia. The activities
of the commercial lending business are discussed below.
The product offerings of the distribution finance operation of commercial
lending include inventory financing, trade receivable servicing and funding,
accounts receivable financing, vendor leasing, commercial collection services,
credit insurance brokerage, international financing and border to border
financing. After initial review of the borrower's credit worthiness, the ongoing
management of credit risk includes various monitoring techniques, such as
periodic physical inventory checks, monitoring of the borrower's sales and
quality of collateral and reviewing customer compliance with financial
covenants. In inventory financing, repurchase agreements are generally
maintained with manufacturers which provide a degree of security in the event of
a repossession.
Page 5
The business credit operation of commercial lending provides
asset-based loans to middle-market customers, as well as revolving and term
loans to development stage technology companies. The asset-based lending
activities consist of secured, primarily revolving, loans to manufacturers,
retailers, and selected service businesses, as well as other financial services
companies. These loans are collateralized and consist of retained credit lines
typically from $5 million to $40 million with terms ranging from three to five
years and in some cases also involves the receipt of stock warrants. As of
December 31, 1999 the average loan size was $2.2 million. Advances under
asset-based loans are limited to specific percentages of the borrowers' eligible
collateral. Credit risk is managed by monitoring the quality of the collateral,
the borrowers' financial performance, and compliance with financial covenants.
Technology financing consists of term, revolving, and bridge loans and equipment
leases to growing companies in the life sciences and specialized electronics
industries to finance research and development, manufacturing and other business
activities. All loans are secured and are underwritten based on the strength and
viability of the customers' technology, which is evaluated with the help of
industry experts and other advisors retained by the business credit unit. Other
products provided by business credit are Small Business Administration loans,
repayment of which is partially guaranteed by the federal government, short term
commercial real estate loans, and insurance premium financing.
The equipment financial services operation provides secured debt and
lease financing to middle-market customers primarily in manufacturing,
transportation, construction, and the public sector for the purchase of capital
equipment or refinance of their current equipment debt obligations, with an
emphasis on essential use or revenue producing equipment. Transactions are
structured with average customer outstandings typically ranging from $1 million
to $7 million and with terms ranging from three years to fifteen years. As of
December 31, 1999 the average loan size was $3.4 million. The underwriting
philosophy is based on evaluating the borrower's cash flow and liquidity along
with the value of the underlying collateral. Credit risk is managed by
monitoring the borrower's payment and financial performance.
The retail operation provides consumer private label credit card
financing for manufacturers and dealers of consumer durable goods and instalment
loans to finance the purchase of consumer goods through a network of independent
dealers. The retail business also provides first and second mortgages secured by
residential properties.
The Commercial lending business is exposed to interest rate risk to the
extent that its interest-earning loans do not re-price as frequently or on the
same basis or to the same extent as its interest-bearing liabilities. At
December 31, 1999, $5.5 billion and $2.2 billion of its loans were variable rate
and fixed rate, compared with $4.1 billion and $1.5 billion at December 31,
1998. Variable rate loans are tied to variable rate indexes such as the prime
rate, LIBOR and commercial paper with the primary interest rate index being the
prime rate. Commercial lending pursues funding strategies that attempt to reduce
the sensitivity of its gross interest margin to interest rate fluctuations.
These strategies take into consideration both the variability of interest rates
and the maturity and re-pricing profile of its interest-earning loans and
interest-bearing liabilities. Commercial lending seeks funding sources from the
Company that match the maturity and interest rate characteristics of its loans.
Short-term variable rate borrowings, principally commercial paper, are used to
fund variable rate loans, and long-term fixed rate borrowings with maturities of
approximately two to seven years are used to fund fixed rate loans.
Page 6
In 1997, the commercial lending operation announced that it intended to
sell its insurance premium finance operation and reclassified the insurance
premium finance receivables to assets held for sale. In early 1998 management
decided not to proceed with such sale. Accordingly, the insurance premium
finance receivables were transferred back to finance receivables on the balance
sheet in 1998.
During 1999, the commercial lending operation securitized $300 million
of distribution finance receivables, $150 million of equipment finance
receivables and $150 million of retail revolving credit card receivables. In
1998, the commercial lending operation securitized $600 million of distribution
finance floorplan finance receivables, $200 million of equipment finance loans
and leases and $93.9 million of retail operation mortgage loans. In 1997, the
distribution finance operation securitized $1.5 billion of floorplan finance
receivables. At December 31, 1999 and 1998, $360 million of securitized
insurance premium finance receivables were outstanding. At December 31, 1997,
$375 million of securitized insurance premium finance receivables were
outstanding.
The commercial lending industry is highly competitive and has seen
increasing numbers of new market entrants. In addition to competition from other
finance companies, there is competition from captive finance subsidiaries of
manufacturing companies and commercial banks. The commercial lending business
competes by offering a variety of financing products, superior customer service
including prompt credit review, and competitive pricing.
Page 7
The following table sets forth certain statistical information relating
to the commercial lending operation's finance receivables for the years
indicated. The table does not include the receivables of the insurance premium
finance operation as of December 31, 1997. At that date those receivables were
classified as assets held for sale.
Years Ended December 31,
1999 1998 1997
---- ---- ----
(Dollar amounts in millions)
Volume of finance receivables acquired:
Distribution finance . . . . . . . . . . $ 19,668.6 $ 15,720.4 $ 12,415.8
Business credit . . . . . . . . . . . . 5,908.0 5,830.9 4,522.1
Equipment finance. . . . . . . . . . . . 1,429.6 681.2 333.5
Retail (1) . . . . . . . . . . . . . . . 1,117.5 1,130.8
------------ ------------ ------------
Total. . . . . . . . . . . . . . . . $ 28,123.7 $ 23,363.3 $ 17,271.4
============ ============ ============
Finance receivables outstanding at end of year:
Distribution finance (2) . . . . . . . . $ 2,768.9 $ 2,220.5 $ 2,081.1
Business credit (3) . . . . . . . . . . 2,759.5 2,121.4 892.9
Equipment finance (4). . . . . . . . . . 1,576.4 974.7 648.5
Retail (1) . . . . . . . . . . . . . . . 1,168.3 717.0 109.2
------------ ------------ ------------
8,273.1 6,033.6 3,731.7
Less unearned finance charges . . . . . 443.2 330.3 199.3
------------ ------------ ------------
Net finance receivables - owned . . . . . . 7,829.9 5,703.3 3,532.4
Net finance receivables securitized and serviced:
Distribution finance 2,443.4 2,113.2 1,539.6
Business credit (5) 388.3 396.1
Equipment finance 350.0 200.0
Retail 272.5 184.2 158.0
------------ ------------ ------------
3,454.2 2,893.5 1,697.6
Net finance receivables owned ------------ ------------ ------------
and securitized . . . . . . . . . . $ 11,284.1 $ 8,596.8 $ 5,230.0
============ ============ ============
Allowance for losses at end of
year (6) (7) . . . . . . . . . . . . . . $ 160.4 $ 141.7 $ 98.6
Ratio to outstandings less
unearned finance charges (8):
Owned . . . . . . . . . . . . . . . . . 1.61% 1.99% 2.35%
Owned and serviced . . . . . . . . . . . 1.42% 1.65% 1.89%
Provision for credit losses
charged to income (9). . . . . . . . . . $ 79.2 $ 49.8 $ 16.2
Credit losses (net of
recoveries) (9). . . . . . . . . . . . . $ 55.5 $ 34.2 $ 10.1
Ratio to average net finance
receivables outstanding:
Owned. . . . . . . . . . . . . . . . 0.87% 0.77% 0.25%
Owned and serviced . . . . . . . . . 0.58% 0.49% 0.22%
- ----------
Page 8
(1) The 1998 volume amount includes $334.1 million of gross receivables
acquired from Whirlpool Finance Corporation in January 1998. The December
31, 1997 receivables amount represents the residual ongoing assets from the
discontinued consumer lending segment.
(2) The increases were due to increased originations offset in part by the
securitization of $300 million in 1999 and $600 million in 1998 of
inventory floor plan finance receivables.
(3) The increases were primarily due to growth of net receivables in the asset
based lending and technology finance divisions. In 1997, $281 million of
insurance premium finance receivables were transferred to assets held for
sale in line with a plan to sell the operation in 1998. In early 1998
management decided not to proceed with such sale. Accordingly, the
insurance premium finance receivables were transferred back to finance
receivables.
(4) The increases were due to increased originations in equipment finance and
lease and structured equipment finance divisions. The 1999 increase also
included originations generated by the new public finance division.
(5) Amounts serviced by the insurance premium finance business of $375 million
were excluded for 1997 following the decision to reclassify the insurance
premium finance receivables to assets held for sale. In 1999 and 1998,
securitized insurance premium finance receivables of $360 million were
included in the balance.
(6) Includes allowance for losses on the securitized and serviced portfolio
of $34.5 million in 1999, $28 million in 1998 and $15.5 million in 1997
which is reported in other liabilities in the consolidated balance sheet.
(7) The increases were primarily attributable to receivables growth.
(8) The increase in allowance was attributable to significant receivables
growth in various product lines which resulted in a better credit risk
profile of the portfolio requiring a lower level of reserves as a
percentage of net receivables.
(9) The 1998 increase was primarily due to the addition of the new retail
lending operation acquired from Whirlpool Finance Corporation.
--------------------
Leasing
Transamerica Leasing leases, services and manages containers, chassis
and trailers throughout the world. The leasing operation is based in Purchase,
New York and operates through approximately 400 offices, depots and other
facilities in 49 countries. The company specializes in intermodal transportation
equipment, which allows goods to travel by road, rail or ship. The company's
customers include railroads, steamship lines, distribution companies and motor
carriers.
Page 9
The leasing operation's fleet of intermodal transportation equipment is
one of the largest in the world based on units of equipment available for hire.
It provides service, rental and term operating leases through an extensive
worldwide network of offices and third party depots and offers a wide variety of
equipment used in international and domestic commerce around the world, in the
United States and in Europe. The leasing operation also utilizes technology,
including its TradexTM On-line Internet capability, to enable customers around
the world to book their own on-hire and off-hire transactions. In addition, the
leasing operation provides structured financing that enables customers to
purchase equipment over time, and an equipment matching service, GreyboxTM
Logistic Services, in which it manages containers for customers and brokers
equipment interchanges among them. The leasing operation's main competitors are
other transportation equipment leasing companies and financial institutions. Due
to a worldwide oversupply of containers and lower new equipment prices, the
demand for leased container equipment declined in 1999, 1998 and 1997. As a
result, a program of accelerated equipment disposal, initiated at the end of
1997, was implemented in 1998 and a loss was recognized in 1997 related to the
disposal program. Accordingly, at December 31, 1997, the leasing operation
reclassified $96.1 million of revenue earning equipment to assets held for sale,
of which $2.3 million remained at December 31, 1998 and was sold during 1999.
The oversupply of containers and lower new equipment prices also resulted in
decreased per diem rates in 1999, 1998 and 1997.
At December 31, 1999, the leasing operation consisted of a marine
container fleet of standard twenty and forty foot dry containers and specialized
containers such as refrigerated containers, high cube, open top and flatrack
equipment types totaling 732,300 units, a tank container fleet totaling 19,600
units, a domestic products fleet of rail trailers, chassis and domestic
containers totaling 108,000 units which are leased to all major United States
railroads and to roll on/roll off steamship operators, shippers, shipper's
agents and regional truckers and a fleet of 21,500 over-the-road trailers in
Europe. The leasing operation's equipment is leased to customers from
approximately 400 offices, depots and other facilities worldwide.
Page 10
The following table sets forth the leasing operation's fleet size, in
units, including owned, managed, leased from others and units held for sale:
As of December 31,
1999 1998 1997
---- ---- ----
Marine containers (1) 732,300 734,900 796,600
Tank containers 19,600 16,700 15,000
Domestic products 108,000 101,100 100,400
European trailers (2) 21,500 19,400 15,100
- ----------
(1) The 1998 decrease was primarily due to the program of accelerated equipment
disposition from less desirable logistical locations in response to the
worldwide oversupply of units in 1998.
(2) The increases reflects expansion in the European trailer operating and lease rental market.
The percent of the leasing operation's fleet on term lease with
commitment periods from one to fifteen years or service contract minimum lease
was 50% in 1999, 46% in 1998 and 40% in 1997.
The following table sets forth the leasing operation's fleet
utilization for the years indicated:
Years Ended December 31,
1999 1998 1997
---- ---- ----
Marine containers (1) 75% 77% 78%
Tank containers (2) 77% 81% 80%
Domestic products 93% 92% 90%
European trailers (3) 81% 88% 92%
- ----------
(1) Utilization rates have continued to be negatively impacted by the worldwide
oversupply of container equipment and the trade imbalance between Asia and
the United States.
(2) Decrease in 1999 was primarily due to an expanded fleet size.
(3) 1999 utilization declined as rental on-hires were negatively affected by
the weak economic growth in European countries during 1999, and as a result
of a larger fleet.
--------------------
Page 11
The following tables set forth the volume of lease finance receivables
originated during the years indicated and the amount of lease finance
receivables outstanding at the end of each such year:
Years Ended December 31,
1999 1998 1997
------- ------- -------
(Amounts in millions)
Volume of lease finance receivables originated:
Domestic ............................................ $ 144.1 $ 173.7 $ 24.5
Foreign ............................................. 296.0 279.0 110.9
------- ------- -------
Total ................................................... $ 440.1 $ 452.7 $ 135.4
======= ======= =======
As of December 31,
1999 1998 1997
-------- ------- -------
(Amounts in millions)
Lease finance receivables
Outstanding :
Domestic ........................................... $ 320.9 $ 192.1 $ 48.3
Foreign ............................................ 841.4 718.0 553.4
-------- ------- -------
1,162.3 910.1 601.7
Less unearned finance charges ...................... 282.9 190.9 141.5
-------- ------- -------
Net finance receivables ................................ $ 879.4 $ 719.2 $ 460.2
======== ======= =======
Delinquent receivables are defined as receivables contractually past
due 60 days or more. The ratio of delinquent lease finance receivables to total
lease finance receivables outstanding as of December 31, 1999, 1998 and 1997 was
0.85%, 0.50% and 0.03%. Because future changes may be impacted by factors such
as economic conditions, the extent and timing of any change in the trend of
delinquent receivables remains uncertain. Nonearning receivables at December 31,
1999, 1998 and 1997 were $17.3 million, $15.7 million and $7.9 million.
Certain information regarding credit losses on lease finance
receivables for the leasing operation during the years indicated is set forth in
the following table:
Years Ended December 31,
1999 1998 1997
------- -------- --------
(Dollar amounts in millions)
Allowance for losses at end of year................. $ 18.7 $ 10.4 $ 6.1
Provision for credit losses charged to
income (1) ..................................... 8.2 3.2 1.9
Credit losses (net of recoveries) .................. 0.0 0.0 (0.3)
Ratio to average net finance receivables
Outstanding at end of year .................... 0.00% 0.00% 0.00%
- --------
(1) The 1999 increase is primarily attributable to a larger lease portfolio and increased delinquencies.
Page 12
Regulation
Transamerica's commercial lending operation is subject to various state,
federal and foreign laws. Depending upon the type of lending, these laws may
require licensing and certain disclosures and may limit the amounts, terms and
interest rates that may be offered.
Employees
The Company and its subsidiaries employed approximately 3,600 persons at
December 31, 1999.
Return on Assets and Equity
Certain information regarding the Company's consolidated return on assets
and equity, and certain other ratios, are set forth below:
Years Ended December 31,
----------------------------------------
1999 1998 1997
---- ---- ----
Return on assets (1)....................................... 1.2% 1.4% 3.5%
Return on equity (2)....................................... 8.5% 9.7% 24.9%
Return on tangible equity (3) ............................. 12.7% 15.4% 15.6%
Dividend payout ratio (4).................................. 104.7% 65.9% 131.0%
Equity to assets ratio (5)................................. 14.3% 14.8% 14.3%
- ------------
(1) Net income divided by total average assets (2 point method).
(2) Net income divided by total average equity (2 point method)
(tangible equity is defined as total equity less goodwill).
(3) Income from continuing operations before amortization of goodwill
divided by tangible average equity (2 point method) (tangible
equity is defined as total equity less goodwill).
(4) Cash dividends paid divided by net income.
(5) Total average equity divided by total average assets (2 point
method).
Consolidated Ratios of Earnings to Fixed Charges
The following sets forth the consolidated ratios of earnings from
continuing operations to fixed charges for each of the five years ended December
31, 1999.
Years Ended December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
1.49 1.52 1.51 1.68 1.70
The ratios were computed by dividing income from continuing operations
before fixed charges and income taxes by the fixed charges. Fixed charges
consist of interest and debt expense, and one-third of rent expense, which
approximates the interest factor.
Page 13
ITEM 2. PROPERTIES
The Company owns no significant property other than equipment held for
lease.
ITEM 3. LEGAL PROCEEDINGS
Various pending or threatened legal proceedings by or against the Company
or one or more of its subsidiaries involve tax matters, alleged breaches of
contract, torts, employment discrimination, violations of antitrust and other
laws and miscellaneous other causes of action arising in the course of their
businesses.
Based upon information presently available, and in light of legal and
other defenses and insurance coverage available to the Company and its
subsidiaries, contingent liabilities arising from threatened and pending
litigation, income taxes and other matters are not expected to have a material
effect on the consolidated financial position or results of operations of the
Company and its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted in accordance with General Instruction I.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Not applicable. All of the outstanding shares of the Registrant's capital
stock are owned by Transamerica Corporation which is a direct subsidiary of
AEGON N. V.
Page 14
ITEM 6. SELECTED FINANCIAL DATA
Omitted in accordance with General Instruction I.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Omitted in accordance with General Instruction I. See "Management's
Narrative Analysis of Results of Operations" following the Notes to Financial
Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The response to this item is set forth in "Market Risk" and "Interest
Rate Risk" in "Management's Narrative Analysis of Results of Operations"
following the Notes to Financial Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item is submitted in a separate section of this
report (see page F-1).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Omitted in accordance with General Instruction I.
ITEM 11. EXECUTIVE COMPENSATION
Omitted in accordance with General Instruction I.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Omitted in accordance with General Instruction I.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted in accordance with General Instruction I.
Page 15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) and (2) The response to this portion of Item 14 is submitted as a
separate section of this report (see page F-1).
(3) List of Exhibits:
3(i) Transamerica Finance Corporation Restated Certificate
of Incorporation, as amended, (incorporated by
reference to Exhibit 3.1 to Registrant's Form 10-K
Annual Report (File No. 1-6798) for the year ended
December 31, 1988 and Exhibit 3.1a to Registrant's Form
10-K Annual Report (File No. 1-6798) for the year ended
December 31, 1990).
3(ii) Transamerica Finance Corporation By-Laws, as amended,
last amendment--February 19, 1991 (incorporated by
reference to Exhibit 3(ii) to Registrant's Form 10-K
Annual Report (File No. 1-6798) for the year ended
December 31, 1994).
4.1 Indenture dated as of April 1, 1991 between Registrant
and Harris Trust and Savings Bank, as Trustee
(incorporated by reference to Exhibit 4.1 to
Registrant's Registration Statement on Form S-3 (File
No. 33-40236) as filed with the Commission on August
16, 1991).
4.2*
10.1 Stock Purchase Agreement by and among Transamerica
Corporation, Transamerica Finance Corporation,
Transamerica Financial Services Holding Company,
Household Acquisition Corp. and Household
International, Inc. dated as of May 20, 1997
(incorporated by reference of Exhibit 10.1 to
Registrant's Current Report on Form 8-K dated June
23, 1997).
10.2 Asset Purchase Agreement by and among Whirlpool
Financial Corporation, Transamerica's Distribution
Finance Corporation, Whirlpool Corporation and
Transamerica Commercial Finance Corporation, I dated as
of September 17, 1997 (incorporated by reference to
Exhibit 10.1 to Registrant's Current Report on Form 8-K
dated January 1, 1998).
12 Ratio of Earnings to Fixed Charges Calculation.
23 Consent of Ernst & Young LLP to the incorporation by
reference of their report dated January 24, 2000 in
the Registrant's Registration Statement on Form S-3
(File No. 333-69065).
24 Power of Attorney executed by the directors of the
Registrant.
27 Financial Data Schedule.
(b) Reports on Form 8-K filed in the fourth quarter of 1999: None
(c) Exhibits: Certain of the exhibits listed in Item (a) 3 above have
been submitted under separate filings, as indicated.
(d) Financial Statement Schedules: The response to this portion of
Item 14 is submitted as a separate section of this report (see
page F-1).
* Pursuant to the instructions as to exhibits, the Registrant is not filing
certain instruments with respect to long-term debt since the total amount
of securities currently authorized under each of such instruments does not
exceed 10% of the total assets of the Registrant and its subsidiaries on a
consolidated basis. The Registrant hereby agrees to furnish a copy of any
such instrument to the Securities and Exchange Commission upon request.
\
Page 16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TRANSAMERICA FINANCE CORPORATION
By /s/ GEORGE B. SUNDBY
-------------------
George B. Sundby
Senior Vice President and Chief Financial Officer
Date: March 2, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 2, 2000 by the following persons on behalf
of the Registrant and in the capacities indicated.
Signature Title
Principal Executive Officer:
ROBERT A. WATSON *
- ------------------
(Robert A. Watson) Chairman of the Board, President and Chief Executive Officer
Principal Financial Officer and Principal Accounting Officer:
GEORGE B. SUNDBY
- ------------------
(George B. Sundby) Senior Vice President and Chief Financial Officer
Directors:
FRANK C. HERRINGER * Director
STEVEN A. READ * Director
MITCHELL F. VERNICK * Director
ROBERT A. WATSON * Director
* ROBERT D. MYERS
- -----------------
(Robert D. Myers)
Attorney-in-Fact
Page 17
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a)(1) and (2), and ITEM 14(d)
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LIST OF FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
Year Ended December 31, 1999
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
SAN FRANCISCO, CALIFORNIA
Page 18
FORM 10-K--ITEM 14(a)(1) and (2)
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Financial Statements:
The following consolidated financial statements of Transamerica Finance
Corporation and subsidiaries are included in Item 8:
Consolidated Balance Sheet--December 31, 1999 and 1998
Consolidated Statement of Income--Years ended December 31, 1999, 1998 and
1997
Consolidated Statement of Cash Flows--Years ended December 31, 1999,
1998 and 1997
Consolidated Statement of Stockholder's Equity--Years ended
December 31, 1999, 1998 and 1997
Notes to Financial Statements--December 31, 1999
Management's Narrative Analysis of Results of Operations
Supplementary Financial Information--Years ended December 31, 1999 and
1998
The following consolidated financial statement schedules of Transamerica
Finance Corporation and subsidiaries are included in Item 14(d):
None
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission pertain to items which do
not appear in the financial statements of Transamerica Finance Corporation and
subsidiaries or to items which are not significant or to items as to which the
required disclosure has been made elsewhere in the financial statements and
supplementary notes, and such schedules have therefore been omitted.
Page 19
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Stockholder and
Board of Directors
Transamerica Finance Corporation
We have audited the accompanying consolidated balance sheet of
Transamerica Finance Corporation and subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of income, cash flows, and
stockholder's equity for each of the three years in the period ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Transamerica Finance Corporation and subsidiaries at December 31, 1999 and 1998,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
Ernst & Young LLP
San Francisco, California
January 24, 2000
Page 20
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
December 31,
1999 1998
(Amounts in millions)
ASSETS
Cash and cash equivalents......................................................... $ 23.8 $ 51.2
Finance receivables, net of unearned finance charges.............................. 8,709.3 6,422.5
Less allowance for losses..................................................... 144.6 124.1
----------- ----------
8,564.7 6,298.4
Property and equipment -- less accumulated depreciation of $1,510 in 1999 and
$1,300 in 1998:
Land, buildings and equipment................................................... 59.3 49.1
Equipment held for lease........................................................ 3,020.5 3,055.0
Investments (cost of $56.7 in 1999 and $17.7 in 1998) ............................ 88.7 17.7
Goodwill, less accumulated amortization of $191.3 in 1999 and $172.6 in 1998...... 409.3 423.4
Assets held for sale.............................................................. 24.5 180.8
Other assets...................................................................... 732.0 724.0
----------- ----------
$ 12,922.8 $ 10,799.6
=========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Debt:
Unsubordinated................................................................ $ 9,295.2 $ 7,365.4
Subordinated.................................................................. 222.0 433.2
----------- ----------
Total debt............................................................... 9,517.2 7,798.6
Accounts payable and other liabilities............................................ 1,096.4 1,004.1
Income taxes payable, of which $484.5 in 1999 and $397.3 in 1998 is deferred...... 502.9 407.0
Stockholder's equity:
Preferred stock -- authorized, 250,000 shares without par value; none issued
Common stock -- authorized, 2,500,000 shares of $10 par value; issued and
outstanding, 1,464,285 shares................................................ 14.6 14.6
Additional paid-in capital..................................................... 1,742.9 1,532.9
Retained earnings.............................................................. 41.3 48.0
Components of other cumulative comprehensive income:
Net unrealized gain from investments marked to fair value.................. 20.8
Foreign currency translation adjustments................................... (13.3) (5.6)
----------- ---------
Total stockholder's equity............................................... 1,806.3 1,589.9
----------- ---------
$ 12,922.8 $10,799.6
=========== =========
See notes to financial statements
Page 21
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
Consolidated Statement Of Income
Years Ended December 31,
--------
1999 1998 1997
-------- -------- --------
(Amounts in millions)
Revenues
Finance charges .................................................................. $ 875.2 $ 705.1 $ 522.5
Leasing revenues ................................................................. 697.2 736.8 762.4
Other ............................................................................ 179.0 111.0 47.6
-------- -------- --------
Total revenues .......................................................... 1,751.4 1,552.9 1,332.5
Expenses
Interest and debt expense ........................................................ 456.2 382.2 354.4
Depreciation on equipment held for lease ......................................... 298.8 284.9 278.8
Salaries and other operating expenses ............................................ 673.7 620.4 488.7
Provision for losses on receivables .............................................. 87.4 53.0 18.1
-------- -------- --------
Total expenses .......................................................... 1,516.1 1,340.5 1,140.0
-------- -------- --------
Income before income taxes ....................................................... 235.3 212.4 192.5
Income taxes ..................................................................... 91.4 71.6 74.3
-------- -------- --------
Income from continuing operations ................................................ 143.9 140.8 118.2
Income from discontinued operations .............................................. 261.8
-------- -------- --------
Net income .............................................................. $ 143.9 $ 140.8 $ 380.0
======== ======== ========
See notes to financial statements
Page 22
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Years Ended December 31,
----------------------
1999 1998 1997
-------------- ------------ --------
(Amounts in millions)
Operating Activities
Income from continuing operations $ 143.9 $ 140.8 $ 118.2
Adjustments to reconcile income from continuing operations to net
cash provided by operating activities:
Depreciation and amortization 332.2 309.2 299.9
Provision for losses on receivables 87.4 53.0 18.1
Change in accounts payable and other liabilities 103.5 (23.0) 394.9
Change in income taxes payable 81.7 61.5 3.1
Other (99.1) 10.3 (470.8)
---------- ---------- ----------
Net cash provided by operating activities 649.6 551.8 363.4
Investing Activities
Finance receivables originated (27,799.4) (23,035.0) (16,136.9)
Finance receivables collected and sold 25,463.8 21,245.8 16,917.6
Purchase of property and equipment (427.6) (443.8) (386.4)
Sales of property and equipment 65.4 121.3 174.2
Purchase of finance receivables from Whirlpool Finance Corporation (386.3) (881.9)
Proceeds from sale of Transamerica HomeFirst 200.0
Proceeds from the sale of, and related
transactions with discontinued operations 4,413.2
Other 39.1 32.0 (112.1)
---------- ---------- ----------
Net cash provided (used) by investing activities (2,458.7) (2,466.0) 3,987.7
Financing Activities
Proceeds from debt financing 7,336.7 4,202.7 3,401.7
Payments of debt (5,614.4) (2,446.6) (7,263.5)
Capital contributions from parent company 210.0 232.0 41.5
Cash dividends paid (150.6) (92.8) (497.7)
Return of capital (361.5)
---------- ---------- ----------
Net cash provided (used) by financing activities 1,781.7 1,895.3 (4,679.5)
---------- ---------- ----------
Decrease in cash and cash equivalents (27.4) (18.9) (328.4)
Cash and cash equivalents at beginning of year 51.2 70.1 398.5
---------- ---------- ----------
Cash and cash equivalents at end of year $ 23.8 $ 51.2 $ 70.1
========== ========== ==========
See notes to financial statements
Page 23
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
Consolidated Statement of Stockholder's Equity
Accumulated Other Comprehensive Income
--------------------------------------
Net Unrealized
Gain (Loss) Foreign
Additional From Investments Currency
Common Paid-in Retained Comprehensive Marked to Translation
Stock Capital Earnings Income Fair Value Adjustments
-------- ---------- -------- -------- ---------- -----------
(Amounts in millions)
Balance at December 31, 1996 $ 14.6 $ 1,620.9 $ 117.7 $ 2.7 $ (3.2)
Comprehensive income
Net income 380.0 $ 380.0
Other comprehensive income, net of tax:
Reclassification adjustment for gains
included in income from
discontinued operations.............. (2.7) (2.7)
Foreign currency translation
adjustments.......................... (9.1) (9.1)
--------
Comprehensive income $ 368.2
========
Capital contribution from parent
company................................. 41.5
Dividends declared and paid................ (497.7)
Return of capital.......................... (361.5)
-------- -------- -------- -------- ---------
Balance at December 31, 1997............... 14.6 1,300.9 (12.3)
Comprehensive income
Net income................................. 140.8 140.8
Other comprehensive income, net of tax:
Foreign currency translation
adjustments.......................... 6.7 6.7
--------
Comprehensive income $ 147.5
========
Capital contribution from parent
company................................. 232.0
Dividends declared and paid................ (92.8)
-------- -------- -------- -------- ---------
Balance at December 31, 1998............... 14.6 1,532.9 48.0 (5.6)
Comprehensive income
Net income................................. 143.9 143.9
Other comprehensive income, net of tax:
Unrealized gains from investments
marked to fair value................. 20.8 20.8
Foreign currency translation
adjustments.......................... (7.7) (7.7)
--------
Comprehensive income $ 157.0
========
Capital contribution from parent
company................................. 210.0
Dividends declared and paid................ (150.6)
-------- -------- -------- -------- ---------
Balance at December 31, 1999...............$ 14.6 $1,742.9 $ 41.3 $ 20.8 $ (13.3)
======== ======== ======== ======== =========
See notes to financial statements
Page 24
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
Notes To Financial Statements
Note A--Significant Accounting Policies
Transamerica Finance Corporation (the "Company"), through its
subsidiaries, is principally engaged in commercial lending and leasing
operations. The Company is a wholly owned subsidiary of Transamerica Corporation
("Transamerica"). The United States is the primary market for the services
offered by the commercial lending operations while the leasing business operates
worldwide.
On July 21, 1999, Transamerica Corporation which owns all of the
Company's outstanding stock, completed its merger with a subsidiary of AEGON N.
V., a Netherlands based international life insurance group. As a result,
Transamerica Corporation is now a direct subsidiary of AEGON N. V.
Consolidation: The consolidated financial statements include the accounts
of Transamerica Finance Corporation and its wholly owned commercial lending and
leasing subsidiaries. Certain amounts reported in the consolidated financial
statements are based on management estimates. Such amounts may ultimately differ
from those estimates.
Cash and Cash Equivalents: Cash and cash equivalents include money market
funds and marketable securities with original maturities of three months or
less.
Depreciation and Amortization: Property and equipment, including
equipment held for lease, which are stated on the basis of cost, are depreciated
by use of the straight-line method over their estimated useful lives. Other
intangible assets, principally renewal, referral and other rights incident to
businesses acquired, are amortized over estimated future benefit periods ranging
from five to 25 years. Goodwill is amortized using the straight-line method over
periods up to 40 years.
Investments: Investments in fixed maturities are generally held to
maturity and carried at amortized cost. Equity securities and stock warrants are
carried at fair value based on quoted market prices. Changes to the carrying
amount of equity securities and stock warrants are included in stockholder's
equity. Realized gains and losses on investment transactions are determined
generally on a specific identification basis and reflected in earnings on the
trade date. Cost is based on the original purchase price.
Page 25
Foreign Currency Translation: The net assets and operations of foreign
subsidiaries included in the consolidated financial statements are attributable
primarily to Canadian and European operations. The accounts of these
subsidiaries have been converted at rates of exchange in effect at year end as
to balance sheet accounts and at average rates for the year as to operations.
The effect of changes in exchange rates in translating foreign subsidiaries'
financial statements is accumulated in a separate component of stockholder's
equity.
Transactions with Affiliates: In the normal course of its operations, the
Company has various transactions with Transamerica Corporation and certain of
its other subsidiaries. In addition to the filing of consolidated income tax
returns and the transactions discussed in Note I, these transactions include
computer and other specialized services, various types of insurance coverage and
pension administration, the effects of which are insignificant for all years
presented.
Finance Charges: Finance charges, including loan origination fees, offset
by direct loan origination costs, are generally recognized as earned on an
effective yield method. Accrual of finance charges is suspended on accounts that
contractually become past due in excess of 90 days. Accrual of finance charges
on accounts in nonaccrual status is resumed only when the accounts have been
paid up to contractually current status. Charges collected in advance, including
renewal charges, on distribution finance receivables are taken into income on a
straight-line basis over the periods to which the charges relate.
Allowance for Losses: The allowance for losses is maintained in an amount
sufficient to cover estimated uncollectible receivables. Such estimates are
based on percentages of net finance receivables outstanding developed from
historical credit loss experience and, if appropriate, provision for deviation
from historical averages, supplemented in the case of commercial loans by
specific reserves for accounts known to be impaired. The allowance is provided
through charges against current income. Accounts are charged against the
allowance when they are deemed to be uncollectible.
Page 26
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements --(Continued)
Leasing: Leasing revenues include revenues earned from rental and
operating leases. Rental revenues are recognized in the period earned. Operating
lease revenue is recognized on the straight-line method over the lease term.
Finance lease income, included in finance charges, represents the excess of the
total lease receivable over the net cost of the related equipment and is
deferred and amortized over the term of the lease using an accelerated method
which provides a level rate of return on the outstanding lease contract
receivable.
Derivatives: The Company uses derivative financial instruments to hedge
some of its interest rate and foreign exchange rate risks. The cost of each
derivative contract is amortized over the life of the contract. The amortization
is classified with the results of the underlying hedged item. Contracts are
designated and accounted for as hedges of certain of the Company's liabilities
and outstanding indebtedness and are not marked to market. Gains or losses on
terminated hedges are deferred and amortized over the remaining life of the
hedged item. When a liability which is hedged by a derivative contract is
disposed of, the derivative contract is either reassigned to hedge another
liability or closed out, and any gain or loss recognized.
Income Taxes: Taxable results of each of the Company's operations are
included in the consolidated federal and certain state income tax returns filed
by Transamerica Corporation, which by the terms of a tax sharing agreement
generally requires the Company to accrue and settle income tax obligations as if
the individual operations filed separate returns with the applicable taxing
authorities. Under the tax sharing agreement, Transamerica Corporation provides
an unlimited carryforward period for the utilization of federal net operating
losses and foreign tax credits. The Company provides deferred taxes based on
enacted tax rates in effect on the dates temporary differences between the book
and tax basis of assets and liabilities reverse.
New Accounting Standard: In June 1998, the Financial Accounting Standards
Board issued Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities. This statement establishes accounting and reporting
standards for derivative contracts and for hedging activities. The Company is
required to adopt this statement as of January 1, 2001. The effect on the
Company's financial statements of adopting this standard is uncertain at this
time.
Page 27
Note B--Finance Receivables
The carrying amounts of finance receivables outstanding were as follows:
Receivables
At December 31,
1999 1998
-------- --------
(Amounts in millions)
Commercial:
Distribution finance $2,768.9 $2,220.5
Business credit 2,759.5 2,121.4
Equipment finance 1,576.4 974.7
Retail 1,168.3 717.0
-------- --------
8,273.1 6,033.6
Less unearned finance charges 443.2 330.3
-------- --------
Net finance receivables 7,829.9 5,703.3
-------- --------
Leasing:
Finance receivables 1,162.3 910.1
Less unearned finance charges 282.9 190.9
-------- --------
Net finance receivables 879.4 719.2
-------- --------
8,709.3 6,422.5
Less allowance for losses 144.6 124.1
-------- --------
Total net finance receivables $8,564.7 $6,298.4
======== ========
At December 31, 1999 and 1998, finance receivables for which the accrual
of finance charges was suspended amounted to $128.8 million and $81.4 million.
Page 28
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements --(Continued)
Contractual maturities of finance receivables outstanding, before
deduction of unearned finance charges, at December 31, 1999 were:
Commercial % Leasing % Total %
---------- - ------- - ----- -
(Dollar amounts in millions)
2000........................ $3,872.3 46.8% $ 204.3 17.6% $4,076.6 43.2%
2001........................ 1,055.4 12.8 198.2 17.1 1,253.6 13.3
2002........................ 960.6 11.6 176.4 15.2 1,137.0 12.0
2003........................ 489.3 5.9 178.4 15.3 667.7 7.1
2004........................ 474.5 5.7 118.4 10.2 592.9 6.3
Thereafter.................. 1,421.0 17.2 286.6 24.6 1,707.6 18.1
-------- ------ -------- ------ -------- ------
Total.................. $8,273.1 100.0% $1,162.3 100.0% $9,435.4 100.0%
======== ====== ======== ====== ======== ======
The commercial lending operation's business credit unit provides
revolving lines of credit, letters of credit and standby letters of credit. At
December 31, 1999 and 1998, borrowers' unused credit available under such
arrangements totaled $2,581.4 million and $1,399.4 million.
Concentration of Risk
The Company engages in the extension of credit to electronics and
appliance dealers, retail recreational products dealers and computer stores. The
majority of these loans is secured by the assets being financed. Additionally
the Company leases, services and manages containers, chassis and trailers
throughout the world. The risk associated with this credit is subject to
economic, competitive and other influences. While a substantial portion of the
risk is diversified, certain operations are concentrated in one industry or
geographic area.
The commercial and leasing finance receivables portfolio included 12
customers with individual balances in excess of $40 million. These accounts in
total represented 10% of total commercial and leasing net finance receivables
outstanding at December 31, 1999.
Page 29
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements --(Continued)
Note C--Notes and Loans Payable
At December 31,
1999 1998
--------- ---------
(Amounts in millions)
Short-term debt:
Commercial paper.............................................................. $ 3,025.4 $ 2,325.8
Bank loans.................................................................... 291.0 400.2
Current portion of long-term debt:
Unsubordinated........................................................... 845.9 1,713.2
Subordinated............................................................. 159.5 211.3
--------- ---------
Total short-term debt............................................................ 4,321.8 4,650.5
Long-term debt due subsequent to one year:
5.42% to 11% notes and debentures, maturing through 2028...................... 5,768.7 4,444.5
Zero to 6.50% notes and debentures due 2007 to 2012 issued at a discount
to yield 13.8% to 14.77%; effective cost of 11.10% to 14.17%; maturity
value of $582.8 million................................................. 210.1 194.9
6.05% to 9.95% subordinated notes and debentures maturing through
2003.............................................................. 222.0 433.2
--------- ---------
6,200.8 5,072.6
Less amounts due in less than one year........................................ 1,005.4 1,924.5
--------- ---------
Total long-term debt due subsequent to one year............................... 5,195.4 3,148.1
--------- ---------
Total debt............................................................... $ 9,517.2 $ 7,798.6
========= =========
The weighted average interest rate on short-term borrowings at December 31, 1999
and 1998 was 5.7% and 5.2%.
Long-term debt outstanding at December 31, 1999 matures as follows:
Average
Unsubordinated Subordinated Total Interest Rate
(Dollar amounts in millions)
2000........................................... $ 845.9 $159.5 $1,005.4 6.34%
2001........................................... 2,411.4 2.0 2,413.4 6.27%
2002........................................... 1,582.9 7.0 1,589.9 6.87%
2003........................................... 308.7 53.5 362.2 6.81%
2004........................................... 457.1 457.1 6.61%
Thereafter (1)................................. 372.8 372.8 10.94%
-------- ------ --------
Total................................. $5,978.8 $222.0 $6,200.8
======== ====== ========
(1) Includes the accreted values at December 31, 1999 on original issue discount
debt and not the amount due at maturity.
Page 30
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements --(Continued)
Short-term borrowings are primarily in the form of commercial paper notes
issued by the Company. Such commercial paper is continuously offered, with
maturities not exceeding 270 days in the U.S., 365 days in Canada and 364 days
in Europe, at prevailing rates for major finance companies. The cost of
short-term borrowings is directly related to prevailing rates of interest in the
money market; such rates are subject to fluctuation.
The Company's short-term borrowings are supported by noncancelable credit
agreements with various banks. One credit agreement provides the Company the
ability to borrow up to $3.5 billion with interest at variable rates and expires
in 2002. The Company also has a $50 million credit agreement which expires in
2000. There were no borrowings outstanding under the credit lines at December
31, 1999. The credit agreements require the Company to pay an annual fee on the
amount committed.
Interest rates on borrowings during the years indicated were as follows:
Years Ended December 31,
1999 1998 1997
--------- -------- ------
Weighted average annual interest rate during year:
Short-term borrowings..................................... 5.34% 5.52% 5.48%
Long-term borrowings...................................... 6.36% 7.23% 7.25%
Total borrowings.......................................... 6.05% 6.49% 6.59%
Interest payments, net of amounts received from interest rate swap
agreements, totaled $427 million in 1999, $377 million in 1998 and $482 million
in 1997.
The Company uses derivative financial instruments to hedge some of its
interest rate and foreign exchange rate risk. The Company uses interest rate
exchange agreements and forward contracts to hedge the interest rate risk of its
outstanding indebtedness and future commitments. The interest rate exchange
agreements are intended to help the Company more closely match the cash flow
received from its assets to the payment on its liabilities, and generally
provide that one party pays interest at a floating rate in relation to movements
in an underlying index and the other party pays interest at a fixed rate.
Forward contracts allow the Company to hedge funding commitments made for future
dates. The Company also uses cross currency exchange agreements, which fix by
contract the amounts of various currencies to be exchanged at a future date with
other contracting parties, and forward exchange contracts whereby the Company
agrees to sell to other contracting parties at a future date a specified amount
of foreign currency for a specified amount of dollars. These agreements are
intended to hedge the Company's exposure to fluctuations in foreign exchange
rates when the Company settles its debt denominated in foreign currencies.
Page 31
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
At December 31, 1999 and 1998, contracts designated as hedges of
outstanding indebtedness comprised:
1999 1998
------------------------------- -----------------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Fixed Floating Fixed Floating
Notional Interest Interest Notional Interest Interest
Amount Rate Rate Amount Rate Rate
(Dollar amounts in millions)
Interest rate exchange agreements-- the Company pays:
Floating rate interest expense, receives fixed
rate interest income........................ $2,409.1 6.9% 6.3% $ 1,194.1 6.5% 5.4%
======== ==== ==== ========= ==== ====
Fixed rate interest expense, receives floating
rate interest income........................ $ 278.1 5.9% 6.3% $ 450.5 5.2% 5.5%
======== ==== ==== ========= ==== ====
Floating rate interest income based on one index
(5.4%) and receives floating rate interest
expense based on another index (5.7%)....... $ 100.0 $ -
======== =========
Cross currency exchange and foreign interest
rate swaps.................................. $ 25.3 $ 58.4
======== =========
Forward contracts............................. $ 11.0 $ -
======== =========
While the Company is exposed to credit risk in the event of
nonperformance by the counterparty, the likelihood of nonperformance is
considered low due to the high credit ratings of the counterparties. At December
31, 1999, the interest rate exchange agreements are with financial institutions
with investment grade ratings of A or better by one or more of the major credit
rating agencies.
Page 32
Note D--Allowance for Losses
Changes in the allowance for losses on finance receivables and assets
held for sale are as follows:
Assets
Finance Receivables Held
Commercial Leasing Total For Sale
---------- ------- ------ ----
(Amounts in millions)
Balance at December 31, 1996 .............................................. $ 81.3 $ 4.5 $ 85.8 $1.8
Provision charged to expense .............................................. 16.2 1.9 18.1
Charge-offs ............................................................... (14.8) (0.3) (15.1) (1.8)
Recoveries ................................................................ 4.8 4.8
Other ..................................................................... (4.3) (4.3) 5.4
------ ----- ------ ----
Balance at December 31, 1997 .............................................. 83.2 6.1 89.3 5.4
Provision charged to expense .............................................. 49.8 3.2 53.0
Charge-offs ............................................................... (41.6) (41.6)
Recoveries ................................................................ 7.4 7.4
Other ..................................................................... 14.9 1.1 16.0 (4.8)
------ ----- ------ ----
Balance at December 31, 1998 .............................................. 113.7 10.4 124.1 0.6
Provision charged to expense .............................................. 79.2 8.2 87.4
Charge-offs ............................................................... (62.7) (62.7)
Recoveries ................................................................ 7.2 7.2
Other ..................................................................... (11.5) 0.1 (11.4) 1.1
------ ----- ------ ----
Balance at December 31, 1999 .............................................. $125.9 $18.7 $144.6 $1.7
====== ===== ====== ====
Page 33
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements --(Continued)
Note E--Dividend and Other Restrictions
Under certain circumstances, the provisions of loan agreements and
statutory requirements place limitations on the amount of funds which can be
remitted by the Company to its parent company. The loan agreements also specify
the minimum level of capital that must be maintained. At December 31, 1999, the
Company's capital level exceeded the minimum requirements by $357.6 million.
Note F--Fair Value of Financial Instruments
Finance Receivables
The carrying amounts and estimated fair values of the finance receivable
portfolio at December 31, 1999 and 1998 were as follows:
1999 1998
--------------------------- ---------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
(Amounts in millions)
Fixed rate receivables................... $ 3,079.9 $ 3,079.4 $ 2,183.7 $ 2,286.4
Variable rate receivables................ 5,484.8 5,484.8 4,114.7 4,114.7
--------- --------- --------- ---------
Total................................ $ 8,564.7 $ 8,564.2 $ 6,298.4 $ 6,401.1
========= ========= ========= =========
The estimated fair values of the fixed rate receivables are based on the
discounted value of the future cash flows expected to be received using
available secondary market prices for securities backed by similar loans after
adjustment for differences in loan characteristics. In the absence of readily
available market prices, the expected future cash flows are discounted at
effective rates currently offered by the Company for similar loans. For variable
rate loans, which comprise the majority of the commercial loan portfolio, the
carrying amount represents a reasonable estimate of fair value.
Notes and Loans Payable
At December 31, 1999 and 1998, the estimated fair value of debt, using
rates currently available for debt with similar terms and maturities, was $9.6
billion and $8.0 billion.
The net present value of the interest rate and cross currency exchange
agreements offsets changes in the fair value of the hedged indebtedness, which
are also carried at amortized cost. The fair value of interest rate and cross
currency exchange agreements is the estimated amounts that the Company would
receive or pay to terminate the agreements at the reporting date, taking into
consideration current interest rates and the current creditworthiness of the
exchange agreement counterparties. The fair value of the liability hedges at
December 31, 1999 and December 31, 1998 were gross obligations to counterparties
of $28.2 million and $2.3 million and gross benefits of $7.6 million and $62.2
million resulting in a net obligation of $20.6 million at December 31, 1999 and
a net benefit from counterparties of $59.9 million at December 31, 1998.
Page 34
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements --(Continued)
Note G--Income Taxes
Provision (benefit) for income taxes on income from continuing operations
comprised:
Years ended December 31
1999 1998 1997
------- ------- -------
(Amounts in millions)
Current taxes:
Federal ............................................................. $ 9.5 $ 17.8
State ............................................................... 2.9 $ (1.6) 0.4
Foreign ............................................................. 7.1 4.3 3.1
------- ------- -------
19.5 2.7 21.3
Deferred taxes:
Federal ............................................................. 60.8 66.2 40.3
State ............................................................... 5.3 8.6 9.1
Foreign ............................................................. 5.8 (5.9) 3.6
------- ------- -------
71.9 68.9 53.0
------- ------- -------
Total income taxes ............................................. $ 91.4 $ 71.6 $ 74.3
======= ======= =======
The difference between federal income taxes on income from continuing
operations computed at the statutory rate and the provision for income taxes
was:
Years ended December 31
1999 1998 1997
------- ------- -------
(Amounts in millions)
Federal income taxes at statutory
rate ................................................................ $ 82.4 $ 74.3 $ 67.4
State income taxes, net of federal
income tax benefit .................................................. 5.3 4.6 5.3
Book and tax basis difference of
assets acquired ..................................................... 5.0 5.3 5.5
Prior year items ......................................................... (6.5) (1.1)
Other .................................................................... (1.3) (6.1) (2.8)
------- ------- -------
$ 91.4 $ 71.6 $ 74.3
======= ======= =======
Page 35
Deferred income taxes reflect the net tax effects or temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Deferred tax assets and liabilities comprised the following at December
31:
1999 1998
-------- -------
(Amounts in millions)
Deferred tax assets:
Allowance for losses ..................................................... $ 57.0 $ 40.9
Net operating loss and foreign
tax credit carryforwards.............................................. 432.2 420.2
Other .................................................................... 80.7 86.0
-------- -------
569.9 547.1
Deferred tax liabilities:
Accelerated depreciation ................................................. 661.7 700.7
Discount amortization on notes
and loans payable .................................................... 96.1 96.6
Direct finance and sales type leases...................................... 222.7 92.9
Other .................................................................... 73.9 54.2
-------- -------
1,054.4 944.4
-------- -------
Net deferred tax liability .................................................. $ 484.5 $ 397.3
======== =======
Page 36
Total income tax payments, net of refunds, totaled $19.7 million in 1999,
$37.2 million in 1998 and $149.3 million in 1997. Pretax income from foreign
operations was $30.1 million in 1999, $14.6 million in 1998 and $15.3 million in
1997.
Note H--Comprehensive Income
The components of other comprehensive income in the statement of
stockholder's equity are shown net of the following tax provision (benefit):
Years ended December 31
1999 1998 1997
---- ---- ----
(Amounts in millions)
Income tax effect on components of other comprehensive income
Unrealized holding gains from investments marked to fair value ........ $11.2
Reclassification adjustment for gains included in income from
discontinued operations................................................... $ (1.5)
Foreign currency translation adjustments.................................... (4.1) $3.6 (4.9)
----- ---- -------
Income tax effect on other comprehensive income $ 7.1 $3.6 $ (6.4)
===== ==== =======
Note I--Pension and Stock Savings Plans and Other Post Employment Benefits
The Company participates with Transamerica and its subsidiaries in a
number of noncontributory defined benefit pension plans covering most salaried
employees. The Company also participates in various programs sponsored by
Transamerica that provide medical and certain other benefits to eligible
retirees. The Company also participates in the Transamerica Corporation Employee
Stock Savings Plan (the 401(k) plan). The 401(k) plan is a contributory defined
contribution plan covering eligible employees who elect to participate. The
Company recognized for continuing operations, for both the pension plan and the
401(k) plan, income of $0.4 million in 1999, expense of $0.5 million in 1998 and
income of $0.3 million in 1997. Additionally, the Company recognized a
curtailment gain of $18.8 million in 1997 as a result of the sale of its branch
based consumer lending operation.
Note J--Commitments and Contingencies
The Company and its subsidiaries have noncancelable lease agreements
expiring mainly through 2003. These agreements are principally operating leases
for facilities used in the Company's operations. Total rental expense amounted
to $71.1 million in 1999, $72.5 million in 1998 and $71.4 million in 1997.
Minimum future rental commitments under operating leases for real estate
and equipment as of December 31, 1999 were as follows (in millions):
2000........................ $ 65.6
2001........................ 61.3
2002........................ 60.2
2003........................ 54.4
2004........................ 39.6
Thereafter.......... 122.8
-------
$403.9
=======
Contingent liabilities arising from litigation, income taxes and other
matters are not expected to have a material effect on the consolidated financial
position or results of operations of the Company and its subsidiaries.
Page 37
Note K--Business Segment Information
Business segment data, as required by Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information, for each of the years in the three year period ended December 31,
1999 included in the tables on pages F-19 to F-22 of Management's Narrative
Analysis of Results of Operations are an integral part of these financial
statements.
Years ended December 31,
1999 1998 1997
-------- -------- --------
(Amounts in millions)
Revenues:
Commercial lending........................ $ 937.6 $ 716.2 $ 518.5
Leasing................................... 790.0 816.5 797.8
Other (1)................................. 23.8 20.2 16.2
-------- -------- --------
Total .............................. $1,751.4 $1,552.9 $1,332.5
======== ======== ========
As of December 31,
1999 1998
--------- --------
(Amounts in millions)
Assets:
Commercial lending............................. $ 8,707.5 $ 6,495.4
Leasing........................................ 4,132.3 4,108.1
Other (1) ..................................... 83.0 196.1
--------- ---------
Total.................................... $12,922.8 $10,799.6
========= =========
(1) Unallocated items including intercompany eliminations.
Foreign revenues of the Company's foreign domiciled operations were as
follows:
Years ended December 31,
1999 1998 1997
------------------- ---------------------- -------------------
Foreign Foreign Foreign
Revenue % Revenue % Revenue %
------- ------ ------ ------ ------- ------
(Dollar amounts in millions)
Canada....................... $ 43.6 18.4% $ 21.2 10.4% $ 25.2 15.8%
Europe....................... 184.1 77.5 181.3 88.8 134.6 84.2
Other ....................... 9.7 4.1 1.6 0.8
------- ------ ------ ------ ------- ------
Total........................ $ 237.4 100.0% $204.1 100.0% $ 159.8 100.0%
======= ====== ====== ====== ======= ======
Percent of total revenues.... 13.6% 13.0% 12.0%
Page 38
Note L--Discontinued Operations
On June 23, 1997, the Company sold its branch-based consumer lending
operation. Gross proceeds from the sale were $3.9 billion, or $1.1 billion after
repayment of associated debt. In December 1997, the Company decided to exit the
consumer lending business.
The following results of the discontinued consumer lending business are
included in income from discontinued operations:
1997
(Amounts in millions)
Revenues .............................................................. $ 290.4
Gain on sale of branch based
consumer lending operation ........................................ 469.0
-------
Total revenues ........................................................ 759.4
Expenses .............................................................. 310.3
-------
Income before taxes ................................................... 449.1
Income tax provision .................................................. 187.3
-------
Income from discontinued
operations ...................................................... $ 261.8
=======
Note M--Subsequent Event (Unaudited)
On March 1, 2000 AEGON N.V.(AEGON) announced that it had completed its
strategic review of the businesses comprising Transamerica Finance Corporation
(TFC) acquired in connection with the purchase of Transamerica Corporation in
July 1999 and it has decided to make strategic dispositions of these businesses.
The strategic dispositions under consideration include possible asset or
business unit sales, in whole or in part, as well as joint ventures. AEGON had
previously classified the TFC businesses as non-core. Investment bankers have
been retained to assist AEGON in the process.
Page 39
MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
Transamerica Finance Corporation, which is a separate Securities and
Exchange Commission registrant, includes Transamerica's commercial lending and
leasing operations.
On July 21, 1999, Transamerica Corporation which owns all of the
Company's outstanding stock, completed its merger with a subsidiary of AEGON N.
V. (AEGON), a Netherlands based corporation. As a result, Transamerica
Corporation is now a direct subsidiary of AEGON.
On March 1, 2000 AEGON announced that it had completed its strategic
review of the businesses comprising Transamerica Finance Corporation (TFC)
acquired in connection with the purchase of Transamerica Corporation in July
1999 and it has decided to make strategic dispositions of these businesses. The
strategic dispositions under consideration include possible asset or business
unit sales, in whole or in part, as well as joint ventures. AEGON had previously
classified the TFC businesses as non-core. Investment bankers have been retained
to assist AEGON in the process.
The Company provides funding for its subsidiaries' commercial lending and
leasing operations. Capital is allocated among the operations on the basis of
expected returns and creation of shareholder value. The Company's principal
assets are finance receivables and equipment held for lease, which totaled a
combined $11.6 billion at December 31, 1999 and $9.3 billion at December 31,
1998. The Company's total notes and loans payable were $9.5 billion at December
31, 1999 and $7.8 billion at December 31, 1998. Variable rate debt was $3.9
billion at December 31, 1999 compared to $2.2 billion at December 31, 1998. The
ratio of debt to tangible equity was 6.4:1 at December 31, 1999 and 6.3:1 at
December 31, 1998. Tangible equity is defined as total equity less goodwill plus
minority interest.
The Company offers publicly, from time to time, senior or subordinated
debt securities. Public debt issued totaled $3.1 billion in 1999, $1.9 billion
in 1998 and $120 million in 1997. Under a shelf registration filed in December
1998 with the Securities and Exchange Commission the Company may offer up to $4
billion of senior or subordinated debt securities (which may include medium term
notes) with varying terms, of which $3.1 billion had been issued at December 31,
1999. For a further discussion regarding borrowing operations and related use of
derivatives, see Note C of Notes to Financial Statements included in Item 8.
Liquidity is a characteristic of the Company's operations since the
majority of the assets consist of short term finance receivables. Principal cash
collections of finance receivables totaled $25.5 billion during 1999, $21.2
billion during 1998 and $16.9 billion during 1997.
Page 40
The following table sets forth income by line of business for the years
indicated:
Years ended December 31,
Income by Business Segment 1999 1998 1997
-------------------------- ---- ---- ----
(Amounts in millions)
Commercial lending $122.5 $102.9 $ 92.1
Leasing 36.4 63.8 40.6
Other 3.0 (10.0) (1.2)
Amortization of goodwill (18.0) (15.9) (13.3)
------ ------ ------
Total income from continuing operations $143.9 $140.8 $118.2
====== ====== ======
The following discussion should be read in conjunction with the
information presented under Item 1, Business.
Commercial Lending
Commercial lending comprises the Company's distribution finance,
business credit, equipment finance and retail operations.
The following table shows the results of its operations for each of the
years presented:
Years ended December 31,
----------------------------------------------
1999 1998 1997
----------- ----------- -----------
(Amounts in millions)
Revenues
Finance charges and related income $ 937.6 $ 716.2 $ 518.5
Expenses
Interest 283.8 203.3 179.9
Operating expenses 382.0 311.7 179.9
Provision for losses on receivables 79.2 49.8 16.2
Income taxes 70.1 48.5 50.4
----------- ----------- -----------
815.1 613.3 426.4
----------- ----------- -----------
Income from operations 122.5 102.9 92.1
Amortization of goodwill (16.0) (13.8) (11.2)
----------- ----------- -----------
Net income $ 106.5 $ 89.1 $ 80.9
=========== =========== ===========
Page 41
The commercial lending business makes commercial loans through three
operations: distribution finance, business credit and equipment financial
services; commercial lending also makes consumer loans to facilitate sales by
manufacturers and dealers of consumer durable goods. Net income from the
commercial lending operations was $106.5 million in 1999, an increase of $17.4
million (19%) from $89.1 million in 1998. Income before the amortization of
goodwill for 1999 increased $19.6 million (19%) from 1998. Operating results for
1999 included $18.6 million in after tax gains from the sale of a portion of the
stock received from the exercise of stock warrants by the business credit
segment and $2.5 million in after tax gains from the sale and securitization of
finance receivables. Operating results in 1998 increased $10.8 million (12%) and
included $7.2 million in after tax gains from the sale and securitization of
finance receivables, a $6.5 million tax benefit from the resolution of prior
year tax matters, and a $2.1 million after tax charge for losses and the
restructuring of the insurance premium finance business. In 1997, operating
results included an after tax gain of $5.4 million on the sale and
securitization of $1.5 billion of floor plan finance receivables and a $3.2
million benefit from tax matters resolved in 1997.
Excluding the above items, commercial lending income from operations
before the amortization of goodwill increased $10.1 million (11%) in 1999 and
$7.8 million (9%) in 1998. Higher average net receivables outstanding
contributed to the increased profits and more than offset increased operating
expenses and provision for losses on receivables in both 1999 and 1998.
Commercial lending revenues rose by $221.4 million (31%) in 1999 and
$197.7 million (38%) in 1998. Revenues rose principally as a result of growth in
average net receivables outstanding and higher servicing and other income on
securitized receivables. Revenues in 1999 included $29.5 million of gains on the
sale of stock.
Page 42
Interest expense increased $80.5 million (40%) in 1999 and $23.4
million (13%) in 1998 primarily due to higher average debt levels needed to
support receivable growth which more than offset lower interest rates. Operating
expenses in 1999 increased $70.3 million (23%) principally as a result of costs
related to product line expansion and servicing of receivables. In 1998
operating expenses rose $131.8 million (73%) primarily because of increases in
business volume and receivables outstanding and the integration of the Whirlpool
Financial acquisition. The provision for losses on receivables increased $29.4
million (59%) in 1999 principally as a result of growth in receivables. In 1998
the provision for losses on receivables increased $33.6 million (207%)
principally as a result of credit losses from the new retail loan portfolio
acquired as part of the Whirlpool Financial acquisition and additional
provisions made on the insurance premium finance portfolio. Credit losses, net
of recoveries, on an annualized basis as a percentage of average commercial
finance receivables outstanding, net of unearned finance charges, were 0.87% in
1999, 0.77% in 1998 and 0.25% in 1997.
Net commercial finance receivables outstanding at December 31, 1999,
increased $2.1 billion (37%) from December 31, 1998 due to continued growth in
each of the business units. During 1999, the commercial lending operation
securitized approximately $300 million of inventory floorplan receivables, $150
million of equipment lease finance receivables and $150 million of retail
revolving credit card receivables. Management has established an allowance for
losses of $125.9 million (1.61% of receivables outstanding) compared to $113.7
million (1.99% of receivables outstanding) at December 31, 1998. The increase in
the allowance was attributable to significant receivables growth in various
product lines which resulted in a better credit risk profile of the portfolio
requiring a lower level of reserves as a percentage of net receivables.
Delinquent receivables are defined as the instalment balance for
inventory finance and business credit asset based lending receivables more than
60 days past due and the receivable balance for all other receivables over 60
days past due. At December 31, 1999, delinquent receivables were $97.5 million
(1.18% of receivables outstanding) compared to $98.6 million (1.63% of
receivables outstanding) at December 31, 1998.
Nonearning receivables are defined as balances from borrowers that are
more than 90 days delinquent for non credit card receivables or at such earlier
time as full collectibility becomes doubtful. Nonearning receivables on
revolving credit card accounts included in retail are defined as balances from
borrowers in bankruptcy and accounts for which full collectibility is doubtful.
Accrual of finance charges is suspended on nonearning receivables until such
time as past due amounts are collected. Nonearning receivables were $111.5
million (1.35% of receivables outstanding) at December 31, 1999 compared to
$65.7 million (1.09% of receivables outstanding) at December 31, 1998. The
increase resulted primarily from higher nonearning receivables in the business
credit portfolio, attributable to one account in asset based lending, upon which
no loss is anticipated.
Page 43
Leasing
Leasing comprises the company's marine container, tank container,
structured finance, domestic products, and European trailer operations.
The following table shows the results of its operations for each of the
years presented:
Years ended December 31,
----------------------------------
1999 1998 1997
----------- ----------- ---------
(Amounts in millions)
Revenues
Total leasing revenues $ 790.0 $ 816.5 $ 797.8
Expenses
Operating expenses 185.3 175.3 174.1
Depreciation on equipment held for lease 293.0 281.5 275.8
Selling and administrative expenses 101.7 113.3 116.7
Interest 151.2 153.7 166.1
Income taxes 22.4 28.9 24.5
----------- ----------- -----------
753.6 752.7 757.2
----------- ----------- -----------
Income from operations 36.4 63.8 40.6
Amortization of goodwill (2.0) (2.0) (2.0)
----------- ----------- -----------
Net income $ 34.4 $ 61.8 $ 38.6
=========== =========== ===========
Leasing income before the amortization of goodwill, decreased $27.4
million (43%) in 1999. Earnings in 1999 were lower than 1998 as a result of
fewer marine container units on hire and higher positioning costs. In addition a
loss of $5.6 million was recognized on certain age refrigerated containers by
specific manufacturers. The European trailer business results were also lower
due primarily to lower utilization on a larger fleet. These unfavorable results
were partially offset by improved earnings from a larger portfolio of finance
leases, improved tank container earnings due to a larger on-hire fleet,
increased earnings in domestic products, especially chassis and domestic
containers, resulting from more units on-hire offset in part by the cost of
complying with U. S. Federal Highway regulations requiring the installation of
reflector tapes on all U. S. wheeled vehicles. In addition, earnings were
favorably impacted by a $4.9 million benefit from the termination of a tax-based
leveraged lease, income of $2.8 million associated with the settlement of an
outstanding escrow claim and a $2 million benefit from the reversal of a 1997
realignment provision.
Income before the amortization of goodwill increased $23.2 million
(57%) in 1998. However, earnings in 1997 were reduced by a $25.8 million after
tax provision for fleet downsizing and organizational realignment primarily in
the standard container fleet. Excluding the provision in 1997, earnings in 1998
declined $2.6 million (6%) primarily due to lower standard and refrigerated
container per diem rates and on-hires and lower European trailer short term
rental utilization. Partially offsetting these factors were $6.7 million in net
tax benefits realized from a tax efficient structured equipment financing.
Earnings from the chassis line were higher due to increased on-hire units and
per diem rates associated with rail traffic congestion caused by railroad merger
inefficiencies.
Revenue for 1999 decreased $26.5 million (3%). Trade imbalances between
Asia, the United States and Europe, and an over supply of marine container
equipment persisted and negatively affected container on-hire levels and per
diem rates. Revenue was also lower from a $9.1 million provision for certain age
refrigerated containers by specific manufacturers. Weak economic growth in
Europe during 1999 had a negative impact on the demand for European short term
rental trailers. Offsetting these decreases in revenues were increased revenue
from a larger portfolio of finance leases, the favorable results of the
termination of a tax-based leverage lease agreement and by income associated
with the settlement of an outstanding escrow claim.
Page 44
Revenue increased in 1998 by $18.7 million (2%) because of the
unfavorable impact of the fleet downsizing provisions' effect on 1997's
revenues. Excluding the 1997 fleet provision, revenue would have declined by
$12.2 million (2%)in 1998 due to lower container per diem rates and lower
container on-hires associated with a continuing oversupply of equipment and low
prices for new equipment. Lower rail trailer on-hires also reduced revenues.
Larger fleets and more on-hire units for tank containers, chassis, domestic
containers and European trailers partially offset these declines.
Expenses for 1999 increased $7.4 million (1%). Operating costs for 1999
were unfavorable mostly due to higher storage costs associated with a larger
off-hire fleet and higher positioning expenditures associated with the movement
of marine container equipment from the United States and Europe to Asia to meet
anticipated demand, and with the cost of complying with U. S. Federal Highway
regulations requiring the installation of reflector tapes on all U. S. wheeled
vehicles. Higher interest expense associated with growth in the finance lease
portfolio was also experienced. Offsetting these increased costs were lower S&A
costs partially attributable to lower Year 2000 remediation costs.
Expenses declined $8.9 million (1%) in 1998 primarily due to the effect
of the realignment provision on 1997's expenses. Higher depreciation from the
larger fleets of tank container, chassis, domestic container and European
trailers was offset by favorable interest expenses and lower selling and
administrative expenses.
Combined marine container utilization averaged 75% for 1999, 77% for
1998 and 78% for 1997. Tank container utilization was 77% for 1999, 81% for 1998
and 80% for 1997. Combined domestic products utilization averaged 93% for 1999,
92% for 1998 and 90% for 1997. European trailer utilization was 81% for 1999,
88% for 1998 and 92% for 1997.
Other
The favorable results in other operations for 1999 were primarily due
to an $11 million after tax gain on the sale of Transamerica HomeFirst, and
improved operating results at Transamerica HomeFirst in the period leading up to
its sale.
Discontinued Operations
In the fourth quarter of 1997, the company discontinued the remainder
of its consumer lending business following the sale of its branch-based lending
operations. In 1997, income from these operations was $261.8 million including a
$275 million after tax gain on the sale of the branch-based consumer lending
operations. This gain was offset in part by an operating loss of $13.2 million.
Page 45
Market Risk
Market risk is the risk of loss that may occur when fluctuations in
interest and currency exchange rates and equity and commodity prices change the
value of a financial instrument. Both derivative and nonderivative financial
instruments have market risk so the company's risk management extends beyond
derivatives to encompass all financial instruments it holds that are sensitive
to market risk. The Company is primarily exposed to interest rate risk.
Interest Rate Risk
The Company's operations are subject to risk from interest rate
fluctuations when there is a difference between the amount of its interest
earning assets and the amount of its interest bearing liabilities that are
prepaid, mature or repriced in specified periods. It manages its exposure to
interest rate fluctuations by managing the characteristics of its assets and
liabilities so that changes are offset. The Company's objectives for
asset/liability management are to provide maximum levels of finance income and
minimize funding costs while maintaining acceptable levels of interest rate and
liquidity risk and facilitating its funding needs. To help achieve these
objectives, the Company uses derivative financial instruments including interest
rate swaps that correlate to instruments recorded on its balance sheet.
If market interest rates on December 31, 1999 and 1998 abruptly
increased 75 basis points, the fair value of the Company's finance receivables
portfolio would decrease approximately $52 million and $33 million, the fair
value of its debt would decrease approximately $102 million and $90 million and
the fair value of its interest rate swaps would decrease approximately $49
million and $24 million. Conversely, if rates on December 31, 1999 and 1998
abruptly decreased 75 basis points the fair value of its finance receivables
portfolio would increase approximately $61 million and $38 million, the fair
value of its debt would increase approximately $108 million and $90 million and
the fair value of its interest rate swaps would increase approximately $54
million and $33 million.
The Company determined these amounts by considering only the impact of
the hypothetical interest rate change. These analyses do not consider the
possible effect a change in economic activity could have in such an environment.
Also, in the event of a change of such magnitude, the Company would likely take
action to mitigate its exposure to the negative consequences. The Company's
customers and competitors would also respond to these fluctuations, and
regulators or legislators might act in ways it cannot foresee. Because the
Company cannot be certain what specific actions would be taken and their
effects, the sensitivity analysis above assumes no significant changes in the
Company's financial structure.
Page 46
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY FINANCIAL INFORMATION
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Three Months Ended Total
1999 March 31 June 30 September 30 December 31 1999
- ---- -------- ------- ------------ ----------- --------
(Amounts in millions)
Revenues......................... $414.6 $436.6 $423.9 $476.3 $1,751.4
Net income....................... $ 24.4 $ 44.7 $ 33.7 $ 41.1 $ 143.9
Three Months Ended Total
1998 March 31 June 30 September 30 December 31 1998
- ---- -------- ------- ------------ ----------- --------
(Amounts in millions)
Revenues......................... $373.1 $382.2 $381.2 $416.4 $1,552.9
Net income....................... $ 27.5 $ 36.7 $ 33.1 $ 43.5 $ 140.8